Archive for October, 2006

2006-10-26 :: Oil Breaks Downtrend Line

Thursday, October 26th, 2006

If you look at the graph above, you can see that oil has broken its downtrend line in a fairly decisive manner.  This downtrend has been in place since July, so this is a fairly important technical event, albeit a short-term indicator.

In terms of what this means for our strategy, we are still overweight energy stocks.  This has treated us quite well this month as the energy bears (principally the hedge funds and momentum investors) have left the market and the value shoppers that are focusing on the long term fundamentals of these cash generators (witness ExxonMobil’s earnings report today).  There is not a direct correlation between the price of oil and the stock prices of companies in the energy sector, but there is a fairly close pattern in the charts.

As the prices of energy companies have been moving up, we’ve been raising our trailing stops.  A few of the stops have hit on the way up as investors have sold taken profits in some of the weaker names.  We’ve been stopped out of Nabors, Encana, and Helix (I think HLX will be a long term winner, but its technicals are not as strong as DrilQuip or Smith International, similar companies).  We want to maintain our overweight position in energy, so we have been reinvesting the proceeds in either Schlumberger or Arch Coal, building a strong position in these two companies.

One of my clients pointed me toward a very interesting interview in last week’s Barrons with one of the premier energy analysts in the country (sorry, I can’t recall his name and the article is in my office).  His view seems to fit pretty well with our energy strategy as he sees that crude oil will bottom in 2007 or potentially 2008, then will march significantly higher as the world comes to realize that oil production has peaked.  His numbers show that the top two oil fields in the world have already peaked, in Saudi Arabia and Kuwait.  The number three field, in Mexico, will peak within the next year or two.  The oil fields run by non-government producers (ExxonMobil, ChevronTexaco, etc) will all peak between 2009 and 2011; the exception to this is the Canadian producers (Suncor, Nexen, etc.) which will not peak until the 2040’s. 

The lessen to learn here is one that long-time readers of my newsletter know:  Canadian producers deserve a higher valuation than other producers because their reserves have a significantly longer life than the rest of the world.

More later!

Mark

2006-10-18 :: Morgan Stanley Energy Analysis

Wednesday, October 18th, 2006

So, to show how dull my Wednesday nights are, I am reading a Morgan Stanley energy sector analysis report.  I am getting some consolation from reading it and want to share it with you.

They have lowered their expectations, yet the names we own are still at the top of their recommendations with huge 18 month upside.  They are still worth holding in spite of the weakness in the group since May.  In fact, we have an overweight position on the sector even after cutting back on exposure over the last month.

Here are some of the upside targets over the next 18 months Morgan Stanley has for names in our Universe:

Schlumberger +70%
Dril Quip +41%
Grant Prideco +34%
Baker Hughes + 49%
Smith International + 50%
Haliburton + 36%
Tenaris +46%
W-H Energy +49%
Noble +28%
Todco +29%
Ensco + 20%

In the nearterm, we will likely continue to see ups and downs in the energy sector.  As the names have been recovering, we’ve used trailing stops that follow the stock prices up.  This is to protect the price gains in some names so that if the prices contract and we are stopped out we can add to the names we have the greatest confidence in.  Particularly, we want to add to Schlumberger, Haliburton, Dril Quip, Tenaris, Smith International, and W-H
Energy, and we’ll use any proceeds from stops to add to these positions.  This is an active strategy, but one that will ultimately prove to make a lot of money for our clients.

Many of you have had such nice words for me relative to losing my Black Lab, Manny, this summer.  Well, the photo above is of my new puppy, Trip.  He’s 8 weeks old in this photo and is turning into a real live Tasmanian Devil!  He is a Wirehaired Pointing Griffon and will end up at about 60 – 65 lbs, although he’s only about 8.5 lbs in this photo.  He’s a lot of work at this age, but I’m sure he’ll turn out to be a great dog.

More later!

Mark

2006-10-13 :: Cyclicals On The Move

Friday, October 13th, 2006

In good news for our portfolios, the cyclicals have started to move up nicely from the summer lows.  People are transitioning out of the defensive names and moving into the names that grow with the economy. 

Additionally, energy stocks are moving up again and are back to where they were prior to the big sell-off in mid-September.  We’ve been selling energy during the move up and investing in the cyclicals (United Technology, Expeditors Internatinal, Ingersol-Rand, Foster-Wheeler, URS, JB Hunt, Spartech Regal-Beloit, ), Technolocy, Financials, Home Builders and related companies. 

We’ve increased  our technology positions, particularly in the consumer device area (Garmin, Satayam Computer, Silicon Motion, Cree, Silicon Image, THQ, Sandisk)  and business applications/services (Infosys, Adobe, BMC Software).

We’ve added some banks which should benefit from increased margins of falling interest rates, once the Fed starts cutting (Carolina Bank Holdings, Wachovia Bank, Commerce NJ, City Bank, Heritage Commerce).

The home builders group and their related industries, which sold off significantly in anticipation of a drop in the housing market, put in a bottom and have started to retrace some of their losses.  We’ve been buying Centex, Beazer Homes, Brookfield Homes, and Fastenal because this group will rally higher in anticipation of the housing market firming up.

Finally, we’ve started to add positions in the consumer discretionary area that should benefit from lower rates as well.  These stocks will move up on the anticipation of lower rates, and many will benefit from the coming Christmas season.  So far, we’ve only added American Eagle Outfitters, but will add others in due course.

More later!

Mark

2006-10-11 :: Earnings Season Startson Low Note

Wednesday, October 11th, 2006

Earnings season started out on a down note, with Alcoa and Legg Mason reporting below estimate numbers.  The Federal Reserve minutes of the last meeting were released today, and the concensus reading is that the much anticipated rate cut is still several months into the future.  Then, to top it off, an aircraft crashed into a building in New York, and rumors circulated that it was a terrorist attack, sending the market down.

We’ve started seeing some strength in the cyclical names as money has begun to rotate out of the defensive companies and into those that have earnings tied to economic activity.  This is great for our portfolios as we have a heavy emphasis on those types of stocks.  There are some companies that should have significant double digit share price increases  once that flow of funds picks up steam:  United Technologies, Ingersol-Rand, Expeditors International, Fed Ex, Foster-Wheeler. 

Today we had some interesting news from Bank of America in that it was going to give online brokerage free trades for accounts above a certain size.  Add on to that the earnings news from Legg Mason and the brokerage/wealth management firms (excluding Goldman Sachs) are now viewed with suspicion.

Its a treacherous time and we are working hard to navigate the pot holes.  We’ve been executing the strategy changes discussed in earlier postings, preparing the portfolios for an autumn rally.  The strongest time of the year for stock markets is from November until May.  The revised strategy should put our portfolios in the sweet spot for above market returns during that time period.

More later!

Mark
 

2006-10-04 :: Big Day in the Markets

Wednesday, October 4th, 2006

For the first time in several sessions, everything was working in the markets.  Lately, the Dow has been moving up, but the rest of the market has been left behind.  Today, energy and Nasdaq led the charge higher, with the Dow stocks following along.

We’ve been busy realigning portfolios to meet our revised investment strategy.  As has been our plan, we’ve been selling energy companies into market strength.  With the proceeds, we’ve been adding to non-semiconductor Nasdaq stocks, financials, and healthcare. 

Over the past 4 years, the energy sector has made our clients a lot of money.  During the 6 1/2 years that the Dow went from current levels, down 30% and back to current levels, our clients have experienced significant growth, some nearly doubling their account size.  This year has been tough as the leadership of the energy sector, in spite of stronger earnings than other sectors, has been down.  Unfortunately, that is the way the market works some times.

When we have times like this that requires a change in directions,  it is a pretty monumental task.  First, you have to be sure that the tide has truly turned.  You don’t want to incur brokerage costs to change positions only to realize later that the original assets were the proper investments for the time.  So, you have to be sure that the shift is warranted and that you time the changes so that you are selling/buying in a measured and organized manner.  All of this takes time and patience.

We are getting very close to being re-positioned for the future.  There will likely be some more sales and reinvestments in coming days, as the market affords opportunities.  The chart above shows that the Dow is currently in overbought territory, so we should expect a short-term pullback at some point as people begin to lock in short-term profits on large cap stocks.  That will present additional buying opportunities for us in re-positioning the portfolios. 

The most concerning thing about the Dow making new highs is that the Dow Transportation Index is stuck well below its earlier highs of the year.  Dow Theory says that a new high in the Dow Industrials has to occur in conjunction with a new high in the Transportation index for it to be sustainable and indicative of a strong bull market.  If that does not happen, then its likely a head fake that draws money off the sidelines only to see the market fall back to lower levels.    Dow Theory is not perfect (it is a theory after all), but it is certainly something to watch, and indicates that all new purchases should have trailing stops underneath to protect against the head fake.

In upcoming posts, I’ll discuss the companies that we are investing in for the coming months.  I’ll also talk about our selective use of stop losses and targeted sales prices.

More later!

Mark