Archive for July, 2006

2006-07-31 :: Black Crack, Illinois Smack

Monday, July 31st, 2006

Yeah, I know its a bad pun on the Beverly Hillbillies song, but Coal (at least according to the Wall Street Journal) is the new energy alternative of choice.  With the world likely to become adicted to it just as it has petroleum products, and Illinois being the Saudi Arabia of coal, coal companies will likely make a major impact on the markets in coming years.  

Our investment in Consol Energy was up 6% or so today, and the rest of the energy portfolio also had a pretty great day, but coal was clearly the star.

So, what does it mean that coal is the alternative energy source of choice?  With natural gas now at $8 (up from $5 a couple of weeks ago), and likely headed higher as the heat wave continues to eat up our stores of nat gas on hand.  Estimates are that if this heat wave goes on for the next 2 to 3 weeks, nat gas supplies will be cut in half.  Coal as the alternative electricity source will be in tight supply and coal related industries will make a lot of money.

I know its a bit ugly to feel vindicated by the current action in the energy markets, but there are so many people out there that completely lack common sense.  Whether they are analysts or the pundits on CNBC who tried their best to convince us that energy stocks had seen their day, the reality of the world’s situation vis-a-vis demand V. supply in energy will keep the earnings of energy-related companies moving higher.

Ok, so maybe I was early when I started buying Consul, Headwaters and Alstom a based upon my thoughts that with petroleum products at all time highs and likely heading higher, coal would be the most likley substitute.  Consul produces coal; Headwaters provides technology for the use of coal byproducts; Alstom makes coal powered generators for industrial use; they should all be heading through the roof as alternatives for energy.  It now seems that the WSJ might agree.

Looking at this theme, the railroads are also a likely beneficiary of the coal revolution.  Alstom reports that its coal electricity generators are selling above expectations.  This is something that will be self-fulfilling prophesy as utilities switch from natural gas as a back up to coal as a back up source.  How will they ge the coal? By rail.  Look for rail earnings to continue to rise as a byproduct of the increase in coal useage.  Also, if you are looking for a coal-centric state, Illinois is your choice.  Peabody Coal is very big in Illinois and will be a good investment.  I’m going to stick with Consul for the time being but will likely add an additional rail investment, CSX to our holdings.

As I look at todays market I see what should be a normal day on the screen:  energy and metals are nicely green; consumer products are taking it on the chin; and everything else is mostly mixed.  Industrials, particulary the infrastructure stocks, have a great potential to jump significantly higher once the Fed’s interest rate direction is determined.  We’ve been adding bits of IR and URS to accounts, but its been on the way down (like today).  We will likely continue to add shares where I see its appropriate in anticipation of the big bounce we’ll likely see when the traders in NY figure out what happens normally when the Fed changes direction:  Cyclicals Rule!

Our overarching theme is that the US economy is in an expansion mode.  We may see some intermediate slowdowns (like now) or even a contraction (a recession, although not now on my radar), but that is a short-term thing.  If we live with the crazy times – like now – and wait out the bumps and grinds, the long-term is very positive and the cyclical stocks tied to the commodities and the infrastructure will be the big winners.

Its proved us right for since 2000 and will continue to do so.

More later!

Mark

2006-07-28 :: Energy Earnings Continue to Surprise Market

Friday, July 28th, 2006
Below is a story from MarketWatch detailing Chesapeake Energy’s earnings for the most recent quarter.  Energy earnings, particularly companies focusing on US, Canada, and Gulf of Mexico, are coming in well ahead of analyst projections.  Once the current soft spot subsides, the stock prices on these companies should move significantly higher. 

SAN FRANCISCO (MarketWatch) — Chesapeake Energy Corp. posted an 86% jump in second-quarter profit Thursday, built on an aggressive drilling and gas field acquisition program that boosted the company’s energy output by 45%.
Chesapeake, headquartered in Oklahoma City, Okla., reported after the closing bell second-quarter net income rose to $360 million, or 82 cents a share, from $194 million, or 52 cents a share, a year ago.
Revenue for the three months ended June 30 totaled $1.58 billion, up 50% from $1.05 billion a year ago.
Analysts polled by Thomson First Call expected Chesapeake to hand in earnings of 72 cents a share on $1.42 billion of revenue.
“The company delivered top-tier organic production growth and impressive profit margins as strong oil and natural gas price realizations far exceeded modest cost inflation,” Chesapeake Chief Executive Officer Aubrey McClendon said in a statement.
Daily production for the second quarter averaged the equivalent of 1.57 billion cubic feet of natural gas, up 26% from the 1.24 bcf daily average pumped in the second quarter of 2005.
About 45% of the year-on-year increase came from the company’s own drilling activities and 55% from acquisitions.
Since the start of the year, the company has raised its proven reserves by 7.7% to the equivalent of 8.1 trillion cubic feet of gas, managing a reserve replacement rate of 308%.
“We have also opportunistically hedged service costs and a substantial portion of our anticipated production through 2008 at exceptional prices in order to ensure strong profitability,” McClendon said.
The company, primarily a natural gas producer, said it has hedged fully 93% of its third-quarter gas production at an average price on the New York Mercantile Exchange of $8.85 per million British thermal units.
About 9% of the company’s overall energy output is oil, which it has hedged in the third quarter on NYMEX at an average price of $64.83 a barrel.
During the second quarter, the company’s realized price for natural gas, including the impact of derivatives gains and losses, was $8.04 per thousand cubic feet. The average realized price for crude, using the same formula, was $58.80 a barrel.
Earlier Thursday J.P. Morgan raised its rating on Chesapeake to overweight from neutral, citing the company’s protection from risks in the near-term natural gas market and its attractive valuation.
The company is also frequently cited by analysts as a good long-term investment among exploration and production companies in North America.

Yesterday the market opened up, particularly energy companies extending the move up from the bottom, but turned around near the end of the day for a loss as the traders in New York got spooked by some economic news.  This is going to happen in a market that is as skittish as this one is.

Hang in there and we’ll work our way through the soft spot.

Mark

2006-07-26 :: Nabors' Earnings and the Energy Sector

Wednesday, July 26th, 2006

I know you may get tired of hearing me talk about the earnings growth in the energy sector being the only predictable engine of growth for portfolios at the current time.  Here is a story about Nabors (a company we’ve been buying while its been under pressure and which I’ve written about a lot in this blog) cut/pasted from The Street.  It quotes Nabors on their business and the idiocy of the analysts that don’t see what’s really happening in their industry:

Oil driller Nabors (NBR) posted a sharp rise in second-quarter earnings and said it expects earnings to continue to show strong growth.

For the quarter ended June 30, the company made $233 million, or 77 cents a share, up from the year-ago $132 million, or 41 cents a share. Excluding items, latest-quarter earnings were 82 cents a share, a dime ahead of the Thomson Financial analyst consensus estimate. Revenue surged to $1.14 billion from $786 million a year earlier, beating the $1.08 billion Wall Street estimate.

“We are acutely aware that there appear to be two distinct rig markets, the one which actually exists and the one that the majority of analysts expect to develop out of the current gas storage overhang,” the company said in a Monday afternoon statement. “We fully recognize the potential for short-term softening in the rig market if gas prices cause significant customer spending reductions. While this situation reduces the degree of certainty of our outlook over the near-term, recent and prospective developments lead us to conclude that any impact on our results will likely be much less and shorter in duration than consensus expectations imply for both this year and next. We continue to see a high number of customers planning sizeable increases in rig requirements, particularly for new higher specification rigs, across our global businesses.

“Regardless of the near-term North American natural gas outlook, we still expect significantly higher year-over-year quarterly results throughout the balance of the year and next year for all of our major businesses,” Nabors added. “We expect our U.S. Lower 48 Land Drilling business to grow nicely over the next six quarters, but we expect even larger percentage gains in our International, U.S. Well-Servicing and U.S. Offshore units.”

This is all good.  You can buy this company for a 7 P/E.  What’s not to love?

Mark

2006-07-26 :: S&P Breaks Out to Upside

Wednesday, July 26th, 2006

When I last wrote, I told you about my laptop being fried by lightning.   I finally had time to go to Best Buy to purchase a new one and I was amazed at how cheap they were.  My deceased Dell cost in the $1,800 range when first purchased 3 1/2 years ago.  I purchased a Toshiba with more speed, memory, and significantly storage space for less than 1/3 the price of the Dell.  The forces of Chinese driven deflation seems to be alive and well in the electronics business.  Anyway, I can now write the blog from home and should be able to keep it more current.

I’ve included the chart above so you can see the break out on the S&P 500 Index after yesterday’s second positive day in a row.

You can see where the 50 day moving average crossed the 200 day moving average in a downward trend.  This sort of inflection point, when followed by the index itself moving higher than both indices, is a good indicator that there is pent up bullish sentiment out there just looking for reasons to move the market higher.  IF, and its a big if, the market can stay generally positive as we approach the Fed’s next meeting on interest rates in August, and IF the Fed announces that they are finished raising rates (either concurrent with or instead of a final rate increase) the market should find its catalyst to move back up to its highs for the year.

The sectors that would lead us higher would be the financials, the interest rate sensitive – like home builders that are trading as if no one in the country will ever build another home  – and the cyclicals.  We should also see energy, metals (including gold), and infrastructure move to more realistic valuations that reflect their earnings growth consistency.  We should also see longer duration bonds rally in anticipation of lower rates ahead.

We have built up a roughly 10% cash position department wide, which was our goal.   Some accounts have a bit higher, some a bit lower.   We’ve been adding shares of energy companies that will benefit from this activity and have specific characteristics that improve their outlook for the future – Frontier Oil because of its ability to refine heavy crude; Devon Energy for its vast stores of energy in the US; Grant Prideco, Gardner Denver, DrilQuip, and Helix for their ties to ever-growing drilling industry; Nabors and Noble as drillers themselves.

This chart is the things that market bottoms are made of.  Is it definite? Absolutely not; geopolitical issues could cut its legs out at any time, the Fed could drive the economy into recession from its interest rate hikes, the government could do something stupid, a terror attack could surprise us.  We will maintain our above normal cash position for the forseeable future and layer in longer duration bonds where appropriate.

More later!

Mark

2006-07-21 :: Lightning Strikes

Friday, July 21st, 2006

Sorry to have been out of touch the last couple of days.  Lighning struck my house and fried my computer, where I typically blog.  I generally don’t have time to blog at the office, particulary now with the market jumping up and down as it has been the last couple of weeks.

Anyway, enough of my issues.  Let’s talk the markets.

We continue to raise cash, albeit slowly, as we see selling opportunitites, and add to selected energy positions that should take off one the market settles down.  Frontier Oil, Devon Energy, DrilQuip, Helix, Nabors and Noble are all great buys at current levels, and should be significantly higher a year from now.  Earnings are strong, and contrary to what many are saying, these historic cyclicals’ earnings aren’t going to crash as the economy slows.  As I’ve written ad nauseum, the supply/demand dynamics provide a support level that will keep their cash flow strong.

That can’t be said for tech stocks…if you are holding any in your portfolios and hoping that your EMC or Intel or Sun Micro will come back to pre-2000 levels, you will be very disappointed.  We are in the third leg of their secular bear market (something I wrote about in my periodic newsletter a year or so ago) and the third leg is generally a grinding down of stock prices to single digit P/E ratios.  The third leg takes years to complete – just witness the third leg of the energy and metals secular bear that last 20 + years or the Nikkei bear that lasted 17.  Find an  up day, and sell the stocks, move into an energy company trading at a 9 P/E with a 30% earnings growth rate…its not rocket science, but it will make you money.

The Israeli skirmish looks to grind on for a long time to come.  The more I read the more I’m convinced that the attack on Israel was a well planned event financed by Iran and Syria, with foreknowledge that Israel would react strongly to the hundreds of rockets and kidnappings of soldiers.  I don’t know where it will end, but it will likely end badly for the innocent people caught in the middle.

We will continue on enacting our plan to generate cash and overweight energy, to protect clients from the negative impact of this situation.

Have a great weekend!

Mark

2006-07-18 :: Italian Diplomacy

Tuesday, July 18th, 2006

The Italians have stepped in to broker a peace between Israel and Hezbollah.  Energy prices dropped on the news yesterday, sending energy stocks down.  We purchased a bit of DrilQuip, Frontier Oil, and Helix yesterday on the drop, but the stocks dropped a bit further after we bought.  Today, oil prices have strengthened, so we should see energy stocks pop up again on their march higher.

As the rest of the market was flat, we continued to take profits in some of our weaker names, most that have great futures, but that near term are under considerable price pressure.  Companies like Lazzard, RBC Bearings, and Molex have great futures and we will likely add them back to portfolios when the economic direction is clearer.

If the Italians are successful, this will remove a major unknown from the picture and everyone can return to fretting over interest rates.  If they are not, then watch for continued unrest in the stock market.

More later!

Mark

2006-07-16 :: The Week Ahead

Sunday, July 16th, 2006

Last week was a bad week. All three major markets fell victim to Middle Eastern violence. The Dow , the S&P 500, and the NASDAQ lost 3.2%, 2.3%, and 4.4%.  With no improvement over the weekend, more missles rained into Israel from Lebanon and more Israeli airstrikes hitting strategic targets in Lebanon, there is no reason to expect next week will be much better for the markets. What’s more, there is enough other downbeat news regarding interest rates, oil prices and trade to keep the markets struggling.

The big economic announcements will be  the producer price and consumer price indices for June. They’re due out Tuesday and Wednesday, respectively. We will also get a look at the minutes from the last meeting of Fed policymakers, and Chairman Ben Bernanke will testify before congressional committees on Wednesday and Thursday.

As you can see from the VIX Volatility Index Chart above, we are in the area where we could see a bit of a relief rally in stock prices.  But the war in the middle east will weigh on things heavily for the near term, at a minimum.  From a strategic perspective, we will use any rally to increase our cash positions in accounts, generating 10% to 20% of equity allocations in cash.  As things progress, we will continue to press our energy positions in selected names that are seeing strong returns (DrilQuip, Helix, Frontier Oil, Valero), the streetTracks Gold fund, and add long-term bond positions through the Vanguard Long Term Bond Index fund.  I usually hesitate to use mutual funds but the bond position will hopefully be a short-term strategy to protect capital, and we can avoid brokerage commissions with this index fund.  The bond fund won’t come into play immediately as I want to see if the war is negotiated to a settlement and it becomes a non-event.  This is not likely, in my opinion, but until then cash, energy and gold will be our emphasis.

Check back as the week progresses for updates on my strategy implementation.

More later!

Mark
 

2006-07-13 :: 1973 War Redux?

Thursday, July 13th, 2006

I haven’t posted in 48 hours as I’ve been watching the developments in the Israel / Hamas / Hezbolah / Lebanon / Syria conflict.  This is ugly and it has the potential really, really, turn the market south.  The 1973 War was the proximate cause of the Arab Oil Embargo against the west.  There seems to be a lot of fear in the market that if this situation escalates further, we could see a serious disruption in oil flows from the mideast.  That could lead to the $100 oil that Goldman Sachs has forecast.

I am seriously concerned about what is going on.  As in 1973, the US was the only country in support of Israel.  In today’s UN Security Council the US vetoed a resolution that the other 14 countries supported in condemnation of Israel’s response to the rockets hitting Israeli territory from Gaza and Lebanon. 

If this is deja’ vu all over again, then there will be very few places to hide in the markets.  The defensive stocks that are trading at twice their growth rates will sucker in a lot of mutual fund money and money from novice investors that follow that investing rule of thumb, only to see their thumb stuck somewhere other than in a pie pulling out a plumb.

Energy, gold, cash and long bonds will be the few areas that  rule if we see a full scale war the scope of the 1974 war. 

Oh, I am selling TEVA, too.  Its had a tough time along with most  of the health sector lately, but having money in an Israeli company – even one with fundamentals as good as TEVA – is just not the best plan.

In a market like this, we will continue to pick away at small buys in my favorite areas.  We will likely start to add additional gold postions – via streetTracks gold shares ( the miners are falling with the rest of the market – as well as strengthening our energy holdings to emphasize oil in the US and Canada.  In selected accounts we’ll also add long bond positions, via mutual funds, as appropriate.

Keep your eyes on the stories coming out of the middle east.  It could hold the direction of the market for the next several months, or longer.

More later!

Mark