Sold DOW Chemicals

Sold my ~4% position in Dow Chemical (Ticker DOW), which had appreciated about 20% in the 3+ months I have owned it. The stock has been bouncing around $34 for most of February after running up in January, suggesting to me that it has peaked out. The consensus analyst estimate in 2013 assumes a 25% EPS growth rate, which I believe is quite aggressive should my Sagflation theme play-out of deflationary pressure. Furthermore, with excess capital in the economy and growing consumer debt, I believe demand may slow for large segments of the company. Finally, about 1/3 of revenue comes from Europe, to which I would prefer to lower my exposure. The P/E on the consensus 2012 EPS estimate is about 12x and the dividend yield is around 3%, both reasonable in my mind. I just believe the company may face stronger headwinds going forward.

Easy Money Now, Hard Times Later

Following up on the last post, "Freight Trained," I wanted to highlight an article in Barron's that outlines quite well the expansionary monetary policies by most large central banks in the world. I agree with many of the concerns outlined in the article and believe these monetary policies, coupled with the fiscal austerity in many countries, lead to the following in 2012:

(1) Rising commodity prices into the first half of 2012, driving up prices for gas and food,
(2) Higher equity valuations into the first half of 2012 as liquidity inflates the stock markets,
(3) Rising interest rates on longer-term bonds due to inflation concerns and rising stock valuations,
(4) Declining wages as companies control headcounts to offset higher material prices, and
(5) Rising CPI by mid-2012 as companies pass along higher costs to customers,

All this leads to a potentially violent reset of the markets in the middle of 2012, in my view, in-line with my expectations under my Sagflation thesis of slow-to-negative growth combined with more volatile prices. During this phase of Sagflation there may be rising fear that we are entering a period of Stagflation, or high inflation, high unemployment and slow economic growth. I suspect this potential period of Stagflation may precede a period of negative growth and deflation in 2013 and 2014. While worrisome, I also believe the years 2013 and 2014 enable the political and economic re-structuring required to set-up for healthy growth in 2015 and beyond.

Returning to 2012, the potentially violent reset during the middle of the year may occur due to:

(1) Consumer spending falling due to a squeeze between rising food/gas prices and declining incomes,
(2) Debt stifling growth in European countries and with US consumers,
(3) Social unrest stemming from economic hardship in Europe and the US (Occupy movement),
(4) Additional austerity measures legislated in the US and enacted in Europe to reduce debt, and
(5) Diminishing impact, or even reversal, of expansionary monetary policies that appear to hurt growth.

These are my opinions and I lay them out in order to refer back to them in the future in order to track how my perception of the future evolves as unexpected events occur.

With all this in mind, I may exit a few positions that do not benefit from the anticipated rise in commodity prices and steepening of the yield curve. My portfolio currently includes the following:

Weight	Name	Ticker
~16%	Proshares Ultrashort 20+ Yr Treasury	TBT
~11%	SPDR Gold Trust	GLD
~4%	Base Metals Double Long	BDD
~4%	Rowan	RDC
~4%	Boardwalk Pipeline	BWP
~4%	Eaton Corp.	ETN
~4%	DOW Chemical	DOW
~4%	Huntsman	HUN
~4%	Prudential Financial	PRU
~4%	Brookfield Asset Mgmt	BAM
~4%	General Electric	GE
~4%	Vale SA	VALE
~3%	iShares Silver Trust	SLV
~3%	Tyson	TSN
~3%	Goldman Sachs	GS
~3%	Ferrell Gas Partners	FGP
~2%	ETFS Physical Palladium Shares	PALL
~2%	Citigroup Inc.	C
~2%	Morgan Stanley	MS
~2%	Pepsico	PEP
~1%	Teva Pharmaceutical Industries	TEVA
~1%	Computer Associates	CA