DISCIPLINE

LARGE CAP ENERGY STOCKS
I am torn about energy patch now. Commodity has corrected a bit in the last couple of days and crude has fallen from $55 to $50. Is this an opportunity or a trap? Should I increase exposure or stay put? On the positive side, (1) demand / supply favorable; (2) blockbuster earnings coming; (3) still reasonably valued; (4) discounted at $35-40 crude, and downside risk is limited; (5) trend favorable; (6) other sectors suck. On the negative side: (1) over-weighted already; (2) even they are discounted at $40, if the crude falls from $50 to $40, all stocks will fall with them; in other word, they will go down before they go up. Shouldn’t we be more opportunistic? This is why discipline is so much more difficult to achieve. For this reason alone, I think I will resist the temptation to add more energy stocks.

GOOD IDEA, POOR EXECUTION

SOLD PKZ @42.33
Out on stop. It was a terrible trade. A monster earning is no match for the falling crude price. PKZ is not helping with its production figures. Long term it continues to be a very good stock, but in the near term, there is no sense to fight the WTI. How terrible could it be? It reversed and now is traded north of $45. Another piece of "Good idea, poor execution".

SOLD IOI @30
Out on stop. This turns out to be a very stressful day again.

OCTOBER
It appears that I am going to end the month up slightly, or flat. While I am not too excited about the result, I believe the portfolio probably is in a better sharp than that of previous few months, as I was able to get rid of a few dead woods, without serious damage the portfolio. Energy exposure is also reduced somewhat, although it was mosly accomplished by way of STOPS.

FRUSTRATING DAY

DUMP IQW @27.75
I finally dumped all IQW. It probably an emotional action, and hence an inappropriate one, but I simply can’t handle it anymore. The company has done nothing other than disappointing quarter after quarter, in good times and in bad times. (As far as the management concerned, it’s all bad time). It’s a bad company in a difficult and decline industry with very poor management and a terrible record. Targets consistently missed, earnings persistently lowered, and price continuously cut, and hopes, one more time dashed. What’s the point to hold this loser and dead money? It was a bad stock to begin with, and a mistake to hold for so long.


ATY
This is a terribly frustrating day for me. I have correctly anticipated the market rally, but it appears the vehicle I select may not be very effective (not enough beta, to be fair, the choice is very limited up here). It is up only slightly. One reason may be the TSE is actually down, weighted by the energy and material sectors.


ADD PKZ @42.80
The weakness in the energy sector leads to another interesting question: does this represent an opportunity to add a little? PKZ reports tomorrow morning and earnings should be very good. I decide to add a little for a trade. Remember this is a trade and should the share move up, I have to either let it go or STOP-LOSS, because I have more than sufficient exposure in this sector. If it does not move, I will certainly sell this in order to limit the exposure to energy sector. Again do not turn a trade into a long term position, even though I do like the sector and the stock.

AGA
Covering AGA turned out to be a correct one as it has a monster quarter, earned $3.0 this quarter. It will make at least $6.0 this FY, and that makes it very cheap at $21.5. The question is where will it go from here? Steel down, US dollar down, scrap up and auto sales questionable. That's four factors against AGA. I am not in the position to short, nor interested in long. It was a trade.

TOO CLOSE TO CALL

ADD ATY @ 21
I have added some ATY as planned. Again, the thesis is that there will be a rally regardless who the winner is. And the rally will be likely be lead by the lagers, such as tech names. In any event, down side risk for ATY is limited as it is reasonably priced, with earning risk removed. Having said that, the exposure to ATY is relatively large and should be reduced after election.

AN ELEPHENT- OR A DONKEY-RALLY?

RALLYING STEEL
As expected, steel stocks move strongly this morning after DFS’ Q3 results. A major consolidation in the sector also helped. It is tempting to put out a little, but such temptation should be resisited as a number of strong earnings will come this week. Also the overall market has declined materially, and it could snap back at any moment.


ELECTION
My sense is that the market will struggle from here until election, when it will attempt to rally, regardless who the winner is, although a Bush-rally probably will be broader, and have stronger legs than a Kerry-rally. Given that, I believe we should increase exposure in high-beta stocks, and again, I think ATY would be an ideal candidate because (1) it has high beta; (2) there is no earning risk; (3) SOX is pretty depressed; (4) reasonable valuation; (5) institutions love it; and (6) there are not too many high beta stocks here to choose. I would like to increase the exposure of ATY for a trade, as long as exposure is reduced.

DO NOTHING IS A DECISION

SJR.TO
Finally, I manage to get enough courage to dump this. Remember doing nothing is actually a decision. I have held this thing for more than two years and had only misery. Emotion aside, at best this will be a dead money for a while; At worst, it will have limited growth, more competition to its core product, limited ability to increase margin, uncertainty with new product introduction, higher level of capital expenditure, and diminishing free cash flow. I am certainly not impressed by its management over the years, despite its reputation as a superb operator. Its earning momentum is clearly slowed and it has for all practical purposes, missed two consecutive quarters. But more importantly, the exposures is simply too large for the portfolio to deal with. It is the right thing to do, but man, it hurts.


AE.UN
Pick up some AE.UN (14.85). The trust currently yield approximately 13.05% (net). About half gas, reasonable valuation (5.5 times of CF), D/CF: under one times, P+P RLI about 8.8 years; NAV 12.06 (traded at 1.23 times premium); payout ratio at about 75% and will decline to about 65% by next year. As long as it can maintain at current level, the 13% return is guaranteed for next year. If the commodity price remains at current level, I believe it will go up a little, which will easily translate into a 15% return.


It appeared a number of big misses (MSFT, BCOM, AMZN), and the tech market does not look very promising at this point.

CLOSEOUT

COVER AGA.TO @18.21
Close my position this morning before the market. There might be a little more downside, but I do not want to hold the position before quarterly results (DSF: 10/25, AGA: 10/28, IPS: 10/29), which will likely be blockbuster quarters. If these share run up after results, I may put out a little more.

A real mixed bag of reports. EBAY and softwares reported very strong results and their shares popped up, while chips, continued to be cautious, with a couple of big misses. The preponderance appears to be on the positive side. Tech continues to show strengths, this confirms my early thesis that the poor Q3 is significantly discounted, although that did not necessarily mean these who committed the "misses" would not get severely punished. This is why I added a little ATY, just for such a scenario.

LOWER STOP

AGA.TO
Haven't updated for a few days. (sick like this market). Lower the stop to 19.01. Let's see if it could break lower. No support until 50-day MA (17.10).

I sensed some panic here, and if it continues into the last hour, I will cover the position. Nothing done, support seemed strong at the end.

TO SHORT OR NOT TO SHORT

SELL AGA @19.50
Metals appear to have a correction here as most of metal stocks are down. Up or down, it's all related to the five-letter word: CHINA. To short or not to short, that is the question. Steel price starts to roll-over, so did most of steel stocks. I sensed that the speculators may start exiting the sector. So I put out a little AGA for a trade. I do not want to take too much risk on this though, so the stop is pretty tight at 20.01. Let's see if it's going to work. Early indications do not look good. Man, these early calls are not working for me. They generally almost always fall into "good idea, poor execution" category. I got to stop these early calls.


The market's reaction to the early earning reports is pretty much as expected. But if that is the case, isn't the decision to buy ATY inconsistent with the theme of the quarter. Yes, guilty as charged. The ATY purchase may be ill-timed. While the support for the theme is strong, the question whether the poor Q3 results are discounted has always been lingering, and this doubt was somewhat confirmed by the two early returns, INTC and YHOO. The results, while not bad, certainly were not impressive. The market's early reaction was enthusiastic, although the rally petered out. The market faked, trapping more bulls, and promptly resumed heading south. Its reaction to last night's results had been more predictable, which casted doubt on the ATY purchase. Having said that, it behaves reasonably well today, I do not believe we should dump it in panic. I guess I just have to sit it out.


The acquisition of ATY proven to be a terrible decision (down 6% in one day), and it just proves that a good company does not necessarily mean a good stock. I always believe that picking stocks is really not that hard, having convinction is. This will certain test it. There could be potential more down side risks as more bad news are being delivered. Going through the reporting cards, most appear to meet or beat, but guided lower. Despite the setback, I can't be unhappen given the triple digits loss of DOW.

IT'S NEVER WRONG TO TAKE PROFIT

SELL TUI AT OPENING (2.7)

Energy stocks appear to lose some momentum and I am pare some exposures, even though I still believe strongly that they will come through for the next two quarters. 20% return is really not that bad in a couple of weeks, in relation to the overall return objectives. If the momentum continues to move downward, we should be able to pick up a few with lower prices.

SELL DY AT OPENING (1.31)
This is a different story. There are simply too much exposure in this, which I do not believe will move at all, probably until 2006. Even that depending on the decent level of nickel price. Dead money for a while.

BUY CLC.UN (11.76)
A part of strategy to shift a portion of the portfolio into trusts, with objective to achieve 10% overall return. CLC currently yields only 8.0%, but it is in a very stable business with a steady growth, good management, strong balance sheet, and proven records. There is a good chance that distribution may increase by a couple of ticks next fiscal year. The fundamentals of the healthy care industry appears to be positive as spending is on the rise. The trust has not run up as much as others. Overall, I believe that 10% should be easily achievable.

ENERGY
A sea of red in the energy patch. Let's see if we can figure out why. (1) The temptation to take profit is huge. Energy stocks have gone up at least 20% in the past few weeks, and well over 50% for the year. As said earlier, it is never a bad thing to take some off the table. (2) Oil's one-day reversal from $54 top is perceived as a bad omen, particularly for speculators; (3) INTC and YHOO give traders reasons to shift sectors from energy to tech. You can almost feel the euphoria in the air, they are practically giddy. Pity the euphoria is short lived; (4) PD pre-announced, lowering its earnings expectation. Service stocks got hammered. Hello, didn't we all know that drillers' earnings will miss due to wet weather? No matter.

BUY ATY @20.99
ATY is in a sweet spot. Market share up; new products; new revenue streams (including royalties, a QCOM model); governance issue pretty much resolved; Q3 results exceeded, guidance up; analysts loved it; buy-side managers can't afford not to having it; valuation reasonable; cash flow strong; balance sheet non-issue. Concerns relate to the overall condition of the market, particularly the tech. If it can go through this Q3 season without serious damage, it could reach 25 by the year end. A 20% upside with a limited down side risk. After all, the results were out and no skeletons in the closet.

Earlier returns of reports are not encouraging, SNDK missed big and got slammed (down 20%). NVLS met but guided cautiously (down 9%); AAPL on the other hand, exceeded and up by 7%; SOX appears to be under pressure tomorrow. My early thesis appears unfolding. I may have to endure some volatility for ATY;

PARTY OVER?

The WTI goes through US$54/bbl, most of energy stocks go down! Is the energy party over? Are we too late for the party? Or is this just some wanting to exit the party earlier?

Let's review the PROS and CONS of the energy plays.

PROS

• It's the commodity price, stupid;
• Valuations remain reasonable;
• Analysts only start to move up the commodity pricing projections for 2005, most still use US$35 for oil and US$5.75 for gas;
• Results for Q3/04 will be good for most, notwithstanding the wet weather;
• On the other hand, Q3/04 for most other sectors will be disappointing, forward guidance will be cautious; Energy is the best place to hid;
• This is traditionally the strong season for energy stocks, particularly for gas producers;
• Demand and supply appears to support the high energy price;
• The trend is certainly not broken;

CONS

• It's best to sell at top;
• It's a bubble and it will burst;
• Speculative money could gone in a flash, and they may have exited already;
• This level of commodity price is not sustainable, as it will inevitably lead to an economic recession, which in turn will lead to lower energy demand, and lower commodity price;
• Near term uncertainty (election, Iraq, Nigeria, Gulf of Mexico) could be resolved;

I could go on and on, and both sides have strong arguments. In its totality, the PROS may appear to have an upper hand here. To the minimum, we ought to let the Q3 earning season runs its course. I doubt that poor overall results / strong energy results would do too much harm to this sector.

We do need to address the scenario where the commodity price declines precipitately, from $53 to, say $40 in the near term. What will happen to energy stocks? I have no doubt that most energy stocks will fall, some significantly, particularly those who had a spectacular run (CUX comes to mind). While long term fundamentals may continue to be favorable, I believe A SELL is in order. You can always pick up later. I personally do not believe this scenario will materialize, but I can't emphasize more: PROCEED WITH CAUTION.

INTC met, guided in line, and up modestly after market. YHOO exceeded and raised guidance, but down slightly after market (go figure). Most other announcements seemed to be misses or lowering guidances. The general tone of the market is slightly positive, probably driven by the reversal of oil and INTC's results. Expecting a positive opening tomorrow. Energy appears to be under pressure and the day-reversal did not look good.

ENERGY, ENERGY, NOT ENOUGH ENERGY

Selling LIQ.UN @ 12.85

I had a second thought of this thing. Originally it appears that it is a no-brainier as a mature sin-business. However, the business has no competitive advantage, it has less than 8% of Alberta's market share, regulatory environment does not provide efficiency with size, and the yield, at current price is not very attractive. There are better alternatives.

The question is then: should I put more into junior energy companies? Obviously commodity pricing still favorable; we are entering into a seasonal strong period; Q3/04 results will be very good; On the other hand, is this sector too crowded? Is there a mob mentality there? Is every one chasing the same thing; Is this a bubble of different type? Is commodity price driven by fundamentals or speculation? Finally, on a more personal level, we are closing to about 30% of total portfolio, is this level too high?

I continue to add more energy exposure, as of this morning RER will likely be the candidate. However, easy money is made already. Commodity prices could decline rather quickly if speculators decide to cash in. PROCEED WITH CAUTION.

BOUGHT 350 RER @10.50



WEEKLY SUMMARY

The week turns out to be alright as the portfolio posts over 4% net gain while all major Indies are flat or down. Energy remains the driver, generate strong growth. Communications also post reasonable return. Small caps and financial are basically flat and biotechs are flat or down as expected. Technology remains very weak, fortunately it contains only one name which could be qualified as "Tech" (biotech excluded). Overall the portfolio remains very defensive with approximately 30% in energy sector. Majority of the pre-announcement continued to be on the negative side and I still believe Q3/04 results would be disappointing in general, particularly in tech. The question is how much of this weak Q3/04 and weak guidance have been discounted already. Regardless, even assuming it is largely discounted, it is unlikely that continuing bombardments of misses would be good for the market. On the other hand, Q3 for energy companies would likely be much better than expected, and guidance for winter drilling season will likely be raised again, which could generate some buzz from here until early 2005.

I have done a few things this week. Sold NS (cut loss), bought a few more energy names (TUI, RER, WEI, CUX), all turned out to be reasonable bets. But the story of the week continues to be IOL which climbed all the way from $19 to $35, and there is no sign that momentum would stop. I guess there is no reason for me to sell it now, if I had been holding it when it was down the drain. I also ventured into the trust market for the first time (where have you been?), although I sold it rather quickly for no gain. The quick exit does not mean disinterest, rather, as mentioned above, I changed my mind. I am definitely leaning towards increasing exposure in this class of assets as its performance is simply hard to ignore. More importantly, if your objective is only a modest 7.5%, is it much more easier and less volatile with a well-structured trust portfolio? A few conservative names: YLO, CLC, REI, ZAR. I will move at least a third of my portfolio into trusts after Q1/05.

Earnings will come like flood next week. Be ready for a lot of misses or lower guidances. Watch those that meet or exceed. They will be leaders if market rallies.