Market Sentiment - Positive!?

A few indicators are actually looking pretty positive, in spite of the lack of followthru by the market in general:

• Corporate insiders are buying at high levels
• Newsletter sentiment is overly negative, according to Hulbert.

Other sentiment indicators are negative (and therefore positive) as well. So, the market looks likely to rally, altho I think it best to sell into these rallys, and use them as a way to fine tune and position your portfolio. Continue to underemphasize the financial and technology sectors. NASDAQ gains in 2007 were primarily driven by Apple, RIM, Amazon, and Google, and they all have interesting and solid businesses, but the simple fact is that P/E's got too high. Amazon for example last fall sold at a P/E of close to 100, very few if any stocks can sustain a P/E that high.

Energy Sector....

Oil prices seem to me to be at the high end, and likely to decline as the economy slows, possibly into a recession. While demand growth from China and India will help, I don't think they are at the point where they can compensate for a slowdown in the U.S. Consider selling to raise cash, or, since options premiums are high, writing covered calls. 2008 is a good year to realize capital gains anyway, since tax rates are likely to go up next year with a change in administration.

Natural gas companies are probably a somewhat better play, but even there industrial demand is a high proportion of demand compared to residential and can be expected to drop as the economy slows. In general, natural gas appears to be well-supplied....no hurricanes last year, and a relatively normal winter so far.

Hedge where you can (as above), companies with a pipeline component for example can be held, these include El Paso (EP), Williams Brothers (WMB), and Questar (STR). In addition, partnerships such as Enterprise Production Partners (EPD) and Kinder Morgan (KMP) aren't really affected by prices, and both yield over 6%.

Current View

Last year, I thought financials such as banks/brokerages were heading for trouble and that's exactly what happened. We held highly liquid positions such as Berkshire Hathaway and Leucadia National, but just in case hedged these positions with some of the new UltraShort ETF's, in particular the SRS and SKF ETF's. This worked well as both BH and Leucadia had significant gains as well as the ETF's.

Currently, it looks like the latest rate cuts will support financials but I think there are still a lot of problems to come. I would continue to underweight financials, but would add to Berkshire Hathaway, in particular. It's one of the few legitimate AAA-rated companies with $50B in liquidity (more with leverage) and Warren Buffett should do well investing in this environment.

Introduction

I've been investing for over thirty years, with a value-oriented focus. I don't restrict myself in any to a particular asset class, since the value equation can change over time. I'm hoping this blog will be a forum for sharing ideas from others with a similar investment philosophy.