Chavez Just Destroyed Venezuela's Economy

See this link: http://news.yahoo.com/s/nm/20070131/ts_nm/venezuela_chavez_dc_8

Nationalizing an economy is a sure death blow. It will cause shortages, inflation and all other kinds of dislocations. Money is fleeing the country like crazy and I suspect many of its citizens will do the same, if they are able to. I also anticipate that he will, at some point, be assassinated for causing the domestic economic depression which will spark a huge rally in its stock market. It will be similar to a stock rallying when a horrible CEO steps down as investors see better times ahead.

Navellier

The weekly Navellier Marketmail report is generally worth a read as they hit the main points. Here is a link:

http://www.navellier.com/commentary/weekly_marketmail.aspx

The timing of Bush's announcement to increase the SPR does not seem that strange to me though as in came just before the State of the Union Address where energy was a major topic. Several countries are increasing their oil reserves or have plans to, namely the U.S., China and India. While it's psychologically bullish for oil prices in the short-term, significant inventory building is bearish longer-term. Inventory building is basically artificial demand. It's similar to a technology company stuffing the channel except the inventory doesn't become obsolete.

Exxon (XOM)

I expect Exxon will run into resistance right here at $75. The fundamentals have deteriorated a lot with oil falling from $78 to $53 and refining margins contracting quite a bit from year-ago levels, yet the stock is only about $4 off its all-time high. One analyst I know makes a good case that, at these levels, Exxon is trading like oil prices are going back to $70. Earnings estimates will have to come down so the stock is not as cheap as it looks on a forward P/E basis. I think it's a value trap and wouldn't be surprised if the stock is flat to down over the next 2 to 3 years.

Richard Young Gets It Right!

Veteran investor, Richard C. Young, understands risk management. In his latest Intelligence Report he lists some risky areas that are priced like Blue Chip investments. They are: China, India and Russian stocks (high P/E ratios), emerging market and high-yield corporate bonds (very low credit spreads), and oil (inflated futures prices).

You know that I’ve been all over the bubble in the oil futures. Here is what he said about the positively sloped Nymex Oil Futures Curve:

“When a futures curve is positively sloped, investors are willing to accept negative “roll yield” for the privilege of gaining exposure to the commodity. Historically, the oil futures curve has been negatively sloped, providing investors with compensation for taking commodity price risk. Investors have become so complacent with commodity price risk that they are now willing to pay for it.”

That’s well said, investors are paying up for risk and it should be the other way around.

Weakness in Reinsurance Stocks

The following information does not seem to be well known, so the reinsurance stocks like RNR may have some additional downside even though they look pretty inexpensive. Perhaps the best time to buy them is when this news becomes widely disseminated and everybody freaks out.

Details of Expected Changes To Florida Hurricane Catastrophe Fund -- RNR Appears Most Exposed. Property reinsurance stocks such as RNR (2-EW, $52.81) have been hurt recently in our view based in part on expected changes to the Florida Hurricane Catastrophe Fund that would crowd out private market reinsurers from offering coverage at the low-and-high ends of this facility. We believe this is because Florida's Governor Crist is pushing hard for rate relief for buyers of Florida homeowner's insurance. Also weighing on the reinsurers, in our view, is exposure to European winter storm Kyrill, which catastrophe modeler AIR Worldwide ests could result in insured damage of $5-$10B. Based on pending legislation in Florida, it appears increasingly likely that Florida private market reinsurers (including RNR) will be pushed out from offering residential property catastrophe reinsurance coverage. Based on our conversations with industry lobbyists, our understanding is that this legislation is highly likely to pass. In 2006, the Florida Hurricane Catastrophe Fund (FHCF), a state funded residential insurance facility, provided reinsurance coverage to primary homeowner's insurers for between losses of $6B - $16B with 10% coinsurance. In 2007, the proposed FHCF coverage is substantially increased to cover losses of $3B - $35B with 10% coinsurance. Previously, the increased coverage was provided by the private reinsurance mkt. As a result, the private reinsurance mkt in 2007 will likely write much less reinsurance coverage for residential exposures in Florida. Further, primary homeowner's insurers like Allstate (ALL, 2-EW, $63.00) are likely to be required to pass along savings from reduced reinsurance costs (now estimated at about 2% rate-on-line, a substantial reduction) to their customers. Our view on the reinsurance stocks with substantial Florida exposure like RNR is that the anticipated legislative change in FHCF coverage could hurt its premium volume and underwriting results in years with light Florida hurricane losses. RNR currently trades at 1.5x our 4Q06 book value est of $34.15, which is only slightly below the long term median multiple of 1.6x.

Souce: Lehman

CCI Breaks Out on Big Buyback

I like the chart and the cell phone capacity growth story.

More on Black Gold and Contrarian Indicators

I caught another interview of Boone Pickens yesterday and I couldn’t help but laugh. He’s predicting $70 crude by year-end 2007. Yeah, right Boone - keep those blinders on buddy. Demand in the latest week was down -3.5% year-over-year, non-OPEC production is at a 30-year high and growing while OPEC is freeing up spare capacity. There is no sign whatsoever that world oil production is even close to peaking. Heck, Saudi is even canceling projects to bring more capacity on line because inventories are so high. To make matters worse for energy stockholders, the XLE has not yet fully discounted the drop in crude as it’s only off 11% from its high while WTI is off about 35%.

Besides closely and objectively looking at the supply/demand picture for oil and the absurd amount of hot money flowing into commodity derivatives and energy sector funds compared with history, there were a couple excellent contrarian indicators that suggested oil prices were (and still are) in a bubble. First, I was receiving several pieces of junk mail daily regarding “the next great oil/energy play” or similar. Secondly, energy stocks were all the talk at cocktail parties over the last year. It was somewhat reminiscent of tech stocks in 1998 and 1999. Always keep your eyes and ears open for information.

Oil Pain = Tech Gain

It's going to be very difficult to make money in energy stocks over the next couple years outside of playing a short-term bounce. Not only will the stocks follow the commodity price lower, but now you're going to see a swarm of lowered earnings expectations and in some cases, dividend cuts. I don't think I've ever made money on a stock with declining earnings and dividends. To make matters worse, there is still a few trillion dollars of hot money in the commodity sector. Now that the sector is no longer working, that money will start flowing to other areas. My guess is that it's starting to flow into growth sectors like technology and biotech. That's what the charts are saying anyway. This is a tend that could easily last one or two years.

Fraud at ALD

According to this article, things are looking very bad for ALD and the chart confirms it. Looks like a good short to me.

Oil Slick

I don’t seem to be getting through to anybody regarding this huge oil bubble, yet nobody can give me a good fundamental reason why crude is still $50+ bbl. The peak oil crowd, including T. Boone Pickens is still firmly convinced that supply production is peaking while cold hard facts show otherwise. This ridiculous peak oil theory is nothing but a hype machine. Also, just because oil prices have declined 30% from their high doesn’t mean they can’t fall much further. Remember technology in 2001 and 2002? Sure, this oil bubble is not as big as that tech bubble, but it’s still very big. Let me show you.

In December of 2004 the total value of OTC Commodity Derivatives held by U.S. and foreign banks was $1.02 trillion. In June 2006, the value had swelled by nearly 6x to $5.85 trillion. Assuming half of this is for oil (reasonable assumption), at $60 bbl, that represents ~48 billion barrels of crude which is ~1.5 years of what the world physically consumes. Let that sink in for minute – 48 BILLION barrels of crude have been purchased in the futures market! I think a liquidation event is necessary, especially now that it’s clear, at least to me, that supply is growing faster than demand.

Market Thoughts / CCRT

The markets are struggling so far this year because the economic news has been stronger than expected and pushed up bonds yields. Slow growth is your friend if you are long. Stronger economic data over the next few months may push out the big market gains into the second half of the year.

CCRT preannounced 4Q earnings below expectations due to 1) additional marketing expenses 2) higher expenses associated with new products and technology 3) slower growth within the auto finance segment and 4) higher depreciation associated with relocating the corporate headquarters. Higher credit costs do not appear to be an issue. The good news is that management is gearing up for growth and also reaffirmed its full year 07 guidance of ~$4.25 which appears conservative since it doesn’t include benefits from acquisitions or share repurchases. At $37.50, the stock trades at 8.8x 07 estimates, a very attractive price IMO.

Biotech Breakout?

These charts look pretty juicy!

Nasty Crude Oil Action

Wow! It was nice to see some air taken out of the oil bubble today. The energy sector got crushed on worries about warm weather hurting demand and NBR's reduced earnings guidance. Check out this nasty action of the IYE (energy sector) vs the IVV (S&P 500):


If you have been reading this blog, you know that I'm an energy bear (see post: Crude Oil Set To Tank?). I stand by my call that supply can and will grow faster than demand in 07 and that OPEC cutting supply and freeing up spare capacity is a bearish event. If it were not for all of the hot money flowing into energy derivatives over the past couple years, the price of oil would be much, much lower. If I were OPEC or a large oil company, I would be selling the shiznit out of the futures right now!!

4 Pillars of Equity Returns

Ed Keon of Pru has a nice report out today about the 4 pillars of equity returns that have shown predictive power in the past and do not require a forecast. They are: valuation, relative valuation, modest inflation and a strong profit environment.

Currently, all of them are pointing to a good year.

1) Valuation – Stocks are trading at an average P/E ratio versus history, which has generally indicated ~10% returns, but transaction costs and capital gains/dividend taxes are lower than history so multiples could expand by 1 or 2 points.

2) Relative Valuation – Stocks are clearly cheap versus bonds and real estate. For the last 60 years this has always led to out-performance of stocks until equilibrium is re-established. This is creating massive economic incentive for companies and private equity firms to increase leverage (issue overvalued debt to buy undervalued equity). At the same time, novice U.S. investors are selling equities ($12.4 billion of large cap funds in 2006) and putting it into money market, foreign stock funds and taxable bond funds ($400 billion).

3) Inflation will likely be in the 1 – 3% percent range that has historically been the sweet spot for stocks, ~13% returns.

4) Profits are strong and companies are performing better than one might expect based on the slowing macro data.

Da Bears Are Angry

I'm sensing a lot of frustration and anger by the bears right now. The problem is that are trying to justify their bearishness by factors that don't really matter to the market. Here is a list of some of the reasons I've read recently:

1) The Iraq War - Sure, we are wasting lots of money and that is hurting our budget a little and may be causing some weakness in the dollar, but it's not that bearish.

2) We are still recovering from 9/11 - No, we have recovered from 9/11 and it's a non issue now. I can't believe people are still talking about this from a market standpoint.

3) The market has gone up 3 years in a row - So what! Valuations are still reasonable because corporate profits have been strong.

4) The housing market is imploding - No, the housing market is weakening, not imploding because the job market is strong and interest rates are still pretty low.

5) Billions of dollars are flowing into ETF's - Humm, that sounds bullish to me.

6) There is too much liquidity and hot money around the world - I don't know about too much. Strong liquidity is very bullish for the market. It only becomes a problem when it creates bubbles and then those bubbles pop when the money flows somewhere else. Housing got bubbly and is in a correction and oil is still in a bubble. Small and mid cap stocks look a little bubbly in general compared to large caps, but some of them still look highly attractive. REITs look bubbly so stay away from those.

7) Inflation is accelerating - There are pockets of inflation but there are also pockets of deflation. Just look at anything tech related like TV's and computers. Inflation will remain in check for many years because of tech, productivity, global competition and the global glut of labor.

8) The dollar is going to collapse - I'm not so sure about that. The budget deficit is improving from strong tax receipts and interest rates are higher than in many G7 countries, therefore the dollar is still attracting a lot of capital. Also, Japan and China want to support the dollar to keep their exports to the U.S. strong. This is the one area that I'm probably the most concerned about, however. I'd like to see some reforms and a balanced budget without tax increases. Cut the spending!

9) Everybody is expecting a soft landing - No, not everybody, but it is consensus right now. However, most market pundits are predicting meager gains. That's where I think they have it wrong. Equity gains will be strong in a 2% GDP growth environment because interest rates won't rise, inflation will cool, profits will be good and multiples will expand, probably similar to 1995.