Saturday, January 31, 2009

4 Rules For Successful Short Selling

4 Rules For Successful Short Selling

By Michael Shulman | 31 January 2009

Savvy short-side investors make big, quick profits from falling stocks in good times and bad markets.

Whether you're shorting a stock the traditional way, or doing it the smart way— i.e., buying put options— choosing a name to play to the downside should be just as well thought out as any long side play that you add to your portfolio. But how do you go about finding spectacular short side plays and, more importantly, profiting from them? I have four solid rules that shed some light on how to survive and thrive on the "dark side."

Rule No. 1: Take A Short Position Based On Fundamentals As Though It Were A Long Term Position. [[I thoroughly endorse this rule; individual stocks should ONLY be shorted on impeccable knowledge/research of WHY the company WILL tank shortly (NOT just 'probably') AND WHY they are not likely to be a) rescued at the last minute by some "white knight", or b) are not very likely to be able to get an "extension" from their creditors, or c) are not likely to be able to "pull a rabbit out of a hat", eg, by selling something or laying off half the workforce or ... It's why short sellers invariably do the best company research! : normxxx]]

I am a stock-picker at heart, meaning I study companies' business models, management, product lines and prospects instead of looking at just their charts. There are a lot of technical gurus out there who use past stock performance as prelude to where a stock "should" trade next. But just because a company appears to be doing OK does not mean that it can keep up its past performance, especially if it's starting to crumble from the inside.

Wall Street seems to want to believe the best in companies, and its pundits invariably initially pooh-pooh less-than-stellar stock performance as temporary. My tried-and-true method of making money on the short side is to get situated while everyone else is still rooting for a company's recovery. I'm not a day trader looking for a quick 3% to 5% gain and ready to head for the hills whether or not I get it. Rather, I do comprehensive analysis and put my money on the bets that stand the greatest chances of paying off... and paying off big.

Don't get sucked into "trade-only" plays. Even if a chart is lousy and a trade looks good, you should never go against fundamentals. Sure, you may miss something here or there, but the discipline you exercise with your long side investments is also vital on the short side. [[And, NEVER underestimate the power of company management to just 'muddle through' while keeping the shareholders suitably entertained.: normxxx]]

In the same vein, you may be tempted to head for the hills at any sign of good news for a shorted stock. BUT, if you've based your trade on well established crumbling fundamentals, you must tell yourself that "this, too, shall pass" when you see a bad stock caught in a temporary updraft. Sticking to fundamentals gives us confidence in the logic of a position and enables us to wait out market volatility [[and temporary 'positive' situations which have been invariably 'manufactured' for the express purpose of raising the stock price: normxxx]].

Rule No. 2: Look For Reasonably Priced Puts.

Just like stocks, options come in all shapes, sizes and prices. If you're going to be trading put options, why not take advantage of the inexpensive but tremendous leverage that they offer? Remember that one put option contract represents 100 shares of the underlying stock, and that option prices are quoted per share. So, if you see an option trading at $3, your investment would be $300 for a contract.

If that stock heads off a cliff and your put shoots up in value to $6, that's a sweet money-doubler. But if you buy an option at $2 and it goes up to $6, you've effectively tripled your money. And if you're going to go for gains, why not go for the biggest ones possible?

If a $4 put only goes to $5, it's a gain, of course. But if you're only in the market for 25% gains, you may be better off sticking with stocks. I have avoided some short side positions because the premiums on the puts were simply too expensive— and, therefore, the risk/reward ratio was unfavorable. The lower the put entry price, the more money you can make when it turns in your favor. Accordingly, if things don't go your way, then that's less money you've put at risk.

[ Normxxx Here:  I cannot write a primer on options here (google the internet), but Mike has only touched the tip of the iceberg here. In particular, he has NOT covered the 'Time Value Of Owning Options And When To Sell', 'Out Of The Money Options Versus In The Money Options And When To Buy One Or The Other', 'Option Strategies For Limiting Losses/Reducing Costs', 'The Mortal Dangers Of Selling Covered Calls' (Which No Broker Will Ever Tell You), etc. DO NOT, I repeat DO NOT, engage in Option trading until you are conversant with "Iron Condors" and the like... ]

Rule No. 3: Look For A Perfect Storm.

There are many reasons to short a stock. If you wouldn't be caught dead owning the shares, that's a pretty good indicator that it belongs in your short-side portfolio. But how do you go about picking the biggest [[and likeliest nearest failing: normxxx]] losers? As the saying goes, "It's what's on the inside that counts."

If a company, stock or sector is ugly on the inside, it's only a matter of time before the ugliness— e.g., broken business models, less-than-spectacular corporate leadership, loss of a competitive edge, etc.— shows on the outside. And then the stock goes down [[but hardly immediately, depending on how able the company management are to obfuscate the issues (a LOT harder in a bad bear market, which is why judicious shorting is a very viable strategy here… I made a lot of money shorting in the '72/'73 crash): normxxx]].

Finding a company that [[is in the early stages of being: normxxx]] hit by sector weakness is a great way to play the short side. [[Then look for a stock in the sector that has such poor fundamentals that it is not likely to recover even if the sector does a sudden turnaround: normxxx]]— and if the stock you are looking at is also a poorly managed company, which means that even if the company recognizes its flaws and problems, it couldn't execute a turnaround in its business model within a reasonable time frame. If the company you're shorting meets both of these conditions, then you've found a [reasonable] trade.

Rule No. 4: Close And/Or Roll Winning Positions.

Even if a stock continues to slide, I urge you to close a big win and then open another position with more leverage using only your original investment dollars. This is called "rolling" a position. It gives you the opportunity to raise some capital by closing a profitable position and "rolling" the original investment dollars into puts with a lower strike price and/or later expiration date. Another reason you may want to roll your options position is because options come with an expiration date. And you may need more time to ride a stock's slide as far as it can go. [[I would sell or "roll" about half-way through the life of the option— that way, you don't losse too much of the time value premium, if any is left (when an option drops deeply 'into the money', the premium tends to disappear).: normxxx]] For example, it could take a year or two for the bad news to fully play out of a stock, but you may only have nine months with your put option position.

So, whether you have a winner and need to preserve your profits, or if time is running out and you haven't yet gotten the results you expected, you can always buy more time to let the position play out. Rolling a position is similar to staying in a stock for as long as you want to be in it— with a little more active management and attention [[but, of course, it generally is NOT free: normxxx]].

And if just a little more work can yield a lot more profit, I can't think of a better reason why you can't afford NOT to continue investing on the short side!

[[I would add a Fifth Rule: Stay Away From Stocks With Huge Short And/Or Put Option Positions— they are candidates for a "short squeeze"!: normxxx]]

Michael Shulman is the editor of ChangeWave Shorts, an options trading advisory newsletter, and is a contributor to the OptionsZone Web site.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Wednesday, January 28, 2009

We're Back To 1931. Good News: It's Not 1933 Yet

Bad News: We're Back To 1931. Good News: It's Not 1933 Yet

By Ambrose Evans-Pritchard, Telegraph, Uk | 31 January 2009

Barack Obama inherits an economy already contracting at an annual rate of 6%, much like the mid-Depression year of 1931 (-6.4%).

This may beat Germany (-7%), Japan (-12%), and Korea (-22%) over the fourth quarter. But that merely underlines the dangers ahead as the collapse of global trade chokes the mini-boom in US exports, setting off another stage of the crisis. The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10m Chinese have lost their jobs since the crunch began. Japan's exports fell 35% last month, year-on-year. The central bank is printing money furiously, buying bonds to prevent a relapse into deflation.

So yes, it is like early 1931. Citigroup and Bank of America have more or less disintegrated. JP Morgan's health is failing fast. General Motors and Chrysler survive only on life-support from the US taxpayer. But it is not yet like 1933. That second leg down was the result of "liquidation" policies by a Dickensian leadership blind to the dangers of debt deflation. By then the Gold Standard had degenerated into an instrument of torture. It forced the Fed to raise rates from 1.5% to 3.5% in October 1931 to stem gold loss [[to France, FWIW: normxxx]], with predictable results for shattered banks [[not to mention just about all other businesses: normxxx]].

It is worth glancing at the front page of New York Times on Monday March 6, 1933 to see what the world looked like three days after Franklin Roosevelt moved into the White House.

The newspaper front page was splashed with the story that FDR had closed the US banking system— invoking the Trading with Enemies Act— and ordered the confiscation of private gold. From left to right, the headlines read: "Hitler Bloc Wins A Reich Majority, Rules Prussia"; "Japanese Push On In Fierce Fighting, China Closes Wall, Nanking Admits Defeat"; "City Scrip To Replace Currency"; "President Takes Steps Under Sweeping Law of War Time"; "Prison For Gold Hoarders". President Obama faces a happier world.

The liberal economic order is still intact, if fraying at the edges. Capital and ships move freely[!?!] North America and Europe talk the same political language. China has so far proved a dependable pillar of the international system.

But then the world still seemed benign enough in early 1931. It was the second phase of depression that did terrible things. Roosevelt took over a country where the economic machinery had completely broken down. The New York Stock Exchange and the Chicago Board of Trade had closed. Thirty-two states had shut their banks. Texas had restricted withdrawals to $10 a day.

Few states could borrow on the bond markets. Illinois and much of the South had stopped paying teachers. Schools closed for months. An army of 25,000 famished war veterans [[and their families, including children,: normxxx]] squatting in view of Congress had been charged by troopers of the 3rd US cavalry with drawn sabres— led by a Major George Patton [[and commanded overall by General Douglas MacArthur: normxxx]].

Armed farmers threatening revolution had laid siege to a string or Prairie cities. A mob had stormed the Nebraska Capitol. Minnesota's governor was recruiting Communists only for the state militia. Lawyers attempting to enforce foreclosures were shot. More than 100,000 New Yorkers applied to go to the Soviet Union when Moscow advertised for 6,000 skilled workers.

We forget how close America came to open revolt. Eleanor Roosevelt feared the country was beyond saving. Her husband kept the faith. He channelled the anger against Wall Street, diffusing it. "The practices of the unscrupulous money-changers stand indicted in the court of public opinion," he began his presidency.

The Fed was an ideological deadweight. Bowing to pressure from Congress it began to purchase bonds in mid-1932 to boost the money supply, but then recoiled, before retreating into pitiful self-justification. A third of the rescue funds in Hoover's Reconstruction Finance Corporation had been embezzled.

Today there has been no such failure of US institutional imagination, even if, as George Soros argues, the Treasury's policies have been "haphazard and capricious". The twin blasts of fiscal and monetary stimulus have been massive. In short order the Fed has slashed rates to zero. It is now conjuring money out of thin air on an industrial scale, buying $600bn of mortgage bonds to force down the cost of home loans, and propping up the commercial paper market to avoid mass corporate default.

Ben Bernanke, a Depression junkie, is proceeding with a messianic sense of certainty. The wash of money should ensure that the next 18 months will not mimic the cascade of disasters from late 1931 to early 1933. It at least buys time. But it does not solve the deeper problem, which is that a West addicted to Ponzi credit has put off the day of reckoning with ever more extreme monetary policy with each downturn, stealing prosperity from the future.

It will be an extremely delicate task to right the ship again. Central banks will have to extricate themselves from their venture into the bond markets without setting off a bond debacle in 2010 or 2011. Governments will have to map out of a path of Puritan discipline for year after year.

This will be Barack Obama's grim test of statesmanship.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Homes For The Holidays

Homes For The Holidays
Click here for a link to complete article:

By | 28 January 2009

Homes For The Holidays… Unfortunately, yeah, and plenty of ‘em. It’s an understatement to suggest residential real estate was either directly or tangentially very important to both economic and financial market outcomes in 2008. It has been the cornerstone of solvency, or lack thereof, in so many quarters of the financial sector. And as such, has had profound influence on the character of the US and really global credit cycle.

It’s been a while since we’ve checked in and all of us know that residential RE will continue to be a key macro economic health watch point as we move into the New Year. The current reconciliatory cycle drag that is residential real estate affecting financial sector balance sheets, household balance sheets (and P&L's for that matter), etc. is not about to dissipate in importance to macro economic outcomes in 2009. You’ve seen what has happened recently as the Fed has gone into a good bit of hyper drive in terms of trying to financially engineer at least some type of stabilization in what continues to be a downhill journey for the asset class.

They’ve allocated $600 billion to essentially buy agency debt (Fannie and Freddie paper) in the hopes of getting and keeping US conventional mortgage rates down. And so far that has indeed happened as post the establishment of this new Fed investment endeavor, conventional 30 year fixed mortgage rates dropped a good 100 basis points, plus or minus, in a matter of weeks. We’ll spare you the graph, but in recent weeks we’ve seen new mortgage applications and refi apps spike meaningfully higher.

Mission accomplished by the Fed? We’ll see, as we need to remember that a lot of folks with rate-locked in-process loans could only have taken advantage of these new lower mortgage rates by canceling the prior loan and writing a new one, probably with another mortgage vendor, which naturally would count as a "new" mortgage or refi app in recent data. Hence, there may be a bit of anomalistic higher counts in recent weeks due specifically to getting around the prior rate lock issue, so we’ll need to continue watching the data in the months ahead. Lastly, and you may know this already, China and a few foreign friends have been big sellers of government agency paper since the summer of this year. The $600 billion the Fed has already so generously provided is in part simply offsetting current foreign selling of US agency paper.

Additionally, the Fed followed up the $600 billion down payment, if you will, in trying to spark housing price stabilization/reacceleration with an announcement that they would like to put a program together (through wonderful taxpayer sponsored Fannie and Freddie) to provide 4.5% 30 year conventional loans to new home buyers. After all, it is the season of giving, no?

Bottom line being, the Fed is starting to pull out all the stops to arrest home price contraction. Upping the ante in a big way relative to prior efforts. We expect the Obama regime to likewise address this issue, and perhaps forcefully. They’ve suggested rewriting existing mortgages, but that enters into the very dangerous and cornerstone area of contract law.

Key question for both our economic monitoring and investment decision-making ahead then becomes, can the US government decree/legislate/manipulate home prices higher, defying the natural laws of asset class supply and demand, as well as character and path of a generational credit cycle now in reconciliation? Defy? We doubt it. Temporarily arrest? The correct answer is, we’re going to find out. Important in that, as we all know, the locus of initial US credit cycle trauma was the mortgage securities markets.

Residential real estate was also the locus of consumer credit creation this decade [[to 2007: normxxx]] and a current key driver of household net worth decline, certainly along with equities, influencing household financial well-being. Lastly, we need to remember the importance of investor psychology and bear markets as this applies to housing. Any even temporary stabilization in residential real estate would echo in positive psychological influence to the financial markets. All part of the ebb and flow of cycles in both financial markets and investor psychology.

A few macro overview observations about just where we are in the cycle itself. Cutting to the bottom line, at least in our minds, inventory and price remain the two largest cyclically unresolved outstanding fundamental issues for residential real estate at the moment. Once inventories at least get in line with historical precedent and prices stabilize, then we can begin to anticipate a better tone to mortgage credit markets, the housing industry itself, consumer well being and hopefully the macro economy.

It’s when housing stabilizes that the unprecedented stimulus being force fed into the system by the Fed/Treasury/Administration may begin to bite and gain traction. Let’s get right to a few simple and self-explanatory views of life. The following is a four and one half decade view of median family home prices relative to median family income.

To get back to the average level for this ratio since 1963 (the red line in the chart), median home prices would need to drop roughly another 12% from current levels. And of course this assumes the cyclical correction stops at the historical average. Let’s face it; we’ve already lived through a lot of price correction. The problem clearly is that other factors are weighing on residential real estate prices at the current time. Weak labor and wage growth, a coordinated global economic downturn of historical significance, and a credit market contraction of very meaningful magnitude is colliding with a housing reconciliation cycle, arguing the relationship above being arrested at the average of the last four and one half decades may be wishful thinking.

Is the Fed essentially trying to speed up the reconciliatory process implied by the above relationship in manipulating the important plug factor in the real estate equation that is financing costs? Of course this is exactly what they are doing. Whether they will be successful is the unanswered question. And in good part that depends on the ability of inventory to clear as a result of the character of both price and financing costs.

Let’s move right on to the also important issue of inventories. In the past we’ve shown you a lot of raw numbers when looking at this data. Time to stop that. Below is a look at the number of homes listed strictly as "for sale" properties (in other words this does not include second homes, rentals homes, etc.) at the current time. This go around we compare these per unit of inventory for sale numbers to the total US population to get a sense of historical perspective.

We’ve heard "everybody’s gotta live somewhere" a million times by those trying to bull up the residential real estate markets over prior years. And since the population is ever growing, comparing current nominal inventories to past cycles is misleading because of the dynamic of population growth. Oh yeah? Well now we’re looking at the number of homes for sale relative to "everybody". Any questions?

As the chart tells us, when looking at per unit for sale residential homes on what is essentially a per capita basis, we’re looking at a current level that is just shy of twice the historical average of the last four-plus decades. Yes indeed, everybody needs a place to live. It’s just a good thing there are so many places to choose from at the moment relative to historical precedent, no?

The last chart characterizing current residential real estate inventories very much mirrors the directional pattern of what you see above. It’s very simply the number of vacant single-family homes relative to all single-family homes. Bottom line? We’ve never seen anything like current levels. Residential real estate as an asset class cannot begin to fundamentally recover until the inventory 'clears', and this is far from an "all clear" view of life. Seems a matter of relatively basic common sense, no?

House That Again? …Before concluding, a few last housing related anecdotes we hope are of some interest. As per the comments above, we know that fundamentally housing prices and current residential real estate inventories remain open question mark issues. And the home building industry is more than aware. This is a very good thing in terms of cycle reconciliation.

As of the latest data, housing starts rest near half century lows in nominal terms. Residential real estate construction has essentially collapsed. Existing inventories and price have been very strong drivers of this collapse in new activity. Years of demand were more than satiated in the prior mortgage credit cycle. The view of per unit starts is seen in the top clip of the following chart.

In the bottom half we look at starts again as a percentage of the total US population. A new record historical low at recent levels. Clearly existing inventory remains the issue for real estate, not new inventory. As existing inventory clears, the asset class will heal. That process is well underway. The Fed just wants to speed things up a little with a big bit of financial engineering. Of course financial engineering has worked so well for them in the past, right?

Finally a very simple update of macro US homeowner equity as a percentage of the market value of real estate. You already know this ratio has been plunging for many decades now, plumbing new depths at an accelerating rate with each passing quarter over the last two to three years. The Fed has been quite kind to recently manipulate credit market mortgage costs downward, but only the real economy and real world residential real estate cycle can change the trajectory of what you see below. And this is the key to credit market collateral values, a sense of household financial well being, access to real estate based consumer credit, etc. Important? Yeah, we'd say so.

As we look at the chart above and contemplate what may be to come ahead, we again come back to the macro issue of deleveraging, running through the domestic and global economy. How do homeowners act to turn the trajectory of the relationship you see above upward in an otherwise very tough pricing environment? Deleveraging. Paying down mortgage debt.

We're pretty convinced US financial sector deleveraging is well underway and more than discounted by the markets. Alternatively, we'd suggest household deleveraging is more just getting started in comparison and we believe has a long way to run. We expect this will be a major macro theme for 2009.

Have the markets completely discounted this thought? We're simply not sure at this point. Residential real estate was incredibly important to economic and financial market outcomes in 2008. We expect exactly the same in 2009.

The message of the data above is clear, price and inventory cycle reconciliation is not yet finished. What is also clear is that the Fed/Treasury/Administration are stepping up their efforts as we walk into 2009 to truncate unfinished cycle reconciliation at almost all costs. Although we'll save this for a future discussion, we're not only focused on the importance of residential real estate in our current economic and financial market circumstances and how it will influence the financial sector, credit cycle dynamics and the real economy, but place incredible weight on the assured unintended consequences of Fed/Treasury/Administration efforts to truncate the natural cycle. The markets know what the Fed/Treasury/Administration are doing and are discounting these actions known actions in financial market prices. But it's the "at almost all costs" unintended consequences of this truncation attempt that may indeed be most important to 2009 investment decision making.

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Sunday, January 25, 2009

Barron's: Big Oil's A Buy

Barron's Cover: Big Oil's A Buy

By Dimitra Defotis | 24 January 2009

Big oil stocks are likely to creep back up, along with the price of energy. But investors should stick with the best— such as ExxonMobil.

In a very ugly 2008 for stocks, big-oil shares provided one relatively beautiful respite, rising smartly through midyear before losing ground as petroleum prices slid from the astounding peak around $147 a barrel that they hit in July.

Now, with crude more than $100 below that level, shares of the integrated oil giants— those that do everything from exploring to producing to refining and distributing— remain in a slump. Some now look tempting for long-term investors, but there's no need to rush. Big oil stocks could get even more tempting in coming weeks as the companies report earnings, issue subdued guidance for 2009 results and reduce the value of their reserves to reflect the latest realities of crude pricing.

The U.S. Energy Information Administration expects oil to average about $43 a barrel in 2009, while some Wall Street energy bulls consider $60 more likely. If either forecast is right, petro stocks will benefit later this year. If on the other hand, crude slides below its current level, as some Street bears expect, the shares could stumble further. Of course, few oil-price prognosticators have covered themselves in glory over the past year, and there's no reason to assume that their forecasting skills have improved. Especially since just where the price will go has much to do with another great unknown: how long the global recession lasts and how strong the subsequent recovery will be.

Short-term price forecasts vary greatly, but long term, the thrust is upward. But a recovery will come eventually, and higher oil prices almost surely will follow. The most enthusiastic bulls even see them returning to $100 within a few years. That's why, over the next few months, patient investors would do well to buy the stocks of the best-positioned companies with the strongest finances and best long-term outlooks. Among them: ExxonMobil, Total and BP. Also worth considering, although more speculative: Petrobras.

Of the top three, ExxonMobil (ticker: XOM) looks the priciest, but its mighty cash position makes it the No. 1 candidate for a dividend increase. The company, the world's largest non-government-owned energy outfit, is also a low-cost petroleum producer, as are France's Total (TOT) and the U.K.'s BP (BP), each of which also has impressive natural-gas holdings. Brazil's Petroleo Brasileiro, known as Petrobras (PBR), a smaller, production-heavy player, has made some intriguing energy discoveries, but some can't be exploited profitably at current petroleum prices.

The story is less positive for the other big players, whose shares are cheap for good reasons. Although it has a decent cash position and dividend, Royal Dutch Shell (RDSA) trades at a discount to its peers, in part because of its miserable history of writing down the size of its reserves. ConocoPhillips (COP) has a weaker balance sheet than most of its rivals, leaving it at a disadvantage in bidding for assets to replace its maturing reserves. And Chevron (CVX) looks downright expensive, especially in light of its high reserve-replacement costs.

The challenge for the publicly traded global giants is replacing their oil and natural-gas fields on a massive scale. National oil companies, chasing profits, now control about 80% of the world's oil. As energy prices rose, ExxonMobil and ConocoPhillips were among the companies booted from nationalized projects— most notably in Venezuela.

The political realities have forced the majors to do much of their exploration in difficult terrain, where finding-costs are high. The good news is that oil-rich countries seeking to fill growing budget holes are likely to offer more attractive terms to the majors, says Daniel Yergin, an energy expert and the author of The Prize, an oil-industry history. The inducements: the majors' access to capital and ability to execute projects and to marshal technology.

The major, independent energy companies still can thrive with oil prices down because they are "so big and diverse, they benefit in the chemical and refining areas from a drop in prices...," says Sean Bogda, a money manager at Global Currents, a unit of Legg Mason. One big bull on the sector is Tim Guinness, who runs the Guinness Atkinson Global Energy Fund (GAGEX). He contends that all the integrated oil stocks are a "screaming buy" with more than 50% upside, if you believe, as he does, that petroleum prices will average $60 in 2010 and $70 in 2011. The money manager's argument: The Organization of Petroleum Exporting Countries (OPEC) wants $70 oil and ultimately will take the actions necessary to obtain it, even if its members have an interest in "giving the world an economic break" with lower prices for now.

See FULL Table:

Big Break for Energy Investors

With the drop in oil prices, shares of some of the largest integrated oil companies, particularly ExxonMobil, Total and BP, look relatively inexpensive. They offer nice dividends, too.

Rec ent12-MoRev Reser —vesRepl —aceCashDivP/EEPSEPS
PriceChg'08E (bil)'07 (bil)*Cost '07**(bil)  ***Yld'09'09E'08EComments
Exxon Mobil / XOM$78.23 -6% $457 $22.5 $8.00 $36.7 2.0%14.2$5.51$8.46Massive cash stash.
Royal Dutch Shell / RDSA47.01-3345311.717.65 7.8 LNG assets.
BP / BP41.44-3339917.6 9.50 6.1 payout ratio.
Chevron / CVX69.95-1426410.828.41 10.6 3.711.75.9711.10High reserve replacement costs.
ConocoPhillips / COP48.09-3322310.811.52 1.1 position weak vs peers.
Total / TOT46.75-3420610.118.64 16.9 cash position.
24.29-516613.911.755.63.718.4 1.331.58Offshore discoveries bode well.

*At year end, in barrels of oil equivalent; PBR figure is current.
**Worldwide reserve replacement cost, in barrels of oil equivalent.
***At end of third quarter.

Sources: Thomson Reuters, Boomberg; IHS Herold; company reports

Big Break For Energy Investors

One threat overhanging all of the oil companies is the possibility that the Democrat-controlled Congress will revive the windfall-profits tax of the 1980s. But just how deeply such a levy would bite into earnings and whether it really would be imposed are both unknowns at this point. Bears also fear that dividends will fall unless crude and natural-gas prices heat up. But, says Jeff Parsons, an energy analyst at Eaton Vance Management: "Integrated oil companies, even if they have a downturn in cash flows, rarely cut the dividend-they try to maintain or grow it. What they can do is reduce their capital expenditures." In fact, capex budgets are shrinking already, in line with oil prices.

Herewith, a look at the most attractive players, and some of their rivals:


This company is in a league of its own, not just for its girth and $37 billion cash stash, but for its low reserve-replacement costs— born of many accessible energy fields and superior technology— project-financing capability and a shrewd but conservative management team. Headed by CEO Rex Tillerson, Exxon's management gets consistent praise on Wall Street. This is why Exxon investors have long paid a premium multiple, which today stands near 14 times estimated 2009 earnings of $5.51. That's a roughly 10% premium to the integrated oil sector, but well below the 30% the stock boasted last year.

Exxon shares have been the most stable among those of the big energy firms, down only 6% over the past 12 months. In contrast, its 2% yield is the lowest among the integrated giants. But, given the company's powerful financial position, bulls argue that it's likely to boost its payout, after having emphasized repurchases in recent years.

Exxon spent $26.9 billion in 2008's first nine months, shaving its total of outstanding shares by 5.5%, to roughly five billion. The company has repurchased more than 2 billion shares over the past decade. If the buybacks were to continue apace, Deutsche Bank analyst Paul Sankey has quipped, ExxonMobil could be a private company by 2020.

ExxonMobil didn't respond to a request for comment. It noted in third-quarter filings, however, that dividends rose 13% per share in 2008's first nine months— largely the result of fewer outstanding shares. Recently, speculation has grown about whether ExxonMobil will make an acquisition. Among the rumored targets are Britain's BG Group (BG.U.K.) for its natural-gas assets. There has even been talk of a bid for all or part of Royal Dutch Shell, a deal that would face regulatory hurdles.


This big French energy company's outlook is being brightened by the appeal of liquefied natural gas, especially outside the U.S. Standard & Poors expects the company's natural-gas reserves to be significantly bolstered by a recent agreement with Russia's Gazprom. Under it, Total obtained a 25% interest for 25 years in a Barents Sea gas field that the two will exploit together. Unexpected shutdowns in Africa and the North Sea cut production last year, but European refining margins were up 88% in the third quarter alone. With low-cost production in Africa (the source of 42% of Total's earnings before interest and taxes, according to S&P), and rapid expansion in the Middle East, Total should thrive if oil prices stay at current levels or rise. The French major had $17 billion in cash at the end of the third quarter. S&P has a 12-month target of $92 on the stock, double the current price.


In recent years, BP has blitzed consumers with clean-energy ads and expanded its natural-gas operations, especially in the U.S., where last fall it agreed to pay $3.7 billion for some of Chesapeake Energy's shale assets. But oil still looms large in the company's fortunes, and its earnings are likely to be hurt in the near term by low crude prices in Russia, where a joint venture accounts for about a quarter of production. In addition, profits could be squeezed by the restructuring of BP's considerable refining operations, including its Texas City, Texas, operation, the third largest in the U.S. Chief Financial Officer Byron Grote has said that BP's $3.36-a-year dividend isn't endangered, assuming oil stays in the 40s. Investors obviously are skeptical, however; the company's shares are off about 11% this month.


This Brazilian energy concern's shares have fallen about 50% in the past 12 months. While considerably smaller and less diverse than some of the other integrated outfits, Petrobras has crashed the Big Oil party because of a huge discovery under salt deposits deep off the coast of Brazil. The costly project will take years to come to fruition, and some analysts contend that it might be viable only if oil fetches $60 a barrel; the company says the real figure is closer to $40.

The uncertainty over this important discovery makes Petrobras more of a gamble than ExxonMobil, Total or BP, especially since it sells at a higher valuation than any of them. In addition, the Brazilian government, which controls about a third of Petrobras shares, has encouraged the company to return more profits as dividends. Petrobras now yields 3.7%— a number that's likely to rise slightly this year. One possible drag: higher taxes on oil profits by the Brazilian government. As for Petrobras stock, Deutsche Bank cut its target to 35 in December. But that's still well above the recent 24.29.

Royal Dutch Shell

Natural gas has become a more attractive fuel because it burns relatively cleanly and can be transported easily in liquefied form. Royal Dutch plans to double its liquefied natural-gas capacity by 2010, according to S&P. That includes a large Russian LNG project to be completed this year. Offsetting this is that, if oil prices don't rise from current levels, profits will fall at Royal Dutch's high-cost Canadian oil sands operations. In January 2004, before Royal Dutch Petroleum and Shell were unified under one U.K. parent company (resulting in a confusing batch of tickers), Shell was forced to remove billions of barrels of "proven" reserves from its books, resulting in huge financial restatements.

Criminal investigations yielded nothing, and the whole mess is history, but its legacy endures in investors' skepticism about Royal Dutch's management. That might change a bit after the company's well-regarded chief financial officer, Peter Voser, takes over as CEO this year. Royal Dutch Shell's A shares, which underlie its most active American depositary receipts, carry the lowest multiple among the big oil stocks, even though the company has more than $8 billion in cash and offers a nearly 7% dividend yield.


This company, whose stock could rally as its low multiple attracts investors, has the highest exposure among the super-majors to the North American natural-gas market. It also has one of the most capital-intensive portfolios among the U.S. integrated energy outfits. Unless natural-gas prices this year exceed $7.50 per million British thermal units, well above the current $4.70 or so, the stock has only modest potential upside this year, writes JPMorgan analyst Michael LaMotte, who has a 12-month price target of $53. The shares now are in the high 40s.


Shares of this company, which acquired Unocal in 2005, held up relatively well in 2008; they're down 14% over the past 12 months. LaMotte upgraded the stock earlier this month to Overweight, saying that with a higher percentage of crude production, compared to Exxon or ConocoPhillips, Chevron "can move more than the peer group on crude-price movements." While it has far-flung exploration and production projects, from those on land in Saudi Arabia to deepwater Nigeria, it also is searching for oil in deep areas of the Gulf of Mexico, where hurricanes hurt production last year. LaMotte has a target price of $95 on the stock, for an upside of 36%.

Not everyone is a fan of this stock, however. After Chevron released an interim fourth-quarter report showing that refining margins were down, Credit Suisse lowered its earnings estimates, reiterated its Neutral rating and maintained its $68 price target. The shares were around 70 at midday Friday.

In sum, the long-term picture for Big Oil is generally bright. But, given the differences in the companies' strengths and prospects, investors will have to be picky to find the biggest winners. And winners there will be, because despite the hopes of environmentalists and foes of Big Oil, it will be years before conservation and alternative-energy sources can slake much of the world's thirst for petroleum.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Ten Things We're Still Buying

Ten Things We're Still Buying

By Lauren Sherman, Forbes | 25 January 2009

Consumer spending may be at all-time low, but there are plenty of things people can't seem to live with out.

Hey, Big Spender, are you out there? You must be, since December 2008 sales amounted to $343.2 billion. What did you buy?

Nothing impulsive or lavish, it would seem. Consumer confidence is at its lowest point in history and, according to a Jan. 14 report released by the Commerce Department, retail sales were down 2.7% in December 2008 from November 2008 and 9.8% from December 2007.

From Wal-Mart (nyse: WMT) to Saks Fifth Avenue (nyse: SKS), retailers are so desperate to rid themselves of inventory that they're marking down some merchandise by up to 90%. However, $343.2 billion is still something, not zero, meaning consumers still deem many items worthy of the original price tag, says Martin Lindstrom, a retail marketing expert and author of

Buyology: Truth and Lies about What We Buy

In Depth: 10 Things We're Still Buying

While retailers suffer from shoppers changing their behaviors during recessions (mainly by abandoning brand loyalty), says Lindstrom, "There are certain things people won't give up."

Keeping Up Appearances.
Personal care is one of them. That vast category includes everything from shaving cream to perfume to hairspray. From November 2007 to November 2008, U.S. sales of shampoo, acne treatments, skin care gift sets and grooming products increased by 18%, 14%, 11% and 15%, respectively, according to Karen Grant, senior beauty analyst at Port Washington, N.Y.-based market-research firm NPD Group. Consumers are even still spending beyond the necessities in the personal-care category, it seems. At Nelson Bach, a North Andover, Mass.-based natural remedy company, year-over-year sales of its Rescue® Pastilles have doubled, according to company president Cynthia Batterman.

She believes that in a tough economy, when 7.2% unemployment means an increase in those lacking health insurance, many turn to alternative therapies. Nelson Bach's gummy lozenges, made with flower essence of white chestnut, are said to offer natural stress relief. And at $7 a tin, they're a relatively inexpensive way to feel just a little bit better. "When people put off going to the doctor, they're more likely to try self-treatment," says Batterman.

Seeking An Escape.
Whether used for keeping up appearances or curing minor ailments, personal care is— ultimately— about feeling good. Sometimes, that means buying products to escape the reality of the recession. "Even if we can't afford to escape to Paris, we can still afford to buy perfume with 'Paris' on the label," says Lindstrom. But it's technology, not perfume, which many would say does the best job of providing a sense of escape. Arguably the most accessible form is the videogame, which has seen a 14% sales increase in 2008, according to San Diego, Calif.-based Electronic Entertainment Design and Research Group (EEDAR).

In the third quarter of 2008 alone, the two top-selling items— "Madden NFL '09" and "Wii Fit"— sold 5 million units combined, according to NPD. And since it was first released in 2005, Guitar Hero has sold 25 million copies, grossing $2 billion. Smart phones, another way to use videogames and other forms of escapist entertainment— like podcasts and television shows— are also in demand. NPD says that from November 2007 to November 2008, the number of smart phones purchased increased from 13 million to 24 million, which resulted in a sales increase of 53%, from $2.7 billion to $4.1 billion over the same period.

And while you can't do much more than surf the Internet and write (short) term papers on minute-memory netbooks, the reasonable price— about $300— made mini laptops a winner. Sales in the third quarter of 2008 increased by 160% compared with the third quarter of 2007, according to Austin, Texas-based market research firm Display Search.

Keeping Fit.
Don't let consumers' continued thirst for technology have you thinking everyone will be anchored to the couch through the remainder of the recession, however long it lasts. Gyms, considered by some to be an affordable luxury, aren't completely in the red, as people seem to want to stay healthy in both good and bad times. In fact, market researchers at St. Louis, Missouri-based firm Stifel Nicolaus say overall gym memberships will increase by 4% in 2009. And a nationwide survey conducted by Princeton, N.J.-based Opinion Research Corporation, and sponsored by gym chain Anytime Fitness, found that over 60% of the 1,090 (gym-going) participants planned on keeping their current membership plan, while another 23% planned on downgrading to a less expensive option.

Aside from bare necessities, the things consumers are still buying have one thing in common: They provide a break from reality. "We want to dream ourselves away," says Lindstrom. Maybe everything will be fine by the time we wake up.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Saturday, January 24, 2009

Just How Bad Has It Been?

Just How Bad Has It Been?
Current Bear Market Has Been Less Less Severe Than The Dot-Com Bust

By Mark Hulbert, Marketwatch | 24 January 2009

ANNANDALE, Va. (MarketWatch)— Just how bad has it been in the stock market? Few are even bothering to answer this question, since it appears utterly obvious to almost everyone that what the stock market has been experiencing is unprecedented, at least in modern financial history. Don't we have to go back to the Great Depression to find anything remotely similar? Well, no.

These are the surprising implications of a fascinating study published Thursday by Ned Davis Research, the Venice, Fla.-based quantitative research firm. Pat Tschosik, a senior equity analyst at the firm, took a sober and data-driven look in comparing the popping of the financial sector's bubble over the last 18 months compares to the bust of the Internet bubble in 2000-2002. In several significant ways, believe it or not, the tech experience early this decade was even more traumatic than what has transpired since mid-2007.

Since its peak in 2007, for example, the financial stocks in the S&P 500 index (SPX) have dropped 78.7%— slightly less than the 82.5% by which the information technology stocks in that index dropped in the 2000-2002 bear market. Not so fast, you might object: Surely the financials in 2007 constituted a more important sector than technology did in 2000, right? Not necessarily.

According to Tschosik, the information technology sector represented about 35% of the S&P 500 at its March 2000 peak, in contrast to the 22% weight that the financials sector represented at its peak in 2007. As a result, a greater amount of total market capitalization was destroyed by the tech sector's decline in the 2000-2002 bear market ($3.6 trillion) than by the financial sector's decline since 2007 ($2.2 trillion). To be sure, these historical comparisons provide little solace to investors who have lost huge amounts over the last 18 months. But they do provide a reality check on excessive pessimism and despair.

Just as it's dangerous at the top of a bull market to think that "this time is different"— and that the old rules no longer apply— the same is true when we're at the depths of a bear market. Just as trees don't grow to the sky, as John Maynard Keynes famously once remarked, those trees' roots won't continue descending until they get to China either. The stock market did finally recover from the Internet bust, and so will the current bear market eventually give way to a new bull market. Trite as it may sound to say this, it is a helpful antidote to doomsday thinking.

Friday, January 23, 2009

What Kind Of Change Will Obama Bring

What Kind Of Change Will Obama Bring To The Stock Market?

From A Usually Reliable Source…

The good news is that my data points to a very positive outcome for stocks over the next four years.

But, before we go any further, I want to issue my standard "political content" disclaimer: What I am about to report is in no way based on my personal beliefs about how our great country should be run. This report is 100% driven by empirical, 'unbiased' data (at least, insofar as humanly possible!). Sure, there are always ways to make numbers fit a particular worldview or bias. But that isn’t my intent with this newsletter. My only aim is helping you make smarter investment decisions. Period. I don’t recommend throwing your money away on the altar of your beliefs, but rather on going with what the odds favor.

Look at international trade as financing has disappeared from the banking industry:

Click Here, or on the image, to see a larger, undistorted image.

Now let’s look at the collapse in employment and incomes which come from private sector jobs:

This is a reflection of the Wolf Wave as private sector companies lay off workers in order to maintain profitability and solvency. These pictures are of the United States but similar pictures are are mirrored throughout the G7.

Look at the average peak-to-trough employment losses associated with the banking crisis:

Click Here, or on the image, to see a larger, undistorted image.

John Mauldin is reporting that recent reports of of 524,000 new unemployment claims masks the true number of 952,151 (he says it’s not a typo and I believe him). Think of it, almost a million jobs lost in one week and I believe this is just the beginning. He goes on to report that continuing claims rose to 5,832,746 and, if I recall correctly, that is double the number from a year ago. Unemployment is set to double again this year in the US and EUROPE.

Let’s now take a look at the outstanding borrowing and unfunded obligations which must be serviced by these declining incomes:

Wow, debt to GDP of 350%, almost 100% higher than when the Great Depression started. Now let’s look at the value of the assets by which this borrowing is underwritten in the United States (see left). As housing is set to decline another 20%, keep in mind my projections for the S&P 500. Keep in mind also that government debt is serviced through taxes and as incomes and asset values collapse so do government revenues.

Just for fun, let’s take a look at the UK, and see how it compares to US liabilities (from the ):
Future borrowing and ultimately money printing to finance these obligations, or to repair the lenders’ balance sheets (American and European Banks), is set to SKYROCKET! Cumulatively the sum as of January 1, 2009 is already almost 5 trillion dollars and rapidly rising as the bank bailouts are woefully underfunded, as was demonstrated in last week’s bailout of Royal Bank of Scotland, Bank of America and Citigroup. Unrealized losses are piling up at record rates (see below, Europe is worse), the US Bank rescue has consumed $350 billion and the next 'tranche' is being detoured into rescuing new sectors at a rapid rate such as autos, credit cards, mortgage holders, commercial real estate and the list keeps on growing. Lobbyists are lining up like pigs at the trough to get in on the giveaways.

Meanwhile, unrealized bank losses just keep on piling up as this chart illustrates:

In December alone over $320 billion was vaporized from the balance sheets of the nation’s biggest banks! Only we haven’t been told yet… After almost a year of de-leveraging, nothing has been accomplished, as income and book value have shrunk faster than the money can be shoveled in. Europe is in the same boat or worse, depending on the country.

BKX-PHLX/KBW Banking Index
Throughout the US and Europe the biggest banks are toast and will have to be nationalized. You can expect this to happen in all ways but name, merely because the public only understands rescue language. 'Bankrupt' and 'insolvent' will never be used in a headline. Look no further than the 'rescues' of Fannie, Freddie, AIG, Citigroup, Bank of America, Royal Bank of Scotland and more. Shares of all of these companies are headed to Fannie Mae and AIG territory near 1 Dollar. Want to know where the financial sectors (BKX-PHLX/KBW banking index) are headed? Take a look at the weekly charts which are on a sell signal as they sink to ever new lows and plunge through the downside of the downtrend channel established two years ago:

Brand new sell signals on the weekly charts and the "falling out of the bottom" of the trend channel signal the potential for a crash: RSI declining, slow stochastics on new sell signal, MACD on new sell signal and the ADX trend gauge at a healthy 37 (rarely do trends change when ADX is at this level.)

The financial sector shareholders will be left with nothing as management has failed to protect shareholders and their clients alike, and shareholders have not exercised the proper oversight and kicked the bums out. The losses this year by the biggest banks in the EU and US project to over 2 trillion, and either the government recapitalizes the banks or the financial systems will cease to exist. I predict that most of the top 50 banks in the world will be rescued to the tune of at least another 2 trillion dollars in the coming year.

About my data: It covers the S&P 500 and goes back to 1928. While the 2008 numbers weren’t finalized as this issue went to press, I still chose to include the year’s data, using December 9 as the cutoff. That way, I’m working with a complete eight-decade history, encompassing 20 full Presidential terms (41 years of Republican leadership; 40 years of Democrats).

Five of the most interesting things I uncovered:

1. The first year of a Presidential term is generally the worst for stocks. On average, the "500" rose just 3.1%. However, the first year of a Democratic candidate produced a much better 8.9% gain vs. a 2.78% loss under a Republican (the only negative number in the party averages).

2. The third year of a Presidential term is typically the strongest for stocks, with an average annual gain of 14.12%. In a Democratic third year, the gain is an even stronger 17.7%.

3. Overall, stocks have done much better under Democratic Presidents, with an average increase of 10.1% vs. 3.1% under a Republican White House. This clearly runs contrary to conventional wisdom.

4. In terms of Democratic leadership, the second year is typically the weakest for stocks, producing a gain of 4.29%. A Republican’s second year was good for 3.81%.

5. Of President G.W. Bush’s eight years in office, five saw a double-digit move exceeding 13 percentage points.

Strictly going by the past, 2011 would be expected to post the strongest gain (but, of course, with the usual caveat that "past performance is not predictive of the future"). I find that extremely interesting, especially in light of what top economists are forecasting right now— a deepening recession/depression through 2009, and a housing bottom as late as 2010. In other words, based also on fundamental analysis, 2011 would seem to be the light at the end of the tunnel for the U.S. economy.

Typically, stocks 'anticipate' the beginning of an economic recovery. But given the psychological damage that has been done by this severe downturn, perhaps many investors will fail to jump in until the market has already made a substantial jump forward. In other words, 2011 could be the year that stocks really surge from latecomers and momentum players piling back in.

What about the time between then and now?

Based strictly on the Presidential cycles, 2009 will produce a below-average, but positive, return for stocks. Ditto for 2010. On the other hand, the current climate is hardly typical— so, based on the data with which I introduced this report, I would expect down markets in 2009 and 2010. Much will depend on how swiftly and effectively the new Administration handles its massive challenges. And, Obama has already announced his intention to launch the largest infrastructure initiative since Eisenhower developed the U.S. highway system about 50 years ago.

There’s no question our nation could use a facelift— just take a look at the bridges in your immediate area and I’m sure you’ll agree. But as always, the question is whether this money will really flow to the places where it’s most needed. Since we’re talking about the government here, I’m going to say "probably not." Regardless, the investment should be a nearterm positive for the economy (and stocks).

I also expect another stimulus package geared toward putting money directly into taxpayers’ pockets. Frankly, I’m not a fan of such efforts. We’re simply borrowing from our future selves to buy big-screen TVs today. Investing in infrastructure at least creates jobs and improves our daily lives for decades to come.

I believe Obama’s direct effect on Wall Street will be more positive than many expect. He talked tough on the campaign trail, but his recent appointments are all centrists who have been around the block before. While they don’t represent real change, they’re already up to speed and provide a high level of continuity. Once the crisis has been calmed, look for sweeping changes to oversight and regulation.

If the market doesn’t take off immediately, don’t be shocked. As past Presidential cycles demonstrate, it often takes a few years for an Administration (and companies) to see and profit from the benefits of new initiatives. The key is positioning yourself now rather than waiting until everyone else else catches on.

But now that the recession is official, anyways, let’s revisit the sectors. December, 2007 marked pretty much the top of the U.S. economy. As investors, the question we must ask is this— "What areas are best positioned to ride out the tough times ahead and all the other changes likely to happen in the new year?"

Let’s start with where we’ve been. In past recessions, consumer staples, healthcare, and utilities stocks typically outperformed. And they were predicted to be the strongest sectors in 2008. Three specific industries— all in the staples sector— that have outperformed in past recessions are tobacco, alcohol, and household products.

Based on data through the end of November, here’s how the sectors actually performed:

Consumer staples stocks were the top performers in 2008 by a wide margin. In fact, they did twice as well (relative term, I know) as the overall market. Health care and utilities were also up substantially better than the market. All of that is exactly in line with historical data. That’s good news since it means that past performance is still likely to provide a basis for what to expect going forward.

I continue to believe that staples and utilities should make up the bulk of your income portfolio for 2009. As recessionary conditions continue, the companies that provide necessary services will hold up best. Healthcare should play a slightly smaller role until it becomes clearer just how far the new Administration wants to shake things up. My preferred healthcare industry remains pharma.

On the other end of the spectrum is the financial sector. It was the worst place to be in 2008. While the credit crunch and all its challenges were already clear at the beginning of the year, hardly anyone thought we’d see as much additional downside and collapse as we did. In fact, I felt that the group had already been beaten pretty severely.

That didn’t stop the bad news from pouring in from Bear Stearns, Freddie, Fannie, AIG, Lehman and many more of the world’s biggest names in finance. The mounting failures and bailouts came with a swiftness that shocked the entire globe. Still, I maintain my belief that this is not the end of the U.S. financial system as we know it.

But the dividend cuts have been so bad, and the near-term uncertainty is so strong, that I don’t think financial names should play a large role in your portfolio for 2009. That doesn’t mean I won’t recommend the odd bargain or adding to existing positions. One sector that really interests me going into the New Year is another one of the underperformers from 2008— technology.

The best tech stocks are not only paying nice dividends but (so far) are also increasing their payments throughout this downturn. I think that’s a trend worth following, and it is why one of my new recommendations in this issue comes from the tech sector. Yes, I recognize that technology firms tend to get hammered during tough times— as businesses and consumers alike put off upgrades— but the cash-rich companies will come through the weakness just fine.

And Based On Recent Dividend Announcements, This Group Is Emerging As A New Area Of Leadership.
What about the other underperformers— materials and industrials? I think it’s too early to jump in aggressively. As global economies remain in a slump, these firms will likely experience severe business pressure and weak demand. That leaves three sectors uncovered— energy, telecom, and consumer discretionary.

Of the three, energy is far and away my favorite for 2009.

Reason: Lower oil and gas prices do not necessarily hurt major integrated oil & energy companies. Nor do they negatively affect pipeline operators or refiners. Plus, some companies— such as drillers— have been pushed down into value territory. That’s why the portfolio already contains two MLPs that give you strong income-producing positions in the sector. And that’s why I’m recommending you scoop up a solid, well positioned drilling company or two.

I am not ready to get bullish on consumer discretionary stocks. Because their products aren’t necessities, these companies will continue to suffer from tight credit and low consumer confidence. However, as I’ve argued before, some companies, like McDonald’s— despite being considered discretionary firms— do represent good values in this market. Expect select recommendations in this sector for 2009.

That leaves telecom. Competition is fierce in this space, and business prospects are extremely uncertain in this environment. I would continue avoiding this sector, with the exception of high-yield rural local exchange carriers. So, there you have it. While I will not refrain from recommending an attractive dividend stock from any sector, my general outlook for 2009 is as follows:

First, I recommend you overweight staples, utilities, and energy.

Second, I like select companies in healthcare, IT and consumer discretionary for diversification.

Third, I would underweight financials, telecom, materials, and industrials.

Some Great Quotes:

"It's time to start again. I know what's about to happen. I know what Wall Street is up to. I know what they're going to do," he said. "Everyone is way too leveraged. Dozens of the largest and best companies are going broke. The banks will need someone to take the assets off their hands. They'll give me fixed-rate convertible financing— and then inflation will soar. This is what always happens. But this time it will be five or 10 times bigger than the last time. Time for distressed asset funds? It's time to be incredibly cautious about any business that's leveraged— especially real estate investment trusts (REITs). One should list every large American REIT, organized by debt to equity ratio."

Commercial real estate fundamentals are breaking down rapidly. Major retailers are killing open deals. In commercial real estate, expect to see 'blood in the streets' by late this year if not sooner. That is good news for anyone with funds to purchase quality commercial properties at depressed prices. Over the past year, many commercial real estate investors have been trying to figure out how to purchase and profit from the glut of land, developed lots, fractured condo conversions, etc., but the banks have been unwilling to take a hit on these properties and have refused to deal. Now that the commercial market is breaking down, the interest in the former has waned and by the time that the banks are ready to deal, the losses for them will be far, far greater.

Nearly 16 million square feet is currently listed as available in large blocks (generally 100,000 square feet or more) in 68 office buildings in Manhattan, according to Colliers ABR, a commercial brokerage firm. That is almost twice the number of blocks and total square footage listed as available a year ago. And Colliers says those numbers are headed up.

Subleases represented the biggest increase. At least 16 large Manhattan blocks are being marketed for subleasing, up from only three a year ago. In addition to higher vacancies, rents are also falling... in the neighborhood of 20% to 30% to around $80 a square foot in Midtown. Higher vacancies, lower rents, more problems in the future... may be time to short REITs.

Trying to avoid the vulture investors, a group of companies including American Electric Power (AEP), Textron, Home Depot, Honda, Dow Chemical, and Nissan is pushing the Fed to buy their paper, i.e. 'bail them out'. The coalition wants the Fed to go beyond top-rated paper and buy debt with the second-highest grade. AEP CEO Holly Koeppel said the group is looking to add more members.

Every time the government bails out another name business, the stock market craters. And more and more companies line up to be bailed out. Where will it end? Nothing scares me worse than this trend. It's what prolonged the Great Depression [[and the interminable Japanese deflation: normxxx]]propping up 'zombie' corporations, "for the good of society". And we seem hell-bent on repeating all of those mistakes.

"It doesn't add up that they are letting GE and American Express become banks to get aid, but they won't save the car industry." Maybe everyone should become a bank. The Big Three auto companies haven't been truly profitable or competitive in two decades, or more. They have failed.

If we give them more money, they'll still fail. It will only take longer and cost more money and remain a constant drag on any economic restructuring. Meanwhile, if you don't allow the automakers to fail, you'll end up crowding out the better companies, who make better products and bring them to the public at a better price. If you never weed the garden, how can your flowers survive?


"You’ve heard of mental depression; this is a mental recession. We have sort of become a nation of whiners...We’ve never been more dominant; we’ve never had more natural advantages than we have today....Misery sells newspapers. Thank God the economy is not as bad as you read in the newspaper every day."Phil Gramm.

The Parting Shot

The swindling of billions of investors’ capital by Bernard Madoff is sad. But the investors who lost everything with him were fools. They ignored the most basic rules of investing that would have protected them. Some thirty centuries ago King Solomon of Israel, one of history’s wisest men, warned
"Cast your bread upon the waters, for after many days you will find it again. Give portions to seven, yes to eight, for you do not know what disaster may come upon the land."

Always divide your capital by 7 or 8 ways! Never have all of your investment capital in one asset class, at a single brokerage company, or managed by a single fund, or in a single geopolitical region. As the Bible warned, this is just plain foolish because none of us knows what the future holds. Diversification is essential to protect you if one allocation fails totally for any reason. The Bible goes on to say,
"Plans fail for lack of counsel, but with many advisers they succeed."

Always seek multiple, independent wise counselors for any advice.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.