Posts Tagged ‘China’
Donald Coxe: Capitalism Faces its Greatest Challenge
Monday, November 17th, 2008
Donald Coxe
Donald Coxe, Chief Investment Strategist, BMO Capital Markets has just released his latest instalment of Basic Points, “Capitalism Faces its Greatest Challenge” for November, 2008.
Mr. Coxe is best known for his highly read monthly newsletter, “Basic Points,” as well as his bi-weekly conference calls. His convictions that we are in the midst of the biggest long-term commodities bull market have been severely tested during the most recent months since this past summer, when he launched the Coxe Commodity Strategy Fund, but he remains convinced that the thematic fundamentals are in tact.
Here, we summarize his November 14, 2008 recommendations:
- Its too late to sell losing stocks, and too soon to do more than nibble at bargains. This is a time for investors to be opportunistic about investing, and stocks are available at prices that will look incredibly cheap in a couple years’ time.
- When conditions resume for rebuilding equity positions, buy banks and diversified financial sector stocks.In a global recovery, these should perform well, considering the mostly new management teams.
- Buy commodity oriented stocks. They have been totally oversold beyond all expectations. When there is a global recovery, they will be the winning asset group.
- During the waiting period, start accumulating convertible bonds of quality corporations. A sharp contraction in the near-record yield spread between investment grade companies’ bonds and comparable treasuries, could trigger a major equity rally.
- Buy Emerging Market bonds from China, India, and Brazil, whose economies are fundamentally sound. Avoid Eastern European bonds.
- Business-oriented tech-stocks should also be included when once again accumulating stocks as these will participate in the global recovery. comparatively, consumer-oriented tech stocks may take quite a while.
- Railroad stocks benefit from lower energy costs and the savings may offset the reduction in top-line revenues during the recession. Upon exiting the recession, these should be core investments.
- Gold has been disappointing. Though it has outperformed stocks since the peak in the S&P 500, this has not yet been reason enough to own it. As deflation fears diminish, it will once again regain its lustre.
You can download the complete report here.
Source: Donald Coxe, BMO Capital Markets, Basic Points, “Capitalism Faces its Greatest Challenge,” November 14, 2008
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Tags: Basic Points, BMO, Brazil, China, Commodities, Donald Coxe, Eastern European, Gold, India, Recession, S&P 500
Posted in Gold, Markets | No Comments »
Year to Date World Stock Market Returns
Tuesday, November 11th, 2008
Is this a buyer’s market or what?
Look at Russia; although most folks aren’t interested (but should be) Russia is not only off by -64.5%, its valuations have compressed to 4.3 times trailing earnings. China stocks are down -64.3% is fetching 14.55 times trailing earnings. India stocks are down -48.1% and priced at 10.7 times. Canada’s TSX 60 is down 29.4% and PE has contracted to 10.9 times earnings.
Oddly, US Stocks, down -36.4% year-to-date, have experienced a slight expansion in P/E from 20.11 times to 20.54 times. Hmmm? Does this suggest that there is more downside in US stocks, given that there has been no compression in valuation? Tunisia, Bahrain, and Switzerland are the only countries out of 84 to join the US in this phenomenon of rising P/E. For the US, it appears that earnings have gone down in lockstep with the stock market, perhaps more than stock prices themselves.
click to enlarge
For those countries whose P/E ratios have gone down the most in this tumultuous year-to-date, high P/E compression suggests relatively strong earnings fundamentals versus very poor technical considerations.
Only three countries, Ghana, Tunisia, and Ecuador, out of 84, have had positive results this year.
Below are the comparisons of China stocks vs. US stocks, and China P/E vs US P/E. China’s market has had a much larger correction than the S&P 500, but look at the valuations. Chinese stocks are now far less expensive than US stocks. China’s earnings are in tact, while its stock market has been liquidated as a result of deleveraging.
Charts: Bespoke Investment Group
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Tags: Canada, China, compression, India, P/E, Russia, Switzerland, TSX 60, US Stocks
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China Unveils $586-billion Economic Stimulus Plan
Sunday, November 9th, 2008
China’s stunning $586-billion (4-trillion Yuan) economic stimulus package, unveiled Sunday evening, aims to give the country’s domestic demand and global GDP a massive shot in the arm. This should also give commodities and commodity stocks a mighty boost. Here are a few excerpts from the Wall Street Journal on the subject:
The announced sum of four trillion yuan represents about 16% of China’s economic output last year, and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be substantial next to China’s six trillion yuan annual budget for this year.
The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies. China’s economy won’t be able to absorb so much spending immediately: Economists expect one or two more quarters of slowing growth at a minimum before a rebound could take hold.
With the announcement, China will enter a meeting Saturday of the Group of 20 largest economies with a plan that would dwarf stimulus measures by others in the group, which is convening in Washington to discuss ways to stem a global slowdown in growth.
…
In the new stimulus package, total new investment could be less than the headline figure of four trillion yuan, since the plan does appear, for instance, to incorporate rebuilding programs for the areas affected by May’s massive earthquake. Those have already been allocated one trillion yuan in funds.
Although Chinese officials have been meeting daily on the financial crisis, most observers hadn’t expected leaders to reach final consensus on a stimulus plan until an annual economic-policy meeting scheduled for the end of this month. The rapidity of the response underscored the government’s concern about the growing risks of a real downturn.
A stimulus this large comes once in a generation, or two, as does the opportunity, especially when the margin of safety is this high. As of Friday November 7, 2008, the Shanghai Stock Exchange Index was down 72% from October 16, 2007 peak closing of 6,092 points, having closed at 1,747 points, and roughly 44% below its 200-day moving average of 3,120 points.
Other packages have been relatively in the same ballpark, but set to span much longer periods of time, like ten years. A few years ago, for example, China earmarked 2.7-trillion Yuan ($300-billion) towards augmenting the country’s railroads, a sum to be invested over ten years.
Giving details of the package, Xinhua said China would invest an additional 100 billion yuan in national construction this quarter and would earmark an extra 20 billion yuan next year for reconstruction in areas hit by major natural disasters.
Sectors that will benefit from the extra spending include affordable housing, rural infrastructure, transport networks, environmental protection and technical innovation, Xinhua said.
The cabinet also confirmed a long-awaited reform to the way value added tax is calculated. The result will be to reduce companies’ tax bill by 120 billion yuan a year, the agency added.
This sum, a grand total of 4-trillion Yuan ($586-billion) is set to be dispensed over 2 years. You do the math…this is enormous.
Click for the complete WSJ.com article here [PDF]
Sources: Reuters
WSJ, China Sets Big Stimulus Plan In Bid to Jump-Start Growth
http://online.wsj.com/article/SB122623724868611327.html
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Tags: Agriculture, China, chinese officials, economic policy, Economy, GDP, government spending, Infrastructure, Markets, Yuan
Posted in Markets | 1 Comment »
Heebner and Holmes on Emerging Markets
Saturday, November 1st, 2008
Click image for video
Ken Heebner, CGM Funds, and Frank Holmes, US Global Investors, discuss emerging markets in the context of the Fed’s 50 bps rate cut last week. Both their remarks on the rate cut and emerging markets are noteworthy.
Ken Heebner, CGM Funds: “Well, the emerging market economies are going to continue to have long-term growth. Those are the markets down the most, they’re down 50, in some places 60 percent and long term they have a bright future. Even Jeremy Grantham, the mega… the bear, is saying they’re almost cheap enough for him to buy. … When he’s ready to buy something, it’s going to go up.”
Frank Holmes, US Global Investors: “Well, I do like the emerging markets and I think if you look at energy names like PetroChina, it’s been just devastated here in stock price and it has a huge upside to get back to basically a healthier equilibrium and P/E ratios. But remember that most of these emerging markets, unlike 10 years ago Erin, they have, like China has $2 trillion of U.S. dollars…so they have a huge (foreign reserve) surpluses to be able to reinvigorate their economies. …I totally agree with Ken, this is where growth opportunities lie.”
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Tags: China, Dollar, Emerging Markets, energy, Fed, Frank Holmes, Markets, Silver, Video
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BRICs Lay Foundation Stability: Merrill Lynch
Thursday, October 30th, 2008
Alex Patelis, Head of Global Economics, Merrill Lynch discusses the strength of BRIC (Brazil, Russia, India, China) countries in the midst of the global credit crisis, and how well suited they are to recover strongly.
Patelis points out that close to 90% of global GDP growth will come from emerging markets economies in 2009, and goes one step further saying that he would not be surprised if global growth would come exclusively from emerging markets. They are underlevered, strong domestic economies, where consumption growth is being fuelled by income growth, and strong savings rates. In particular, he favours China and India.
Click image to watch video
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Tags: Brazil, BRICs, China, Credit, Credit Crisis, Economics, Emerging Markets, GDP Growth, India, Markets, Russia, Savings Rate, Video
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China’s Bold Economic Policy Moves
Wednesday, October 29th, 2008
CLSA Asia-Pacific Markets, a division of Credit Lyonnais/Credit Agricole, are one of the best groups of analysts providing background on China.
Included here are excerpts from a report by CLSA’s macro strategist Andy Rothman regarding China’s recent decision to stimulate its housing sector.
Beijing is cutting mortgage rates to as low as 5.23 percent, reducing required down payments to buy a home from 30 percent to 20 percent for first-time buyers, comparatively still far above what most Americans have put up to purchase a house, and also lowering some taxes and fees.
CLSA views the government’s action as a move to get people to invest their wealth in real estate, which will serve to shrink an overbuilt housing inventory and help keep the broader economy from slowing down further.
“Beijing had succeeded in cooling off price growth, taking it from 25 percent year over year last fall to about zero year over year today. And, having achieved the objective of avoiding a bubble, the last thing the Communist Party wanted to do was crash the property market.
“(This week’s) policy changes will have two effects:
“First, they make home-buying more affordable, with a combination of lower interest rates, lower down payments and lower transaction fees.
“But the second effect is most important, as affordability has never been the big problem in China. (The) measures represent the government reversing its anti-property stance adopted one year ago. Back then, Beijing said, in effect, ‘we will do our best to depress prices and discourage home-buying.’ Consumers responded rationally by delaying purchases.
“Now, the government is saying, (my words), ‘we encourage home-buying and you should anticipate that property prices will start rising again.’
“With affordability good, household debt almost non-existent, and banks ready to lend (they are all controlled by the Party), homebuyers will return to the market in response to Beijing’s message.
“(The) move can be considered part of an overall effort to give a light stimulus to the economy, but in my view is primarily focused on the real estate sector. These changes also illustrate that the Party is capable of taking proactive steps to deal with a changing economic environment.”
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Tags: Asia, Banks, China, Credit, Economy, Focus, interest rates, Markets, Mortgage, Real Estate
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Interest Rates Cut by 0.50% Around World
Wednesday, October 8th, 2008
Key Central Banks around the globe have announced a concerted cutting of interest rates, by 0.50%, this morning, in an historic moment of cooperation, to stem the tide of the global credit market’s woes.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden, and the United Arab Emirates have all cut key lending rates by 50 bps or 0.5 percent.
The Bank of England also announced that it would partially nationalize the country’s banking system by investing $90-billion in some of its banks.
In China, the People’s Bank has cut its key rate by a commensurate 27 basis points, and the Bank of Japan whose key rate is only 0.5% did not cut, but is lending “strong support” to the other central banks’ moves.
In identical statements, the Fed, ECB, and Bank of England, explained that inflationary concerns have moderated, and the worsening financial crisis had “augmented the downside risks to growth.”
Trichet, the ECB’s Chair, very modestly stated that “inflation is moderating.” Critics have argued that the ECB has been too slow and looking in the rear view mirror too long, to do anything meaningful for the European economy, and at the expense of the financial stability of European businesses. Others argued that while the move is very welcome, it may be too little, too late.
Euro and Sterling both gained on the announcement, while the price of gold fell.
Equity markets in Europe rebounded from intraday lows on the hope that this monetary action would help banks and consumer stocks.
Pre-Opening trading in index futures indicate a strong opening for US markets following the announcements.
Key Rates (post-cut)
- US - 1.50%
- Canada - 2.50%
- ECB - 3.75%
- UK - 4.5%
- Sweden - 4.25%
- China - 6.93%
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Tags: Banks, Canada, China, Credit, Credit Market, ECB, Economy, Euro, Fed, Federal Reserve, Gold, inflation, interest rates, Japan, Markets, Sweden, Trading, UK
Posted in Markets | 1 Comment »
Credit Crisis Observations
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.
Observation# 2
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.
Conclusion
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
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Tags: Banks, BRICs, Canada, CDS, Chart, China, Credit, Credit Crisis, EFU, energy, Fed, Focus, Food prices, GDP Growth, Gold, inflation, interest rates, Japan, liquidity, Markets, Mortgage, Paul McCulley, Paulson, PIMCO, Savings Rate, Trading, Value
Posted in Markets, inflation | 1 Comment »
Rob Fraim’s Call on Energy
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
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Tags: Banks, Brazil, China, Commodities, Crude Oil, Dollar, Economy, energy, energy sector, energy stocks, Financials, Focus, Gold, India, Investment Postcards, jeffrey saut, Market Cap, Markets, Mexico, Mid-Atlantic, Natural Gas, Oil and Gas, Oil Prices, pickens, Rob Fraim, Russia, The Big Picture, Trading, US Dollar
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International Equity Snapshot
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
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Tags: Brazil, Canada, Chart, China, France, Germany, India, International, Italy, Markets, Mexico, Russia, Sensex, South Africa, Spain, Sweden, Taiwan, Trading, UK
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Global Market Performance From 52-Week Highs
Monday, September 8th, 2008
This past year’s declines in local and international markets have had their beginnings at different points in time. This chart below, produced by the fine folks at Bespoke, pays no attention to their timing. Its not a pretty picture, but the perspective sure is useful. Often, we are subjected to guided reporting, where issuers or promoters use numbers and moving averages that “soften” the real numbers.
Canada comes out on top!
Here below is what most investors really want to know; How did they perform from peak until now, irrespective of timing?
After declining 4.25% on Wednesday, 3.94% yesterday, and 3.75% today, Russia’s RTS index is now 41.19% below its 52-week high. These declines put it second to last behind China when looking at recent equity market returns for 22 major countries. As shown, China has fallen 64% from its 52-week high last October! The declines recently in global equity markets have really been astounding. Japan, Spain, Brazil, India, Italy, South Korea, Singapore, Sweden, Taiwan, and Hong Kong all join China and Russia with equity markets off at least 30% from their 52-week highs. North American countries rank 1,2,3 as far as countries holding up the best. International exposure has never hurt so bad.
Courtesy: Bespoke Investment Group
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Tags: Brazil, Canada, Chart, China, EFU, Hong Kong, India, International, Italy, Japan, Markets, Miscellaneous, Russia, Singapore, South Korea, Spain, Sweden, Taiwan
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Mobius: Positive on Commodities, China
Monday, September 1st, 2008
Mark Mobius, executive chairman of Templeton Asset Management, is very positive on commodities, especially integrated emerging markets oil companies including Chinese and Indian energy firms like Reliance. He shares his views with CNBC’s Martin Soong and Sri Jegarajah.
click to view video
“China’s Still a Great Investment”
The long-term story in China is still very bright. And investors should take note that H-shares are currently trading at a substantial discount to their A-share counterparts says Mark Mobius, executive chairman at Templeton Asset Management. He also goes further afield to say that Russia is in a sweet spot, that Putin has done all the right things for Russia and comments positively that Russia’s diplomacy in the Georgia affair has far reaching foreign relations benefits.
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Tags: China, Commodities, Gold, Iron Ore, Mark Mobius, Metals, nickel, Oil & Gas
Posted in Agriculture, BRIC, Brazil, China, Commodities, Emerging Markets, Gold, India, Infrastructure, Markets, Oil & Gas | No Comments »
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
