EOG Resources (EOG) recently announced that they will be hosting their second-quarter conference call on Wednesday, July 30 at 8 a.m. Central Time. If you're interested in tuning in visit their website at www.eogresources.com in order to catch the live webcast. Right now EOG is one of the few stocks that I recommend to my Trader's Advantage subscribers as a buy in this volatile market.
I expect stocks to stage a relatively brief and shallow rebound starting Monday, and then resume their slide. The market is extremely oversold right now, and unless there are forces acting on stocks that are very unusual - such as the liquidation of a major hedge fund or brokerage - there just has to be some sort of bounce in the near term.
Looking out a little farther though, just keep in mind that we find ourselves in a historic period of deleveraging - the likes of which are rarely seen outside of depressions. Banks, brokerages, companies and individuals are in the process of shedding debt and things bought with debt, and the process is just going to take a long time and push stock prices a lot lower.
Our road map for the past few months has been pretty clear: With a global recession brewing and energy prices rising, it simply makes sense to be short industries and sectors dependent on buoyant economic growth and to be long energy producers and service providers.
In last Thursday's post I said, and I quote, "I expect stocks to stage a relatively brief and shallow rebound starting Monday, and then resume their slide." With the Dow up over 100 points this morning then sliding back down falling over 100 points this afternoon, it looks like an "I told you so" is in order.
If you were one of those eager beavers who jumped on the rally bandwagon this morning, my words of warning are for you. Any rally that occurs right now is not guaranteed to last. In fact, my bet is that it won't last very long and we'll be left in yet another downward slide.
As I said before the holiday weekend, "Banks, brokerages, companies and individuals are in the process of shedding debt and things bought with debt, and the process is just going to take a long time and push stock prices a lot lower." So hold on tight people because this is going to be a wild ride. My main advice for investor right now is, don't be afraid to short stocks when the market calls for it.
Right now we're in the midst of constant volatility and one's best bet for survival is taking advantage of the profit being spread around from energy producers and service providers, while also being aware of the opportunities to be had in shorting stocks which stem from industries and sectors that are reliant on economic growth. The growth is just not there right now and it won't be anytime soon.
Australian Business Confidence Drops to 7-Year Low
The above story from Bloomberg presents some surprising news. Australia has been one of the leaders in the resource boom, and in financing the Asian miracle. If their business leaders are gloomy, the mood for everyone else must be more along the lines of clinically depressed.
John Steele Gordon, author of "An Empire of Wealth: An Epic History of American Economic Power" wrote a very interesting piece today featured in The Wall Street Journal which is a comparison of 1932 and today, both economically and politically.
You see, in 1932 the market slid straight down into July 11th. Sound familiar? While, admittedly, there are some dissimilarities between today's market and that of 1932 (in 1932 the market was already down 60% in July, today we're only down 20%), there are also enough similarities to get both economists and historians talking. If history repeats itself, like Gordon believes, then we could be looking for a 70% out-of-the-blue turnaround as early as this week.
To learn more about how history could repeat itself historically as well, I suggest you read Gordon's article "2008: A Watershed Election." Here's an excerpt to get you started:
Exciting as presidential elections can be, they don't often change things fundamentally. Now and then, however, they can remake the American political landscape for years to come, and the country enters into a new era. Will 2008 be one of those watershed elections? Perhaps, but not in the way that many people think.
In case you were wondering why there are no financial stocks in my Trader's Advantage portfolio, you should check out the following article I wrote for MSN back in January, "How the Smart Money got it Wrong."
Smart money? Not so much. A review of the one-year results of value-focused funds with some of the best long-term records shows that a virus of total stupidity savaged their ranks as one after another bought into banks, credit card providers, home builders and retailers at bargain-basement prices that seemed too good to be true -- and were.
In the grand scheme of things, little has changed for financials since I first wrote this in January. The "smart money" has been killed on the financials this year ... and with Fannie Mae (FNM) and Freddie Mac (FRE) down another 40% today, and Lehman (LEH) down 20%, this is as true today as ever.
Along the same vein, back in December I quoted Jim Rogers as saying that FNM and FRE were technically bankrupt back then and would probably be "nationalized." At the time that I wrote the MSN article, "Stock Market Winter is Moving In," this statement seemed pretty outrageous to most.
With FRE currently trading at under $4, it's far from outrageous now.
What it all comes down to is that if you're thinking about investing in financials, do so with flame-retardant gloves and full hazmat suit.
"Crews get their wage packets on the basis of the fish they catch, less expenses. If they are out there steaming around in bad weather, there is no money for them."That is a view echoed by Paul Trebilcock, chief executive of the Cornish Fish Producers Organisation. "The price of fuel has risen to the point where it is affecting skippers' decisions about whether they go to sea," he said.
An article found in Telegraph.co.uk today, explaining the reluctance to hit the seas in bad weather is a great example of higher diesel prices generating "demand destruction" in the fishing industry in England. I wouldn't be surprised if the same thing is happening in Alaska too. Of course the rise of fishermen looking for work that doesn't rely upon oil prices will feed inflation as fish prices will rise in line with the decline in supply. If you thought the price of milk, and other food staples, was high... just wait until you go to pick up fresh salmon.
The financial system is like the oil in your car. Without the oil, it no longer matters whether you have a solid engine, good brakes or fancy safety features. The car will not function.
I couldn't have said it better myself. Mr. El-Erian, a former investment manager of the Harvard Endowment, gives an excellent view of the current market situation and how the government and industry is likely to respond in his Financial Times article, "Crisis and Coherence: Finance Remains Vulnerable."
The downturn in residential and commercial property markets is intensifying, underlining the growing risk of Britain entering its first recession in almost two decades.
In this piece from the Telegraph of London, we can see the commercial real estate downturn is by no means limited to the United States. From falling tenant demand to a sky-rocketing unemployment rate, it appears that our friends over in England are also seeing their fair share of economic turmoil.
Whether you're experiencing financial hardship in the U.S. or across the pond, there are key investment opportunities out there that can provide profits regardless of the economy. My Trader's Advantage subscribers are taking full advantage of these opportunities as we speak. Are you?
Wall Street Journal editor Paul Gigot today published a terrific explanation of the battle over Fannie Mae and Freddie Mac waged by the political left and right. In this editorial, Gigot explains how liberal Congressmen and journalists pushed the quasi-public mortgage banks' agenda, and the extent that the two organizations went to bully their opponents.
Fannie and Freddie's ... unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of "affordable housing." To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo.
This article is a must-read no matter what side of the political spectrum you are on, as it explains a lot about how the two organizations rose and fell. Meanwhile, you should also check out a column written by former FNM chief executive Franklin Raines in the Washington Post.
He argues that the government should not bail out the two mortgage securitization titans because ...they don't need the money. Interesting piece indeed.
Understanding the battle over Fannie and Freddie is critical to understanding the current world credit crisis, as these two organizations were responsible for securitizing trillions of dollars worth of U.S. mortgages. If we can understand the level of corruption, mistakes and incompetence that lies at the heart of credit derivatives, we can better determine how to lay out bets as traders and investors. When you read between the lines of these two op-ed pieces, you can see that the battle has just barely begun to engage in a meaningful way, and as a result it's clear we are going to be able to trade the banks and brokerages from both the long and short side over the next year. My Trader's Advantage subscribers have already made money on trades with longs and shorts in the financial sector, and I'm looking for more right now.
I've found that regardless of whether the news is good or bad for the markets, it's best to stay informed. That's exactly what I've been doing.
Here's some news from Australia that I couldn't help but share with you.
The National Australia Bank's decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a "meltdown".
This massive writedown at NAB, reported in the Business Spectator, is likely a harbinger of more pain to come for U.S. and European banks. It makes me even more concerned than before that the current bear market will continue at least through the rest of this year. If NAB's estimates are correct, banks face the prospect of having to admit up to 3 times more losses than they have already, and obtain more capital at high prices from skeptical investors.
With news like this, I'm encouraged to continue trading mostly from the short side this summer. Just because the bear market's carrying on doesn't mean the profits stop for my Trader's Advantage subscribers and I. Quite the opposite. In this type of environment we find ourselves thriving.
As oil prices come down, it becomes more economical to transport goods from China to the United States. Globalization had been threatened by $145 per barrel crude oil, but now it appears on track again.
That's one reason that I have been recommending premier shipping company Genco Shipping & Trading (GNK) in my Traders' Advantage letter. Lazard analysts last week raised their estimates due to a "persistently firm" market for ocean shipping. They expect GNK to be exposed to profit-sharing arrangements for its Capesize fleet that rise from $93,000 a day in the second quarter to more than $100,000 a day for the rest of the year. Read more about the fleet here.
Lazard lifted its second-quarter estimate to $1.72 per share from $1.56, boosted its 2008 estimate to $7.11 from $6.76, and boosted its 2009 estimate to $8.85 from $8.62. Do the math, and you'll see the stock is trading at a forward price/earnings multiple of 10 despite expectations of 25% growth. That's cheap. Now throw in the sustainability of its 4.85% annual dividend yield, it's a good buy.
Demand growth is coming from increased demand from China for steam coal and iron ore this winter, and we are also entering the northern hemisphere's high-demand grain season. The downside is that more boats are being floated amid a robust stretch of new shipbuilding, but I think GNK will be able to navigate amid lower prices next year effectively by managing its own fleet and improving efficiencies.
