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Oil: The bottom of the barrel?

Panic has run rampant through Wall Street and we believe oil is oversold. Today, the spot price on Brent is 85.04 while WTI is running 82.27 a barrel.

There are many many possible theories as to why the bottom fell out of oil in the last two weeks, the most likely are:

1) Slowdowns in China, Europe and the rest of the world.
2) The Saudis are nervous that the USA has overtaken them in oil production and they are trying to weed out some of the more expensive plays in the US Shale (most US Shale plays need >$60 a barrel to be profitable) by flooding the market (The Saudis admitted over production in September) and selling oil below market price (currently selling a dollar below Brent Spot).
3) A combination of the two.

Since panicking is not a sanctioned strategy here at the BHS, we need to look at the most likely scenario and calculate our next move from there.

We do not believe that the Saudis can keep this up for too much longer. According to the Yemen Times, the Saudis kicked up their social spending budget last year by 36 billion dollars. The IMF the Saudis are going to run a several billion dollar deficit this year and they must keep spending money on social programs or they will run the risk of revolution that we have seen in Libya, Syria, and Iraq. According to the IMF, in 2013, the Saudis needed a Brent price of $89 a barrel to break even, up $13 a barrel from 2012 and the spending must continue to keep the people in line.

We argue that oil is oversold due to the panic and the reliability of Wall Street to overreact. However, the Saudis can keep this up for only the short term. By November, at the OPEC meeting, we may see some fireworks and reluctant production cuts to elevate the price…along with that, a recovery in the US shale stocks such as EOG.

When is enough, enough?

GoPro (GPRO) is a beautiful thing. Locking in a 65% gain in less than a month is the way to go, I should do that more often.

GoPro: GPRO

A great strategy to work on is trading around a core position to maximize your gains. Some people use small percentages to do this, I like to use nice even numbers.

Take GPRO as an example. In my previous posts, one of the rules is to not buy in on a stock that trades more than twice the earnings growth, basically we are using the PEG Ratio as a guide. This is my key to cash out of the position with whatever I have left unless you commit to using the house’s money.

Here is how it works:

I did my research and I want to buy 500 shares of GPRO at $45 a share. One of the rules is to divide up the purchase and never commit everything you have to the first purchase. Ideally, on a large position, I would want to break this up in 25% chunks of my 500 goal. However, we will use two purchases for this exercise.

Lets say that we purchased 250 shares at $45 and the next day we hit the bid on 250 shares at $40 per share. This make an equivalent purchase of 500 shares at $42.50. We have established a position.

Over X amount of time (in this case X = 1 Month, whoo hoo!), GPRO goes up 25%. Using this “trade around a core position” method, we should now sell 25% (125) of our shares, keeping the 375 (75%) as our core position and let it run. Effectively, we are still running even since we are out 25% and we are at this point up 25%.

Now we wait for GPRO to take a 3 or better percent decline (adjust this down for a less volatile stock). If GPRO goes up, we make money in our core position. If it goes down the 3-5% or more (and the reason that we bought in the first place doesn’t change) we commit the money from the 25% (125 shares) cash out to buy back in. When GPRO goes back up 10, 15 or even 25%, we sell the 125 shares (25%) and do it all over again and again. This is a great strategy if you pay attention to your stock and want to make a few extra percentage points.

When enough is enough, either by a multi-day ramp up in your stock (like with GPRO today!), you will need to look at adding more shares to the cash out and reassess whether or not to keep trading around the core position. If you hit the one bagger (100%) mark. I would highly recommend cashing out 50% and play with the houses money letting the remaining 50% ride as a freebie. You can always jump back later.

Tax Inversion

Who cares that Burger King is buying Tim Hortons for 11.4 Billion? You should. A lot of people say that it is unpatriotic for Burger King to to try to escape the U.S. Tax Code. First of all, they will still pay U.S. taxes, but they won’t pay nearly as much. Burger King will go from a top 35% tax rate to¬† 15% (26.5% For Ontario). This is a 46.4% reduction.

The most important thing to remember is that it is the CEO and the Board’s primary fiduciary responsibility to make money for their shareholders.

Energy would be better spent to decrease corporate taxes within the U.S. We are the highest in the industrial world. If we would set a flat 15% tax rate, you would see some serious job growth.

What is a difference between a Hedge Fund and a Mutual Fund?

There are quite a few differences, but to us there are only three things we care about:

1) Mutual Fund Managers make money off of churning and fees and there is not much incentive to make money for you.

2) Hedge Funds are not bound by regulations for leveraging but the manager only gets paid when you make money…a little better deal, but the home gamer or retail investor can’t play…sorry.

3) Very few can beat market average. And by market average, I mean the S&P 500…not the Dow Jones.