Random thoughts about my interests which include (in no particular order) poker, finance & investing, politics, football and whatever else I happen to see that piques my interest

Sunday, August 14, 2011

All this for 1.5%?

Sorry to be talking stocks again but really, what else has been happening this week of greater import?  I mean outside of the judge telling Casey Anthony "No darlin, being in jail does not count toward your probation and you're also not considered to be fulfilling your probation by staying up north and being waited on hand and foot by some Lightbulb guy in Illinois" there really wasn't a lot going on away from the markets.

The market got crushed on Monday losing over 600 points in the Dow.  Tuesday started well with the Dow going up 200 points in the morning prior to the Fed meeting.  After the Fed opened their mouth however, everyone changed their minds apparently and the market started tanking.  By 2:30 its down 200 points.  Seemed like people were expecting Big Ben Bernanke to come out and say something like he was gonna go to the Pres and get another round of Quantitative Easing going to "stimulate" the economy.  Didn't happen.  I think he knows what a hard sell that would be to the American public.  But Wall St has never seen a government handout it couldn't make money from and they were hoping.  Still once the impact of what the Fed talked about sunk in people started to realize the Fed just promised not to raise interest rates for 2 more years.  And they started buying.  And buying.  The market started shooting up and by 3:30 had gone up 300 points from the low and was +100.  But it didn't stop there.  It just kept going up and up.  By 4pm close the Dow was up over 400 points.  In the hour and a half before close it went up over 600 points. 

Wednesday, Mr Hyde returned.  The market started down and just got downer.   Every time I looked it was getting worse.  By lunch the Dow was down over 300 and shoing no signs of stopping.  I've got stocks losing money hand over fist on the down days, making some back on the good days then giving it all back plus some on the next bad day.  I'm kicking myself for not selling out of Sanofi Aventus when it reached 40 a few weeks back.  I was torn then and I'm still torn.  I really do believe this stock gets to 50 in the next 12 months if Europe doesn't completely implode.  If there's another flu scare this winter it could get there even faster as Sanofi makes something like 40 % of the flu vaccines in the world.  And as I sit the stock keeps falling.  I could have sold 2 weeks ago at 40 and bought back in at 32 this week.  But I digress.  While almost all my other stocks are tanking, my gold miners are making money.  The worse the carnage got on Wednesday, the higher gold went, breaking over 1800 and ounce.  I watched 2 of my stocks hitting new yearly highs and decided I'd be a fool not to capture some of that.  So I put in sell orders for both Yamana Gold who I have owned for the past 2+ years and for Aurico Gold who I've had about 6 months.  Sold half of my position in each stock for a very nice profit.  Now I have money to use for some buys if the market tanks again next week.

By the end of Wednesday, the Dow is down another 500+ points.  UGLY.   It's looking like a full blown bear market is coming into play.  Two out of 3 days of minus 500 points or more.  Not looking good at all.  Then Thursday comes along and the market gets into a buying spree.  All day long it goes up.  Just about all of my stocks are up but the gold stocks aren't going up much this day.  Gold is kinda stalling out after the Chicago Board of Options Exchanges decides to raise the margin requirements for traders who buy and sell gold futures contracts.  Gold prices stay about even on Thursday and lose about 30 bucks an ounce on Friday to close out the week at $1755 an ounce.  Both stocks I sold finish a little lower than where I sold at. 

Friday is another good day in the markets though not nearly as big a day as Thursday.  The Dow finishes up about 125 points though many of my stocks do not go up much and my gold stocks are all down a little.  The markets seemed to be taking a little break after the past week plus of yo yo-ing up and down.  By the end of the week the Dow is down 165 points from it's starting place or about 33 points per day on average.  Down just a bit under 1.5%.  But how it got here is really the story.  When you look at it, the market has really been in a downward trend for about a month broken by a few good up days.  Since 7/21, the Dow has given up about 1500 points which is quite a bit and if you take into account the low point it reached on Tuesday, that's over 2000 points. 

My take - I don't think a massive bear market recession like we saw in late 2008 and early 2009 is going to happen.  But people are nervous and the money sloshing around in the system (from QE1 and 2) is chasing two things, returns and safety.  When the economy looks good, money piles into stocks and you see the Dow go up 90% in 2 years.  When things look less good, money flows out of stocks just as quickly as people buy Treasuries, precious metals, or anything else that is going to provide some return without losing them money.  Why else buy a TBill?  The return is less than 1% per annum.  You lose money when you include the inflation.  But your principal is still there.  Buy the wrong stock and even with a dividend you can lose half your investment.  Even most "safe" stocks in a bad market can lose quite a bit.  Take Exxon-Mobil, one of the safest and best run companies in the market.  Between August 1, 2008 and March 5, 2009 it lost 22.5%.  Which beat the actual market return significantly between those dates but that's little solace to the retiree who may need to sell that stock to live on.  So money runs from the "unsafe" stocks and once that starts its almost a self fulfilling prophecy as institutional money managers join in the rout.  No one wants to be the last man standing when money is flying out of something. 

So as I said before, I don't think we have to fear a massive recession this time.  The issues in the markets with toxic debt, over leveraged banks, etc are not still waiting to come down and crush everyone.  But having said that, people are coming to realize the US economy is not growing like they want it to.  And people are nervous and pulling money out to buy safe stuff.  The Fed and the government don't have the tools they had in 2008 to help the economy along.  Of course they probably shouldn't have been helping it like they did already.  Those birds will come home to roost down the road but that's a rant for another post.  Anyway, though the Fed's tools are more limited now, they did use the one tool they did have when they basically said, "Hey, we won't raise interest rates for another 2 years."  Once traders had digested that information they came to realize that would be good for a number of industries like commodities.

What does this mean?  Well I don't expect the American consumer to go completely into a shell though I still don't think you will see the massive spend-a-thon like there was from 2002 - 2007 from people.  But that low interest rate will keep money out there sloshing around and all the money in the system already must lead to higher inflation sometime down the road.  Higher inflation will also lead to a devalued dollar which means the price of all commodities goes up.  So expect higher prices for foodstuffs, metals, steel, iron ore, oil which leads to higher prices for just about everything else down the line.  Stuff I want to invest in are the companies producing them or the companies that support them.  And some of them are now on sale.

You can get premier deepwater driller Transocean (RIG) at a little over 55 - about 10% above their yearly low - with a dividend over 3%.  Or you can wait and see if the market gets pounded again and take a shot at getting it for a lower price.  2 oil producers/sellers that I like are Exxon-Mobil (XOM) and Conoco-Phillips (COP).  Exxon has proven time and again that they know what they're doing in the oil game.  They refuse to panic & buy other companies at the top of the market but will when the market flops and they can get a deal.  Last year they bought out a natural gas producer XTO Energy giving them a huge presence in that field.  They seem to think natural gas is the next great energy field and I'm not gonna argue against them.  Conoco-Phillips announced recently they were going to split their refining business off from their exploration/production company.  The recent downturn in oil prices means you can buy the stock at $66 which is $10 less than when they announced the spin off and get 2 companies when the spin off happens.  Plus a 4% dividend.  Marathon Oil recently did the very same thing and the stock price went up 35% prior to the spin off. 

Oil services are also a good area to bet on the the petroleum industry.  National Oilwell Varco is in my opinion the best in the industry as they design and sell oil rigs plus the equipment on them.  Something like 90% of the oil rigs in the world have some equipment from NOV on them.  Both Brazilian oil giant Petrobras and BP have big new discoveries and will need to order billions of dollars of equipment to drill them.  A lot of that equipment will come from NOV.  Consider that the stock price fell from over 83 to 60 between 7/21 & 8/10 (it came back big to almost 67 now) and that based on their order backlog, there is no reason they won't hit $100 and you can see why I like it.   If you like something cheaper, Weatherford International (WFT) has fallen from the mid 20s to 17 recently.  They aren't as good as NOV but based on their expected earnings for next year, they should get back to the mid to upper 20s.  If you really like to take risks then take a look at Dryships (DRYS).  Dryships is a shipping company, mostly a bulk shipper (iron ore, grains, fertilizer, etc) but has since branched out in 2 areas.  They've got some new tankers with more on the way, and they have a 78% ownership in a company called Ocean Rig which builds deepwater drill ships.  While the bulk shipping segment has been getting killed over the past 3 years, deepwater drilling has been going great guns.  That has been keeping the company profitable.  But the company has a lot of debt and the CEO has no qualms about playing a bit fast and loose with the company funds, especially in dealing with companies of his relatives.  So this is a highly speculative pick.  The company is doing a partial spin off of the Ocean Rig shares in September or October and while you won't get a big piece (approximately 7.4 shares for every 1000 of DRYS owned) you will get a portion.  At $2.72 per share, you are taking some risk but you do get a fair amount of upside I think.

I also think leading gold miner Goldcorp (GG) is a good buy at just under $50 per share though I would buy in slowly.  Gold prices may sag a bit more over the next few weeks and that might let you get GG at $45 or less.  I think mid tier miner Yamana (AUY) is undervalued as it is increasing production at just the right time.  Both produce gold at the lowest cost in the business which gives them a lot of leeway should gold really tumble.  In the crash in 2008 gold fell to $700 an ounce.  These companies both produce at under $450 an ounce so even in a crash these 2 remain profitable.  Even though I sold half of my position in AUY at $15, I still like the stock.  But when you buy in at $4 and $7 a share, you gotta take some money off the table when it more than doubles.  If it falls back under 12 I'll probably buy more shares then.  I also sold off half my shares of Aurico Gold (AUQ) at $13 that I had bought at $7.50.  Again, I love their model, they are really increasing production at just the right time and I expect them to break $20 at some point in the not too distant future but taking profits off the table means I can sit on this stock and wait out any downturns in gold prices secure in the knowledge that I've made back almost all my money on it already. 

I stated in an earlier email that I like South American companies a lot, especially Brazilian and Chilean companies.  Both countries have worked pretty hard to keep their inflation in check by raising interest rates.  It's hurt their economies a bit but they are in far better shape and further along the economic cycle than the developed economies in the US and Europe.  Brazilian airline Gol Linhas Aereas (GOL) has been beaten down pretty bad and announced a not so good quarter recently but its a good company in a good market and when growth starts picking up again in Brazil, it will fly high.  I like their competitor, TAM SA (TAM), even more.  They got beaten down at the same time GOL did and thanks to an untimely downgrade by an analyst at my own company got crushed late last week and earlier this week when the market went down big.  Lost about 30% in 3 days.  But unlike GOL, they came out with a pretty good quarter and came back pretty strong on Thursday and Friday.  They are down about 10% from where they were.  They are set to merge with Lan Airlines (LFL) of Chile pending approval of the Chilean authorities and based on the rate of the merger and the price difference between the airlines, you can pick up a quick 10-15% gain assuming prices don't fall much from here.  As the economy in both countries improves, I'm hoping to see an even better gain as I bought TAM a while ago.  I mentioned Brazilian oil giant Petrobra (PBR) had discovered massive new oil fields off the coast and would be developing them.  I am not a fan of investing in PBR.  They are a good company with a possibly great future but they are a partially state owned company and the government takes a large chunk of money from them every year.  I'm not saying you can't make money with them, you can, but I think there are better ways to invest in oil in Brazil and I'll take the guys who supply PBR over PBR itself. 

Vale SA (VALE) on the other hand is a good play in my opinion.  Vale is one of the worlds largest iron ore miners and mines a lot of other metals such as manganese and copper not to mention coal.  They also are involved in phosphate and potash mining - read fertilizer - and platinum group metals as well.  Finally they recently purchased Bunge Ltd's fertilizer business in Brazil which gives them even more fertilizer exposure and supports another area I like, farming and food production.  Their price is down from 33 to 26.55 which is only 10% above their low for the year and they pay a 4% dividend.  What's not to like there.  I may buy into this stock if we have another big down day. 

I wrote a little about sugar producer Cosan (CZZ) once before and everything I have read recently seems to back up my belief that this is a stock worth getting into.  They reported so-so results last quarter but recently the price of sugar has headed up to new highs and with the sugar harvest in Brazil - the worlds largest sugar exporter - predicted to be 2 to 2.5 million tons less than original predictions, the price CZZ can charge for sugar exports ought to rise substantially.  The Brazilian government is also calling for more sugar to be put into ethanol producton.  Because they are the only sugar exporter from the Southern Hemisphere, they are the only sugar exporter during the summer up here.  Which means no one else will be able to take advantage of any price spikes until October or so.  CZZ recently fell from almost 13 to their yearly low at 9.50 and is only at 10.62 now with a dividend over 2.6%.  Needless to say this is on my watchlist as well.   It might be on my buy list Monday.

I am not big on bank stocks by and large at this time.  Not because there aren't some good banks out there, hell I own shares in my own company who has the 101st largest bank in the US and I've owned Banco Santander (STD is their stock symbol - who the hell decided that would be a good stock symbol to use on the NYSE???) for a while, but because so many big stocks are doing so poorly, all bank stocks are getting tarred with the same brush.  Unless your bank is reporting spectacular numbers, and the banks that are doing well aren't taking the kind of risks necessary to get spectacular numbers, your bank is getting knocked down everytime Bank of America or Citigroup has a bad report.  STD is a Spanish bank with a big presence in Brazil.  Every time bad news about Spanish debt comes out, STD gets knocked down.  A lot of bad news has come out of Spain lately.  Still they pay a good dividend and I'm willing to wait for banks to turn around here.  But if you want to play a bank without the bad European connections, you might want to look at Itau Unibanco (ITUB)

God this post is going on forever.  For those of you still awake (when I start talking stocks the PQ's eyes seem to glaze over so I don't blame you if yours do too.) I want to talk about one more thing.  Foodstuffs are still going up, with the short harvest of sugar and the possible short harvest of corn along with the low stockpiles of both right now, farmers are raking it in.  I mentioned picking stocks of the support companies in the petroleum sector.  Well that also applies here and in mining as well.  So I look at fertilizer producers such as Mozaic (MOS), Potash Corp (POT), Agrium (AGU), equipment manufacturers such as Deere (DE) for farm equipment, Caterpillar  (CAT) for heavy equipment, Joy Global (JOYG) for mining equipment and Cummins (CMI) who supplies engines for a lot of these companies along with many others.  None of them are cheap but compared to their expected earnings they all should do well.  Or wait for dips and see if you can really get a bargain

Well enough boredom for all of you.  I wish I were posting about killing it on the poker tables but I'm a bit on the poor side right now.  There was another thing I wanted to post about but that will be for another time.  Besides this post took me 3 days on and off to write up so that's probably enough to throw out there.  I hope everyone has had a good weekend.  All this must have wore me out, I'm taking a bit of a nap now.  Stay lucky you nuts. 


Memphis MOJO said...

Lots here to digest. Thanks for your thoughts.

The Neophyte said...

Just remember how much you paid for them LOL. I am really wondering what Monday will be like.

lightning36 said...

The first paragraph in this post was ten times more interesting than the rest combined. : o )

The Neophyte said...

Not too egocentric are we?