Archive for June, 2006

2006-06-29 :: The Fed, the Fourth, and Old Faithful

Thursday, June 29th, 2006

We get the interest rate increase news from the Fed today and the only question is will they raise by 0.25% as anticipated or 0.50% as some have speculated.  It should be an interesting day in the market; if the Fed does anything other than what is expected, we’ll likely see increased volatility, although its hard to gauge whether it will be up or down.  The herd mentality will rule the short-term until proper analysis and investing on fundamentals take over.  My gut feeling says we’ll likely rally on the news, but after the past six weeks, anything can happen.

We continue to execute our plans, raising cash from strategic sales and making targeted purchases where appropriate and where cash is available.

This will be my last entry until after the 4th (more specifically after the 5th when I return to town).  I’m headed out west for a few days of hiking, white water rafting, and other summer outdoor activities in Wyoming.  In particular, we’ll be in Yellowstone so that I can finally see Old Faithful, which you can see above.  It will be a quick tour of Wyoming, with Cody, Jackson Lake, and Jackson Hole also on the agenda.

Have a great holiday weekend and don’t hesitate to contact Andy if you need anything:  thorman@bankchampaign.com or 217-351-2870.  We will be speaking each day, so your assets are never out of our care.

Mark

2006-06-28 :: Fed Meeting Looms Large

Wednesday, June 28th, 2006

Tomorrow we have the announcement of the assumed interest rate increase coming from the Fed.  Right now, everyone anticipates that there will be a 0.25% increase in the Fed Funds Rate.  However, one of the catalysts yesterday was a rumor that the Fed would flex its muscles and raise by 0.50%.  Additionally, a number of economists have raised their targets for the Fed Funds Rate to 6% by late 2006 or early 2007.

We also saw a major sell off in tech stocks yesterday, with Marvell down 15% based upon a deal to purchase Intel’s cellular chip business.  Seems like an over-reaction to me, but based upon the negative action in the chip sector in quality companies like Marvell and Qualcomm, we are likely heading into some very rough seas for NASDAQ stocks.  We will be using NASDAQ stocks as a source of funds to extend our purchases of companies with growing earnings.

Everything will continue to be choppy until the Fed action becomes clear to the traders in New York.  We’ll just continue with our plan.

More later!

Mark

2006-06-26 :: Safe Reserves Rule the Markets

Monday, June 26th, 2006

Last week, we saw Anandarko bid to purchase Kerr-McGee and Western Gas at +40% premiums.  Today, we have Phelps Dodge bidding to purchase Inco and Falconbridge at +20% premiums.

The common factor in these purchases is the fact that the reserves in the ground for these four companies being purchased are in the US and Canada.  This goes a long way to confirming our investment thesis that owning commodity companies that have reserves in politically secure areas of the world will be the jewels of an investment portfolio.

Friday, we saw a nice move up in the energy stocks based upon the realization that all of the cash sitting on balance sheets of oil companies would likely be used to enhance shareholder value.  We pointed out  a couple of weeks ago that all of this cash would likely be used for share buyback programs and increased dividends.  This was followed by the announcement of several of these moves.   Now, we are seeing that the next stage in this investment cycle is upon us, the consolidation phase.  The difference now is that we don’t have consolidation for consolidations sake.  What we do have is strategic moves to acquire reserves in countries that have strong property rights and that won’t nationalize oil and mine operations.

This will likely be a long-term unfolding story and one that will positively impact the share prices for my favorite investment group, the Canadian oil sand companies (Suncor, Imperial Oil, Canadian Natural Resources, Canadian Oil Sands, Western Oil Sands, and Birch Mountain).

When we have stiuations like Venezuela and Bolivia nationalizing oil fields and mines that companies have sunk billions into developing, like Indonesia  and Uzbekastan bringing serios charges against Newmont Mining for environmental issues and back taxes that are really swipes at the US government by proxy, and like Nigerian rebels taking hostages at oil operations there, owning assets in Alberta or Wyoming is a much more predictable investment and valuable investment.

If you are managing your own funds out there and you don’t have any of the oil sand stocks, now is agreat time to be a buyer, particularly if we see continued upward pressure from M&A activity.

More later!

Mark

2006-06-23 :: Positive News on Energy Stocks!

Friday, June 23rd, 2006
Below is a story from CBS Marketwatch on the internet with extremely positive comments about the energy sector.  I thought you might want to see that I am not alone in my support for the sector.  Let’s see if it translates into some price gains today!

Deutsche Bank lifts oil majors’ weighting

Raises Royal Dutch Shell, Statoil recommendations to buy

LONDON (MarketWatch) — Deutsche Bank raised its oil price estimates for the next two years and for the longer-term on Friday, prompting increased price targets and earnings estimates for a number of heavyweight global oil companies and recommendation upgrades on two European majors.
The bank said that, with economic growth remaining robust and few signs that the geopolitical price premium will dissipate over the next several months, it has again raised its energy price estimates.

It said that it now expects West Texas Intermediate oil prices to average $62 a barrel in 2007, from a previous estimate of $50 a barrel, and $55 a barrel in 2008, from a previous estimate of $45 a barrel. It also raised its long-term WTI forecast to $45 a barrel from $40 a barrel.
“The bulk of the evidence on the likely sustainable level of energy prices suggests it is increasingly implausible that we are headed back to the $25 a barrel oil and $3.00/mmBtu gas forecasts that dominated consensus views in the 1990s,” the bank said.
Deutsche Bank added that, even though it last raised oil prices estimates only three months ago, it now believes that the threat of energy-price declines in the next twelve months is receding.  The time required to correct underinvestment seems to point toward 2008-2010 as a more realistic range than 2006-2007, it said.

Following the oil-price forecast increases, it raised target prices across the European integrated-oil sector and also upgraded earnings estimates for U.S. majors.
In Europe, the bank raised target prices across the sector by between 5% and 7%.
“On revised price targets, we raise both Royal Dutch Shell.
Royal Dutch Shell shares climbed 1.8% in London while Statoil rose 1.9% in Oslo.
Estimates for earnings per share were lifted across the sector by around 20% for fiscal 2008, while free cash flow estimates increased 30%.

“With the sector now expected to generate some $182 billion of excess cash over this period. We would expect a very significant proportion of this to find its way through to shareholders either through increased buy-backs or additional dividend returns,” it said.
Deutsche Bank’s other preferred European names remain BP, OMV, ENI S.p.A. and Total.   “Of the super-majors, Total in particular looks substantially undervalued,” the bank said. Total shares gained 1.6% in Paris.

Meanwhile, the bank’s U.S. oil company analysts said that another extremely strong quarter for earnings has not been reflected in market estimates for earnings per share.
“We think the market is excessively discounting the potential for demand weakness and returns dilution, because we are, and we find plenty of value in oil,” they said.
These analysts added that, based on pre-existing price targets, they see around 16% upside in the integrated oil group over the next twelve months.

2006-06-22 :: Now That's a Rally!

Thursday, June 22nd, 2006

Yesterday was the sort of rally from a technical standpoint from which recoveries are born.  It was strong, it was broad, and it was based upon the fundamentals of good earnings reports.  That is the sort of thing I like to see.

Advancing stocks were 3 to 1  over declining stocks, something we haven’t seen in a while.  Volume was up on both the NYSE and NASDAQ, although still at moderate levels.  A very broad rally. A total of 430 stocks in the S&P 500 were higher on the day, along with 27 of the 30 stocks in the Dow. None of the 41 indexes Market Dispatches tracks were lower on the day. Among the big winners on the day: gold, steel, oil services, housing, transportation stocks and chips.

Today will be important.  If we simply retreat and take down all yesterday’s gains, then this isn’t the rally we’ve been looking for.  If we are up today, and the buyers aren’t scared off by the sellers, then this could be the inflection point we’ve been looking for.  A couple weeks ago, I wrote about a day that looked like we’d hit a bottom in the decline.  So far, that was the bottom.  I’ve also been writing about the fact that we’d need to bounce along the bottom, up and down, until we hit an inflection point that begins the march higher.  Maybe yesterday was it.

We continue to exectute the strategy discussed in Monday’s entry.  If this is the inflection point, these purchases will look pretty smart in the months to come, and particularly one- and five-years from now.

More later!

Mark

2006-06-20 :: Hubble Telescope Views

Tuesday, June 20th, 2006

http://heritage.stsci.edu/gallery/gallery.html

Follow this link to see what our tax dollars are paying for.  It truly is amazing! 

Mark

2006-06-19 :: Evening Thoughts

Monday, June 19th, 2006

My first boss in this business was a guy by the name of Owen Mair.  He taught me just about everything I know about the trust and investment business, as well as the things you can’t learn in school – many of which aren’t fit to discuss here, but also much about being a success in this business.  He taught me that you have to have the courage of your convictions to make decisions on behalf of your clients that will create and enhance the wealth that they have entrusted to you. 

In order to create and enhance the wealth of your clients, you must have the talents to analyze what is happening in the world, determine how it impacts your actions, and then execute the decisions from which your clients will profit.  Sometimes those decisions are contrary to the investing masses, like our investment thesis three plus years ago that energy and metals stocks would return to favor and move toward their former dominance of the S&P 500 based upon the simple concept of supply and demand.  

Many of you have met Andy Thorman with whom I work quite closely in the management of client money.  Andy is in the same postion I was 20 years ago when I started working with Owen.  He is learning how to structure portfolios so that they fit within our overall investment framework.  I hope to pass along to Andy all that I learned from Owen, but this is likely the most important concept:  since clients trust us with their money, we have to trust ourselves as well.

The point of this rambling is that we are at another one of those inflection points where my analysis is differing from much of the investing masses; Andy and I have to trust that analysis instead of following the lemmings over the cliff .  Most people are underweighting energy, metals and infrastructure in favor of cereal, beer and toothpaste – slow growth, old line consumer industries that will likely see a few percentage points earnings growth keeping pace with inflation.  Quite frankly, I’d be embarassed to have my clients pay me if this is the best I could come up with during the current turmoil.  Courage of convictions?  I see no convictions in the cereal/beer/toothpaste strategy – I see only money managers that aren’t much more creative than index funds.

So, toward that end, I thought I’d tell you what we are doing at the tactical level with client funds right now.  We used today’s drop in commodity stocks to add to positions in Nabors, Suncor, Canadian Oil Sands, and Barrick Gold.  Tomorrow, we’ll add to positions in Tenaris, Gardner Denver, and DrilQuip.  On store for the week are increases to positions in IngersolRand, Johnson Controls, URS,  Alcoa and Ultra Petroleum.  This is an ongoing process which we started a few weeks ago, adding to or start new these positions as client portfolios allow.

We have some cash on hand in accounts, but most likely we’ll need to make sales to cover these pourchases.  Candidates for sale are any of the higher P/E technology stocks that may be implicated in the options backdating scandal.  Also, we’ll likely be shifting within the energy
and metals sectors in favor of the late cycle energy stock as well as the gold and aluminum stocks.  

Energy, metals and infrastructure are the three true secular growth stories in the market today.  Yes, maybe toothpaste will outperform between now and September 30th, but while that is happening, my clients will be building positions in companies that have strong earnings, growing earnings, earnings that matter.  They will be paying fire sale prices for those earnings, and establishing positions that will likely double or triple in value over the next five years. 

That is something that Owen would be proud of and its something I am proud to teach Andy. 

More later!

Mark

2006-06-19 :: China Raises Reserve Requirements

Monday, June 19th, 2006

All four of the big central banks are now in tightening mode.   Normally this would be bad news for the equity markets, and Friday when it became public, we saw some retracing of the gains earlier in the week.  However, an even bigger announcement from the Bank of Japan indicating that they had stopped draining liquidity from their banking system is the key item for this summer.

Last week we had a big announcement from the Bank of China that they were raising their reserve requirements to combat inflation.  The increase will be at the 1/2% level, not huge, but enough to take some of the froth out of the system.  This put China in the same  position as the Fed, European Central Bank, and the Bank of Japan.  It also put the world in unknown territory as I do not recall anytime since China became such an economic force that all four banks were in tightening mode at once.  Uncertainty is ususally a really bad thing for equity markets, and being in a new situaiton involving simultaneous liquidity drain from the four central banks, leads to uncertainty (hence Friday’s small decline).

The good news, though, is that Japan announced (as I wrote last week) that they had ceased their increased reserve requirement policy.  The new bit of news is that they had drained over $175 billion in excess liquidity from the Japanese banking system.  This is a big number, and looking  back at the carnage in the markets from May 10 through mid last week, it only makes sense that this huge liquidity drain was the proximate cause.

As liquidity dried up and banks began to reduce their lending to the hedge funds, the hedge funds had to cover their positions (ie, sell the stock they bought with borrowed funds) and that put a huge downward draft on the market as they had to get out at any price or face being short funds to payoff the debt.

With Japan’s announcement, this means that we now have just some incremental interest rate increases ahead of us.  The Fed will likely increase to 5.5% over the summer; Japan will likely increase to 1%; and the European Central Bank will likely increase another 0.5% as well.  These incremental increases will likely stem whatever inflationary pressures are out there from the demand side, leading to a soft landing and sustained economic growth.

This is VERY BULLISH for the stock market, particularly the commodity stocks that rely upon sustained economic growth. 

The summer will likely be rough, with lots of ups and downs, but we will be using these as opportunities to realign portfolios to increase exposure to the energy, metals, and infrastructure stocks I’ve written about here over the last couple of weeks.  Once the general public gets comfortable that the end of the interest rate increases is near, we should see money begin to flow back into the markets, pushing them back to the pre-selloff highs and beyond.

If you are managing your own portfolio, consider starting to buy on any down days for your targeted stocks.  On any up days, use those as days to sell positions that you can use for liquidity to make your buys.  Look at P/E’s, relative P/E’s, and PEG ratios as an indicator for your sale candidates.  Look to buy the ultra low PEG energy service company stocks as they will make you a lot of money when the next leg up in the energy bull market really takes off.

More later!

mb