Monday, May 29, 2006

On Second Thought: The Super Duper Spike Theory.

Arjun Murthi of Goldman Sachs was responsible for the original $105 super spike call ('Buy early. Buy often. Repeat.') that caused so much controversy in early 2005. He's apparently now thinking that $105 may be too conservative if something happens in a major oil exporter.

AME Info: Oil could go above $105 a barrel.

He didn't apparently mention hurricanes, but it sure is hot.

Update: More information is in this article 'Oil could top $105 in major supply outage: expert'.

Monday, May 22, 2006


With the caveat that I still have some things to learn about technical analysis, it looks to me like today or tomorrow might see a bottom for crude oil prices. If that finds it's footing, I'm thinking the equities also stabilize.

I was thinking of trying to trade it via the USO oil ETF, but right now I'm on vacation and it's tough to make good trades when your mind is on other things.

If they were to find a floor here or close, that would support the idea that we had a medium term top in energy ('Q: The difference between a correction and a crash.'), but if the declines continue in size.. then obviously something more serious is developing. In specific, I'm wondering if perhaps high prices are having effects we don't recognize clearly yet.

I had suggested $3 a gallon was going to be trouble [('Three is the magic number.') and "I think $3+ gasoline on a sustained basis (4+ months) is going to alter the universe." ('Buy early, buy often, repeat.')], but it seemed this year that $3 a gallon was not so bad after all. Maybe my first instinct was right?

Tuesday, May 16, 2006

Enter the Dragon Grand Poobah.

"ConocoPhillips" sung to the tune of "Green Acres".

Starring Warren Buffett and Bill Miller.

Eddie, er, Warren:
ConocoPhillips is the oil stock for me.
Oil production is the life for me.
Oil reserves spread out so far and wide
Keep Manhattan, just give me that oil upside.

Eva, er, Bill:
New York is where I'd rather be.
I don't want no stinkin' commodity.
I just adore a penthouse view.
Dah-ling I love you but give me Citigroup on Park Avenue.

Warren Buffett appeared to suggest that oil was a bubble a month ago at the recent Berkshire Hathaway shareholders meeting, but maybe he'd had one too many cheeseburgers and Cherry Cokes Budweisers, or maybe he was just trying to headfake Bill Miller, another well known value manager (though with a different philosophy).

Motley Fool: Berkshire on Bubbles.


Q. Do you think that we are in a commodity bubble?

A. Not in agricultural products, but yes in metals, oils -- the most extreme being in copper.


Buffett's concerns were recently echoed by Legg Mason's Bill Miller, who said, "Today people want commodities, emerging market, non-U.S. assets, and small- and mid-cap stocks. Those were all cheap five years ago, and had you bought them then, you would be sitting on enormous gains ... [But] [g]iven the choice of buying Commodities with a capital C, or buying capital C -- Citigroup (NYSE: C) -- at current prices, I'll take the latter."

And now, Mr. Buffett's Berkshire Hathaway reveals:

AP: Berkshire reveals stake in ConocoPhillips.

Bershire already held an investment in Petrochina, which to some degree can be looked at 4 ways: an oil play, a China play, an anti-dollar play, and a 'maybe they find something in the South China sea' play ('Investment Advice from Kenneth Deffeyes.'). In addition, he bought a utility that wants to build a large wind farm ('What would Warren do?'), and talked about the idea that he might invest in nuclear power ('LOBG Sing Along w/ Warren Buffett.').

Now he's bought a stake in ConocoPhillips [COP] and GE.

COP is thus officially certified as the oil stock for the value crowd. It also happens to be well diversified oil major, having investments in tar sands projects in Canada and Venezuela, in oil production in Russia via a stake in Lukoil, large US oil operations including refining, and, having just bought Burlington Resources, extensive North American land based natural gas production.

But let's not forget GE also has a large energy business which has been targeted for expansion by CEO Jeff Immelt, producing items for natural gas, clean coal, wind and nuclear power generation.

So apparently Warren Buffett knows a little something about energy.

And in something I missed, so does Charlie Munger, his partner: Buffett Bets on Oil.


The ConocoPhillips stake also fits Buffett's game plan. He has experience in the energy sector, having made high returns by investing in PetroChina (PTR:NYSE - commentary - research - Cramer's Take), and he has long said publicly that he views energy as an attractive area.

Still, the move seems bound to raise some eyebrows, particularly after Buffett's longtime sidekick, Charles Munger, made some controversial comments at the recent Wesco Financial (WSC:NYSE - commentary - research - Cramer's Take) conference. He suggested that future generations will curse present-day Americans for consuming fossil fuels at such a high rate, since the supply of oil will be greatly diminished.

"Those were pretty strong words," says Tongue's partner at T2 Capital, Whitney Tilson. "You rarely see Buffett and Munger investing in something that's just had its biggest run in history in the last five years, [like the oil and gas market] . One reason may be that they believe oil prices are going to be high, if not higher, for a long time."

Monday, May 15, 2006

Q: The difference between a correction and a crash.

A: A correction is when it happens mostly to the other guy's portfolio, a crash is when it happens mostly to yours.

About a month ago I mentioned that the introduction of the various commodity related ETFs could be a signal of a top ('Lessons from the Internet bubble.'), and that's looking like a reasonable call these days.

Again, I tend to think in energy stocks that we may see a medium term top, with more upside ahead, but there are no guarantees.

In terms of watching my stocks, I am looking for them to find support levels at the 20 or 50 day moving average, and I am keeping an eye on volume.

I also have a shopping list which I'm watching to see how they behave and if I find an entry point I like. Candlesticks are a helpful way to identify possible reversal points.

Tuesday, May 09, 2006

Leggo my Diamond Offshore.

Q: What's trading roughly 38% under fair value?

A: Um, lemme think... Dell [DELL]?

Q: No.

A: Um.. Microsoft [MSFT]?

Q: Nope.

A: Wait, wait, I got it. United Healthcare [UNH]?

Q: Ugh. Give up?

CNBC via MSN Money: Manager targets Diamond Offshore, Grant Prideco.


Investors seeking bargains within the energy sector should bore down to companies that drill for oil and gas or provide equipment and services to drillers, said J.C. Waller of Icon Advisers.

Shares of companies in the drilling sector are “still trading, in our estimate, about 38% below fair value,” Waller said Tuesday on CNBC’s “Squawk on the Street.”

Waller arrives at his conclusions via a quantitative analysis that’s focused on company earnings and ignores energy-price fluctuations. “Oil companies are making money (whether) oil’s trading at 50 or 60 bucks a barrel,” he said.

[P.S. Actually, Dell might have washed out today.]

Thursday, May 04, 2006

Jim Cramer starring in "Raging Energy Bull".

Two thumbs way up on Suncor.

Ethanol stocks.

More ethanol.

The late stage drillers.

5/3/06 - "Tonight's show is all about oil."

Though they don't mention it in the transcript, I am pretty sure I heard Jim Cramer say recently on his show that he thought oil would not trade below $70. I don't agree with that. We're having a sort of quasi-Murphy's Law moment, where everything that could go wrong looks like it will go wrong, and that's levitating oil, but I wouldn't want to bet anybody that we might not dip back down in the 60's this year. I can't tell you whether these problems get better or worse, if we get a sense of that you know which way you want to play it.

Also, I am skeptical of the ethanol stocks Cramer recommends. I can't argue with success - they have mostly skyrocketed - but the underlying fundamentals of ethanol aren't very good.

Ethanol from corn, which how it's produced in the US, is not efficient, currently requires subsidies (and likely will for a while), and generates a product that contains less energy than the equivalent gallon of gasoline. Unless something changes there, the story leaves me skeptical, and has a bit of a PT Barnum feel.

Wednesday, May 03, 2006

Mr. Stewart Goes to Houston.

James B. Stewart is a columnist for the Wall Street Journal and SmartMoney, as well as the author of a number of books on business and investment topics, and has a lot of financial experience under his belt. I have no idea what his track record is on investments, but his columns reflect a lot of saavy and intelligence.

So I feel rather less pseudo Internet bubblehead-ish when I read his new column, which suggests investing in oil service, among other things.

Note: For some reason this column has a different title in the WSJ than SmartMoney, but it appears to be the same article. The SmartMoney version is free.

WSJ: Prospecting in the Energy Sectors Is Likely to Pay Off in Long Term. [$]

SmartMoney: Playing Energy.


Eventually demand should ease and production increase, which is the only long-term solution to high oil prices. Needless to say, this would knock energy stocks from the lofty perches they've recently been occupying.


One of the savviest investors in the oil and gas arena I know is a Houston-based executive who recently told me he's been aggressively buying stocks in the oil-services sector. In the past, his suggestions have been impeccable. Among the stocks he mentioned are BJ Services, which specializes in pressure pumping, and Noble Corp., which focuses on deep-ocean drilling. I recently sold Noble in some premature profit-taking but still own Smith International, which makes a wide array of oil-field equipment, including drill bits. There are also oil-services exchange-traded funds, such as the Oil Services HOLDRs.

[By the way, it's possible his source is John Olson.]

Tuesday, May 02, 2006

Dan Rice's Words of Wisdom.

WSJ (via Post Gazette): The No. 1 energy fund's wild (but energizing) ride.

Dan Rice runs the excellent Blackrock Global Resources fund, which I'd recommend, but it has a load.

My suggestion: Print the article out, read it, put it up on your wall, read it again in a week.

The main points:

- The best scenario is that oil trades in a range of $60 - $70; not too high, not too low. And if you've been reading along, that's clearly where OPEC wants it too.

- He believes there's still substantial upside, particularly in coal, but also in oil production and oil service.

- He highlights the fact that since 2000, there have been 20% corrections roughly twice each year in the energy sector. Be aware of this, use it to your advantage; let cash build during the surges and try to jump in on the corrections.

- He suggests a small portion of the average investor's portfolio be allocated to the energy sector, but admits to having 90% of his own money in it.

Monday, May 01, 2006

Oh Lord, Please Don't Let Ben Be Misunderstood.

Some days I wonder if I know anything about investing at all.

It seems there's a bit of a conundrum going on about what Ben Bernacke might have said the other day, what exactly he meant, and did he know what he meant, etc, etc. And you know what, I thought he was pretty clear.

This is the important bit of his testimony:

The FOMC will continue to monitor the incoming data closely to assess the prospects for both growth and inflation. In particular, even if in the Committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives.

Does it mention a timeframe? No. Just the possibility of pausing. Some people apparently took it as hinting at an imminent pause. Um... I dunno, I guess I'm too unsophisticated to see that. It rather seems like that would be reading something into it that isn't there. The rest of the testimony goes into the usual suspects; inflation, housing, energy, etc.

Perhaps people are so used to the circular talk of Greenspan, they were thrown off by the plain speak of Bernacke. In fact, unlike Greenspan, you don't even have to try to parse it or paraphrase it, it's pretty clear on it's own. Which is why I'm a little perplexed by the whole issue. And I think we've got more interesting things to worry about.

Bernacke has a rather nasty job ahead of him, and I don't mean in guiding the markets to exactly what he's doing every step of the way.

No, he gets to try to do the economic equivalent of driving a semi out of control fire truck from the back end, which is to say he has to use short term rates to try to move long term rates enough to thread the needle, just enough to put the brakes on inflation, which nobody really has a great read on, while not inadvertantly triggering a crackup of some sort, perhaps in housing, which nobody really has a great read on either.

Keep an eye on that, that's the real issue, not whether the market or various participants think he is or isn't handling communicating with them well.

Anyway, on a more important topic, Leggo my Diamond Offshore..