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Posted on Friday, June 18, 2010 - by Henry Walter
June 2010 Round-up
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
1. WHAT AILS THE MARKET?
We think that Alan Abelson’s explanation in this week’s Barron’s article “Bracing for the Fallout” (June 5, 2010, page 6) is as good as any. But if you don’t like his, there are plenty of other choices in the media.
He first asks what happened to that Wall of Worry that provided rock-solid assurances that the market had plenty of room on the upside. These days, it’s conspicuous by its absence.
He then points out that there is plenty to worry about besides the oil spill in the Gulf of Mexico: “The Middle East, the euro, Hungary, China’s real estate bubble, Korea, Iran, softening retail sales, the cloudy outlook for housing, the parlous condition of state finances, intimations that even Uncle Sam the Munificent is toying with the alarming idea of exercising some fiscal restraint – and that is by no means the whole roster of rue.”
“And it’s no great mystery why. Gradually but inexorably, investors are starting to realize that their great expectations for the economy that propelled the indexes 80% higher from the lows of early 2009 are not due to be realized anytime soon. In other words, what’s really ailing the market is a strong whiff of reality – for which, it grieves us to say, there’s no quick cure.”
2. STAYING ON THE RIGHT SIDE OF THE MARKET
Our first chart, courtesy of BigCharts.com, is a long-term plot of the S&P 500 that we showed on a regular basis in the discontinued S.I.P. ADVISER. It is a monthly chart, and superimposed on the price bar (open, high, lo, close) is a 10-month simple moving average line, roughly equivalent to a 300-day moving average. Note that in December 2007, the close on the price bar fell below the moving average and stayed there until June 2009, a good time to be out of the market. Recently, both in May and June thus far, the close is below the moving average. The market is extremely volatile and June’s closing could well be above the moving average line, so think of this as a yellow flag calling for a more cautious approach to the market, but it’s something worth paying attention to.
3. WATCH THE TED SPREAD
Shown below is the TED Spread for the last 12 months (as of June 7, 2010) courtesy of the Bespoke Investment Group (www.bespokeinvest.com ). The vertical scale is in basis points (bps). A basis point is 1/100th of a percentage point. The TED spread measures the difference between the three-month T-bill interest rate and three-month LIBOR, the London Interbank Offered Rate. When the spread is high it is indicative of a higher level of risk in the credit markets. As you can see the spread is higher (39) than it was two months ago (13) but is nowhere near the highs of the credit crisis (450). But it is worth watching for early signs of a renewed credit crisis.
4. CHINA IN A BEAR MARKET
If one defines a bear market as one with a greater than 20% decline, China is in one now as shown in the chart below of the Shanghai Composite Index, courtesy StockCharts.com
The index is off almost 60% from its October 2007 high and about 27% off its July 2009 high. Medium-term we are bullish on China and we have FXI, a very liquid ETF, on our watch list (see topic #8). Here is a funny story from someone who was in Beijing recently checking out investment opportunities. “I was in antique store, negotiating for this antique knife. I was about to make the deal when the guy looked at my Rolex watch and offered to exchange it for the knife. I was ready to do it, but I knew my Rolex was a fake, and I didn’t want to take advantage of this guy. So I told him I didn’t want to trick him and that the watch was a fake. He said to me, ‘That’s OK, this knife is fake too.’ “
5. ENERGY COMPANIES CONNECTED TO THE OIL SPILL
On May 21 we posted an Update on Energy pointing out that as a result of the tragic Deepwater Horizon disaster, prices of oil are probably headed higher, unless we have a full-blown depression.
Russ Britt, writing for MarketWatch (www.marketwatch.com) “Spill Takes a Big Bite Out of Energy Shares” on June 1, 2010, listed the companies most connected to the spill. Here they are.
Key companies: BP, APC, RIG, HAL, CAM.
Some connection: BHI, SLB, XOM, CVX, RDS.A
Other stocks with exposure: DIA, WFT, NE, ESV, RDC, NOV.
This list is purely for information purposes. We are not suggesting buying or selling any of these companies’ shares. That is a decision you and your financial advisor need to make. At some point in time share prices will bottom and become attractive investments. What that point is we have no idea.
In case you are concerned that the demand for oil will slacken, here’s a photo of traffic on a Chinese turnpike. Each of those cars uses gasoline which comes from oil. And auto sales in Asia are still booming.
6. WHY DIVIDENDS ARE IMPORTANT
Ned Davis Research, a well-respected investment research firm, recently updated their analysis of dividend-paying and non-dividend paying stocks in the S&P 500. The source of the data is Ned Davis Research via Oppenheimer Funds. The chart below is a little hard to read but the bottom line is that dividend growers have outperformed over time.
7. IT IS OUR PROBLEM, NOT OUR GRANDCHILDREN'S
The Ira Sohn Investment Research Conference Foundation was founded in 1995 after the untimely passing of Ira Sohn. Sohn was a successful trader on Wall Street who battled cancer and passed away at the age of 29. His courageous battle with cancer inspired his colleagues and friends to launch the annual Ira Sohn Research Conference, the proceeds from which support the treatment and care of pediatric cancer and other childhood diseases. The conference brings together top tier professionals in the financial industry, many of whom do not normally share their insights in any public forum. Here is a partial list of presenters at the 2010 conference held in May:Niall Ferguson, Jeremy Grantham, Seth Klarman, David Einhorn and Sam Zell. (www.irasohnconference.com).
The reason we mention this is to share with readers the first paragraph of David Einhorn presentation. “I have titled today’s talk Good News for the Grandchildren. By that, I mean that I do not believe that there is a need to worry that today’s debts will be passed on to our current youth . . . I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation – not our grandchildren’s – will have to deal with the consequences. If we do one thing, let’s stop bemoaning the fate of our grandchildren on this topic. We might take the issue more seriously if we realize that our own future is at risk.” Amen.
8. VOLATALITY = OPPORTUNITY
The current market decline and increased volatility spells opportunity. That’s when your watch list comes in handy. Usually when we bring this up investors agree but complain they have no money, i.e., they were fully invested at the top. It might be a good idea to keep some cash reserves for the opportunities that come along on a fairly regular basis.
9. GOLD IS IN THE NEWS
Gold is very much in the news. We are planning to post an article on gold investing in the near future. The chart below is courtesy of www.kitco.com as of June 1,2010.
For questions or additional information on this blog entry, please contact us.
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Posted on Friday, May 21, 2010 - by Henry Walter
Update on Energy
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
The tragic explosion and sinking of the Deepwater Horizon oil rig, resulting in massive leaks of oil into the Gulf of Mexico endangering the environment, raises many questions about U.S. energy policy and how oil companies are regulated.
As you would expect, the blame game and finger pointing is the order of the day, as Congressional, Presidential and other investigations are announced to look into, among other things, lax oversight by the Minerals Management Service (MMS) of the safety practices of offshore drillers, the cozy relationship between regulators and oil companies and BP’s poor safety record. We are not going there, the media is supplying ample coverage.
Instead, we will provide you with some information about the oil and natural gas business that we hope will help you evaluate the opportunities for investors in the oil patch.
First, let’s start with a chart of recent oil prices courtesy www.BarChart.com.
Note that prices have fallen off sharply so far in May. It is hard to tell if the drop is based on the weak global economy and sluggish demand for oil, or on the accident in the Gulf. If the global economy continues to improve, oil prices should recover rapidly. The accident itself should put upward pressure on prices as stiffer regulations curb drilling and increase costs. Insurance costs alone are going to sky rocket as insurers recalculate risk based on this accident and past oil spills that are receiving more attention now.
Below we show a chart of natural gas prices, also courtesy of www.BarChart.com. Note that while oil prices have fallen, natural gas prices are stable to up in April and May. Long-term we are bullish on natural gas and have covered it in past bulletins (see Bulletin Archives - July 2009 and February 2010.)
The next chart shows that oil discoveries have been declining since 1964 (Source: Association for the Study of Peak Oil and Gas, www.agorafinancial.com.)
This would not be so bad if it were not for depletion. As oil fields age, and most of the world’s major oil fields are old, they produce less oil. Average depletion is estimated to be around 8% a year, meaning that just to stay even we need to make new oil discoveries of 6-7 MBD each year, an increasingly and costly tall order, not helped by the situation in the Gulf of Mexico.
The US military, among others, warns that oil output may dip causing massive shortages by 2015. Below is the energy summary from the JOE 2010 (Joint Operating Environment), page 29, recently published by the United States Joint Forces Command (USJFCOM).
ENERGY SUMMARY
To generate the energy required worldwide by the 2030s would require us to find an additional 1.4 MBD (Million Barrels per Day) every year until then.
During the next twenty-five years, coal, oil, and natural gas will remain indispensable to meet energy requirements. The discovery rate for new petroleum and gas fields over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new fields.
At present, investment in oil production is only beginning to pick up, with the result that production could reach a prolonged plateau. By 2030, the world will require production of 118 MBD, but energy producers may only be producing 100MBD unless there are major changes in current investment and drilling capacity.
By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.
Energy production and distribution infrastructure must see significant new investment if energy demand is to be satisfied at a cost compatible with economic growth and prosperity. Efficient hybrid, electric, and flex-fuel vehicles will likely dominate light-duty vehicle sales by 2035 and much of the growth in gasoline demand may be met through increases in bio-fuels production. Renewed interest in solar power and green energy sources such as solar power, wind, or geothermal may blunt rising prices for fossil fuels should business interest become actual investment. However, capital costs in some power-generation and distribution sectors are also rising, reflecting global demand for alternative energy sources and hindering their ability to complete effectively with relatively cheap fossil fuels. Fossil fuels will very likely remain the predominant energy source going forward.
For the complete report (76 pages) go to http://www.jfcom.mil/newslink/storyarchive/2010/JOE_2010_o.pdf, or Google "Joint Operating Environment 2010".
Not every expert agrees that there will be shortages of oil going forward. Some experts counter that technology will enable us to produce oil into the next century. For example, coal is abundant and with the right technology could be converted to oil.
In our opinion, in the next few years we will see much higher prices for oil and selected energy stocks, unless we go into a serious global depression. We favor oil companies in relatively stable areas like Canada and with substantial reserves.
To select energy stocks, we find this web site to be invaluable, www.mcdep.com, Independent Energy Valuation by Kurt Wulff. This is an institutional research firm that charges up to $24,000 annually for their service. The information is made available to retail investors for free after a 2-3 week lag.
Finally, we find the chart shown below, courtesy www.StockCharts.com, helpful in deciding when to buy and when to sell oil stocks. The chart shows the bullish percent of energy stocks over time. When it is over 80%, energy stocks may be overbought and ready for a decline. When the percentage is below 20%, energy stock are oversold and the next move may be up.
If you have an interest in oil stocks talk to your adviser. Be patient and be disciplined. For example, before we add to our energy holdings we like to see $BPENER fall below 20%, and we would employ a dollar-cost averaging or buy-on-a-scale down approach.
For questions or additional information on this blog entry, please contact us.
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Posted on Thursday, May 6, 2010 - by Henry Walter
May 2010 Roundup
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.
VIEWS and OPINIONS on the following topics:
- Kodak Pension Plan
- Euro Zone Issues
- Stable Funds
- “Sell in May and go away”
- Safe Haven Funds
- We have met the enemy and he is PowerPoint.
1. Kodak Pension Plan – Just as we were about to write an update on the Kodak pension fund based on the Eastman Kodak Company Annual Report on Form 10-K, we received in the mail YOU & KODAK, 2009 Annual Funding Notice & Benefits Update, 4.2010. According to the notice, the document is being distributed to all employees as well as retirees, LTD recipients and survivors. On page 2-5 is a fairly comprehensive report titled 2009 Annual Funding Notice for your enjoyment. Pension fund accounting is complicated, but as the notice indicates the funding target attainment percentage of a plan is a measure of how well the plan is funded on a particular date. So here are the numbers from the notice: 2009 118.04%, 2008 124.28% and 2007 93.22%. This data would indicate the pension fund is well-funded.
The Form 10-K (see page 95) has somewhat different numbers as the table below indicates.
In addition to being complicated, pension fund accounting is not exactly transparent, and we have been unable to reconcile the data in the two reports. At the bottom of the table in the Form 10-K is the following note which may help explain why the funding status went negative in a year when the stock market boomed: “The decline in funded status from December 31, 2008 to December 31, 2009 was primarily due to lower discount rates”.
Regardless, both sets of numbers indicate the pension fund is in reasonably good shape, particularly compared to other large corporations whose pension funds are way under funded. If you are or were an expert in pension accounting at Kodak, we would certainly appreciate your comments so we can pass them on to readers.
2. Euro Zone Issues – The stock market ended April on a sour note with the Dow down 158 points on Friday, April 30. The media had plenty of reasons for the decline, among them sovereign debt problems in Europe and, closer to home, the possibility of criminal charges in the Goldman Sachs controversy. But these could simply be excuses for a tired market that needs a rest after its remarkable rise of about 70% since the low on March 9, 2009.
Before we comment on the Greek debt crisis, below is a map of Europe to refresh your knowledge of European geography.
Media reports on Sunday (May 2) said that Greece reached an agreement under which it would accept a bailout package of direct loans from euro-zone countries and the International Monetary Fund with a potential value of 100 billion to 120 billion euros over three years. ( MarketWatch.com, May 2, 2010). That will probably be enough to ease market fears of “contagion” spreading to other highly indebted countries like Portugal, Spain, Italy and Ireland – for now. In order to secure the bailout, Greece had to agree to economic reforms that have already caused serious social unrest. Fiscally responsible Germany is not very happy with the outcome, and the agreement could possibly unravel in the next few weeks.
Apart from the profligate spending and rampant tax avoidance, Greece does not “own” its currency and therefore can not do what many countries do and that is print money to bail themselves out through inflation. In a year’s time or less, we’ll probably be back again worrying about the same problem. And don’t think for a moment that this problem is confined to some small country on the Mediterranean. If contagion results down the road it will affect the global economy including the U.S.A.
Just to show how bad things got before the bailout was announce, below is a chart of Greece’s benchmark 2-year note or sovereign debt (Chart by Money & Markets e-letter of April 30 using data from Bloomberg). Since late last year the yield shot up from around 2.1% to as high as 19% last week. For reference, the yield on the U.S. Treasury 2-year note is about 1%.
3. Stable Funds – There was an interesting article in the Wall Street Journal (Saturday/Sunday, May 1-2, 2010, page B8) entitled ‘Stable” Funds Are Looking Shakier by Eleanor Laise who frequently writes on the subject. The comments in her article and below are about stable-value funds in general and not specifically about the Kodak Fixed Income Fund.
As Ms. Laise points out, stable-value funds are designed to deliver steady performance and protect against losses. But financial-crisis fallout and changing market conditions are crimping these funds’ returns and imposing new restrictions on fund managers and investors. The funds, which hold roughly $700 billion, are available only in tax-deferred savings plans such as 401(k)s.
According to the article, there is a significant shortage of wrap contracts causing higher fees and other problems. Wrap fees have shot up in the past few weeks to roughly 0.20 to 0.25%, from as low as 0.06% previously. Stable-value investors should prepare themselves for lower returns. The shortage of wraps is causing some managers to hold higher cash balances, a drag on performance. The average stable-value fund delivered 3.1% last year, down from 4.6% in 2008, according to Hueler Cos., which tracks such things. (As of April 1, 2010, the return on the Fixed Income Fund was 4.28%.)
As you would expect, during the financial crisis, participation in stable-value funds rose to about 35%, and has since declined to about 25%. To read the full article Google the title.
4. “Sell in May and go away” – We have always been interested in the old Wall Street adage which holds that the worst five months for stocks begins in May and ends in September (one variation uses 6 months or May-October). In this week’s Barron’s (May 3, 2010, page 17) in the ‘This Week Preview’ section, Barron’s points out that for the past 60 years through April 28, a $10,000 investment in the Dow Industrials in the “bearish” months resulted in a loss of $474, while a like investment in the ‘bullish’ months gained $529,000, according to the Stock Trader’s Almanac.
We personally tend to cut back our exposure to equities in the bearish months, but it is important to note that the batting average for this approach is about 80%, in other words in some years, like 2009, it doesn’t work.
5. Safe Haven Funds – Also in this week’s Barron’s (May 1-2, 2010, page B9) is an article titled Safe Haven: ‘Mutual Funds That Act Like Hedge Funds’. The article notes that Morningstar’s ‘long-short’ mutual fund category includes market-neutral and absolute-return funds, which are designed to generate returns in any market environment. But there is a price for that downside protection: underperformance when markets rise sharply.
Morningstar’s top pick, their so-called “analyst pick”, is Gateway Fund, with annualized returns of 3.2% over the past five years and an expense ratio of 0.94%. Todd Rosenbluth, mutual fund analyst at S&P Equity Research, says two other long-short funds worth a look are Diamond Hill Long-Short Fund with an annualized return of 4.3% over five years and an expense ratio of 1.48%, and Aberdeen Equity Long-Short Fund with a five-year annualized return of 4.6% and fees of 1.74%. (Warning these funds have front end loads and we question the return for Diamond Hill.)
Your writer is currently looking at TFS Market Neutral Fund (TFSMX) rated 5 stars by Morningstar with a five-year annualized return of 9.50 but expenses of 2.49%, a little on the high side, but no front end load.
More conservative investors can benefit most from the diversification these funds offer. But before you even think about investing, talk to your financial advisor.
6. We have met the enemy and he is PowerPoint – On a more humorous note, the New York Times (Tuesday, April 27, 2010), showed on page 1, top center, the PowerPoint diagram below. PowerPoint is, or was, popular in the military establishment.
Upon seeing the diagram, Gen. Stanley A. McChrystal said, “When we understand that slide, we’ll have won the war”.
For questions or additional information on this blog entry, please contact us.
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