Take Your Profit

I'm recommending selling oil and taking the profit. I realize this would have been a great move on Friday, but I'd rather lose a few percent from a price decline than lose ten or fifteen percent from selling too early. It seems that OPEC is willing to increase supply if needed:

"Iran said on Tuesday Opec would inject more crude oit to the market if it was needed, the official IRNA news agency quoted Javad Yarjani, head of Opec affairs at Iran's oil ministry as saying."

"'In case the oil market needs it, Opec will inject more oil into it,' Yarjani said."

OPEC knows a few things. First of all, the members know that increasing energy costs cause slower economic growth. Slower economic growth means OPEC would sell less oil, albeit at a higher price. But if economic growth were to grind to a halt, OPEC would sell virtually no oil. In addition to this, OPEC realizes that if they increase supply which creates downward pressure on prices, then the people will buy more. This could lead to greater profits than selling less oil at a higher price. Of course, this is all me hypothesizing about their intentions.

I recommend selling your crude and wait for a jump in point at the end of the year or the beginning of next year. As of this writing, crude futures are selling at 73.28.

Hundred Dollar Oil - Sooner or Later?

We should all be prepared for oil/gas getting more expensive in the future. What we might not be prepared for is the fact that it could happen much sooner than people expect:

"'We're only a headline of significance away from $100 oil,' said John Kilduff, an analyst in the New York office of futures broker Man Financial Inc. 'The unrelenting pressure of increased demand has left the market a coiled spring.' New disruptions of Nigerian or Iraqi supplies, or any military strike against Iran, might trigger the rise, Kilduff said in a July 20 interview."

A military strike against Iran is highly unlikely, though I'm not discounting the possible threat they pose. But oil will climb to a price of or above one hundred dollars by the summer of 2008. Oil has been a volatile commodity and will continue to be for as long as the BRIC (Brazil, Russia, India, China) countries are growing. I previously said that oil will exhibit an upward trend, while at the same time offering buying opportunities about once a year. I believe this is based on seasonality:

"On January 18, 2007, the price of crude was $50.20. Today, June 14th, oil traded at $67.69 per barrel; that's a 35 percent increase since the winter months. Seasonal cyclical patterns are apparent in the short term."

I find it hard to believe that we're at the seasonal peak right now. Although oil pulled back today, it should be temporary. The Market Oracle offers a great visual representation of oil's summer peak last year. Oil peaked at a price just above $78 in September; although last summer seemed to have more conflicts last year, I would estimate that the world demand for oil this summer is higher than last summer. I would suggest taking profits if oil tops $78 dollars (16.5% profit) this summer and wait to jump back in during the winter months, which generally offers more jump-in points. Of course, I wouldn't recommend anything until the event happens and I issue a recommendation; oddities in the world could trigger unusual spikes and a savvy investor would much rather take more profits, even if the risk increases.

Black Gold - Are You Profiting?

The price of oil has been riding high the last few weeks. And it could go higher:

"Crude oil prices soared to 11-month highs Friday on a new forecast that global oil demand will accelerate next year as supply remains tight."

"'My line right now is that we're headed to triple-digit oil prices within three or four years and the first digit is not going to be a 1,' said Philip Verleger, an economist who heads energy consultancy PK Verleger LLC."

"He cited 'huge' pent-up demand in China and the rest of Asia, lack of growth in production capacity and reduced investment in refineries amid local resistance to new sites, and worries about measures to fight global warming."

Since my recommendation one month ago, oil has increased by 9.5 percent. On June 14th, oil was trading at $67.69. Although historically high, if Philip Verleger is correct a $68 barrel of oil will look mighty cheap. And it's not just a lack of supply or an increase in demand; it's both. From Forbes:

"Scheduled summer North Sea maintenance lent support, while the unexpected closure of the Central Area Transmission System (CATS) stoked supply jitters. J-Block, a group of oilfields in the region, has been unable to produce oil or gas since July 1, when CATS was closed."

Maintenance issues are strangling supply, while increased growth in emerging economies such as Chindia are accelerating demand. I don't anticipate the price to subside any time soon. Hold onto your oil funds!

Solar Overvalued

Last week, I reported on the possible over valuation of solar energy stocks. First Solar (FSLR) was trading at 491 times earnings, while SunPower (SPWR) was trading at 182 times earnings. Quite inflated! In today's New York Times, comes a solar story with more evidence that the psychology of solar is trumping fundamentals:

"The trade association for the nuclear power industry recently asked 1,000 Americans what energy source they thought would be used most for generating electricity in 15 years. The top choice? Not nuclear plants, or coal or natural gas. The winner was the sun, cited by 27 percent of those polled."

"...some of the most ardent experts and investors say that moving this energy source from niche to mainstream — last year it provided less than 0.01 percent of the country’s electricity supply — is unlikely without significant technological breakthroughs. And given the current scale of research in private and government laboratories, that is not expected to happen anytime soon."

Even by the year 2030, the government expects solar energy to account for a tenth of a percent. Of course, plenty can change over that period, but the fact that most experts are pessimistic should hold plenty of weight.

The only question now is when will we see the correction in stock prices?

GE Ditches Subprime Sector (and Other Reasons to Buy)

It was recently announced that General Electric is in the process of getting out of the subprime mortgage industry:

"The Fairfield, Conn.-based company...announced it is exiting the U.S. subprime-mortgage business, and that it has already sold off $3.7 billion in loans to reduce its exposure to turmoil in that market."

"In the first quarter, GE laid off more than 460 WMC Mortgage employees and took a $500 million charge when it sold off part of its residential subprime assets. On Tuesday, Moody's Investors Service downgraded 399 subprime securities, including home loans originated from WMC Mortgage."

As the subprime mortgage industry continues to crumble, the smart players are positioning themselves for protection. That's precisely what GE has been doing. The company also reported a ten percent increase in profit for the second quarter:

"General Electric Co. shares notched a five-year high Friday after the conglomerate reported a 10% increase in second-quarter earnings, due in part to strong revenue growth in its infrastructure businesses, including aviation- and energy-equipment sales."

I want to focus on their energy-equipment sales. In his book, The Coming Economic Collapse, Stephen Leeb takes a few pages to discuss General Electric's alternative energy ventures. Leeb describes GE as being a leader in the area of wind:

"General Electric is the world's largest integrated wind company and the second-largest maker of wind equipment. Over the past three years, wind revenues, admittedly starting from a small base, have grown by 50 percent a year. [The edition I have was published in 2006.] The Street projects the percentage growth from this division will be in the low 20s over the next five years. We think it could easily exceed 30 or even 35 percent."

Leeb also touches on the fact that energy-related products and services make up 12 percent of revenue (in 2006). A quick glance at GE's most recent earnings report indicates that orders for energy related equipment increased by 72 percent in the second quarter of 2007. Furthermore, revenues from their energy business increased by 17 percent, while total profit in the energy business increased by thirty percent. Those are strong increases that should continue, even despite a possible market downturn. That's why I recommend buying GE. The company closed trading on Friday at $39.50.

Blowing Green Bubbles: Solar Skyrocketing

MSN poses the question: could there be a green bubble brewing? I'd say so:

"Indeed, some green-fund managers now see the share prices of many companies tied to environmental sustainability as, well, unsustainable. 'Now you've got to worry about valuation and some of the speculative bubbles that are building,' Robinson says."

I fully agree that there are plenty of green stocks that are vastly overpriced. In particular, solar energy stocks have been on a tear:

"These funds have performed well, of course, because many of their growth-stock holdings have fared even better. Solar energy bellwether SunPower, for example, was up 158% in the past 12 months, as of July 9."

Sunpower (SPWR) is trading at 182 times earnings. That's definitely high, but it's not the best example. MSN failed to notice, or intentionally omitted that one. In my opinion, the best example of an overpriced company thus far is First Solar, Inc (FSLR). (Thanks to the individual who gave me the tip!) Forget being up 158 percent in the past twelve months. In just eight months, First Solar is up 364 percent. You read that right. The stock closed trading at $24.74 on November 17, 2006; it closed trading on July 10 at $114.89. The current P/E ratio is 491. That, my friends, is a classic example of a bubble.

Obviously, solar energy has a bright future. But does it warrant such overvaluation? Maybe yes, maybe no. The danger lies in the complete unpredictability of which direction it will go. I highly recommend watching the future trajectory, perhaps jumping into a short sell after it's observed to be heading down. It's way too volatile for me to assert a stance at this point.

World Oil Demand

According to the International Energy Agency, demand for oil will increase at a greater than anticipated rate:

"...the International Energy Agency, which is based in Paris and advises 26 industrial nations, said that global oil demand would rise by an average of 2.2 percent a year from this year to 2012, up from a forecast in February of 2 percent annual growth from 2006 to 2011."

"The share of world oil consumption represented by the developing world, including emerging industrial economies, will rise to 46 percent of global demand by 2012 from 42 percent, the report said."

Given this information, it's a safe bet that oil companies heavily invested in the exploration and production of oil (upstream operations) will benefit greatly over the next five years. Chevron and Exxon-Mobil to name a few. It's also a safe bet to assume that developing countries could see nice runs in their stock markets. The Argentinian MerVal stock index could be in line to see nice returns. The Bovespa index in Brazil has already seen some solid gains and the Hang-Seng index in China has been going berserk; others may follow. All of this, of course, is contingent on whether or not the world enters an economic recession.
No recommendations for now - I'll update these companies and indexes when I can be more sure about where we are in the economic cycle.

The beginning...

Welcome to my blog!

As I start this blog, general market conditions look bleak.
The housing market is in tatters; and still, people keep yammering about a rebound. It's not coming anytime soon. Interest rates have been rising constantly over the past few weeks, which means more loan defaults and an even greater supply of housing on the market. AND, a rise in interest rates means less people will be eligible for mortgages; thus, less houses will sell.
The stock market keeps making gains; Dow Jones record highs are a weekly event. I'm anticipating a market top in July. I like the week of the ninth as a target date. This year, the Fourth of July falls smack dab in the middle of the week; I don't believe that investors will shake their bullish attitude until after the holiday. I'm somewhat amazed that the market hasn't tanked sooner, especially with all the recent bad news. It's a perfect example of psychological factors trumping fundamentals; it's like faith trumping reasoning. Soon enough there will be a price to pay. Get out now while you still can.
Gold has been up and down this year. Hovering around $600 at the beginning of the year, the price of gold shot up to $690 around the middle of April. Currently, the price is $651.60.

Chart: http://www.thebulliondesk.com/

Looking at the five year chart reveals a distinct upward trend. At this point in time, I'd recommend buying gold due to the lull in price; it makes for a perfect jump in point. I expect that the price of gold will continue to rise through at least the end of the year.
Oil has been a bit volatile since the beginning of the year. On January 18, 2007, the price of crude was $50.20. Today, June 14th, oil traded at $67.69 per barrel; that's a 35 percent increase since the winter months. Seasonal cyclical patterns are apparent in the short term.
The long term will inevitably create upward pressure. There is a finite amount of oil in the world; because of it’s relative scarcity, it makes for a great economic topic. In 2007, the United States is consuming oil at the highest rate: 20,730,000 bbl/day. Compare that to China's paltry 6,534,000 bbl/day, a mere 31.5 percent of our consumption. There are 1.3 billion people living in China, compared to 301.1 million people inhabiting the United States. To put it another way, the whole of the population of the USA only amounts to 23 percent of the population in China. So what happens when their oil consumption catches up to ours? I recommend holding oil for the long term. If I had no position, I'd recommend seeing what happens in the next few months prior to jumping in; however, crude oil and oil stocks should see gains in the long term.

---EP