Friday, May 30, 2008

Thoughts on Current Market


Buyers seem to continue to gain confidence as time passes. We got thrown back last week, but have slowly plowed forward this week. GDP was revised up, but not as much as some had hoped. It has been kind of a "curb your enthusiasm" week though, and prices have reflected that. We could be range bound for a bit as we wait for economic data, and to see what fuel prices do.

We're seeing more and more critical commentary pointed toward Washington, and I think that trend will intensify. Congress can interview traders and oil company execs, but they have done so poorly in working to make us energy independent.

If economic conditions worsen, it will be a slow grind. We're past the sharp decline phase that we saw over the past six months. These things take time. Some questions that need to be answered are: How much lower will home prices drop? Can companies and consumers handle $4.00 gasoline? Will the global economy and emerging markets continue to grow at a strong pace? Can our government come up with anything resembling and energy policy?

Being in this trading range, I'm buying when we hit the lower end of the range, like last week. I continue to like steel, natural gas, and industrial/infrastructure companies.

Have a nice weekend!

image borrowed from barrons.com

Thursday, May 29, 2008

Some Reasons to be Bullish

Fortune magazine has a nice profile up about fund manager Ken Heebner. His CGM focus fund was incredible last year, returning 80%. He has been a believer of international growth driving the global economy, and has scored gains in agriculture, oil services, and miners. He's big on steel right now, as am I. We all know the reasons why, and this article adds some of the details. He owns larges stakes in ArcellorMittal(MT), US Steel (X), and Nucor (NUE). He's also big on Brazil's Petrobras (PBR), although I can't seem to find anyone who isn't.

He's a very active investor, often switching in and out of stocks quickly. He's willing to short stocks, and willing to admit when he's wrong and get out. That's one thing most fund manager's can't quite master.

There's also a valuable portion in the article about when he was talking with a Goldman Sachs analyst about sovereign wealth funds. Here's the excerpt:

Fox mentions that sovereign wealth funds are diversifying out of bonds and bank bailouts and into broad portfolios of common stocks. Coming from Goldman, the world's top trading house, this is valuable information. Heebner is one of the few fund managers who routinely engages in short-selling, and the prospect of a couple of trillion dollars flooding the equity markets should be enough to give any short-seller pause.

That's something very important to consider as an investor. That massive amount of money flooding into the market could really affect stocks to the upside.

Click here for the full article from Fortune.

Tuesday, May 27, 2008

Low Consumer Confidence Numbers Can be Bullish

Low consumer confidence numbers and investor sentiment are one of my favorite market indicators. Things are never as bad as people or the media make them out to be (nor are they as good as some say). There are some reasons to be bearish on stocks, but media gloom and doom isn't one of them. The media is fishing for ratings and will keep looking until they find a story that fits their opinions.

I've often thought about at what point will low consumer confidence really hinder the economy. I don't think we're there yet. When Indiana Jones is selling $300+ million in a weekend, and consumers are clamoring for the Nintendo Wii Fit and Apple iphone 3G, we're still okay.

What our economy needs is leadership from the top, which we haven't seen. We need an energy policy that both economists and environmentalists can feel good about, we need to reign in our outrageous government spending (see my post about the farm bill), and use the government as a tool for the people, not a black hole for our money to be thrown away.

The consumer may slow up a bit, but will be fine. I think its a great time to be buying a home. Use market weakness as an opportunity to by high quality stocks and funds with good balance sheets, operating in industries with few competitors, and in areas of secular growth. Don't count out the U.S. consumer and economy, we'll be back before your know it.

Friday, May 23, 2008

Why Washington is Broken

It's clear that Washington has no idea how to fix our energy policy. Their latest ideas have been to repeal the federal gas tax for the summer, beg the Saudis to increase production, and stop adding to our petroleum reserve. We are spending $600 billion each year to import oil, which is four times the amount of the war. To loosely quote Boone Pickens "it's the biggest transfer of wealth the world has ever seen." We are literally building economies in the Middle East, while at the same time talking about fighting them. Hmmm.

The farm bill that was just passed, vetoed, and overridden, is a classic example of Washington at its worst. Bush can finally veto bills like this because he doesn't have to please the electorate anymore. But congress does. There are a lot of elections this fall, and you'll never guess which group is one of the most influential when it comes to getting people elected. Yep, farmers. And this isn't the family farm we're talking about. It's millionaire farmers. I found a good opinion piece from the Wall Street Journal yesterday, and I'll give you some excerpts.

Since the last farm bill in 2002, the price of cotton is up 105%, soybeans 164%, corn 169% and wheat 256%. Yet when Mr. Bush proposed the genuine change of limiting farm welfare to those earning less than $200,000 a year, he was laughed out of town. The bill purports to limit subsidies to those earning a mere $750,000, but loopholes and spousal qualifications make it closer to $2.5 million. As Barack Obama likes to say, it's time Washington worked for "the middle class," which apparently includes millionaire corn and sugar farmers.

The USDA reports that if crop prices fall from these highs to their norm over the next five years, farm payments will surge. For example, if corn prices return to $3.25 a bushel from today's $6, farmers would get $10 billion a year in support payments. If bean prices fall to their norm, they'd get $4 billion. Thus, if farm prices stay high, consumers face higher grocery bills and farmers get rich. If farm prices fall, taxpayers kick in the difference and farmers still get rich.

You can read the full article here.

Among all the "problems" in Washington, this is number one to me. Both sides of the aisle worrying more about getting re-elected than doing what is right for America. And of course, McCain and Obama couldn't make it for these votes. But does anyone believe they would vote any different. Change? I doubt it.

Tuesday, May 20, 2008

Energy Still the Best Thing Going

Boone Pickens continues to get a lot of face time on CNBC with oil prices skyrocketing. He continues to speak his mind and I'm sure happy he is doing it. The world can produce 85 million barrels of oil per day, and we're using 87. According to Pickens, this is the reason why prices have gone up. Not the weak dollar. Not speculation. It is time to get some leadership on this issue. He said no one running for president will address the issue, either because they don't understand it or don't want to talk about it. I honestly think the people in Washington have no idea what to do with energy. It is kind of frightening. But its also an exciting time, because there are lots of ways to make money in energy stocks right now. Stay away from diversified oil companies, or anything to do with refining. Beyond that, its hard to miss. My favorites are natural gas companies (think CHK, XTO, EP), oil services (think SLB, NOV), and offshore drillers (think NE, RIG).

I've talked at some length about infrastructure companies performing well. This is in large part due to building energy infrastructure. New plants, pipelines, nuclear facilities, power grids, wind turbines, solar infrastructure. This is work that only a handful of companies can pull off, and their order backlogs are increasing. In this space, think of ABB, FLR, FWLT, JEC, CBI. Most of these stocks have risen quite a bit, but all have a great outlook.

Can anyone give me a reason to buy a financial stock right now?

Monday, May 19, 2008

Continued Resiliency/A Move to Alternative Energy

The market continues to handle higher oil prices better than expected. But the consumer appears to be nearing a tipping point with gasoline prices. This will bring more and more talk of alternative fuels as politicians will be pandering for votes this fall.

The video I posted last week with T Boone Pickens discussed some of what might work for our energy policy. The key point Boone talked about is getting away from imported oil. Much of this imported oil goes to power our vehicles. He's a proponent of using Natural Gas to power our vehicles. Its clean, reliable, and we have quite a bit of it in the US. Natural gas currently provides about 1/4 of our electricity generation and that must be powered in a different way. He said thats where wind and solar come in. He is currently investing billions of dollars into wind projects in Texas.

How do we invest in this trend? Boone founded Clean Energy Fuels (CLNE). It provides natural gas for vehicle fleets. Right now natural gas is powering buses, taxis, garbage trucks, etc, and it is a growing market. The stock is still pretty speculative, but if you believe in the trend, then its a good investment.

I also like FPL energy (FPL). They are an electric utility based in Florida. They are the largest supplier of wind power, but also use nuclear, natural gas, and others. The key here is nuclear. We will probably see increased interest in nuclear power in the coming years as oil prices have gone up, and coal plants could be scrutinized for carbon emissions. Here's a nice article from the Wall Street Journal about that subject.

In the near term, its good for us to think about upping oil production to help gas prices, but this country is moving in a new direction, especially if the leadership in Washington sees a major change.

Thursday, May 15, 2008

The Truth About the Future of Energy

As readers of this blog know, I commonly discuss the energy problem in our country, and which solutions can fix our energy policy, and how investors can make money off this. T. Boone Pickens says everything you need to know in this video I found today. If you're interested in investing in energy, or just curious on what is wrong with our goverment, you have to watch this video.

CLICK HERE TO WATCH VIDEO.

Wednesday, May 14, 2008

Inflation Tame? Not in the Real World

The always interesting inflation numbers came out this morning. Continuing the trend, the numbers come in below expectations so the market can rally. Let's take a look at some of the numbers:

Food prices rose 0.9%
Medical prices rose 0.2%
Clothing rose 0.5%

Here's where it gets interesting. Transportation prices fell 0.7%. With airline fares and car prices falling. Didn't many major airlines just say they needed to raise fares across the board to keep up with fuel prices?

And the real beauty, energy prices were unchanged. Gasoline prices fell 2% and natural gas prices rose 4.8%. I'm not sure what planet they are on. Gas prices fell 2%?

Meanwhile, average weekly earnings for U.S. workers, adjusted for inflation fell 0.5% in April.


Barry Ritholtz covers inflation a little more in depth.

Monday, May 12, 2008

Are "Alternatives" Worth the Price?

An opinion piece in the Wall Street Journal today titled "Wind ($23.37) v. Gas (25 Cents" talked about the heavy subsidies being given to wind, solar and clean coal. Its main point is that taxpayers are carrying a heavy burden to bring these clean energies to market, and the clean companies want more subsidies. It also says that these companies have been around awhile and have yet to bring lower costs to the market.

I beleive that a prolonged period of high oil prices, like we are in now, will let the subsidies do their job. The technology will be reached. It won't be instant, as companies have to muddle through mistakes and find the best and cheapest products, but it will sort out. The reason it didn't develop when many of these technologies were introduced (like in the 70's) is oil prices came back down. The infrastructre of oil was in place, and it was cheap to produce and bring to market. As long as oil prices stay high, consumers will demand alternatives at a reasonable price. It can happen, but it will take time. I'm not a big believer in subsidies, but in this case, I'm a fan. This type of transformation will take as much promotion as it can get.

These clean energies can become reliable and sustainable, in my opinion. But they have to be given a chance. In the mean time, our goverment needs to find ways to help lower gas prices. We either have to up production or drop consumption. Pretty simple. It is going to be hard for the goverment to convice oil companies to invest in new production if we're handing out massive subsidies to the very companies that will eventually make oil companies obselete. So to me, we need to figure out ways to lower our level of consumption.

Anyone else have ideas?

Trouble With Fedex...Is this Bad?

FedEx guided down on this quarter's earnings estimates. I always say that companies like FedEx and UPS are good barometer's of the economy. In this case, that's exactly what it is. The big hit is coming from fuel prices, which is the big problem for everyone in the US right now. Demand is weaker, like much of the US, but not horrible. The key here is that our economy is sluggish, but not that bad.

Although stocks have risen well off their tech-bubble bear market lows, there hasn't been any meaningful gains for the decade as a whole. Don't be surprised if stocks move higher as the US sorts out its economic troubles. Investor sentiment, even though it spiked in late April, is bearish, especially among individual investors. Individuals are usually the ones you can count on to do the opposite when in comes to investing. Just look at mutual fund flows and money market flows in the late 90's and early 2000's. Mutual funds peaked with the market, and were very low when the market was recovering.

Stay defensive, but optimistic. Don't get lured into buying poor companies because they are cheap, but also don't let the wave of bearishness cloud your decision making.

Friday, May 9, 2008

What is Investor Sentiment Telling Us?

Somewhat conflicted right now. I'm more bullish than the bears and more bearish than the bulls. We're well aware of all the ways the consumer is being squeezed right now, but there are reasons to be bullish. Wall Street and big companies always find ways seem to navigate situations like this by limiting bad press and keeping investors on board until things improve.

The average investor is so bearish right now, and that makes me bullish. Money market funds continue to climb. One interesting thing I like to keep an eye on as an indicator is the "comment index", or so I call it. On most news sites and blogs, they allow readers to make comments. Every article with a bullish tone just gets leveled by negative comments. I mean, 90% of these comments are bearish.

A lot of pundits and bloggers that are bearish are interesting to watch as well. Those who are expecting a recession seem to try and re-define a recession when they don't get the numbers they want. If any numbers come out bullish, they just say how corrupt the system is and statistics are manipulated. If the numbers come in the way they want, than they are concrete evidence! Again, be careful in believing what these writers are saying. If they truly were good at anticipating markets, they would be traders.

I'm slightly bearish on the market as a whole right now, but there are plenty of names I'm looking to buy.

Thursday, May 8, 2008

Bullish Trend Wearing Out?

Now that earnings season is winding down, there doesn't seem to be a lot of bullish catalysts to drive stocks higher. Meanwhile, consumers are getting hit on all fronts with high food and energy inflation, and uncertainty about their home price.

If food inflation continues to rise, the new presidential administration could feel real pressure to change our course on ethanol, which could unwind the agribusiness trend.

I think another trend will be US infrastructure spending, and its something that is already in play. Bridges and roads are going to be updated, but with the construction slowdown, its hard to find a pure play here.

I'm continuing to like oil service stocks (think NE, NOV) and Steel stocks (think MT, X, RIO).

There are some nice opportunities in stocks, but you have to be careful because its not stocks across the board, but in sectors that benefit from inflation and/or a weaker dollar.

Tuesday, May 6, 2008

Back on the (Weak Dollar) Train

The weak dollar plays are out in full force again. We've got crude oil rising over $120/barrel, and the typical reaction. Every time oil spikes, they go to the commodity analysts for their two cents, and they throw out a projection that scares the market. Today it was $200/barrel. Here's the quote, "Oil prices are increasingly likely to hit between $150 and $200 a barrel over the next six to 24 months." Hmmm. Sounds like a pretty broad price range, and a pretty broad time frame. Funny how that quote got shuffled into "$200 OIL PREDICTION ROCKS MARKET."

I think oil will continue to rise as long as the dollar continues to weaken and there is no sign of a change in our country's energy policy (or lack there of). I suppose we need to keep in mind that a geopolitical event or bad weather could push oil higher, but neither of those have really been a factor in the past year. I'd focus more on the weak dollar and demand.

Portfolio holding Noble (NE) is continuing to climb, and has a nice outlook with oil at this level.

Solar stocks and other alternative energy plays usually rise as oil prices rise, and I'd look for that correlating trend to continue.

Quote from Goldman Sachs.
Headline from Drudge Report.
Disclosure: Long NE.

Monday, May 5, 2008

Potential Risks to the Agriculture Boom

The agriculture boom that has taken place has been quite interesting. I've followed it somewhat closely, but haven't made any big investments in the sector. Although the sector looks promising, and many stocks have performed quite well, there are some risks that people are probably overlooking. The biggest risk that I would focus on as an investor would be the US changing policies on ethanol. There has been a lot of food inflation over the past year, and ethanol is one of the major reasons why. I understand that China and other growing economies are demanding more goods, but 1/5 of the US corn crop is going to ethanol, and we're on target to increase our ethanol output under the current policy. But a new president could change that course, and if prices rise much more, that president might have no choice. That is a pretty big risk for agriculture stocks.

I've also read various articles that a lot of the price increases have been driven by speculators in the commodities markets. Although this is nothing new, it may have to do with the rapid price increases. The fundamentals are there, but I do think some of the price rise is due to speculation.

Adding to the debate, I found an interesting quote. At Berkshire Hathaway's investor meeting, Warren Buffett was asked about this, and he had a pretty interesting response.

"There is a boom in oil and also in soybeans. Because of increases in food prices, would anyone expect to propose an excess profits tax on farmers? But what about an excess profits tax on Exxon? Situational ethics and policy making depends a lot on voters."

Politicians would never propose an excess tax on farmers, but would rather continue to subsidize them. This is actually a reason to be bullish on agriculture, but I wanted to bring up that point.

Overall, the market still looks promising for these stocks, but there are risks that cannot be overlooked, especially when the big ag. stocks have doubled many times over already.

Game Planning for This Week

This week may be a more realistic look at the market than last week. I've continued to be in favor of the weak dollar game plan for awhile. Long oil services, steel, infrastructure, and short financials and Russell 2000. There is some strength in tech right now, as Apple and Google are zooming again.

I think Microsoft got lucky that they didn't get Yahoo. It is tough to continue organic growth to supply meaningful profits when you get as big as Microsoft, but its not good to fall into the habit of making big acquisitions for too much money. Looking at Google's strategy, you can find a few dislocations that make them a better investment. They focus on creativity more than any of their competitors. In the article I linked last Friday, which had an interview with Google co-founder Larry Page, I found something he said to be quite interesting. He said that they have a small amount of people working on projects that have a ten percent chance of succeeding, but if they do, they will be huge profit-drivers. A game-changing situation. It is smart risk to take for a company like theirs. And they will get a few of those risks to pay off as they have in the past. The company itself was built on that type of risk. My point is that when companies get too big, they lose sight of how they got there. The fall into the trap of protecting what they have and struggling to find new ways to make money. They overpay for bad acquisitions and the shareholders eventually lose confidence.

We'll see what lies ahead this week.

Friday, May 2, 2008

End of Week Thoughts/Why it Pays to Take a Risk

Kind of a wild week on Wall Street as investors displayed newfound confidence. It got a jump start from positive GDP numbers for Q1. We're seeing new leadership leading us higher. Financials, tech, and homebuilders. Although many of these companies are struggling, many feel we've reached a bottom and are looking for that "easy move" where the quick money is made. I spent the week pondering whether these are really good investments right now. I'm still more comfortable re-loading into some weaker dollar plays. I'm looking to enter National Oilwell Varco (NOV), Prologis (PLD), Vale (RIO), Arcellor Mittal (MT), and maybe a clean energy ETF. I'm a believer that we will see some more disruptions in the stocks that led this week and a reversion to strength in the weaker dollar plays.

I'm concerned about inflation, although our leadership doesn't seem to be. Over the past few months, they have sacrificed inflation to fight off recession. They have increased liquidity to banks that needed it, but I'm afraid it isn't helping individuals much as "everyday interest rates" haven't dropped much.

I don't usually talk politics on the blog, but I'll say right now that I will vote for a candidate that can propose an energy policy that makes sense. Right now we really don't have an energy policy. It is "let's up production at our refineries." Or "let's lift the federal gas tax for the summer." Okay, but that sounds like someone who will be out of office soon talking. We're still importing oil from unstable parts of the world, and it is costing too much. Thomas Friedman wrote a nice piece about it this week in the New York Times.

We need to give tax breaks to companies that are developing solar, wind, and geothermal energy. Their progress will mean huge progress for America, not only for the environment, but economically and politically. We need to again be a leader in technology and the world will come to us to buy these technologies and products. Why not institute a Manhattan Project for a sustainable energy solution? Hire a group of scientists to exclusively work on it until its done. It can be done if Washington gets out of its own way. It will take a long time for the free market to come up with solutions, especially without tax help. Visionaries like Richard Branson are offering rewards to those who come up with sustainable alternative energy ideas. This is the kind of thinking we need.

I'll end with a nice interview with Google Co-Founder Larry Page. It talks about the importance of people who are working not just to get through the day but to make things better for the future, and why its important to take risks to achieve our goals. I think there are some important lessons to be learned here not just for investing, but for everyday life.

Have a great weekend!

Hang on a Minute...

Visa and Mastercard are finally rolling over as investors are cashing in some really nice short term profits. I don't know the exact numbers, but don't need to. This is a secular growth story. They do face broad risks from a slowing economy, but people are using plastic for more everyday purchases than they ever have, and international business is doing well also.

I still think the weak dollar stock will be in play as they have the wind at their backs due to international strength. Steel stocks, such as Vale and Arcellor Mittal will continue to do well.

Its hard to put a lot of faith in new economic data based on how they are interpreting inflation.

Thursday, May 1, 2008

Market Shifting Focus, Will it Continue?


Everyone seems convinced that THIS is the real move, that Bear Stearns marked the low. The money is shifting from weak dollar plays back into your more typical holdings like financial stocks, pharmaceutical, insurance, technology etc. One thing I've been keeping an eye on is investor sentiment. I was viewing the ultra low sentiment a couple months ago as a bullish theme. Well, it has completely reversed. Take a look at this graph of the panic/euphoria model published by Barrons. The graph tells us quite a bit. The question is, are investors acting a little too quickly here? Have we seen enough evidence to be bullish again? That's what the banks are telling us. That's what those on tv are telling us. But I tend to be skeptical as those were the people saying banks were fine last year.

Tough Market to Navigate

I'm finding this market very difficult to navigate right now. All the weak dollar plays are getting trounced (agriculture, oil, etc). But at the same time, shorting the market isn't working either, because a lot of stocks I don't like are rising, and keeping the broad market higher. Mostly financial names and some tech stocks. You have Visa and Mastercard getting very overextended. And who really wants to buy Citigroup right now? But someone is.

The Dow gets manipulated by one or two stocks quite often, because its price weighted, not cap weighted. So a stock like IBM, which trades over 100, moves the index much more than a stock like Intel, which trades just over 20.

Our patience is really getting tested right now. But you have to stick with the companies that are performing well right now. It's important not to get suckered in to buying stocks that are losing money but rising simply because they are oversold.