Reflections on Monday's Selloff

 | Apr 16, 2013 | 1:00 PM EDT
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First, I send prayers and well wishes to those affected by the bombing in Boston yesterday. As someone who was a hundred yards away when the planes hit the towers, the city and its residents are in my thoughts and they have my deepest empathy and condolences. Godspeed to Boston on its recovery and may it quickly find the perpetrators of this crime against liberty.

I have been expecting a substantial pullback in the market for several weeks now. I did not expect the selloff to be triggered in part by a huge pullback across the commodity complex, especially in the precious metals. Gold has now had its largest two-day sell-off in over 30 years and silver has been hit hard as well. I have heard different explanations for the rupture in gold prices. I don't buy the ones that are centered on deflation concerns. I don't think the central banks of the world will ease up on QE efforts in the near future to allow that monetary event to happen.

The more likely explanation is that a major player or players got into trouble and had to liquidate some significant positions in the yellow metal. Others probably had to lighten up due to margin calls. The beaten-up gold and silver miners suffered even more declines yesterday. I am avoiding the space until we get more clarity on the direction of precious metal prices. I believe some of the small mining concerns could be good buy opportunities in the near future. I believe the sector is going to see some significant consolidation to cope with falling prices and cost pressures.

The more concerning trigger for yesterday's declines was the slack Chinese growth. First quarter GDP in the Middle Kingdom came in lower than expected and the report was behind some of the large decreases in energy prices, especially oil. Caterpillar (CAT) was one of the worst performers in the Dow yesterday on the double whammy of slowing Chinese growth and the carnage in the mining sector, both of which are significant customers for the company's products. Joy Global (JOY) sold off on similar concerns. Both stocks are about 5% to 7% away from long-term technical support levels. I will probably add some small positions in both of these industrials if we get another 5 percent decline in their equities.

The energy sector got clobbered yesterday on the back of a $3 a barrel decline in the price of oil. I added to my stakes in some small E&P concerns as the sector overreacted and many equities were off 6% to 9%. The long-term story on these fast growing energy firms was not altered by the short-term fluctuation in the price of Brent or West Texas Intermediate. In addition, credit conditions are still good and the M&A environment is still supportive. Natural gas prices have more than doubled since their lows early in 2012, which makes their gas reserves more valuable. I added to my positions in Triangle Petroleum (TPLM), Warren Resources (WRES) and Emerald Oil (EOX).

Finally, I added some to my core positions in cheap large cap stocks that pay solid dividends. ConocoPhillips (COP) at $57 is a gift. The stock yields almost 4.5% at this level and is priced at just over 5x operating cash flow here. I also added a few shares to my Apple (AAPL) stake late yesterday. The stock is establishing a solid technical support level at around $420 where it has already bounced off of a couple of times. I also expect at least a 50% dividend hike when it reports earnings next week, which will take its yield north of 3.5%. The company has more cash/short term securities than some small countries and the shares are selling at approximately 6x earnings after subtracting that cash hoard.

It is on days when the market experiences sharp declines that an investor must remember the first rule from The Hitchhiker's Guide to the Galaxy -- "Don't Panic". Take out your shopping list and use some cash on hands to pick up some bargains. Happy Hunting!

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