Posts Tagged ‘Commodities’
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 »
Hugh Hendry Interview: Invest in Long Government Bonds
Tuesday, November 11th, 2008
Hugh Hendry, the brilliant, brash and outspoken and eloquent CIO of Eclectica Asset Management, one of the UK’s most prolific asset managers discusses global markets and is investing in long-term government securities in the US and UK. Dominic Frisby, of Money Week and Commodity Watch Radio conducts this interview, which was recorded on November 1, 2008.
Here is a summary of some of Hendry’s thoughts:
- the present environment is all about the return of your capital, not return on capital.
- he is intrigued by government bonds and bets that interest rates will be cut further than people anticipate at the present time.
- interest rates will come down to unprecendented levels but it won’t make a difference.
- monetary policymakers will be pushing on a string.
- Hendry has been investing in long term US treasuries
- he is profoundly bearish on commodities, for now
- He believes that gold will drop further to below $600 as a result of the deflationary pressure that we are facing from the fixing of the system, then as a result of all the stimulus, we will face profound inflation. When long-term bond yields drop to around 2.5% that’s when you want to own commodities. That’s when he’ll back the truck up for gold, the big 16 oz. bars.
- For now Hendry will place his bets on deflation and falling long term interest rates.
If being leveraged means shorting cash, then deleveraging means buying cash, and he’s afraid the deleveraging is far, far, from over, because debt levels are still very high at this point. That means the dollar will continue to rally on the resultant repurchasing or short covering of the dollar. The rallying dollar, and ongoing asset liquidation is deflationary for now.
Hendry’s case and outlook is deeply compelling and worth taking seriously.
The second part of Dominic Frisby’s interview is with Dr. Francis Claessens of Peers, who tells us what the super rich have been doing with their money. Claessens leads WealthPeerGroup.com, a peer group that meets on a monthly basis to discuss financial issues. Minimum entry to this group is investable assets of £5-million ($8-million). This too is very interesting, i.e. if you’re interested in what’s worrying the very HNW investor these days.
Listen to the entire interview here:
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Tags: Claessens, Commodities, Commodity, deflationary pressure, Dollar, Dominic Frisby, Eclectica, government securities, Hugh Hendry, interest rates, Monetary Policy, UK
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Commodities Snapshot
Wednesday, November 5th, 2008
A snapshot view of commodities reveals that they have all experienced some mild recovery at the end of the month of October, as liqudation pressure caused by the deleveraging of hedge fund and bank balance sheets which wreaked havoc on markets during the month subsided. Its been little more than a week since TARP began deploying funds in a meaningful way. Also, another factor seems to have been the destabilization that was caused by the covering of short positions in Dollar/Yen carry trades that forced further liquidation in equity and commodity markets making October 2008 the worst month in 21 years. These conditions have been profoundly deflationary.
The following chart shows how as a result of high commodity prices the daily cost of living rose incrementally to a high of an additional cost per capita of $4.77. While the turmoil in commodity market has been terrible for investors, the turn has been beneficial to comsumers, who are now enjoying a $2.58 dividend off the resultant cheaper cost of living.
In the above chart we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers wallets this year. (Bespoke)
Volatility in commodities is sure to continue and their prices have still a long way to go before the upper limit of the current downtrend line is broken. Under present circumstances, if you consider the economic growth numbers for the US economy continue to show up in the negative GDP growth and the credit market volatility continues to reign on the markets’ parade, commodity prices could face more downward pressure.
Charts: Bespoke Investment Group
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Tags: Banks, Carry Trade, Chart, Commodities, Credit, Credit Market, Economy, energy, GDP Growth, Gold, Markets, Natural Gas, Silver
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Deleveraging Forces Liquidation
Friday, October 31st, 2008
“When investors are in trouble, they sell what they can, not what they would like to.”
The current issue of The Economist features an excellent article about the forced selling that has been the key feature of this bear market, caused by the violent trading days that have come in the wake of the deleveraging of many banks and hedge funds as they need to get their balance sheets in order.
Here are some excerpts:
… the speed of market movements suggests another factor has been even more important. When investors are in trouble, they sell what they can, not what they would like to. It looks as if they have been dumping a whole range of assets.
Emerging stockmarkets, for example, have lost more than half their value this year, while emerging-government bonds were yielding more than eight percentage points above Treasury bonds, at least until a rally on October 28th. Leveraged loans (debts to finance management buy-outs) are trading at just 70 cents on the dollar.
… Who is being forced to sell? One obvious answer is banks that have ended up owning far more risky assets than they would like. Barclays Capital put $970 million of leveraged loans up for sale in October; in the face of disappointing offers, it ended up selling just 30% of the lot. Other banks have been winding down their trading, a big source of revenue earlier this decade, in an attempt to reduce risk.
Another group of sellers is the hedge funds. After a disappointing performance this year, many are facing calls for redemptions from clients and are having to sell assets to raise cash. But their problems also stem from their use of leverage, or borrowed money.
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Tags: Banks, Commodities, Dollar, Markets, Trading, Value
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Resurgent Yen a Global Destabilizer
Wednesday, October 29th, 2008
Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.
We have covered this topic on several occasions during this year:
- The Carry Trade and Markets? What is the relationship?,
- Resurgent Yen is Scary News,
- Why the selloff in commodities and emerging markets?,
- More Carry-Trade commentary
- More volatility coming and more ETF options
- Yen’s Strength [has been] profoundly negative for global markets
From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.
The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.
As a matter of background building, we provide below a summary of milestones in the yen’s history:
1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.
1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.
1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.
1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.
December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.
1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.
1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.
1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.
1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.
1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.
1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.
1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.
August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.
June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.
April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.
June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.
1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.
1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.
2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.
2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.
2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.
2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.
June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.
August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.
The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.
March 13, 2008 - The yen hits an 12-year high of 99.77.
October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.
October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.
The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.
(Sources: Reuters, Bank of Japan, Bank of England)
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Tags: Australia, Banks, Carry Trade, Commodities, Correlation, Currency, Dollar, Economy, Emerging Markets, ETF, Gold, interest rates, Japan, Markets, Mortgage, Recession, SMI, Value
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Jeremy Grantham: Silver Linings and Lessons Learned
Wednesday, October 29th, 2008
Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, who manage approximately $120-billion in assets, well known among institutional investors but relatively unknown to retail investors. Here are some highlights from both parts of Grantham’s October 2008 newsletter “Reaping the Whirlwind,” and ”Silver Linings and Lessons Learned.”
Part 1, “Reaping the Whirlwind,” published 2 weeks ago:
“At under 1,000 on the S&P 500, US stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10 prices, but even more so. History warns, though, that new lows are more likely than not.
“Fixed income has wide areas of very attractive, aberrant pricing.
“The dollar and the yen look okay for now, but the pound does not.
“Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!
“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.
“As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”
You can read ”Reaping the Whirlwind,” in its entirety by clicking here where Grantham has published his views on the fallout from the financial crisis and the investment opportunities he sees.
Part 2, ”Silver Linings and Lessons Learned”, published early this week:
“When asked by Barron’s on October 13 if we would learn anything from this ongoing crisis, I answered, ‘We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term. That would be the historical precedent.’
“That is unfortunately likely to be the case. But over the next several years at least, there are many silver linings and valuable lessons to be learned.
“Chief among the many benefits of this crisis are unprecedented opportunities for investing in some fixed income areas where some spreads are so wide as to reflect severe market dysfunctionality.
“As of October 18, we also have moderately cheap US and global equities for the first time in 20 years. Probably quite soon, global equities too will offer exceptional opportunities after the additional pain that is likely to occur in the next year.
“We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.
“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.”
You can read ”Silver Linings and Lessons Learned,” in its entirety by clicking here where Grantham has published his comments on lessons learned from the credit crisis, as well as his proposed strategy.
Source: Jeremy Grantham, GMO, October 2008.
Courtesy: Prieur du Plessis, Investment Postcards
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Tags: Barron's, Commodities, Credit, Credit Crisis, Dollar, EFU, Fixed Income, inflation, Investment Postcards, S&P 500, Silver, spreads, US Stocks, Value
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Commodity Snapshot
Sunday, October 26th, 2008
Judging by the way that commodities prices have literally been “drawn and quartered” since July, its obvious that the market has been forced into liquidation by the massive unwinding or rather de-levering caused by the near failure in the credit market, and the assumption of debt by governments and central banks around the world.
Gold, notably, has traded lower during this anomalous selling-spree, even though it has long been regarded to be the real asset choice of those wanting to protect against financial risk. Perhaps its simply either that gold is highly liquid at a time of great need and is being sold off, or there has been a substantial amount of central bank intervention by way of shorting gold in the futures market. Either way, given the sheer amount of money supply growth, by contrast, gold is very cheap. Which brings us to platinum. Take a look at these charts:
Platinum, which is 30X rarer than gold closed at $793, only $83 premium to the price of gold. At peak earlier this year, platinum traded at a $1,300 premium to gold.
Oil is continuing to get cheaper. OPEC held an emergency meeting, agreeing to cut production by 1.5 -million barrels. News of this had no effect on oil prices, not even an intermediate effect; it closed on Friday at $64.15. Which begs the question: Is OPEC really a cartel? They seemed content to sit back and watch gleefully as the price shot up to 147, but have been unable to do anything to stop its slide to current levels, not even a substantial cut in production. Or so it seems.
Is the imminent food crisis over? Are fears of oil shortages overwrought?
Right now, it looks like nobody cares. They just want their money out, and at any price.
As Warren Buffett has put it so eloquently in his recent NYTimes Op-Ed piece, Buy American. I am, “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Charts: Bespoke Investment Group
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Tags: Banks, Chart, Commodities, Credit, Credit Market, Dollar, EFU, energy, Gold, Oil Prices, Platinum, Silver
Posted in Agriculture, China, Commodities, Credit Markets, Crude Oil, Economy, Emerging Markets, Gold, Markets, Oil & Gas, energy, inflation | No Comments »
Governments Keep Making Mistakes: Jim Rogers
Wednesday, October 22nd, 2008
Jim Rogers, CEO, Rogers Holdings, appeared on CNBC’s European Squawk Box this morning with Geoff Cutmore, to discuss the progress of markets and his outlook.
click image for video
Rogers stated that the economy is in for high inflation given the size and nature of the central bank interventions and injections in to the financial system, and pre-ambles this saying,
“The world is unfolding. The American government keeps making mistake after mistake after mistake. Other governments do too. Unfortunately this is going to be a mess,” Jim Rogers, CEO of Rogers Holdings said Wednesday.
“Bernanke, and Paulson and the guy at the NY Fed, Tim G-r-eithner [or whatever his name is: slips Rogers] have been wrong every week for the last two years. Why do you think they know what they’re doing?”
He has covered most of his “shorts,” and wishes that he had not yet covered them, as their has been more downside.
He is long short-term US government bonds and short and shorting long term government bonds as he believes that we are heading for inflation. He has been buying agricultural commodities, though he admits that his timing is bad, as they are down.
“I bought some more agriculture earlier this week and it promptly went down. The fundamentals for commodities and agriculture have not changed,” says Rogers. “What’s happening in the world right now means that there will be less supply of everything coming out of this, and nobody can get a loan for a new zinc mine or a loan to increase their crop production.”
Rogers adds that
“What’s happening now is that we are in a period of forced liquidation; we’ve had 8 or 10 of these in the last 100-150 years; 1929 in the US, 1974 in the UK…We’ve had these before. The things that come out on the other side have always been the things that are unimpaired. The US financial system is impaired. The investment banking system is impaired.”
“But, commodities and agriculture are totally unimpaired by all of this. If history’s any guide, the things to buy will be the things that are doing fine; water treatment in Asia [for example], agriculture’s gonna do fine; that’s what you should buy.” Rogers adds, “However, my timing’s not very good.”
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke should resign for keeping alive “zombie banks” that should be allowed to fail, he said.
The Japanese government refused to let financial institutions fail in the 1990s, Rogers said.
“It’s 18 years later and their stock market is 75 or 80 percent below what it was 18 years ago,” he added.
Rogers also said that interest-rate cuts are coming.
“I know we are going to get aggressive rate cuts everywhere, that’s why I’m long short-term government bonds in the U.S., but shorting long-term government bonds because it’s not going to help, it’s going to add to inflation.”
Source: CNBC
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Tags: Agricultural commodities, Agriculture, Asia, Banks, Bernanke, Commodities, Economy, EFU, Euro, Fed, Federal Reserve, inflation, Japan, Jim Rogers, Markets, Paulson, UK, Video, Water
Posted in Commodities, Markets | No Comments »
Jim Rogers: Buying Commodities, Yen and Swiss Francs
Friday, October 10th, 2008
Jim Rogers appeared on CNBC this early this morning on Capital Connection on CNBC World Edition, and had the following to say, when he was asked what he’s doing with his money.
What are you doing with your money now?
“I have an enormous amount of cash and I’ve been using it to buy more Japanese Yen, more Swiss Francs, more agricultural products. We’re in a liquidation phase, you know. I bought agriculture last week and their down this week. They’re liquidating everything.”
“I’ve covered some shorts today [too] this morning, that’s what I’m doing with my money now.”
At what levels would you look to buy equities again?
“I’m not sure I want to buy equities now. Equities are not going to come out on top. The way you make money in a market like this is you buy the things that have been unimpaired, and they will lead the market coming out.”
“Morgan Stanley is not coming out of this unimpaired. I’m buying commodities, Commodities are the only thing I know that are coming out of this thing unimpaired where supply and demand are still terribly out of balance, and Yen and Swiss Francs.”
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Tags: Agriculture, Commodities, Japan, Jim Rogers, Video
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Global Long-Term Rates Signal Deflation
Thursday, October 9th, 2008
Its pretty clear that the last thing on investors minds these days is inflation when the 10-year yields around the world are back at last year’s lows. Falling long rates are a fairly reliable signal of deflation, and given how commodities, both hard and soft, as well as housing prices in the G7, investors have been making the flight to safety for most of this year.
10-year government debt securities have been among the best performing investments anywhere in the developed world.
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Tags: Australia, Commodities, inflation, interest rates, Japan
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Cramer: Dow 8300, Oil $50, Obama
Wednesday, October 8th, 2008
From Jim Cramer in New York magazine:
What will New York look like a year from now? The answer: bad and probably worse, and perhaps downright catastrophic. Three degrees of awful. The first step was passing the bank-bailout legislation. Now that it’s done—and if it didn’t get done we would have been looking at a guaranteed economic collapse—the critical issue will be presidential leadership. And while any president will be an improvement over the current one, there is a growing belief on Wall Street that Barack Obama has the capacity to lead us out of this wilderness while John McCain does not. I’ll go a step further: Obama is a recession. McCain is a depression…
At this time next year, I could see the Dow as low as 8,300. That’s more than 40 percent off its October 2007 high of 14,164. On Main Street, that means a further slowdown in consumer spending, as buyers feel poorer, and another hit for 401(k) and college savings accounts. For Wall Street, it means more bank closures and mergers and still more layoffs. The two remaining independent commercial banks–née–investment banks, Goldman Sachs (GS) and Morgan Stanley (MS), will have to fight mightily to remain independent. The bet here is that Goldman makes it but Morgan Stanley succumbs to one of the four emerging megabanks — Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC)…
In terms of investing between now and next fall, I’d buy the stocks of only companies you can’t not use—Kellogg’s (K), General Mills (GIS), Kraft (KFT), P&G (PG). You can’t trust anything to do with financial paper — there’s still too much uncertainty (if a bailout bill does pass, at what price will the toxic bonds be marked?). And commodities have been bid up too high — demand soared as investors sought shelter from stocks — to buy for some time. Oil’s going to $50 on weaker demand; when it gets there, we can revisit the oil stocks.
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Tags: Banks, Citigroup, Commodities, energy, Gold, oil stocks, Recession
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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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Energy-Led Correction: Capitulation Selling Underway?
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
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Tags: asset class, Commodities, Dollar, energy, Financials, Food prices
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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 »