stock market stocktake

The past few months have provided me lots of excitement in the stock market. I was initially very gleeful at successfully avoiding the spectacular sub-prime crash earlier in the year. But since I started putting money back in the market, the subsequent declines have been no less significant. I am constantly reminded of one piece of wisdom that stuck in my mind from one of the market research reports I read quite a while back:

A stock that drops 90% is a stock that drops 80% and then halves.

Many of my stocks have halved. Nevertheless, I am still very optimistic in the long term, and I thought that for once I would take stock of my key holdings, and review my reasons for holding on to them and averaging down, or whether I should consider cutting losses on some of them. I want to capture a snapshot of my logic so that in another few months from now, I can look back again and laugh or cry.

Gold (STI: GLD.SG)
Of all my holdings, I am most bullish on Gold in the short- to mid-term, and have been trading (mostly accumulating) since June. There are a lot of reasons for this:

• With the announcement of the bailout plans, the US government will reach unprecedented levels of debt. I expect the US dollar to go down, and historically this will drive the price of gold up.
  
• If the bailout plan is successful, I expect high inflationary pressure in the US to increase demand for gold.
• If the bailout plan is not successful, the impending recession will also cause people to retreat to gold.
• Recent weakness in the price of gold is attributed to fund managers being forced to liquidate their holdings to pay off other margins
  
• The other interesting fact is that there is a huge shortage of physical gold. I'm not exactly sure how this relates to the price of futures and ETFs (since the disconnect has existed for quite a while), but the natural inference is that high demand should bring prices up somehow.
• The price is down 25% from its high in Mar 08.
  

Posco (NYSE: PKX)
Posco is a South Korean steel company I have become quite attached to, having made quite a bit on them over the last 2 years. The have a proprietary steel-refining process that is supposed to be the most advanced in the industry.

• My investment in this company is premised on the continued demand for steel from the developing countries.
  
• The stock dropped sharply this year, firstly due to high oil prices and then the global economic decline, but I expect this to recover in the mid- long-term once growth in China, India and Asia resumes.
• Warren Buffet has called this the best steel company in the world and he owns a 4% stake.
• The price is down 70% from its high in Oct 07.

Alexco Resource Corp (AMEX: AXU)
Alexco is an American silver mining company, with large operations in Canada.

• Silver is supposed to be the poor-cousin of Gold, and the two usually trend together although Silver fluctuates more. Currently, the price of Silver has been beaten down much more relative to Gold.
• Unlike Gold, Silver also has industrial applications, hence demand is also affected by the general economy. Hence, the longer-term outlook is also optimistic similar to steel.
• The price is down 80% from its high

Chesapeake Energy Corporation (NYSE: CHK)
Chesapeake is one of the largest natural gas producers in America. The price has fallen sharply lately, but I think the price of energy will remain high in the long term.

• The stock has dropped substantially with the falling price of oil
• The company has cash flow problems in the current tight credit market
  
• The CEO had to liquidate his stake to cover other margins, leading to further price drop
• The price is down 70% from its high in Jul 08

NVIDIA Corporation (NASDAQ: NVDA)
NVIDIA is the leading maker of computer graphics chips. I've been toying with it for a while, and will probably look to buy in over the next few days.

• It is strengthening its dominant position in the graphics industry
  
• The company has a very strong cash position, although the importance of this has lessened slightly
• It has a strong historical annual ROE of 24%
• It has been incorporated into the latest line of Apple computers, which will likely increase demand greatly
• However, the company is facing recent lawsuits over GPU failures, which could be costly
  
• The price is down 80% from its high

SIA (STI: SIAB.SG)
I first bought this expecting the price of oil to fall in the short term. The price of oil fell, but so did everything else! I've since reduced my holdings (contrary to popular sentiment that this is a good stock to accumulate) because I think the airline industry will be hit hard by less travel (esp on the major carriers) in the short term. In the mid- to long-term, bankruptcies and mergers within the industry may improve the buying proposition. So for now, I'll just hang on to a small stake and watch.

UBS (NYSE: UBS)
When I first bought UBS, after GIC had already lost tremendous amounts of money on it, I was optimistic on a quick recovered. Since then it has dropped much further, although the government interventions in both US and Europe have helped stabilise the price. I'm just going to hang on until more positive signs emerge, or perhaps I will diversify by financial holdings with another American bank.

Well, these are my core holdings for now. Most of them are in America, because I figured the American market was a lot closer to bottoming out (although the STI has since caught up significantly). I'll just continue to shop around for now.

One major strategy I've adopted is to decrease the size of my lot purchases. I used to buy about $3000 of stock at a time to minimise the % impact of brokerage fees, but with the ridiculous fluctuations I've decided it is a lot wiser to buy smaller, more frequently. Fortunately, the volatility also makes the brokerage fee less significant as a percentage of expected gains.

So let's see how this goes ...