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The Benefits of Higher Prices (Yes, Benefits)


High prices, whether for food, ships, or barrels of oil, consistently lead to one thing much more often than the doom often predicted - innovative solutions from capitalists motivated by extraordinary payoffs.

I have been looking at some specs on a new venture Prof. Zucchi and I are considering – turning Florida condos into dry bulk shippers. "Earlybird Special: You get to load your own soybeans!" is a preliminary marketing slogan.

All Aboard

I've shared my thoughts on the name often and remain long, but Quintana Maritime (QMAR) thinks prices are high enough to explore strategic alternatives for its ships, in news announced Tuesday. For an update on this industry, I'm not sure you could do much better than listening to the guys who own the ships. For those wondering why I was considering naming my daughter Baltic Krueger, I present to you the Baltic Dry Bulk Index below.

Click here to enlarge.

There have been countless times if you expanded this one-year chart even more that the cost of renting a ship for the day looked too expensive, no different than for those of us who wonder when the price of stocks we are renting may be too steep. The publicly traded dry bulk shippers have been a case study in parabolic moves that have defied most expectations, including my own.

I got involved in this group a few years ago as a key ingredient in my "Food Fight" trade, where I have been building positions ever since around the work my firm had done which concluded we would witness shortages in supplies of agricultural commodities next to relentlessly swelling demand. My firm attempted to connect every dot around this long-term secular move it believed would unfold, including, rather significantly it thought, ships to get the stuff from the fields to the table. My firm got to know these companies very well, and continued its work, including challenging its own ideas at every turn. Then a funny thing happened along the way.

We have seen it before, but it is still no less surprising – when value stocks become momentum stocks, often skipping the growth managers altogether! So what do you do? What makes you feel comfortable, that's what you do. You sell as much as you need to not worry about how much to sell.

What did I do? My firm held every share, added some more, and raised and tweaked stop-loss orders under every one several different times. My firm was challenged by some bright minds about some of its positions in this space, noting the valuations were off the charts. For investors whose playbooks say that at a certain price a stock must be sold, that is what they do and I greatly respect their process. I think the key, and the reason I bring up this example, is my recommendation if I could share anything is to indeed have a process.

What happens when a value stock finds itself in a growth industry? Selling one of those makes as much sense to me as selling a great growth stock because the valuation gets too attractive. There are tremendous investors in each camp and I learn from them constantly, but from where I sit I couldn't imagine being confined to either. I cannot look at a stock as one or the other; they are two sides of the same coin on my screens.

In September, where the chart above ends, the prices on some of these shipping stocks were viewed as ridiculous by any measurement. Funny thing about people and money, though, they are a wicked brew and hard to measure. George Soros may have described this brew the very best when he said, "The generally accepted theory is that financial markets tend toward equilibrium and, on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future; they help shape it." Here is the month after the "top" through yesterday, where another 30% was added in 30 days.

Click here to enlarge.

Just when I had plenty of reasons to make some sales last month, I shared this instead on September 12: Let the Market Turns Call You. Dryships (DRYS) was trading in the $60s at the time and arguably "at the top" or well beyond any range it should have been at. It traded into the $120s four weeks later.

Perhaps this is an extreme example, but the funny thing about stocks and people is that extremes happen more often than they should. I am short "shoulds" and long "stops" in my book. There are plenty of risks with using stop-orders, but my experience has taught me that their risks are outweighed by rewards. In the final analysis for me, a stop-loss order answers more questions than it presents and collectively they finance the beautifully hidden secret in this business – you don't have to be right more than you're wrong (although that certainly doesn't hurt). The overwhelming desire among all of us is to be "right" about a company's products and services is trumped daily by something else altogether - the next print - born from buying and selling pressure on the company's shares, instead.

So on certain stocks at certain times, stop-loss orders may be appropriate and may help you greatly. I am already anticipating being stopped out on some shippers and if our floating condo idea doesn't have sea legs then I'll be turning the pages on some new potential positions.

Cycles Tend to Cycle

One possibility may have been shining in my backyard of all places. I was sitting and thinking about these ships just last night with an able-bodied Super Tuscan at my side which is paired nicely with the second run of Fast Money, I might add, where our very own Wolf and Negotiator have been spot-on in key areas. Recalling that cycles tend to cycle, or so I've noticed, I was emailing my partner, hatching a few potential secular winds we had been discussing when a short-term wind hit. Lights out.

A storm knocked out our power as I sat at the table.

So I'm in complete darkness, praying the crew gets there before my Mini-Minyans figure out another game to play with candles. Then I look outside and see only one tiny set of lights - the cheap solar lamps my wife bought more as a decoration than anything else. They lit her garden perfectly while I was stabbing and squinting at my Pescatore with only my lit BlackBerry screen to guide me. A sign from the Market Gods?

While I tried to explain what happened to Diego on the now blank TV, I also tried to explain how there may be 2 bln people or one-third of the planet who have never had electricity at all, and how grateful we should be. "He went where?...." Moving on.

It's the Sun!

Solar power, in my view, should not be written off as just another alternative energy idea, as many of my crude-sucking buddies in Texas would like to do. With a barrel of the sweet stuff approaching $100, don't forget to reconsider a lot of tossed-aside energy solutions whose plans become more and more viable with every tick higher in traditional energy prices.

One that might be worth taking a peek at is MEMC Electronic (WFR). I visited a WFR plant personally about five years ago when the company was in temporary buildings, unsure of its future, and toiling in virtual anonymity while employees couldn't wait to cash out of their options.

It makes silicon wafers, a lot of which are needed for solar power. Its story is now fairly well-known. What may not be as well understood and even offer opportunities for volatility to the downside in the short-term is that it is betting on itself long-term in a new pricing strategy that I am impressed by. Competitors have cut prices and WFR may be in for a couple of sloppy quarters as a result. But those prices are likely not sustainable and WFR took a much different path with an eye toward the future instead. It is pricing some of its products based on performance. The more efficiency its customers get from its products, the more they pay WFR.

High prices, whether for food, ships, or barrels of oil, consistently lead to one thing much more often than the doom often predicted – innovative solutions from capitalists motivated by extraordinary payoffs. The beauty of the stock market is that you can exit more easily than they can when the payoff odds change, and change your positions accordingly.
Position in DRYS, QMAR and WFR.
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