| Number of Stocks: | 53 long |
| Concentration: | Top 5 holdings = 32% of total |
| Percent Long: | 82.7% |
| Percent Short: | 0% |
| Top 5 Holdings, in order: | Sociedad de Chile (SQM) Canadian Oil Sands Trust - COSWF (oil sands) Diamond Offshore (DO) Petrobank (PBEGF) Transocean Inc. - RIG (drilling and services) |
Note: percentages above taken on stock portion of portfolio only
PERFORMANCE
EIS | OIH | IYE | SPY (without DIVS | |
| 2008 YTD | -5.4% | -2.7% | -5.5% | -11.9% |
| August 2008 | -9.6% | -4.6% | -0.3% | 1.5% |
| July 2008 | -21.8% | -13.0% | -14.35% | -0.1% |
| June 2008 | 4.4% | 5.0% | 2.3% | -8.8% |
| May 2008 | 16.6% | 7.6% | 3.7% | 1.5% |
| April 2008 | 11.3% | 11.0% | 10.9% | 7.2% |
| March 2008 | -6.9% | 0.2% | -2.3% | -2.0% |
| February 2008 | 10.4% | 12% | 8.5% | -2.6% |
| January 2008 | -4.4% | -16.7% | -11.2% | -6.04% |
| 2007 | 38.7% | 35.3% | 39.7% | 3.1% |
| 2006 | 28.9% | 8.55% | 1.05% | 13.62% |
| 2005 | 34.4% | 51.4% | 52.43% | 3.0% |
| 2004 | 38.2% | 37.21% | 26.74% | 8.99% |
EIS = Energy Investment Strategies account
OIH = Oil services ETF
IYE = Broad oil and gas ETF
SPY = S&P 500 without dividends reinvested
Click here to see complete historical information regarding performance.
LOOKING FORWARD
SUMMARY
Stocks are in a bear market as the U.S. economy seems headed for recession in the short term. I believe it will not be a short recession for a number of reasons:
- In the modern era of less manufacturing and lower inventory levels the economic cycles have gotten longer, so this down cycle could also be a long one.
- Real interest rates are already very low and inflation is a substantial risk. Therefore the Fed has little ability to lower interest rates to take the economy out of recession.
- The U.S. economy is being “taxed” very substantially by its oil and other trade deficit which has a greater depressant effect on the economy than does the stimulative effect of the Federal budget deficit. Thus we are unlikely to get a Keynesian sort of stimulus effect.
- I expect the growth rate of China and other developing Asian economies to slow due to electricity shortages, recently higher oil prices, and new inflation fears. These economies will still grow, but their slower rate of growth bodes ill for the U.S. economy.
- Housing prices are still declining. A slowing of the decline of home prices may happen, but that is still not a stimulus to the economy. If the housing price decline bottoms, that would help the economy, but I doubt we will see that for a while.
If the economy continues to decline for the next 6 - 18 months, which will cause further earnings declines, stocks should also be hurt further. That said, the stock market generally anticipates the economy and is likely to turn up about six months before the economy does starting when the economy is at its weakest point. I can’t predict when the current bear market in stocks will reverse but I am sure that there will be short, energetic counter-trend rallies which some will misinterpret as the end of the bear market.
In the longer term - two to three years - I expect to see much higher oil prices starting by mid 2010 at the latest and caused by declining production. I think much higher oil prices will deal the U.S. economy another strong blow. Since the economy will already be in a weakened posture, possibly still in the current recession, it is likely to become much weaker much more quickly when it is hit with higher oil prices. I suspect that will have very negative implications for stocks.
In sum, the odds favor lower and possibly very much lower stock prices going forward. Therefore I want to keep a substantial portion of my investments in cash and options on longer dated oil futures. An alternative to the futures options would be to invest in an oil ETF such as stock symbol OIL.
If home prices show signs of improving or if the price of oil were to drop well below $100 I would want to reconsider the above strategy.
CRUDE OIL
Crude oil is testing lower levels. Ordinarily I would expect it to hold above $100 through the winter bolstered by higher winter demand and potential efforts by OPEC to defend the $100 price level. However this is an election year. Some cynics suggest that the Saudis may want to avoid high oil prices during the U.S. election to foster the election of a Republican. That may be true and I would not be surprised to see oil continue to be weak through the election.
In theory oil service and drilling stocks should not be much affected by lower oil prices since the global demand for finding and retrieving oil from ever more difficult and expensive new fields should be strong so long as oil stays above, say, $80. But the fact is that as oil has pulled back from $147 to about $110, the OIH fund of oil service and drilling stocks has done only slightly better than the IYE index that combines oil exploration and production companies with oil service and drilling companies. The theory has not worked in stock market reality.
NATURAL GAS
Gas has been weaker than oil because gas inventories are adequate and because gas production has been increasing significantly due to new unconventional plays of major size that can now be developed using new horizontal drilling and new fracking technologies. Demand for gas is likely to grow based on its lower cost. New transportation uses in North America look to be coming on stream along with new electrical generating demand and potentially new industrial demand as natural gas intensive plants move back to North American from which they had migrated a few years ago when the price spiking above $15 for a short time. It is hard to predict the timing of a recovery in natural gas prices, but patient investors in natural gas names will eventually be vindicated, I think. Though perhaps not in my lifetime (just kidding, I hope).
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This article has 16 comments:
- Whidbey
- 769 Comments
Sep 07 07:48 PM- Kunst
- 591 Comments
Sep 07 10:37 PMWhat would happen if the US were suddenly forced to live within its means? Long recession is right.
- jegan ;-)
- 672 Comments
Sep 08 12:32 AMI reviewed your holdings... I'd seriously begin to sell them off in a bounce and buy stocks that are moving up during this period... Look at FRED for example.. Moving up steadily during our downturn..
jegan ;-)
- investor88
- 563 Comments
Sep 08 03:36 AM- mangolfer
- 152 Comments
Sep 08 08:01 AM- john s. gordon
- 533 Comments
Sep 08 08:46 AM> jack
- paulk8756
- 883 Comments
Sep 08 09:05 AMOnly positive I see is you guys are ALL becoming BEARS. That's what will ultimately turn the market.
- leh
- 133 Comments
Sep 08 10:17 AMAs far as the economy goes, go talk to any middle income family trying to deal with spiraling food, fuel, education, and health care costs and ask what's left in their pockets at the end of the week to spend. Then talk to lower income folks in New England and you'll find they're even more strapped and wondering how they'll keep their houses warm this winter.
Life is not a technical rally, and we will not suddenly bounce out of this recession. The US market looks done to me for your average investor, and we're left with a handful of hedgies trying to jerk a day's pay out of every so-called rally, which is really just short-covering by these same short-term players.
- einstein p fleet
- 94 Comments
My Website
Sep 08 11:06 AMDespite the "good news" about yet another government bailout, the fundamentals remain the same. Even at 80 dollars a barrel gas is not cheap --- provided it gets to that level at all. Food is expensive. Education is expensive. Health care is expensive. Is it any wonder that the average consumer is tapped? With unemployment on the rise and a negative savings rate, a great many people are living hand to mouth. Something needs to change.
The politicians in DC need to stop bickering and come up with a domestic energy policy. T. Boone Pickens has been advocating a plan and putting his money where his mouth is. Natural gas will be a major factor in weening America off foreign oil, along with coal, wind, solar, and nuclear. We need to build the infrastructure to support this policy, which in turn will help to create jobs and fund other issues, such as education and health care. It will not happen over night, but we have to start somewhere and soon.
The government has bailed out Bear, Freddie, and Fannie and may not be done. My question is, who is going to bail out the government? The taxpayer? Most likely not. The alternative? Better learn to speak Arabic, Chinese, or Russian.
- David Lentz
- 351 Comments
Sep 08 11:31 AMNope. Not even a little bit. Even the grand gesture to bail out the Chinese, Japanese, and PIMCO is small compared to the amount we are burning in Iraq in order to ... ?
Oh yes, keep the terrorists over there.
But what about the terrorists in Washington?
- isaac the terrible
- 17 Comments
Sep 08 11:36 AM- yank
- 85 Comments
My Website
Sep 08 11:48 AMThere was an article out last week that stated that energy stock valuations have not been this low since 1982. Now I know all about the case for lower oil prices but oil is still above $100 and we are trading at a 25 year low? That just does not make any sense at all. Especially since we have added millions more auto drivers worlwide since 1982. Traders are pricing energy stocks for a global depression. As bad as things are, I just don't see it as getting that bad. Maybe I'm just an optimist.
Yank
- paultaut
- 1068 Comments
Sep 08 12:52 PMI believe the sell off is almost over in the CSI 300, expect the 2000 area to hold and move sharply higher in the ensuing 12 months.
The length of our Recession will be motivated by external rather than internal factors.
Contrary to the short covering rally in progress, LIBOR took an upward spike on the Frannie news.
Meanwhile, reversals have already occurred in both Washington Mutual and Lehman.
The Treasury will issue $500 Billion trying to forestall a meltdown, all told. This is not the way to solve the problem. The Fed has to get onboard before DEFLATION takes hold.
- earlyride
- 1 Comment
Sep 08 05:12 PM- JRBH
- 5 Comments
My Website
Sep 08 07:40 PM- paultaut
- 1068 Comments
Sep 09 12:42 AMMeanwhile, Idaho has confirmed a case of Bird Flu in a couple of Game Birds. Increases in the number of cases worldwide is escalating but the Media apparently has decided that this is old news undeserving of attention.