Upping the Ante

As we predicted last week, stock market turmoil over Russia’s aggressive stance towards Ukraine was short lived.  By now Putin and his cronies realize they are playing poker with a very short stack of chips, and the rest of the world is willing to call their bluff. And unlike professional gamblers who often work in teams to improve their odds of winning, Russia has no friends of any real significance to turn to for help.

Were it not for the energy sector, Russia would have almost no chips to play with at all in terms of the global financial markets. Even then, the handwriting is on the wall as the United States moves closer to flooding European and Asian markets with cheap liquefied natural gas.  When that day comes it will be interesting to see which direction Russia turns to reconcile its political dogma with economic reality.

But that day is still several years down the road, so with the current contretemps gradually losing steam investor attention now swings back to more pressing matters. Of much greater immediate concern is China’s continuing economic woes.  This week the issue is softer than expected trade data indicating a huge drop in Chines exports.

Lower exports means reduced cash flow for Chinese corporations to purchase from western suppliers, and less tax revenue for the Chinese government which may induce it to sell off U.S. treasury bonds to stabilize its currency. Throw in heightened nervousness over how Russia will extricate itself from Crimea without triggering some sort of regional military conflict and you have the ingredients for excess volatility in the near term.

However, it is what investors are not overly concerned about that may be even more important in the long term.  I do not recall hearing a single financial media person mention the terms ‘quantitative easing’, ‘tapering’, or ‘sequester’ during the past week; it has been well over a year since the last time I remember that happening.

For the first time in a long time most of the attention in this country is focused on the traditional economic metrics of unemployment, GDP, and inflation without being overtly framed within the context of political policy. That may sound like good news for the stock market, but when investor attention is not distorted by exogenous events the result is usually a more rational valuation mindset towards stocks.

For that reason 2014 continues to shape up as a two-tiered market, with fairly valued and fundamentally sound companies attracting investor capital while their overvalued and financially shakier rivals slowly lose out.  As an example, in the Portfolio Update section below we will discuss the continuing woes of 3D Systems Corp, which once again is paying the price for unmet (and unrealistic) investor expectations.   

NASDAQ Composite Index:

Friday, March 7 = 4,336.22

Year to Date = + 4.7%

Trailing 7 Days = + 0.7%

Trailing 4 Weeks = + 2.2%

PORTFOLIO UPDATE

As mentioned above, Equity Trades Portfolio short sell recommendation 3D Systems Corp. (NSYE: DDD) is taking another big hit today in response to a Barron’s cover story over the weekend warning that the company could be overvalued by as much as 80%. Just last month the stock took a similar hit after reporting disappointing quarterly financial results, dropping from a closing high of $96 reached in early January to a closing low of $64 just one month later.

However, the stock gamely fought back in the weeks that followed, climbing above $80 by the third week of February. That price happens to coincide with our short sell limit price of $80 for DDD, so if you missed out the first time you had a second chance to sell short or buy puts on the stock (but not for long, as the stock managed to stay above that level for only a couple of days).

The trading activity since then suggests that DDD has captured the attention of professional short sellers as its chart was already pushing downward prior to publication of the Barron’s article.  And if “the shorts” have indeed targeted this company for a takeout then this time there may be no recovery until a lot more damage has been done.

If you shorted DDD at our limit price of $80 then right now you have a 20% profit in that position in less than three months (and if you shorted it in January when we actively recommended shorting it above $90 then your profit is closer to 30% in less than two months).  Either way that’s not bad, and we wouldn’t blame you at all for cashing in on an annualized gain of well over 100%. 

We don’t think the stock price will drop by 80% as the Barron’s article suggests it could, but we do think it could drop to $50 before it finds meaningful support.  Whether or not it’s worth it to stick around for another 20% drop is entirely up to you, and you could always buy some call options (while they’re cheap) to lock in your gain if you want to see how much further it may drop.

We also want to reiterate our recent Equity Trades Portfolio buy recommendation for Lenovo Group (OTC: LNVGY), which is now priced about 20% cheaper than it was two weeks ago before announcing a couple of major product line acquisitions from IBM and Google. It may take a while for the rest of the market to figure it out, but Lenovo has now positioned itself to be a major player in the Chinese PC market which, unlike the U.S. market, is still growing.

We reiterate our buy recommendation on Lenovo up to $22.