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2006-08-02 :: Energy Continues Climb

Yesterday was a generally down day for stocks as August, the worst month for stocks over the last 15 years, opened in typical fashion.  The bright spot was that energy stocks were up fairly uniformly across the board, particulary companies that specialize in Natural Gas.

Traders seemed to be fretting about the Fed ahead of the Aug 8 meeting.  My thoughts are that we will still see a quarter point increase then an announcement that they have finished raising rates at the present time.   The announcement may come in the form of a “pause” to see the impact of prior cuts (its pretty clear that the economy is slowing, from earnings reports by UPS and Fed Ex, two of my favorite leading indicators of economic activity); or it may come in the form a a “change in bias” to a neutral stance.  Either should be, at least initially, positive for stocks.

Then, we will have the traders fretting about whether the Fed has gone too far and that the economy is slowing too much.  Any negatives after the 8th that push the market down will come from this mindset.

The earnings in the energy sector will continue to drive those shares as people see that a slowing US economy has little impact upon the earnings of companies in an industry whose prices are being set by the 11% GDP growth in China and 8% GDP growth in India (forces of increasing  demand) and geopolitical unrest – Nigerian rebels, unrest in Middle East, Russia’s moves away from democratic governance ( forces negatively impacting supply).  The earnings in the metals sector will continue to be impacted by demand growth as well.

Our biggest sector having issues at the moment is the infrastructure sector.  In spite of earnings reports showing that the US economic slowdown has not impacted these global companies, their stock prices are down.  We have been using this as an opportunity to buy more shares in companies that we have faith in.   They are negatively impacting the portfolios in the short-term, but will have positive impact once the market sees that the Fed has turned the corner, and particularly when he market begins to anticipate interest rate cuts.    “Buy low, sell high” is an old maxim in the investment world; buying these companies now when they are at temporary lows the contrarian act that can be tough to initiate, but that pays off.  The only reason it works is because the earnings growth says this sector is undervalued and will eventually pay us back in a big way.

More later!

Mark