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2006-05-23 :: Tuesday's activity

The rally we’ve needed has finally hit and there are some companies we own that have moved up sharply.  DrilQuip is +6%; Tenaris is +7%; Phelps Dodge is +7%; Southern Copper is + 6%; Titanium Metals is + 11%; Gardner Denver is +4.5%; Joy Global is +7%; Consul Energy is +5%, to name a few.

I’ve used the strength in the copper stocks to take some profits in Phelps Dodge and Southern Copper, and the strength in the oils to take some profits in the majors and the natural gas pipelines, to redeploy into the three areas that I think we’ll see the best upside through year-end:  oil services (Nabors, Gardner Denver, Grant Prideco, Haliburton); construction (URS, Foster Wheeler, Haliburton); and late cycle industrials (Ingersoll-Rand). 

The added benefit of these companies over the sales that were made, in addition to better upside potential, is that they have an earnings stream that should not be negatively impacted by a slowing US economy.  If Fed interest rate increases continue, there is a possibility that US economic growth will slow.  This will likely slow the demand for copper (the US is still a big user of copper), but not so likely to slow the demand for oil (the supply/demand imbalance in oil, along with the likelihood of negative geopolitical circumstances, will keep oil prices higher than Wall Street Estimates).  These should be good defensive equity positions; unfortunately, as we’ve seen over the last two weeks, all stocks can go down when there is a selling frenzy.  The key is figuring out which stocks to buy that have the best combination of potential growth for current value.

I am concerned about the tech sector, though.  The chip stocks that looked like they had found a bottom to their slide late last week are down today, with Broadcom being down big yesterday.  There is a lot of negative press about tech companies’ manipulation of their executives’ compensation through the timing of option grants.  From what I’ve read there is no actual proof, just a lot of circumstantial evidence that is pretty telling.  I’m beginning to wonder if this will hang a cloud over this sector for the forseeable future.  We’ll see later in the week if today’s rally can push into these growth stocks.

Mark