Friday, June 06, 2008

Are You On or Off The Bus??

Ever wonder why - over the past four years - commodity stocks have risen ceaselessly yet periodically crater in despair before vaulting to the upside with even more vigour, each up-leg catching more traders and portfolio managers with the equivalent of Commodity-Cat Scratch Fever?? It's easy to say "the specs", the BRIC bulls and dollar bears , though one must admit that rising prices have belatedly been requited with continued upward earnings revisions. That said, future earnings projections have in the main NOT caught-up with the pace of the rises in the stock prices, leaving "ratings" (valuation based upon out-of-sample forward-looking PEs) unprecedentledy high for a period when earnings are stable or rising.

Well I think I have stumbled upon the answer: guys... big guys... you know really big investors who punt around in round-lot percentages of shares outstanding, simply cannot make up their minds whether to stay-on the hard-asset bus, or get-off the commodity bus. This is perhaps best exemplified by Glenn Krevlin's Glenhill Advisers' position in Southern Peru Copper's parent Grupo Mexico SAB de CV (right). Krevlin, a former partner in Cumberland Advisers, now runs his own quiet $3bn operation, apparently throwing around large blocks in I "love it" - "I hate it" fashion.

Now the company itself has a reasonably small float anyway, but what's with the largest arms-length shareholder trading like a yo-yo??? Just look at the buy-puke-buy-puke-buy sell way early-jump back onto the
commodity trampoline. To me it is the classic reactive response that knows these thing aren't the thing to hold when the party is over, but ever the reveler, doesn't want to miss a good thing so-long as the party looks like it'll continue to cook. Importantly, judging by the historical price action, mirrored across the whole complex, Mr Devlin is almost certainly not alone in his hot and cold flashes of affection for the companies in this group.

Maybe this is as it should be. Maybe what he is doing is completely rational, processing, and discounting new information - sometimes bullish for the complex, sometimes not. But each time, The Trade attracts more marginal buyers and newly-converted portfolio managers, the pari-passu risk in "The Trade" increases in, what is in the hackneyed but nonetheless apt phrase, "archetypical bubble fashion".


Byrne said...

The Glenhill thing is nuts. But over the last year, he's traded out of a block of what seems to be exactly the same number of shares -- it looks like this might be some kind of option or swap strategy that we can only see part of.

You're right about the first chart, there. I have an atavistic reaction to anything that looks like March of 2000.

"Cassandra" said...

byrne, i contemplated precisely that, considered inclusing such a disclaimer on my observation, and upon more rumination, think it reasonably likely there's an alternative technical explanation. Nonetheless, it is interesting to ponder the possibility that he's doing the Joe Strummer thing, which undoubtedly people (CTAs are when they get stopped out by their Donchian channel breakdowns ...