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2006-08-26 :: Energy and Other Thoughts

The Energy sector ended last week quite strong, with oil topping $72 and energy stocks up 2% on average for the week.  Oil was down in Europe overnight, so we’ll have to see what happens today.

We start this week off with news of a merger, with Western Refining buying Giant Industries.  As we’ve discussed several times in the past, companies in the Energy sector are making huge earnings and accumulating an unbelievable amount of cash.  If they don’t put that back into R&D to find new oil reserves, they have only a couple of other choices available:  increase dividends to shareholders, buy back their own stock, or buy another company.  All three are positive to stock prices in the Energy sector.

The broader market was down last week in spite of Energy being up.  Investors had fears that the economic slowdown would pick up steam and turn into a recession based upon economic reports showing housing sales were slowing further and the index of US manufacturing showing a significantly bigger contraction than forecast.

One sector that we are trying to increase exposure to is the large cap pharmaceutical companies.  I continue to wait for a pull back to the 21 or 50 day moving averages so we can get in.  The three companies that I want to add are Merck (at $38.50), Pfizer (at $26.35)  and Johnson & Johnson (at $63.75).    When we do buy in, we’ll set stop losses at the 50 or 200 day moving average level to protect the positions in case this sector is used as a source of capital when the market turns and money begins to flow back into the cyclicals.

More later!

Mark