Archive for September, 2008
Tuesday, September 30th, 2008
Perhaps the biggest problem with the credit market debacle is that Main Street doesn’t get it. Literally. Try explaining the credit market to the average guy.
The “TARP bailout” is being billed as a Main Street rescue, by Henry Paulson, et al. If you look at the situation realistically, Wall Street has already fallen. If you were Rip Van Winkle and you fell asleep for a year, while the US government tried to bailout Wall Street, you’d be wondering, what happened to all the banks that disappeared, or were bought up as of September 26, 2008. What was the point?
Add to this now Wachovia (now Citigroup), and the $700-billion TARP bill itself, as of September 29, 2008.
While Congress was voting against the credit market bailout yesterday, the market panicked and gave up $1.3-trillion.
Ironically, the folks who make the laws in America are not Wall Streeters, and are having the same difficulty as Main Streeters in understanding how the credit market works. How can you expect US Congressmen to vote on something they do not understand?
What is a credit default swap? Alt-A Securities? The Discount Window?
The failure appears to be an inability to “sell” Main Street on this bailout deal. The average guy doesn’t get “Wall Street,” and is wondering why they are going to get stuck with the bills that this bailout will generate.
What happens when you can’t refinance your mortgage, when you can’t withdraw cash from an ATM, when your employer can’t pay your salary, or the buyer of your home can’t secure financing, or your business is unable to extend credit to customers, or get credit from suppliers?
Wall Street, Ben Bernanke, and Henry Paulson are going to have to a better job to get an agreement on a “rescue package” to lawmakers, that the lawmakers can understand and pass on. Main Street still doesn’t get why it has to pay for the mistakes of others, and they don’t get yet how close the credit system is to imploding.
For now it appears that Congress has rescued voters. From what, though?
Tags: Alt-A Securities, America, ATM, Bailout, Banks, Ben Bernanke, Bernanke, Citigroup, Congress, Credit, Credit Default Swap, Credit Market, Henry Paulson, Mortgage, Paulson, Rally, Rip Van Winkle, Trillion, Us Government, usd, Wachovia, Wall Street
Posted in Credit Markets, Markets | Comments Off
Wednesday, September 24th, 2008
Not likely, according to PIMCO’s Bill Gross. In his most recent Investment Outlook, Gross, reasons and opposes (for now) the idea that in the very different worlds of Louis Rukeyser, Jim Cramer, and Jim Grant, “There’s always a bull market somewhere!”
While he does agree that there are always stocks, bonds, and currencies that can be found to be going up, while markets are going down, Gross cautions:
So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but NOT NOW, because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
- Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
- Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
- The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
Essentially, Gross’ thesis is that as the GSEs, banks, investment banks and global hedge funds delever their balance sheets, they also lower the prices of all securities that can be arbitraged within the marketplace.
The 10% year over year decline in prices has not been witnessed since the great depression, and that is a red flag.
a 10% aggregate asset price decline does more than make us all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
This rare event of systematic debt liquidation is the central issue in both the US and globally. If central bankers are unable to take effective measures, the campfire could turn into a forest fire, and a mild asset bear market could turn into a destructive financial tsunami. Gross points out that even they and their SWF and central bank counterparts who have been doing their part to stem the tide, and in some cases bought into debt issues too early, only to see those issues now priced “underwater,” are now reluctant to make additional commitments.
Paulson and Bernanke have consulted PIMCO regularly throughout the credit market debacle, and have apparently acted on some of that advice as well as that of others like Pershing Square’s Bill Ackman, who floated a Frannie bailout plan prior to the Fed’s that was eerily similar.
Paul McCulley stated in late July, that the only thing that was viable given the delevering of the market that was well underway, was for government to lever up its balance sheet, much the way it is proposing to this week, with the $700-billion TARP plan.
Gross too, re-iterates and lobbies for this in his newsletter most recently published newsletter:
common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.
Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
(note: these ideas were published well before the Fed/Treasury realized the need for a far reaching solution)
Is there a bull market somewhere?
There is, but those assets are “rare as diamonds, as opposed to grains of sand,” according to Bill Gross.
Investment Outlook, Bill Gross, September 2008
Tags: Bailout, bank counterparts, Banks, Bear Market, Bernanke, Bill Ackman, Bill Gross, Blog, Chart, Credit, Credit Market, Economy, Fannie, far reaching solution, Fed, Freddie, Grain, GSE, Hedge Fund, Hedge Funds, Investment Banks, Jim Cramer, Jim Grant, liquidity, Louis Rukeyser, Markets, Paul McCulley, Paulson, Pershing Square, PIMCO, PIMCO Investment Committee, Recession, risk, spreads, Thesis, U S Treasury, UK, United States, Us Federal Reserve, usd, Water
Posted in Bonds, Credit Markets, Economy, Markets, Outlook | Comments Off
Tuesday, September 23rd, 2008
Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:
Loans and Mortgages are getting much harder to come by on average, globally.
This has bold and negative implications for property prices everywhere.
Observation # 1
It all began with housing and it will end with housing.
The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.
Don’t trust central banks to always do the right thing.
Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.
In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.
Observation # 3
Policy mistakes are likely to be repeated.
The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.
Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.
Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.
Observation # 4
The golden era of investment banks is over.
The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.
Observation # 5
The final shoe hasn’t dropped yet.
There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.
Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.
Observation # 6
Leverage is ‘dead’ but capital is not.
Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will need to stabilize before we can expect better times.
Observation # 7
The end of the crisis looks further away than it did a year ago.
Its complicated, very complicated.
Commodity price induced inflation has made it hard for policy makers to reduce interest rates. Despite this, interest rate cuts may not be the magic bullet and in 20 of the 36 countries recently surveyed by Morgan Stanley, real short-term interest rates are currently negative.
At this point the $700-billion Treasury/Fed proposal appears to be a solid response, as does the stimulus injections of cash into markets around the world.
This problem remains possibly years away from being done with.
Observation # 8
Traditional risk management has lost its way.
Paul McCulley of Pimco touched on the subject in the July 2008 issue of Global Central Bank Focus:
“[...] every levered financial institution – banks and shadow banks alike – decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed.”
In fact, while it is known that PIMCO was regularly consulted by Secretary Paulson, it was Paul McCulley who rightly proposed in his newsletter during the summer, that the only real solution would consist of the formation of a new government agency to create a market to thaw frozen or cemented assets. This would be the only viable long term solution.
Where is the opportunity? According to Absolute Return Partners, real value is to be found in credit instruments. This is where the most damage has been inflicted and it is where the biggest bargains are to be found in today’s markets.
What would you rather own? Equities which trade at 15-20 times earnings or credit instruments trading at a fraction of that cost? Deutsche Bank estimates that senior secured loans are trading at an implied PE ratio of 5-less than a third of the cost of equities.
You may read the full original version, at Observations on a Crisis, Courtesy John Mauldin
Tags: Absolute Return Partners, America, Banks, Blog, BRIC, BRICs, Canadian Market, CDS, Central Banks, Chart, China, Commodity, Credit, Credit Crisis, Deutsche Bank, Earnings, Economist, energy, Fed, Focus, Food prices, GDP, GDP Growth, Global Central Bank Focus, Gold, inflation, interest rates, Investment Banking, Investment Banks, Jan Wilhelmsen, Japan, John Mauldin, liquidity, Markets, Mississippi, Morgan Stanley, Mortgage, Niels Jensen, oil, Paul McCulley, Paulson, PIMCO, Real Solution, risk, Savings Rate, Secretary, Term Solution, Trading, Trillion, United States, Us Federal Reserve, usd, Value, www.arpllp.com
Posted in Credit Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas | 1 Comment »
Monday, September 22nd, 2008
Today’s trading in the oil saw the front month October contract, which rolled over today, close at $123, opening up a 12% spread between itself and the 2nd month November contract. During the course of the day it traded up as high as $130. When traders smells a short squeeze, they tend to pile in.
Word is that a large investor got caught on the wrong side of the trade and moved to cover a large short position.
The CFTC is said to be investigating the cause of today’s anomalous trading.
AP reported, “Phil Flynn, analyst and oil trader with Alaron Trading Corp. in Chicago, said the late-session surge in oil appeared to be the result of a large investment fund scrambling to cover their short positions, or bets that prices would fall.
“When people sense that someone is short, it’s like blood on the streets. It just accelerates the rally,” Mr. Flynn said.
The November contract closed at $109.37 also up sharply by about $6.62. If the price of oil manages to maintain above the $108-109 level, it may break the current downward trendline established since oil began its correction from the July $147/bbl peak .
It remains to be seen if energy prices will be impacted by a recession-led fall in demand. At last glance this evening, the November contract was trading just below 109.
Charts: Bespoke Investment Group
Tags: Alaron Trading Corp., analyst and oil trader, Bespoke Investment Group, Chart, Chicago, energy, Energy Prices, Miscellaneous, oil, oil trader, Phil Flynn, Rally, Recession, risk, Short squeeze, Trading, usd
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off
Friday, September 19th, 2008
Barry Ritholtz of the highly followed Big Picture blog, submits that the last time the market behaved the way it has, posting its two biggest days since October 1929, what followed, can only be described as a cataclysmic drop in stock prices. Beware of the bear market rally.
To read and see further, visit Industrials: Biggest 2 day rally since 1929
Courtesy: Barry Ritholtz, The Big Picture
Tags: Barry Ritholtz, Bear Market, Blog, Desc, Rally, SMI, The Big Picture
Posted in Markets | Comments Off
Friday, September 19th, 2008
The following chart shows how the ten sectors of the S&P 500 performed this week in the context of the government’s credit market intervention. Only energy (on oil’s price recovery) and financials (on bailout) made progress while eveything else was down.
It was a crazy week in stocks too. Merrill Lynch (MER) was the best performer on news that it was being acquired by Bank of America (BAC) and AIG was the worst performing stock on news that it would receive a two-year $85-billon loan from taxpayers.
Charts: Bespoke Investment Group
Tags: Aig, Bailout, Bank Of America, Bespoke Investment Group, Chart, Credit, Credit Market, energy, Financials, Merrill Lynch, Miscellaneous, oil, S&P, S&P 500, usd
Posted in Credit Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off
Friday, September 19th, 2008
Oil prices rallied back over $100 in the midst of this weeks turmoil, to close Friday at $104, up $6. According to the current downtrend, oil, which appears to be in a bull market consolidation, is likely to continue lower for the time being, unless it can break the trendline and close above $108-$109.
Chart: Bespoke Investment Group
Tags: Bespoke Investment Group, Chart, energy, oil, Oil Prices, risk, usd
Posted in Energy & Natural Resources, Markets, Oil and Gas | 1 Comment »
Wednesday, September 17th, 2008
September 17, 2008 - The fall in the price of oil during the past two months may not have surprised everyone, but its dramatic nature and swiftness was unexpected. One analyst who got it right was Rob Fraim of Mid-Atlantic Securities. With crude down by almost 40%, a new report on energy has just been published by Rob.
This report is worth perusing for two reasons: (1) Rob has a good long-term track record in this sphere, and (2) a common-sense approach and findings with which I mostly concur. Here are some excerpts from his current report.
Today I will tackle one of the (many) issues with which market participants are grappling. And I will have a sector recommendation that has “hero or a goat” implications for the writer of this missive.
I am cogitating on the disruptions and disasters in the financial sector – and the implications for the broad market. At some point you will hear from me on that subject as this mess unfolds and I feel that I have actionable thoughts to share.
Today though – we talk energy.
I’ll probably get tons of e-mail taking exception to my conclusions and citing multitudinous arcane bits of Economist World data. And I will gladly receive these and will appreciate the input. But that doesn’t have to mean that I will necessarily agree or find reason to change my conclusions.
I am approaching this … and I don’t want to use the word “gut feeling” – given that I believe that I have sound reasons for my opinion on this – but there is a certain amount of “feeling” involved in the process and conclusions. What I see in market action, what I hear from clients, what I sense in the mood of market participants, what I observe in the market’s reaction to events. And with all due respect to economists, the market is often more art than science. So I don my proverbial beret, pick up my figurative brushes and paint, and present my art project. Some fact, some feel, lots of opinion.
What a bleak mood in the energy patch. What a sickening slide. What the h*** happened? What an … opportunity?
Back on June 10, in a piece I wrote entitled “Oil – Whither Goest Thou? ”I gave the opinion that crude oil – then at $136 a barrel was overextended and due for a correction. I said that the $100 or so area looked about right. Of course oil promptly rallied to $147 or whatever it was and I was a stoopie-head for a little while. But since then, well … hey, hey what a genius, huh?
You don’t believe that I actually got something right? OK, you force me to quote/copy/paste. Here is an excerpt from the June 10 flash in which I recommended lightening up on energy stocks:
“Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a better than average chance that we are going to revisit $100-ish and stabilize there for a while.
“This being the case I am suggesting that reaping some profits and reducing energy positions a bit might be a wise move – at least on a trading basis. Keep a core holding for the long-term, but lighten up. Sell some stuff. Write some covered calls. Hedge a bit. Maintain the core but trade with part of your energy investments. Do something other than get whipsawed.
“… It would not surprise me to see $100-105 oil by the end of the year. That probably equates to gasoline in the $3.50-ish area.”
Of course after that I went on to elaborate brilliantly (oh all right it wasn’t that brilliant, but I did elaborate) on the reasons why I was – at that time, in June – becoming cautious on energy. Recapping (sans the details) the reasons for the selling recommendation were:
a) Demand destruction resulting from changing consumer and transportation industry driving habits and vehicle choices
b) The potential for a rise in the US dollar
c) Slowing demand for China with the Olympics build-out winding down
d) Modest production growth – specifically from Russia
e) Comments from the Saudis saying that there was no justification for the rise in oil prices that had occurred.
Hmm … not too shabby on those points if I do say so myself.
And then I stated the following:
“When the crowd is virtually all leaning in one direction on a sector, you have to take advantage of it at some point. You just have to. Right now everybody says that financials are garbage and energy is gold, and we of course know all of the reasons for both. But just you wait and see… 12 months, 18 months out – when quality banks have risen 30% in price – the analysts will fall in love with them again. And if energy stocks go down 20% the cries to sell will erupt. We have to take the opposite side of the masses sometimes. We. Just. Have. To.”
So as it turns out I was reasonably on target with those comments and the call to reduce energy holdings for a while. (You know what they say about even a blind squirrel finding an acorn every now and then.) Now the burning question on the minds of my readers is this: “What now, Rob?” Well, again, I don’t know how many minds are burning and hearts yearning to hear the answer, but I’ll take a crack anyway.
I don’t expect a huge rally in oil in the near term, but I do believe the correction has just about run its course. Recently when crude approached $100 on the way down, OPEC began the “defending” process by announcing some production cutbacks – hoping to maintain $100 as floor of sorts. But now with the disruptions across all segments of the market, oil prices have moved right through that level – particularly yesterday as panic hit all markets, trading below $92 as I write this. I would not be surprised to see OPEC coming back with more production curtailments.
I am somewhat more bullish on natural gas prices than many analysts I have read, more based on seasonality, but also because of increased focus on natural gas use. (We’ve all seen the Boone Pickens/Aubrey McClendon ads. And we are approaching an election – what politician is going to badmouth natural gas? Heck, Nancy Pelosi said that it isn’t even a fossil fuel. As to the seasonality play, I have had some success through the years in buying natural gas stocks in the fall prior to our entering the heating season for a trade out as spring approaches.
So, I’m kind of reasonably positive on oil itself – the commodity – for the short term. I’m growing more bullish on natural gas – against the opinion of some smart people who feel otherwise.
The key point though is that I am getting significantly more interested in the stocks of the energy companies. Why? Because it doesn’t take $140 oil for the energy companies to make a lot of money. They do very nicely at $100 and the resultant decline in gasoline prices (once we get past this hurricane pricing anomaly) will calm down some of the finger-pointing and windfall profit-espousing by the politicians.
And the prices of the energy company stocks – oil and gas producers, drillers, coal companies, energy trusts, MLPs, alternative energy … the whole bunch of them – have just absolutely plummeted over the last couple of months and it (again I hate to use the word but here I go) feels like a bit of a selling crescendo taking place.
I have made the comment to a number of people the last few days that it seems that we have margin clerks running billion dollar portfolios. We know there was a liquidation of a large energy-focused hedge fund recently. The sector action of late feels/smells/acts like there is more forced selling taking place. And as one astute observer pointed out to me, in addition to the margin clerks, you have to factor in the risk management people at the funds. Forced selling of another sort. On top of that there seem to have been some significant fund redemption requests at hedge funds – particularly by fund-of-fund groups, which are notoriously fickle and prone to pull out.
So now that everything energy-related has been hammered we hear all of the after-the-fact cautionary/bearish thoughts: China doesn’t want any energy anymore … all commodities are going to fall another 50% they say … the economy is going to totally destroy energy demand … we’re all going to bike to work and cook on campfires … we’re going to be awash in cheap oil … blah, blah, yadda, yadda.
We’ve heard it all lately. I’m just not totally buying it. I’m not convinced that the big picture has shifted totally.
I believe that the stocks of energy companies have more than discounted the decline we have seen and then some. 50% declines in stock prices have not been out of the ordinary. I don’t think you have to be a raging, snorting bull on the commodities themselves to believe that the producers of energy products and services will be very nicely profitable – even at today’s lower-than-before prices for oil and gas.
And my very astute friend Jeffrey Saut at Raymond James (who has been spot on about energy and who has become more bullish of late) pointed out something very interesting yesterday. Evidently China – the previous “buyer at the margin,” the force that kept sopping up all supply for so long, which contributed to the big rise in energy before – has been pretty much out of the energy markets for a couple of months. The reason: pollution concerns during the Olympics and the Paralympics (the games for those with disabilities.) Many factories and industries were shut down and idled during that period so as to improve air quality during a time of so many visitors and so much world attention being focused on China. (We know China is image-conscious. Just ask the little girl who was not considered pretty enough to sign the anthem live and was replaced by a more attractive lip-syncher.)
The Paralympics end on September 17, and this means that China may very soon reopen manufacturing and transport – particularly so since there is a massive earthquake rebuilding to be done. And they could well be back in the energy market as buyers almost immediately – like on the 18th. The implications for the energy commodities are positive and a psychology shift in those markets could quickly spill over to the beaten up stocks of the energy companies.
Big picture, let’s not forget a few key energy points:
1. Production in many places is peaking or has peaked. Mexico appears to have peaked and Russia – a recent source of supply and the currently the 2nd largest oil producer – is doing things in a way that is short-term profitable for them, but long-term counterproductive. They are investing very, very little in new exploration (the capital intensive part of the business) – opting instead to try to squeeze out production from existing fields. That’s cheaper production for them in the short run, output has peaked and they are depleting those fields. Ultimately, they stand to be left with played out reserves and few new prospects – since they are skimping horribly on cap-ex and exploration now. It’s like the landlord who spends all the rent and doesn’t maintain the building. Eventually it catches up to him as the structure falls apart. Or the pharmaceutical company that does no R&D even though patents are expiring. Russia is milking the cow but not feeding it.
2. The low-lying fruit in the oil business has been picked. The potential “super giants” being explored and developed now – Brazil’s Carioca/Sugarloaf and the Bakken formation in the US for example, while exciting are also challenging and very expensive to produce on a per barrel basis. Same with the huge Canadian tar sands projects. Tar sand fields have been known of for years, but until oil reached high prices it was economically impractical to extract oil there.
There is still plenty of oil out there, but it is not the cheaply available, “poke a stick in the ground and watch it flow” type of oil. Prices will have to remain high to justify development.
3. While the world got a bit “China and India crazy” there for a while as regards energy consumption, the basic premise remains valid. As these huge populations become more urban and industrialized in nature – with cars, the need for electricity, etc. – there will be growing demand for the foreseeable future. Oh there will be the month-to-month ups and downs of course and everybody will obsess about that. But big picture – demand grows.
4. Alternative energy sources – and look, I’m a big believer that we have to develop new ways to provide power – are a long way from meeting our energy needs. And while they may do so one day, for now those needs must be met from both traditional (fossil) and progressive (alternative) sources. I believe that we need to break the oil addiction via new sources. But that is a process over a generation of time, not an immediate reality. For now, to quote Mr. Pickens, we have to drill, drill, drill.
5. We need more electrical power. Badly. Some experts say as many as 30 new power plants are needed ASAP. We might be oil addicted, but we are electricity junkies of the first magnitude. Computers, multiple TV sets, cell phones, iPods, recessed lighting all over the house, floodlights in the yard, plug-in cars on the way, so many appliances and gadgets in every home that it would have seemed like The Jetsons to a 1960s observer. And what runs power plants? While it might be alternative sources as time goes on, right now and for a good while to come, it’s fuel of the old-style. Natural gas and coal mostly.
6. And speaking of natural gas, I like Pickens’ idea of automobile conversion. We have lots of natural gas produced domestically and it is comparatively clean and certainly readily available. And what does that mean for the future price of natural gas? The same natural gas that runs the power plants being used to run our cars? Not too hard to figure out.
7. If this financial system mess puts pressure on the US dollar that has the obvious effect of causing oil prices to rise, all other things being equal, as it will take more dollars to exchange for one barrel.
By the way, I recently talked to a coal industry contact – a coal broker – who said that although the stock market doesn’t indicate it, the coal business is not bad at all. Pricing is off of the peaks, but still pretty strong and holding. He said that a lot of buyers – utilities in particular – have been playing a waiting game, looking for lower prices. But with winter approaching they don’t have much time left to get their supplies locked in. Some of the buyers have tried to play hardball with him – saying that they would just buy cheaper from someone else. But there isn’t much of “someone else” out their. Demand season is coming up and there’s not a lot of excess.
Additionally, people forget that most coal is sold under long-term contracts, not in the spot market. So the stock market got spooked about falling oil and gas prices and extrapolated that to coal – when in fact these short-term energy market gyrations have less impact on earnings than they do in other energy areas. Heck, lower fuel prices actually kind of help the coal companies in one regard since they are big fuel users for their equipment.
Coal got nutty a few months back and stock prices were way overdone to the upside as hot money chased the relatively small market cap of the whole sector. But after 50% to 60% declines across the board for the coal stocks over the last little bit? Getting very interesting I think.
Oil, coal, natural gas, alternative energy sources, E&P companies, drillers and service companies, energy trusts, MLPs…all have their own particular appeal in a portfolio. I cannot discuss specific companies here, but if you would like to know which stocks I like in which areas, drop me a note or give me a call.
I thought about finishing up this little blurb and sending it out earlier today, but it has been busy – for obvious reasons with the whole Lehman/Bank of America/Merrill Lynch/AIG/Washington Mutual/etc. etc. mess today. And as it turns out it was just as well, since the energy sector (using oil as a proxy) and the market in general have clearly been weak. Some will attribute the $4 drop in crude today to economic weakness and upcoming lower demand. I tend to believe that it is more a function of forced selling, an aversion to risk in the markets, and the old “sell what you can not what you want to” phenomenon. I don’t know exactly where oil bottoms, nor would I be likely to be correct in pronouncing an exact moment for the general market decline.
But I am intrigued enough by energy sector valuations and energy sector prospects to recommend “re-loading” positions starting right now.
As always, I hope that I’m right in the first minutes and days after such a call. But I probably won’t be. However for the weeks and months ahead … I have a good level of confidence in the ultimate success of the idea.
Source: Rob Fraim, Mid-Atlantic Securities, September 16, 2008.
Courtesy: Investment Postcards
Tags: analyst, Bank of America/Merrill, Banks, Blog, Brazil, BRIC, BRICs, Canadian Market, cell phones, China, coal broker, Commodities, Commodity, Consumption, course oil, Crude Oil, Dollar, Earnings, Economist, Economists, Economy, electricity, electricity junkies, energy, energy areas, Energy Commodities, energy company stocks, Energy Consumption, Energy Demand, energy holdings, Energy Investments, Energy Market, Energy Markets, energy needs, energy patch, energy points, energy positions, Energy Products, energy sector, energy sector valuations, Energy Sources, energy stocks, energy trusts, Excerpts, Financial Sector, Financials, Focus, Gold, Hedge Fund, Hedge Funds, India, Investment Postcards, jeffrey saut, large energy-focused hedge fund, manufacturing, Market Cap, Market Participants, Markets, Mexico, Mid-Atlantic, Nancy Pelosi, Natural Gas, Natural Gas Prices, natural gas stocks, natural gas use, oil, oil addiction, Oil and Gas, oil and gas prices, oil and gas producers, oil bottoms, Oil Prices, Oil Producer, Oil Sands, on energy stocks, Organization Of Petroleum Exporting Countries, paint, pharmaceutical, Php, pickens, Politician, Rally, Raymond James, risk, Rob Fraim, Russia, short-term energy market gyrations, stoopie-head, Stuff, The Big Picture, the Olympics, Trading, transportation industry driving habits, United States, US Dollar, usd, Valuations, Washington Mutual, writer
Posted in Canadian Market, Commodities, Economy, Energy & Natural Resources, Gold, Markets, Oil and Gas | Comments Off
Saturday, September 13th, 2008
BCA Research postulates that commodities are in a bull market consolidation and that it does not appear to be over. The consolidation of commodities prices has caused a fair bit of confusion for those who are long commodities or commodities stocks. In the meantime, financials appear to be doing the opposite, staging a bear market rally.
This activity in the market provides a clear view of the unfolding dichotomy; Commodities Bull vs. Financials Bear. The following piece from BCA does a good job of describing the commodity side of the story.
10:42:00, September 11, 2008
The recent commodity price weakness is a bull market consolidation but does not appear over. Signs of continued cyclical downside risks are allowing for a selling climax.
The deteriorating cyclical demand backdrop for oil and related products, signaled by declining U.S. demand and decade-low SUV sales, allows for a washout in energy prices. Commodities could overshoot to the downside if economic weakness continues to spread, causing a further liquidation in global decoupling bets. In addition, the waning “paper demand” for commodities as an asset class is a near-term wild card. The U.S. political attacks and the price correction itself may spur further liquidation before the wave of index-related inflows resume. That said, a notable offset is that lower energy and food prices will ultimately allow global policymakers to become more dovish and protect growth. Bottom line: It is unlikely that the cyclical trough in commodity prices has been reached. A renewed dollar plunge, improved Chinese economic expectations and/or geopolitical stress events would bring forward the bottom. Barring that, commodities are likely to face downside risks until later this year.
Source: BCA Research
Tags: asset class, Bear Market, Capitulation, Commodities, Commodity, Desc, Dollar, energy, Energy Prices, Financials, Food prices, lower energy, oil, Rally, risk, United States
Posted in Commodities, Energy & Natural Resources, Markets, Oil and Gas | Comments Off
Wednesday, September 10th, 2008
Equity markets across the world have been reeling lately, and our trading range charts for indices of 22 countries highlight the carnage. Countries to recently take big hits include Brazil, Canada, South Africa, and of course, Russia. Any time the price moves below the green shading, it is trading more than 2 standard deviations below its 50-day moving average. Below the green shading is considered extreme oversold territory, and prices don’t typically stay that oversold for extended periods of time.
The one positive chart might be India’s Sensex index that has moved back above its 50-day moving average recently and formed a short-term uptrend.
Courtesy: Bespoke Investment Group
Tags: Bespoke Investment Group, Brazil, BRIC, BRICs, BSE 30, Canadian Market, Chart, China, France, Germany, India, International, Italy, Markets, Mexico, risk, Russia, Sensex, South Africa, Spain, Sweden, Taiwan, Trading, UK
Posted in Canadian Market, Markets | Comments Off