Monday, June 30, 2008

What to Make of This Selloff

Although fundamentals have looked more bleak lately, and oil prices are squeezing the economy, last weeks sell off wasn't triggered by a whole lot of news. I'm attributing it to funds dumping stocks at the end of the quarter. They have to deal with people pulling their money out, and are preparing for it. Also, many hedge funds only allow redemptions twice per year. Once at the end of the year, and once (you guessed it) at mid year. I'm not saying this is the only reason for the tough sledding, but it could be a factor. The volatility index isn't nearly as low as in March, and volume has been lighter. I think end of quarter fund selling can be attributed. This could be a reason for stocks to rally in the upcoming weeks as we start Q3. Let's be optimistic!

Sunday, June 29, 2008

Mid Year Checkup/Performance

Each January, I give a preview of upcoming trends that I see in the next year, and ten stocks or etf's that will benefit. Its time to check up on those picks. First lets look at the major market indexes. The Dow is down 14.46% YTD. The Nasdaq is down 12.69%. The S&P 500 is down 12.94%. My 2008 stock portfolio is down 2.23%. On a relative basis, this portfolio outperformed by about 10%. But losing money, even in a tough year, is not acceptable. Anyway, here is the roundup for each stock.

Claymore Global Water Fund (CGW): Down 9.58%
Credit Suisse (CS): Down 24.35%
Japan Index Fund ETF (EWJ): Down 6.25%
Market Vectors Alt. Energy (GEX): Down 13.95%
Manitowoc Corp. (MTW): Down 31.67%
Noble Corp. (NE): Up 13.77%
Potash Corp. (POT): Up 59.01%
Rio Tinto (RTP): Up 10.10%
SAP Software (SAP): Up 3.15%
Siemens (SI): Down 29.34%
Schlumberger (SLB): Up 6.24%
T Rowe Price (TROW): Down 3.96%

Some thoughts on the results: Well, oil, agriculture and materials have worked in 2008, and that helped the portfolio. The bad news is that not much else has worked. The markets are pushing bear market territory as we've pushed through the March lows. I think there will be more pain amongst financials and consumer related stocks. But I think there will be more prosperity with the other companies as well. The problem with calling oil a bubble is that its something people actually use. Emerging economies continue to need more and more. I agree there is some speculation in the price, but not that much. The only way I see oil dropping significantly is if the global economy really starts falling apart. And if that happens, it will be too late for lower oil to help the economy, so what's the use? To help the US economy and companies dependent on oil, we need reassurance that oil prices can stop accelerating, because its not so much the high oil, but the fear of higher oil thats causing people to panic. The US can help themselves here through demand destruction with alternative energies (hopefully helped by government implementation) and conserving energy (WHAT?) for a change. Yes, we too can conserve energy.

Moving forward, you have to look at companies in the middle of this changing landscape. Companies who are supplying those countries and people looking to grow(BRIC countries), or looking to rebuild new infrastructure (US, Western Europe). I still like oil as an investment. This should be played through an offshore driller or oil service company. Refiners are a big no! US gasoline use is dropping, and they are paying more and more for their oil. Oil will be harder to find, and those that can get it will be rewarded handsomely. Noble Corp. (NE) is still right in the middle of this. They have contacts with dayrates that are strong and rising. I also like National Oilwell Varco (NOV) who supplies cranes and equipment for these rigs. Although the stock is pricey, it could still advance from here.

In the alternative energy sector, there are lots of options, with more arriving daily. I'm not an investor in risky solar companies. Although solar is important, I'm bigger on wind right now. And to invest, let's look at suppliers of key components for wind turbines, not the turbines themselves. Here I like Swiss company ABB(ABB). To quote their interim CEO, "We are in the sweet spot of energy efficiency and of climate change." I chose Siemens to start the year, which operates in many of the same spaces. But Siemens is too bloated and problems sectors, much like GE, are pulling down the ones that are working. So go with ABB here. Here's a nice analysis of the company as well. I also like Quanta Services, who supplies the power grid for new solar and wind. (PWR). Its expensive, but they should perform well up ahead.

Looking to materials, I continue to like CVRD or RIO, as I call it. (RIO). The stock has been taken down by their talks of potentially buying a copper or aluminum producer. This is an important company in the growth of the world. Continuing down the line, steel has performed well, and I didn't catch that this January. ArcellorMittal (MT) is my top choice here. No question.

I don't like to talk about financials stock much, but I'll say a couple of things here. Banks are still in trouble. Investment banks are still in trouble. Credit card companies are overpriced. The only financial companies I'd buy are what I consider the "best of the best," and I still think we'll be able to buy them at lower prices. Those are Goldman Sachs (GS), American Express (AXP), and US Bank (USB). They each still have their issues, but when the sector comes out of this mess, these leaders will be even stronger.

I've made some money with Wyeth (WYE) the past few weeks. They had some good results with their Alzheimer's drug. The stock has a good group of drugs and consumer products. Its fairly cheap, and has a decent dividend. It won't blow the doors off, but not a bad place to keep your money right now.

I also like Nokia (NOK). They have a great global brand, and can get their cheaper phones into markets that others can't. They've gotten hit by "smart phone hype" but the numbers show that Nokia is still dominant. And its really cheap here.

Looking at the second half of the year, I think there will be more pain, but don't be surprised if the market moves higher. This week saw a lot of fund dumping stocks because its the end of the quarter. If things continue to get worse, we could see more downside, but the optimists usually win on Wall Street. I'll start a second portfolio to watch, with my original twelve picks, plus the ten more I mentioned today, and call it "the 2008 second half portfolio."

Disclosure: Long ABB, NE, WYE, NOK, RIO, MTW, CGW.

Friday, June 27, 2008

Who's Ready to Buy?

The past few days have seen negativity wash over Wall Street. It's times like these that we have to think clearly, and not get taken over by emotion. When I see quotes like this, I'm reminded how hard it can be:

"Sell everything. Nothing's working. Revisit when the prices are adjusted for a big recession, soaring inflation and a crushed consumer. Sell at 12,000 and come back at 10,000. Even better: short it." Jim Cramer. June 27, 2008.

Now where does that leave his legions of amateur investors that aren't very experienced but have taken his advice to buy stocks up until yesterday? It's sad.

Anyways, the selling has been swift and painful, but its been done without a ton of volume, much like the March-May gains. I think many are on the sidelines waiting things out, and its hard to blame them.

I'm still a cautious buyer of select stocks, and although the market may drop a little more, I don't see a ton of downside. I'm considering covering my ETF's shorting the Dow. Some stocks that look attractive to me right now are, ABB,RIO,NOK,BA. I'm looking to add to some positions on further weakness.

Perhaps today will mark the Jim Cramer bottom!

Disclosure: Long ABB,RIO,NOK,DXD

Sunday, June 22, 2008

Out of Town, Bad Timing...

In keeping with tradition, I always seem to be out of town when the market is getting pretty interesting. This week will be a big test for both the bulls and bears. I'm still a net buyer in this decline, but its important to keep an eye out for major macro signs that this isn't just a bear market gaining momentum. I will be out of town and unable to post Mon-Thurs. I'm heading to Lake of the Woods in Canada for some Walleye fishing. I'm going to do an update of my 2008 picks when I get back into town at the end of the week, as well as picks for the rest of 2008. Have a great week!

Friday, June 20, 2008

More Contrary Indicators

Researchers are often talking about sentiment on Wall Street, and how it corresponds to S&P 500 returns. I'm a pretty strong believer in bearish sentiment as a reason to buy stocks. I've founds some more strong evidence from a post at Bespoke Investment Group. It shows various points throughout the decade of when Investors Intelligence bullish sentiment readings were at these levels. Each of the past couple of times this happened, stocks rallied nicely soon thereafter. Although the sample time period isn't that extensive, it is worth noting.

By the way, Bespoke Investment Group continually puts out a lot of great data like this, and offers even more if you're a subscriber of their premium services.

Thursday, June 19, 2008

Well, It's a Start...

After the public is becoming more aware of what the economic costs of high oil prices are (look at airlines, FEDEX for example), we're starting to look at the causes. Yesterday I pointed out that the Chinese subsidy is hurting us because they are promoting excess use by keeping prices low. Well, today they announced they would raise prices. It's a start.

Everyone's convinced that we'll retest the March lows. It may happen, it may not. Most of the bullish talk I hear is the big opportunity in buying beaten up financials. You won't get that from me. I'm not buying them here. As I've said before, they may trade up 10% on short covering, but we've reached a point now where most of the panic is gone, but reality is setting in. That reality is that their earnings will be bad for awhile. And who'd excited about buying a stock that continues to get diluted by share offerings and dividend cuts? The only financial stocks I'm looking at are Goldman Sachs (GS) because they always figure out how to make money, and American Express (AXP), because of the strong brand, and a good portion of their business is card based, and look at how Mastercard and Visa have performed.

Those of us who still believe the global economy is strong (we appear to be shrinking by the day) got some good news as China's growth estimates were upped. I'm still a believer in materials and infrastructure-type names.

I've been trying to buy Swiss infrastructure company ABB (ABB) for weeks. It has been stuck in a trading range, and won't sell off as the market goes lower. There appears to be too many people jumping in, which won't let it get much under 30.

Wednesday, June 18, 2008

Why Oil Prices Are This High

We know about the speculation in oil prices (there is some). And we know about the fundamentals of oil prices. We know that oil supply is flat. We know that oil demand is strong and rising. The question that everyone seems to be asking is why is demand so strong? US demand is dropping. The environmental movement has made people more conscious of their carbon footprint throughout the world. As an aside, when I see that Al Gore's house has increased its electricity use 10% in the past year, I just shake my head.

Anyway, check out this post at the blog Naked Capitalism, which displays a Morgan Stanley report on oil price subsidies throughout the world. We know that oil producing countries subsidize oil for its people, but China? There is our culprit. They have one of the strongest growing economies in the world, and they are subsidizing oil. This is promoting people to care less about using more oil because its cheap. Lets face it, if our government subsidized gas at say, $2.00 per gallon, there would little talk of oil prices, even if they were $130/barrel. Bottom line is, because of subsidies, China is probably using more oil than they need, and thus making prices higher for the rest of the world.

There are solutions out there, but our politicians seems more interested in fighting with each other about drilling than seeking long term solutions.

By the way, I found the info on the blog Naked Capitalism, via the WSJ Environmental Capital Blog, which is have linked in my blogroll. For lots of great information about oil and alternative energy, keep an eye on this blog, its great.

Tuesday, June 17, 2008

Stick to the Game Plan

Weak dollar plays continue to dominate. I'm not adding to any oil positions at this point, but am holding. The Fed can't strengthen the dollar just by talking about it. They are in a position where they can't afford to raise rates, but inflation is too high for comfort. So avoid financials, retailers, and consumer related stocks. Where have we heard this before?

The major indexes will be under pressure because they are still so heavily dependent on financial stocks. Last quarter earnings appeared to be the "we're not collapsing, so the stock will go up" quarter. This quarter earnings appear to be the "earnings aren't good and won't be for awhile" quarter. This is the destiny I see for financial stocks for a few quarters. Although they might get a bump here and there from being oversold or short covering, they will continue to be held down by weak earnings. This, in turn, will weight on the S&P 500. But stocks immune from these problems will go up.

Right now the bet of "short major indexes through ETF's, long stocks with strong global presence and weak dollar ties" is continuing to pay off. There will be plenty of opportunities to make money in stocks as the year progresses. Just not in all stocks (so avoid index funds right now).

Friday, June 13, 2008

Inflation Continues to Climb/What to Buy Now

Inflation numbers in today. I don't think anyone who lives in the "real world" is surprised to see these numbers climbing. With inflation levels rising, this is all the more reason to invest in equities. But not just any stocks now. I do think most of the downside is out of financial stocks. But, I'm still not a buyer. I think earnings have eroded and will continue to be weak for at least a few quarters. I don't like to buy stocks in companies that aren't performing. I've tried it before with little success. Financial stocks will get a "stabilization bump", but I think they'll drag for awhile after that, and thats not what we're looking for as investors.

I started a stake in Brazilian mining company Companhia Vale Rio Doce (RIO). I'm going to just call it RIO. The stock recently dropped off after they announced they were issuing some stock and are preparing for an acquisition. Maybe Freeport Mcmoran, maybe Alcoa. While I don't typically like to see stock issued, as it dilutes value of current shareholders, I believe they are building a company that will be unrivaled in this industry, with the exception of a potential BHP Billiton-Rio Tinto merger. I'm impressed with the long term contract RIO signed with ArcellorMittal to supply iron ore for their steel business, which is strong. I'm also looking to enter a position in ArcellorMittal as well.

Its been a tough couple of weeks for investors, but I think we'll continue to stay in the trading range I've talked about. I'm buying when we hit the lower end of this range, which we're close to now. I think as summer wears on, even though the consumer will have issues, the market will stabilize and start to move higher.

Have a great weekend!

Disclosure: Long RIO

Wednesday, June 11, 2008

How to Navigate This Market

I'm a buyer of select stocks at these levels. Weak dollar plays have eroded a bit, with the exception of oil stocks. Bernanke says they would like to support a stronger dollar and fight inflation, but it seems to be just talk for now. I'd continue to avoid financial stocks. I've done a little looking at Goldman Sachs, and on paper it looks cheap here. But that is based on earnings estimates which are probably high.

I'm looking to enter a position in Swiss industrial giant ABB (ABB). They are well positioned for growth as the world builds energy infrastructure, and the US upgrades theirs. Barron's did a nice piece on them, and here are a couple of excerpts worth reading:

And in all its markets, ABB is running hard just to keep up with demand. The company saw orders jump to almost $11 billion in the first quarter, driven by heavy spending on electric-power systems in emerging markets such as India and China, which generate close to 30% of the company's sales. Orders from most emerging markets grew by at least 15% in the quarter, as developing economies accounted for 47% of total orders.

ABB is doing well in more developed markets such as Europe and the U.S., too, as companies are forced to upgrade aging power grids. The company saw double-digit order growth in the quarter in the U.S., where it has little exposure to the weak housing market.

ABB doesn't see white-hot spending on energy infrastructure cooling soon; indeed, the company is adding 20,000 employees to its workforce of some 110,000 in order to capitalize on growing demand. Sterne Agee estimates that global spending on power will total $5.5 trillion between 2006 and 2020, with $750 billion of that directed to transmission and distribution, ABB's core markets. Some investors are confident the company can grow annual earnings by 15% to 20% through 2011, not least because its order backlog stood at $28.6 billion at the end of the first quarter.

"We are in the sweet spot of energy efficiency and of climate change," says interim CEO Michel Demaré.

This is the type of company that I'm looking to build a long term position in. The stock has had a nice run, but is pulling back due to overall weakness in Swiss and US stock markets.

Friday, June 6, 2008

How to Cash in on a Trend

The market is continuing these strong one-day reversals. Yesterday the market looks great, today it looks bad. The key for me would be if we trade out of the current trading range (either up or down), and I'd look at that for an indicator for the coming months. For the Dow, it would be around 12300-13000. I'm not in favor of trying to predict the market as a whole though. We need to identify trends and that includes companies who are growing their earnings in this challenging market (think oil,infrastructure, steel and ag stocks), as well as good values on world class brand names (I like Nokia in this space right now, and there are others).

Although the climate bill is stalled for now, it is something that will be addressed under the new administration. Both McCain and Obama have pledged to do much more in finding alternative and renewable energies. I continue to like companies involved in the construction of nuclear and wind infrastructure. This is a case where rather than invest one of the main players in an industry, invest in a company that is supplying them all. For example, in the oil space. Rather than buy an integrated oil company like Exxon, who pays a lot for their oil and has issues with refining, why not buy an offshore driller? In the nuclear and wind sector, why buy a speculative, volatile and expensive wind turbine maker or solar panel maker, when you can buy a company that supplies components for wind turbines, or is one of the few who can construct a new power plant?

Thats my viewpoint in how to cash in on a growth trend.

Looks like the market will be limping into the weekend.

Have a good one!

Wednesday, June 4, 2008

Oil Bubble? Doubtful

I've seen lots of talk of an oil bubble thats about to burst. Unlike other bubbles (tech bubble, real estate bubble), oil is driven more on fundamentals. The tech bubble formed because companies which made little or no money were given immense valuations on nothing but talk of a "new economy" and internet hype. The real estate bubble inflated over a longer period of time and was due to money being too easily accessible. There is truly a strong demand for oil right now. And although there is some speculation in the price, much of it is pure demand.

I've discussed the potential solutions. You can increase supply or decrease demand. There is too much red tape involved in increasing supply in the US (at least for refineries). The most likely scenario is demand destruction through higher and higher prices. You're seeing it happen already. GM is shutting down plants that produce gas guzzling SUV's. United Airlines is cutting back their fleet due to fuel prices. Americans will adjust if they have to. Public transportation, carpooling, taking less vacations. None of these scenarios are great for the economy, but they will help lower US demand. But there isn't a lot we can do about overseas demand, which is why prices are likely to stay elevated either way.

The key here is finding a solution to power our vehicles, and for it to be good for the environment, and produced in this country. This will happen, but the wait will be painful. You can see it coming down the line with the current cap-and-trade discussion for fossil fuels. It will probably go into effect in the next administration. It will pass along higher electricity costs to us, but will force power companies to shift away from coal.

In this environment, you have to like industrial infrastructure companies who will be building new power plants and grids to adapt this change. I like Swiss company ABB. The stock has had a nice run, but I'm looking to buy it on overall market weakness.

Tuesday, June 3, 2008

Good Opportunity in Nokia

I think Nokia (NOK) shares are a great value today. The shares have been under pressure due to a few factors. There is a lot of "smart phone hype" which has been driving investors to Apple and Research in Motion, and away from Nokia. But Nokia excels in getting their phones to the market quickly. They also are good at selling cheaper phones in emerging economies, who lets face it, make the choice of Nokia phone with a few less features, or no phone. They also have a strong worldwide brand, which is one of Warren Buffet's main criteria for choosing a stock.

Best of all, the stock is cheap. Its trading at less than 10x earnings. A nice 2.7% dividend, and exposure to many growing international economies. I see a nice opportunity here.

Here's a column about Nokia's brand via Seeking Alpha.

Disclosure: Long NOK.