Archives for March 2012

March 2012 - Page 8 of 12 - Money Morning - Only the News You Can Profit From

The Case for Spitting into the Wind (At Least for Now)

You've heard the expression "You don't spit into the wind," haven't you?

Well, it's true when it comes to trading and investing, too. You keep the wind at your back, and you don't give up easy profits by bucking the trend.

That's all well and good, so long as the wind is coming from a discernible direction. I prefer a warm southwest breeze myself. That's why I live where I live (in Miami).

But we have no control over the many ill winds that blow over our investing horizons.

The best we can do is stay aware of subtle shifts in directional changes, and watch out they don't strengthen into hurricane-force monsters.

I've been cautiously (too cautious, I admit) bullish since October, and I remain optimistic that stocks have enough momentum to try and push through important psychological barriers – such as 13,000 on the Dow, 1,375 and 1,400 on the S&P 500, and 3,000 on Nasdaq.

That doesn't mean we won't see a correction first. Or that last Tuesday wasn't a tiny correction in and of itself.

But 30 years of hardcore trading, and catching every major move in that long time span (no, I hardly ever pick the exact top or bottom, but I have come close) has taught me to go with my gut, to know when I "blink" that it means something.

And lately, I'm starting to "blink" more and more…

I'm getting the feeling that something's wrong, and, somewhere, the eye of a terrible storm could be forming. There's nothing out there that I've read (and I read a lot), or heard, or come across in any research, either quantitative or fundamental, that articulates what this nagging feeling is that's hanging over markets.

So, it looks like I'll have to be the one to put it out there.

But first let me be clear. I'm not spitting into the wind here. I'm still going with the path of least resistance.

What I am doing is presenting the backdrop of what people have lost sight of as they look front and center on the investing stage.

Am I saying the eye of a hurricane is forming? No. I'm saying it already has formed.

I'm saying keep buying cautiously and keep raising your stops as markets go higher, if they do. I'm saying keep watching these developments with me.

Things change, and this brewing storm could dissipate, but it could also turn really ugly, really quickly.

If the storm strengthens, and that's my bet, have a fail-safe plan to get out of speculative long positions, a plan to selectively add to core positions on the way down, and a plan to put on short-side positions that will make you a ton of money if I'm right.

Okay, ready?

Here's where the winds have shifted…

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The "Sweet Spot": Goldman Sachs Bullish on Oil and Gas Pipeline Companies

Nothing like having Goldman Sachs (NYSE: GS) confirm what we've already been saying for a year.

But last week, Goldman Sachs reminded us that they are bullish on the oil and gas pipeline sector by upgrading a number of portfolio stocks that have been prominent features of our portfolios and discussion on the sector.

Goldman analysts made headlines last week by adding a number of pipeline firms to their "Conviction Buy" list. The company added Williams Companies (NYSE: WMB) while dropping Buckeye Partners L.P. Nonetheless, Goldman still rates Buckeye as a "Buy."

Goldman also raised a number of additional stocks to the buy list, including Plains All American Pipeline LP (NYSE: PAA), and maintained its "Buy" ratings on Enterprise Products Partners (NYSE: EPD), and Enduro Royalty Trust (NYSE: NDRO), and Magellan Midstream Partners (NYSE: MMP).

The reason for these moves shouldn't be a surprise to anyone who follows us at Oil and Energy Investor.

The Sweet Spot in Oil and Gas Pipeline Companies

It's not surprising that Goldman Sachs is so bullish on the pipeline industry. After all, my colleague Dr. Kent Moors has been touting the best known secret on the markets for more than a year.

If you want to make money in energy investing, you want to park yourself right in the middle of the supply chain. By doing so, you're far less susceptible to price fluctuations in the underlying commodity, and you are able to collect easy profits from the growing demand in fuels.

Midstream companies, those that connect the upstream exploration and production companies to the downstream retail, refining and marketing channels, provide vital services in transportation, storage, and processing.

Simply put, this is the "Sweet Spot" of energy investing.

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PepsiCo Inc. (NYSE: PEP) Bets on New Management To Revive Flat Stock

PepsiCo Inc. (NYSE: PEP) announced today (Monday) it's aligning a new management structure to solidify a growth plan for its stock and future earnings.

The company named John Compton, current CEO of the company's American Foods division, as president of PepsiCo. The position was newly created to prep someone to eventually take over for current chief executive Indra Nooyi.

The new management shake-up also named Brian Cornell, who recently ran the Sam's Club unit of Wal-Mart Stores (NYSE: WMT), as Compton's American Foods replacement.

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With Putin in Power It's Laughable Russia is One of the BRICs

The re-election of Vladimir Vladimirovich Putin last week means even more crony capitalism in Russia.

With Putin in power nothing will change.

In fact, it's laughable that Russia is still even considered among the group of the world's most glamorous emerging markets – otherwise known as the "BRICs."

The truth is Russian prosperity will last only as long as the price of oil keeps rising by 25% a year, and not one second longer.

Of course, that hasn't stopped one of Russia's boosters, Moscow broker Prosperity Capital Management from claiming that Russia is the third fastest growing economy in the world.

But since Russian growth is only expected to be 3.2% in 2012, according to The Economist, Prosperity's definition of the word "world" is as little suspect.

Presumably Prosperity is only including the wealthy countries, most of which are much richer than Russia and should be expected to grow more slowly.

The Economist actually ranks Russia 18th of the 58 countries it surveys, based on projected 2012 growth rate.

That looks reasonably impressive, until you realize that this modest growth is being achieved in a period of sharply rising oil prices. Oil is Russia's largest export.

After all, one of the countries that beat Russia, with a 4.2% growth rate, is Venezuela. Needless to say, few people outside Hugo Chavez' immediate family would claim that country was economically well run.

Apart from corruption and cronyism, Russia's main problem is its state budget, which depends crucially on oil revenues and hence on the oil price.

Before 2008, its budget was balanced at an oil price of around $90 per barrel, already up from a break-even of $30 per barrel earlier in the decade. Now according to the Finance Ministry as reported in Atlantic Monthly, today the oil price must be $117 per barrel for Russia to balance its budget.

In reality, since Putin announced $260 billion of spending programs during the election, plus a defense program totaling $763 billion, the oil price needed for balancing next year's budget is likely to be around $140 a barrel, rising continually thereafter.

Needless to say, the rest of the world is likely to be tipped into recession by any oil price that will make Russian budget managers happy.

In terms of oil, Russia is playing a game that will never add up.

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Marathon Petroleum Corp. (NYSE: MPC): The Best Way to Turn High Gas Prices into High Octane Profits

Average gas prices currently are about $3.75 according to AAA's Daily Fuel Gauge Report.

That's higher than the average for all of 2011, which was the priciest year ever for gasoline. And what's worse is they're only going higher from here.

But if you think that investing in oil majors will help you overcome the sting of high gas prices this summer, think again.

While prices for both gasoline and crude oil have surged more than 10% this year, stock prices for oil majors like ExxonMobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) have been flat.

The dividends these companies pay won't make a dent, either.

It would take the average American something along the lines of a $20,000 investment in a stock that yields 3% to compensate for the surge we've seen in gas prices.

One reason these stocks have floundered is that the recent rise in oil prices has largely been the result of political tensions in Iran, rather than increased demand for oil.

Another is that President Obama has Big Oil subsidies in his crosshairs as he heads into this year's election.

Energy lobbyists have flooded Capitol Hill and Republicans have rallied to the defense of oil companies, but the November election will ultimately decide the fate of the $4 billion of subsidies oil majors get every year.

With so much money at stake, investors are rightfully wary of companies like Exxon and Chevron.

Still, that begs the question: If big oil stocks offer no respite from high gas prices, where can investors turn?

One solution is to invest in the United States Gasoline Fund LP (NYSE: UGA).

UGA invests in futures contracts on unleaded gasoline traded on the New York Mercantile Exchange (NYMEX). It's already up 18% this year.

But there's still an even better option, and that's

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Five Cheap Stocks for an Undervalued Market: KCG, AWP, WLP, MT, CNBKA

Last week marked the third anniversary of the bear market low, and there is compelling evidence that we still have an undervalued market – meaning investors can find cheap stocks.

Even though the S&P 500 Index has nearly doubled off its lows of March 9, 2009, it is still trading at only about 14.1 times earnings, well below its 15-year average of 20.2.

In fact, earlier this month when the markets hit 52-week highs, that was the "cheapest" stocks have been since 1989,according to Bloomberg News.

The index gained 8.6% in the first two months of this year, its best start since 1987. And that came after a rally that added 24% and about $3.2 trillion in value to shares since October.

But after one of the most volatile years on record, nervous investors can't seem to decide whether the glass is half-full or half-empty.

"What you're seeing is a gigantic exercise in behavioral finance," Brian Barish, president of Cambiar Investors LLC, told Bloomberg. "The ability to scare the hell out of people is much greater than the ability to attract them to equities."

Higher Corporate Earnings Create Cheap Stocks

Meanwhile, the government's easy money policies have combined with productivity gains to push corporate earnings to record heights.
Analysts at Standard & Poor's estimate operating earnings will rise from $96.34 in 2011 to a record $104.82 in 2012.

That would represent a 72% increase in earnings since 2010. By comparison, the stock index has recorded a 21% gain during the same period.

S&P analysts say earnings will climb to another record of $111.73 in 2013. But they project higher corporate earnings will drop the P/E from 14.1 to 12.2.

So what is it that's making stocks relatively cheap compared to higher earnings?

Simply put, investors continue to defy logic by shunning stocks and piling into bonds.

Despite record low interest rates, investment-grade bond funds took in a record $3.3 billion during the week ended Feb. 15 while equity funds had outflows of $1.9 billion, according to data provided to Bloomberg by EPFR Global and Bank of America Corp. (NYSE: BAC).

Meanwhile, traders have been bidding up the prices of options that will protect them against stock losses to the highest in four years, according to Bloomberg.

The flight to safety has driven the S&P 500's earnings yield (earnings divided by index price) to 7.3%, nearly a record high.

With the spread between the earnings yield and risk-free 10-year Treasuries about 5.8%,stocks are now cheaper than they were in 2002 or 2008. In fact, the last time the spread was this lopsided was 1975, when stock prices jumped 32%.

All this suggests that something has to give. Either Treasury prices will have to plunge or stock prices will have to rise – by a lot.

So what's an investor to do?

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Bank of America (NYSE: BAC) To Cut Borrowers' Balances in New Mortgage Deal

In addition to last month's settlement, Bank of America (NYSE: BAC) announced Thursday it would cut qualified borrowers' balances by even more than originally agreed to in a side mortgage deal with U.S. authorities.

The bank said it would slash loan balances by an average $100,000. If Bank of America meets the provisions of the mortgage deal – which includes a separate agreement to reimburse HUD $1 billion for loan-related issues – within three years, it will be forgiven $850 million in penalty payments.

The biggest U.S. mortgage lenders, including Bank of America, finally reached a $25 billion mortgage settlement last month to help homeowners. The provisions to the mortgage settlement included $5 billion total in cash penalties, payable to borrowers, states, and the federal government, and $20 billion in additional aid reached by reducing homeowners' loan balances, and refinancing for underwater homeowners.

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Real Unemployment Rate Could Give Obama Heartburn in November

A quirk in how the U.S. government calculates the unemployment rate has made the data look better than it is, some Wall Street experts are saying.

But in a stroke of bad luck for President Barack Obama, that same quirk will mask real improvements to the U.S. unemployment rate over the summer and into the fall, damaging his chances for re-election.

The official Bureau of Labor Statistics (BLS) unemployment rate has fallen from 8.9% in October to 8.3% in January. The number for February, released today (Friday), held steady at 8.3%.

"We think that the improvement over the last few months dramatically overstates the underlying improvement," Andrew Tilton, an economist at Goldman Sachs, told Reuters. "You will not see that rate of improvement going forward."

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What Someone Needs to Ask the Presidential Candidates

Kent is in Europe this week, advising on oil supply concerns in cash-strapped nations.

And it's getting serious over there.

As he noted on Fox Business last week, Greece imports nearly 30% of its oil from Iran, and the country needs fuel in order to keep its economy moving in these uncertain times.

I don't think our leaders or media say this enough, but energy is the catalyst of economic growth and human progression. And a lack of reliable fuel sources will only make this teetering European economy even more susceptible to its ongoing debt woes.

The last 100 years of prosperity in the U.S. was not driven by abstract ideals like the "American spirit."

Cheap, efficient energy sources fueled our growing global economy. They were an underlying driver of a population boom and expansion across the continent. Without them, we wouldn't have our highways, sprawling suburbs, or supporting infrastructure that has made this country so unique.

But the days of cheap oil are fading fast. Production costs are rising as we shift toward unconventional oil fields and tight gas formations for our sources.

So, once again, we're looking to alternative forms of energy.

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