Thursday, August 28, 2008

Infrastructure Spending to Continue

There have been various theories about if the recession (or non-recession) will affect spending throughout the globe on infrastructure and energy projects. Some say it has to be affected because there is less money to go around (credit crunch, etc). That just seems like a weak, generalizing theory to me.

The reason I like infrastructure, and energy expansion is it is purely a necessity. This isn't corporations updating their software, or whether people will buy second homes. Those things are affected by less available money. We're talking about real people who need things like electricity, and fuel to power their homes and vehicles. There is no getting around spending money on these types of projects.

I've been a strong proponent of Swiss company ABB (ABB), given these themes. In a quote from their interim CEO, we hear:

"Asked whether ABB would grow faster than a roughly 3 percent forecast for the global economy for next year, Demare said: 'It is quite obvious that ABB will exceed that several times in 2009."

I like ABB because of its reach into various electrical systems sectors, including wind and solar. They get a lot of their revenue from Asia, among other places, and these are the countries that are taking the lead here. The US government is too busy debating whether or not to drill offshore, or about anything but the right issues, to enter this trend. So you'll want to be in a company that isn't relying on the US to lead this trend, but could still capitalize once the US catches on in a few years.

Full text of the article, via Forbes.

Disclosure: Long ABB.

Tuesday, August 26, 2008

The Recovery is Not Yet Upon Us

This market is going to grind into a pattern or level to slightly down, in my opinion. There aren't any upside catalysts. Growth won't resume until mid to late 2009 according to the Fed. I'm don't take everything they say as truth, but definitely listen to them more than media/blogger types.

Cash isn't a bad place to be, and to some extent, neither is short. Any rallies appear to be short lived, no matter which sector produces them. I still see earnings quality deteriorating in financial stocks, while energy stocks have earnings that will be steady. And in a market like this, steady earnings are pretty dang good. The problem with holding these stocks is you'll have to endure corrections/false moves/strange one-day reversals. If you can handle it, you should be fine.

I'm hearing Democrats jumping on-board with Natural Gas more and more. And this is a positive as it gives us more idea on how the election outcome will determine energy policy. Even if Nancy Pelosi doesn't really know what Natural Gas is, she is one of the main promoters of party policy.

Quite frankly, energy policy is my biggest concern going forward. It means so much economically, politically, and for the environment. It is the "ultimate issue" in my mind, and thats why I focus a lot of my time determining future policy and investments to profit from it.

There you have it. Have a great day!

Friday, August 22, 2008

Back to "Wishing Away" Inflation

Ah yes, another Bernanke speech. More evidence that he won't raise rates (he basically said so), and more talk of inflation moderating. So this is the pattern. They pursue actions that weakens the dollar and don't limit inflation. And to protect against, inflation, they say, inflation will probably moderate. So "actions" to weaken the dollar and protection against downside in the market, and "talk" to limit inflation. I see this a "wishing" inflation will go away while they try to protect fannie, freddie, and other various banks.

These actions all carry long-term effects. Even if these institutions survive, look what we've done to our country's balance sheet.

Thursday, August 21, 2008

Will the Counter-Counter Trend Rally Last?

We're seeing what I'm calling a counter-counter trend, with oil and weak dollar stocks rallying. Normally, I'd just say this gets us back on the trend we've been on. But, with the action we've seen with sector rotation in the past month, who can believe any trend will stick? Those who've read my site know that I'm a believer of the medium-term trend of short financial stocks, short consumer stocks, and long oil service and infrastructure stocks. While I do think this will be the best investment strategy moving forward, it might not be the best one right now. These gains in oil stocks could easily evaporate by next week. So, as someone who doesn't "trade" a lot, I'd say you can move in and out of smallish positions in these counter-counter trend rallies to make some money, while we wait it out a bit.

I'd love to hear some other ideas/theories on how to play this market, so feel free to comment or email me.

Tuesday, August 19, 2008

Is it Time to Buy?

We're seeing a familiar trend, and thats no trend. Any good news quickly evaporates as we continue to get nailed by economic data, and poor outlooks from financial stocks. It has been pretty easy to spot. I haven't advocated buying banks at all, and I still don't. I see the market re-tracing downward again as we'll probably see another bank-related panic. Will the Fed provide a backstop once again? Probably. I'd say it will probably involve Fannie or Freddie.

As I've said before, the real problem with investing in many of these companies isn't that they'll go under, its their outlook for the future. Companies like Citigroup and Merrill and Lehman have leveraged so much of their future, and eroded their competitive advantages just to stay afloat now. Sure, it had to be done, but you shouldn't buy their stock just because it looks like they won't collapse.

I think the time to buy will be on the next major leg down. You'll know it because you'll feel like you're ready to throw in the towel. You'll feel like nothing works in this market, and the outlook is bad for everything. Some people might already feel this way, but when most feel this way, then you can find some bargains.

The outlook for solar has strengthened, and should only get better. The good news here, is many of the solar stocks have come back down out of the stratosphere, and could be bought. I haven't researched them enough to make any recommendations, but I'll take a look at it.

So is it time to buy? In a word, NO.

Friday, August 15, 2008

Strange Times

This market has been strange indeed. By now, everyone's well aware that there are no real trends right now, and they change by the day. It makes it difficult for investors to stomach. Warren Buffett's portfolio filing came out. Buffet stopped adding to his stakes in financial stocks, which is a first in some time. His buys were in utilities, industrials, and health care.

I also noticed Ken Heebner's portfolio. Its been lightened up a bit. He holds much less agriculture, metals, and steel stocks than in previous quarters. Its difficult to discern if this is a trend, or if he needs to move in and out of these names to keep his quarterly numbers up.

It makes it difficult to stick to the strategy, and I've done a little short term trading. No major positions of course, but small positions shorting financial stocks, and buying various names.

The announcement of the massive new solar farm in California is encouraging. It proves that utilities and corporations won't wait for Washington (who continues to sit on its hands) for direction here. As I've said before, if there's a need, the economy will find a way to provide it. We cannot count on our legislators here.

Well, nothing major as we head into the weekend. No big changes in strategy. Just going with the flow.

Have a great weekend!

Thursday, August 14, 2008

Wednesday, August 13, 2008

Don't "Over-Diversify" with ETF's

I'm a big fan of using ETF's (exchange traded funds) as a part of a successful portfolio. But its easy to fall into a false sense of security with many of these funds. Also, people tend to "over-diversify" with these funds. My theory for ETF's is use them as a tool for investing in areas where its hard to otherwise. I use ETF's to short various indexes or sectors. I'd also use an ETF to buy into an asset class with few US listed stocks (for example wind power companies).

But if you've identified a trend to want to capitalize on (say agriculture stocks for example), do your homework. Identify the best companies in that space, and if there are available stocks, which in this case there are, don't handcuff yourself by buying an ETF. For example, buying Mosaic(MOS) or Potash(POT) would give you much better returns than buying an ETF (MOO).

The problem with ETF's is they use a wide variety of stocks to offset risk. But often times, that means your fund is holding stocks of large, diversified companies. These companies may have some businesses in the space you're looking at, but may be at risk in other areas. I think of GE in a situation like this. You'd like to own it for their wind turbine business, or their infrastructure/aerospace business, but you have to buy their finance business as well.

So the big take-away here is use ETF's when there aren't good investment opportunities in a sector or trend you like. Don't use them when there are better alternatives.

Tuesday, August 12, 2008

Rational Markets? Doubtful

Based on the market action in the past few weeks, how could anyone say markets trade rationally? Fundamentals have been completely flipped upside down, with the worst companies being rewarded with gains, while the strong performers get trashed. This is giving me more evidence of my theory that hedge funds are ruining the market. They all trade with the same or similar computer models that track trends and move money into and out of the market so quickly that fundamentals and news make little or no difference.

In the mean time, it makes individual investors want to pull their hair out. I'm not giving up on the "game plan" just yet. The Big Picture had a good piece on oil prices this morning.

As much as I'm a proponent of a new energy policy in this country, talk of opening offshore drilling can't affect oil prices like it has. The dollar has strengthened on nothing but talk and speculation. Bernanke and Paulson have done nothing but promote policies that weaken the dollar. The pendulum has swung the other way and these stocks have over-corrected. And financial stocks have over-corrected too far on the high side given all the risks and unknowns.

Rational markets? I'd like to see some evidence of that.

Thursday, August 7, 2008

See-Saw in Financials to Continue

I can't say I was surprised that AIG (AIG) reported bad results. The extent of how bad it was is the surprising thing, and the market is responding accordingly. I've not been an advocate of buying these types of stocks for many reasons:

-Many companies are completely eroding their major competitive advantages (Think Merrill selling their Bloomberg stake, and numerous companies issuing extra stock).

-Mortgage backed debt is what got these companies into trouble in the first place. So how can they expect to recover until we see some signs of a bottom in nationwide housing prices? Or slowdown in foreclosures? Obviously these companies feel the aftershocks of what happens in the real estate market a few months later, and even though Wall Street trades on future results, its still too early to bottom fish.

Its also important to take a look at consumer behavior. I know retail has been weak, and I don't own anything in that space, I'd much rather go bottom fishing on a Target (TGT) or Kohl's (KSS) than a AIG or Citigroup.

Here's a good analysis of some middle-class retail stocks, via Trader Mark.

Wednesday, August 6, 2008

Portfolio Strategy...More of the Same

From what I've read, heard, and seen, there is plenty more ahead for financial stocks, particularly Fannie and Freddie. Don't overlook the headline from late yesterday about the treasury hiring Morgan Stanley to assess these companies. The treasury's rescue plan for Fannie and Freddie shouldn't be misinterpreted. True, its a backstop. The treasury has authority to buy and unlimited equity stake in the companies, which should prevent them from going under, but it can't prevent them from preforming poorly. So, now that Bernanke and Paulson have bailed out these banks and brokerages, they're going to use them at their disposal. My point here is that these stocks have been bid up too high in my opinion. I couldn't help but take a small stake in the ultrashort financial etf (SKF) yesterday.

I've been looking at the candidates' energy plans, and how to plan an portfolio. They differ somewhat in that McCain favors nuclear energy and some more drilling. Obama is in favor of clean coal, and creating initiatives to really push clean energy. Obama's plan is a little more idealistic, but that is okay for now. The key here is electricity, now matter how its produced, is going to see a rise in output as we move away from oil-based solutions. So we're going to need to increase and upgrade our power grid, and electrical efficiency will be critical, no matter who is president.

I've said it before, but I think Swiss electrical giant ABB(ABB) will be at the center of this theme. I'd also look at a company like Quanta Services (PWR), although the story with that stock is no secret at 25x 2009 estimated earnings. But ABB is a buy, right here, right now.

On oil...I like the opportunities in natural gas more than anything. Natural gas fits into a domestic, clean, energy policy, and I think either candidate will see this. Chesapeake(CHK),XTO Energy(XTO), or Sandridge Energy(SD) are the plays here.

I'm skeptical about integrated oil companies because of a few reasons. 1)the refining business will be tough with gasoline demand slipping, 2)Obama is going after big oil with a windfall profits tax. I totally disagreed with this method, but it may happen just the same.

So my portfolio strategy isn't changing much. I'm still skeptical about financial stocks. I see energy efficiency as a need more than anything, and we'll find the money to supply these changes. Other than that, the market has found a way to give almost any stock troubles.

Disclosure: Long ABB

Monday, August 4, 2008

Are Hedge Funds Ruining the Market?

Hedge funds are a fairly new phenomenon. If you're unfamiliar, they're basically large pools of money invested in nearly any asset class with little structure and little regulation. They're only offered to "accredited investors" (minimum of US $1 Million). For the full rundown, click here.

My point is take a look at recent market action. You've got rotation in and out of various sectors like crazy. Trends can change and reverse course within hours. This phenomenon is not only difficult to stomach for long term investors, but it creates asset bubbles. The buildup of excess leverage and vast liquidity has formed under a hedge-fund dominated market (the past 10+ years). As the money swings from one asset class to another, these bubbles get inflated and deflated, often taking out entire companies (and many investors) when they deflate. This causes major disruptions in the market. The technology bubble, the real estate bubble, and the commodity bubble all have inflated and deflated (whether the commodity bubble has deflated is still up for debate). These events have major ramifications. And most of them are negative for average consumers who many times never took part in profiting from the inflation of the bubble.

Trader Mark has spoken at great lengths about this. It is almost impossible to invest with a medium to long time horizon now. You have to "drink the Kool-Aid" and ride the trend that the funds choose. Earnings don't matter. Positive catalysts don't matter. Strong outlooks don't matter. If the funds have decided the trend is over, then that stock is going down. And hard.

Take a look at XTO Energy (XTO). This oil and gas stock, with one of the largest amount of gas reserves, and is fundamentally very strong, has completely broken down. On June 23, it closed at 73.40. Today, it closed at 43.54. Fundamental analysts have no explanation. The company posted strong earnings last week and said their production output will increase larger than expected, as well as a strong EPS growth. Technical analysts have no explanation. The stock has crashed through its 50 and 200 day moving averages with no sign of "support." Its like sector ration on steroids. Doesn't it seem like everything is juiced up these days?

Given all this, what is an individual investor to do? Stocks may as well be just symbols of random letters, not an underlying company. For those of us who listen to Buffett's success stories, and how he chooses a stock, it is a bit hard to take. I wonder what he thinks about this? What does anyone else thing about it? Are hedge funds ruining the stock market?

Friday, August 1, 2008

Emerging Market Infrastructure: An Investment for the Next Decade

I've talked at length about the prospects of global infrastructure growth. This story is being led by emerging market economies that include: China, India, Russia, Brazil, the Middle East, Eastern Europe, and many other countries. Although there has been some debate about whether emerging market growth has peaked, I believe there are still many opportunities in this space.

In April, Morgan Stanley released a research report, with the following quote "We forecast a total of US $21.7 trillion in infrastructure spending in emerging markets over the next decade, with Asia representing 67% of this total." The report focuses on growth in airports, electricity, ports, property, railways, and water.

A company I've focused on, ABB (ABB) is at the center of the electrical segment of this boom. Take a look at this previous post of mine for some detail on ABB.

In the water space, take a look at Veolia Environment (VE)

If you'd like a mutual fund, T Rowe Price has some great emerging market funds. I currently own their Africa and Middle East Fund (TRAMX).

I've outlined some of the reasons for growth earlier, but here are a few:

-Significant inflows of capital due to commodities (Middle East, Russia, Africa, Brazil)
-Sovereign wealth funds looking to invest capital (Many of these countries have many billions to invest)
-Tremendous population growth taking place as developed nations decline in growth. Human capital is a valuable resource.
-Urbanization taking place (especially in China), furthering the need for roads, railways, water infrastructure, and electrical systems.
-Climate change causing need for improving energy systems (especially in US).

All of these factors point to tremendous capital, both by governments and private industry into global infrastructure, construction, and utilities.

Disclosure: Long ABB, TRAMX.