While working with Alex and Pat I thought writing a blog for a business is a waste of energy. But you have to admit these guys are ahead of the game. Sometimes this just helps cut through, capture, and clarify thoughts for the writer himself. 3 am at night is certainly one of those times. In this place I intend to record....well just like everything worth including as my judgment tells me. But to start I'll pick a specific topic and that's gonna be the process through which I reduce my exposure to the equity market as some deals turn increasingly bad-looking.
To start, I've increased my cash by 10% in the past week. Shares of SUN, CINF and OLN are gotten rid of. OLN was a turn-around situation, but as the market rallies I'm increasing skeptical about its performance prospect in the next 3-5 years. The chemical business is not going away, but after taking another look at its FCF and reproduction asset value I concluded that the MoS is no longer wide enough. At around 19 a pop it still looks reasonably priced, but there needn't be a reason why it merits the market's attention in the future. A great 10-k/q might help, but I have to admit I feel more comfortable taking my gains and pay taxes.
Like OLN, CINF is sold not because I'm convinced it's overvalued, but for the fact that it no longer looks like an attractive business. The stock was bought a year ago, when I focused largely on the quantitative side of fundamental analysis. Now I have to say, an ordinary insurance company like CINF has just about very right to be overlooked by the market. After all, it's a super competitive business, and CINF doesn't have a cost advantage or a pricing ability. In addition, I'm growing increasingly uncomfortable with the busines model of financials in general. In the future (long long long ahead?), fixed income has only one way to go --- down. And financing costs could only go up. The thought that an insurance manager will put MY money into risky positions out of his desperations caused by the lack of good investment opportunitie in the market is keeping me awake at night. The reasoning is very sketchy, but I'll follow my guts.
SUN is the hard one, another turn-around situation. The reason for selling could be summarized into: 1>. I've already made my money on this one, and 2>. Despite the skyrocketing the position remains too small with respect to the portfolio and it's not worth the attention to do the work for so little money. Also, 3>. I asked myself whether I felt comfortable BUYING at the present price, and the answer I got was no --- balance sheet is capital-intensive, cash flow is tight, dividend is a pity, and oil... well energy price is too tricky to understand and SUN's business model has proved to be too vulnerable to that volatility. So I kissed it goodbye simply because, once again, I'm worried.
Now with cash at over 30%, one thing I've got to worry (@#$%$##@) about is inflation. I turned out to be right that bonds are the thing of the year. It's truly a pity. I feel almost like seeing right through it: the trading profits at firms, the malfunctioning of Fed's interest rate wag, the need to pump up equity prices..... the whole situation is nonsense, but happening. Oh well...
