Stocks are the cheapest they’ve been in my investing lifetime. The P/E ratio of the S&P 500 is now at $14. The dividend yield on the Dow Industrial is at $3.06. That’s getting close to the 10-year bond, which is at $3.67.
I happened to catch John Gutfreund on the Nightly Business Report. You may have heard of Mr. Gutfreund of Solomon Brothers fame. He was once called the King of Wall Street. He said that this was the worst investment climate in the 55-plus years he’s been on Wall Street. And his advice was to stay liquid. He looked like a beaten man.
I’ve spoken with many people who’ve said they been waking up with a pit in their stomach for fear the market will crash another 700 points by lunchtime. When all investors find themselves in a position to deleverage at the same time, stocks go down.
Margin calls get triggered and stocks go down some more. Employers can’t get loans to stock their shelves and they set employees free to seek their calling. The jobless rate today climbed to the highest since 2001.
If you can’t work, those balloon payments become even more unreachable. People are losing their houses. The latest statistics I’ve read said that one-third of homeowners owe more on their houses than they are worth.
But all is not lost. A stock, in spite of everything, still represents a portion of a business. Every day people get up, and go to work, and try to make a profit. The fact that it is harder to make a buck today than it was a year ago means that people will work harder. We will emerge on the other side of current crisis.
At some point in the next year Labor and Statistics will come out and say that, according to revised numbers, we were in a recession over the last nine months, but we aren’t any more, and the future looks darn good. Of course, by that time the stock market will have been up for the past few months.
A Word From the DOE on Oil Consumption
Oil is selling off in dollar terms and Brent crude futures are down to $90.33 a barrel as I write this. Natural gas has remained steady at $7.41, though you wouldn’t know it to look at the price of natural gas stocks.
In all of this panic selling, it’s good to look at some basic numbers. The Department of Energy is saying that global consumption of oil will rise by 970,000 billion barrels a day (bbl/d) in the second half of 2008. That is up from a rise of 370,000 bbl/d during the first half of 2008. Oil is projected to continue to rise by 920,000 bbl/d in 2009.
That’s right; demand is still increasing and is expected to continue to increase despite the slow down in acceleration in the first half of 2008.
Consumption will increase for two reasons: The slowdown last year makes for an easy hurdle, and the relatively lower prices mean people will buy more oil and gas. This will put upward pressure on oil and gas prices.
China Slows Imports
One reason that oil is dropping in price is that China built up a large inventory to prepare for the Olympics and is now working it off. This moderation is expected to be temporary.
It should be noted that countries outside the U.S. and China represent the growth in consumption.
OPEC Cuts Production
On the supply side, OPEC is expected to cut back to 32.8 million bbl/d in the next quarter and further reduce to 32.1 million bbl/d in 2009. This is barring any unforeseen black swan, even such as the announcement that Saudi Arabia’s Gashwar field is running out. It will happen some day.
The U.S. government predicts that oil will average $116 in 2008 and $126 in 2009. Gasoline will average $3.61 this year and $3.88 in 2009. The DOE has been correct in its forecasts before and nailed the $4 price of gas last spring.
Printing More Dollars as It Goes Up
I understand the idea that a global recession will slow down the demand side for commodities. What I can’t understand is how the U.S. $700 billion bailout package will make the dollar go up. And yet it is, which is why oil is falling.
A few months ago, I said that oil would hit $85, based on the charts. It’s getting close. I may be wrong, but I feel that will be the point when the currency market will begin to reflect the U.S. position and start to reverse the dollar/commodity trend.
Right now, the underlying logic (in regard to market pricing) is being swept aside due to panicked selling. Yesterday was the end of the quarter -- and a big liquidation sale for hedge funds. Investors sold everything with a ticker.
Today the market is up, because those that have cash are buying value.
Portfolio Update
MasTec Inc. (MTZ:NYSE)
Entered on 12/19/06 at $11.69
Current Price: $12.68
This company is up 8.65% today on no news. Volume is normal. MTZ should benefit from the infrastructure repairs caused by Ike in the Gulf Coast.
Silex Limited (SLX.AU)
Entered on 1/23/07 at $5.99.
Current Price: $3.89
The continued high price of oil and expansion of the nuclear energy business has provided a bounce. The company reported an increase in cash flow and assets but a loss in earnings per share. This is blamed on a large infusion of cash from GE last year.
Cresud (CRESY:NASDAQ)
Entered on 6/23/08 at $15.01
Current Price: $10.48
It looks as if this stock may have found a bottom at $10.01. This company is undervalued. Cresud earnings estimates are 60 cents for 2008, and 81 cents for 2009. It’s got a dividend yield of 62 cents. Buy at current prices.
Denison Mines (DNN:NYSE)
Entered on 6/25/08 at $5.65
Current Price $2.60
The catalyst for Denison is continued production and expansion on the nuclear power industry. Buy up to $4. Insiders are buying. Three new finds in Zambia.
Chesapeake Energy (CHK:NYSE)
Entered on 9/22/08 at $40.78.
Current Price $30.55.
This company is a steal for any long-term holder. True to its form of buying low and selling high, Chesapeake Energy Corp (CHK) just announced that it bought 24,000 acres Barnett Shale property and an 80-mile pipeline owned by an Exxon Mobil (XOM:NYSE). They didn’t say how much they paid for it. As I told you in the last issue, Barnett Shale is one of the largest natural-gas-producing areas in the U.S.
Chesapeake is the largest producer of natural gas in the U.S. Natural gas is equivalent to gasoline at $2 a gallon. CHK has been quietly buying up shale assets for the past several years on the cheap. Third quarter should be large due to asset sales and joint ventures. Buy.
Recent Gains
Natural Gas Services Group (NGS:AMEX), 63%
ION Geophysical (IO:NYSE), 19%
DG Fastchannel (DGIT:NASDAQ), 306%
Concur Technologies (CNQR:NASDAQ), 100%
Potash One (KCLOF:Pink Sheets), 143%
Sincerely,
Christian DeHaemer
Editor, Breakaway Investor
