Posts Tagged ‘Term Investors’
Offshore Oil The Warren Buffett Way
Monday, February 15th, 2010
By Dian L. Chu, Economic Forecasts & Opinions
Commodities, particularly crude, were trending down last week after China’s Central Bank raised bank reserve requirements boosting the US dollar against other major currencies. That marks the second time China has raised its bank reserve requirement in a month.
Ongoing worries about the economy stemming from European debt problems, specifically the lack of a firm Greek bailout plan from European leaders also prompted investors moving out of risky assets. Crude oil fell for the first day in five to below $75 a barrel also partly due to government data showing U.S. inventories rose more than forecast.
Meanwhile U.S. natural gas registered the largest one-day gain last Friday to $5.48 per mmbtu since the beginning of the month on a drop in jobless claims, signaling industrial demand is likely improving, and cold temperatures across the US are boosting residential demand. Industrial Demand accounts for 29% of U.S. consumption.
Oil Services Sector Bottoming Out
While the markets are in a finicky mood from the China and Greek factors, the return of relative stability in oil and natural gas prices has spurred producers to increase their capital budget and restart projects they slowed down or completely deferred a year ago. (Fig. 1)
Absorbing the impact of lower rig counts, weak global demand for fossil fuel and volatile energy prices, the majority of the oil services companies are reporting sharply lower earnings in Q1. However, the rising rig count and producers’ capital budget suggest that oil service markets are probably in the process of bottoming this year, which suggests a good entry point for long-term investors. (Fig. 2)
Oil Majors Go Deepwater & Subsea
Roughly from 2004 to 2008, the onshore, North America in particular, had outshined the offshore in terms of activity growth. But the Great Recession has shifted the tide towards offshore and international. Offshore is one of the few remaining places where the state as well as western oil majors can increase production, while emerging Asian demand is expected to outpace the U.S. and the OECD in coming years.
FBR estimates an increase in deepwater spending of almost triple expected growth in onshore spending will drive offshore spending overall at a rate of around 15% for the next few years. Energy consultants Douglas-Westwood also forecast offshore spending recovering to $439 billion in 2010, up 11% from 2009 with deepwater capital expenditure reaching new highs. (Fig. 3) South America, Mexico, Iraq, Russia, Africa, and the deepwater are the key areas.
Subsea has proven to be considerably more resilient in the downturn, and the secular growth story will continue to improve as the deepwater rig count is expected to increase by 30% in 2012 from 2009 and as projects get more complex and require greater amounts of equipment.
Offshore Infrastructure – The Buffett Way
Warren Buffett made headline last year when he placed the biggest bet of his life with the $34 billion purchase of Burlington North Santa Fe, expecting the infrastructure play will grow as the economy gets back on solid ground.
So, if we apply the same investment strategy as Buffett to the oil services sector, offshore infrastructure will be the logical choice.
Americans vs. Europeans
While oil companies typically fund and own the pipeline, platform, etc, they rely on oil services companies to provide project expertise and resources.
The oil services universe is made up of mainly two camps: Americans and Europeans. American firms such as Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) tend to have a stronger focus on drilling and production services mainly due to the existence of a vast American market, and higher margins.
The European firms, on the other hand, have essentially positioned as specialists in offshore drilling, infrastructure engineering and construction related services.
From Europe with Backlog
Therefore, the current offshore and deepwater trend bodes well for the major European service companies such as Saipem SpA and Technip SA (TKP). Theses two companies are leaders of the European pack dominating in high-tech segments for deepwater activities such as the installation of platforms, the laying of subsea pipelines, the development of subsea fields, etc.,
The oil infrastructure business is generally later cycle and backlog driven, and thus tends to have less volatility in earnings than other energy stocks. That means even if we go into a double dip, these stocks should still be able to generate higher earnings.
Favorable Forex Trend
Dollar appreciation is also a major catalyst. Société Générale estimated that a 10% increase in the dollar translates into an 8% to 10% increase in EBIT for the oil services sector. All oil services companies should benefit but those that combine a sizeable proportion of dollar-based assets with borrowing denominated essentially in euros, for instance, Saipem and Technip (TKP), stand to benefit most.
Furthermore, with euro recently plunging to a near nine-month low amid Greek concerns, the downward momentum is favorable for U.S. investors wishing to add positions in some solid European companies with good long term prospects.
Americans with Niche
All is not lost with the American companies. Large manufacturers of capital equipment such as Cameron (CAM) are poised to benefit as well, since the tender activity for deepwater rigs, subsea equipment, surface, valves and compression will likely accelerate in 2010 with oil companies gaining confidence in the commodity recovery.
Drillers & Seismic – Grinding Ahead
Nevertheless, all services are not created equal. Average day rates for deepwater floating rigs have fallen from up to $550,000 to $350,000. So, the next two years are going to be a grinding period for drillers like Transocean (RIG) and Diamond Offshore (DO) when they have to roll over old contracts at lower rates.
Meanwhile, seismic companies such as CGG Veritas (CGV) and Petroleum Geo-Services (PGS) are still struggling to find a bottom mainly due to vessel overcapacity on the marine side. The sector is also hammered by clients’ preference to use old data instead of shooting new ones in a bid to cut costs.
So, the downward earnings trajectory could signal a buying and/or shorting opportunity depending on investment time frame and strategy.
Oil or Gas, One Sector Does It All
Energy stocks, including shares of services companies, tend to be higher beta, so the sector still has to balance the downside risk of the global growth environment. But as the world journeys on a recovery path, likely with rising oil and gas demand, there is still a significant multi-year opportunity for earnings growth from the oil macro view. (Fig. 4)
In addition, oil services is one sector that stands to benefit from the expected uptrend of either crude or natural gas, or both. With crude and natural gas prices outlook remain diverged in the medium term, this unique characteristic could be a good hedge in any energy/commodities investment portfolio.
Disclosure: No Positions
Tags: Bailout Plan, Capital Budget, Cold Temperatures, Commodities, Economic Forecasts, European Leaders, Global Demand, Government Data, Jobless Claims, Mmbtu, Natural Gas Prices, Offshore Oil, oil, Oil Majors, Oil Service, Oil Services, Relative Stability, Rig Count, Risky Assets, Service Markets, Term Investors, Time China, Warren Buffett
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Marc Faber 2010 Outlook: Go For Gold, Oil & Agriculture, But Watch Out For PIIGS & U.S. Equities
Wednesday, January 20th, 2010
Here is the summary and my thoughts on a trio of Dr. Marc Faber’s latest interview where he discussed his 2010 outlook on China bubble, sovereign default risk, stocks and commodities.
Faber is most famous for advising his clients to get out of the stock market one week before the October 1987 crash. News just broke that Faber, a famed contrarian investor often known as Dr. Doom, has joined Sprott Inc. SII-T as director and member of the money management firm’s audit committee.
Euro Death By PIIGS
Faber believes the countries most likely to blow up are the “PIIGS”: Portugal, Ireland, Italy, Greece, and Spain. One or more of them will likely default in the next couple of years, which could mean the death of Euro.
Debt Interest Costs to Triple
According to Faber, the U.S. annual interest costs, currently around 12% of the government’s tax revenue, will soar to 35% of tax revenue within five years. This will force the government to cut spending (an unlikely scenario), and/or frantically print more money
U.S. & Japan - Default in 5 to 10 Years
Excessive money printing and debasing of the Dollar would most likely result in the United States defaulting on its debt within 5 -10 years Japan could face the same fate as well. (See more U.S. debt crisis charts from Faber here.)
Note: Jim Rogers sees U.K as in danger of an implosion as well.
U.S. Stocks - Correction Coming
After noting in his January 2010 newsletter that he was bullish on U.S. stocks, Faber changed his mind after participating in Barron’s round-table discussion. Faber says the overly bullish consensus worries him.
He now believes a correction in U.S. stocks could come much sooner than most expect as momentum players could “pull the trigger relatively quickly.” Faber is now looking at a 5%-10% rate of return for global investors.
Bonds
Bonds could be in for a rebound near term, but longer term, investors should look for exit opportunities in Treasuries.
Note: Jim Rogers also sees the U.S. government bond as overpriced and “in a bubble”.
Asia
Asia is likely to have longer term favorable growth. Faber favors India and Japan. In a December 2009 interview with Economic Times, Faber liked Japan as a contrarian play for 2010.
China Bubble
Faber indicated it is difficult to pinpoint a day when China will implode. But he does not think it will happen right away. However, when it does happen, investors can expect a hit on commodities and emerging markets.
Gold
Gold is going through a correction phase and probably will test the lows of $1,050 or $1,100 levels, but is still a long term buy through exploration companies and physical gold holdings.
Crude Oil
Prices may come off somewhat. Marginal cost of finding oil is around $70. Longer term, prices are expected to continue rising as demand increases from the developing world.
Agriculture Commodities
In the short term, Faber likes wheat as it is “very, very cheap”. But he advises against buying the wheat ETFs because they’re “very expensive” due to the rollover costs. Instead, he suggests play it through companies with farm land and plantations or potash companies.
China Bubble? Views from Rogers & Mobius
“China Bubble” has been in the media headline a lot lately; whereas in fact, the liquidity bubble created by the central banks’ loose money policy could easily trump China as the biggest bubble in the world most likely to burst first.
Investment guru Jim Rogers, while acknowledging Shanghai and Hong Kong property is in bubble during a Bloomberg interview today, debunked James Chanos yesterday, as quoted by China Daily, saying:
“It is absurd to say China is in a bubble when the stock market is 50 to 60 percent below its all-time high….After 300 years of decline everything is coming together for China in the 21st century”
Meanwhile, Dr. Mark Mobius, who oversees $34 billion of developing-nation assets at Templeton Asset Management Ltd., said Jan. 7 the bubble in China’s property market isn’t about to burst, and that
“The Chinese will act rationally and they’re not going to kill the market…There’s still a lot of savings in China. Prices are high but I don’t see a crash.”
My Take on The China Bubble
As stated in my article - China Is No Dubai or Enron.
“Overinvestment and overbuilding is sometimes a prerequisite of an anticipated mass urban migration such as the one China is destined to experience.”
Beijing is taking measures to prevent a bubble-burst predicament ahead of the U.S. and most of the industrialized countries. Unlike Dubai or Enron, the country is in a better position, with tremendous resource at its disposal that could power through a bubble or two.
Moreover, whether there is a bubble to burst in China is still a matter of great debate among market pundits, as cited here.
My Thoughts on U.S. Equities
The CBOE Volatility Index (VIX) of S&P 500 options fear gauge has crashed more than 63% over the last 12 months and down 18% this month alone, retreating to pre-Lehman levels. Though the VIX index roared 6.14% to 18.66 today, it has trended consistently lower since late 2008. This is causing a great deal of consternation among some investors that the higher investor complacency level is a signal that equity prices are peaking.
The equity market, particularly tech and financials, is quite vulnerable as the current valuation suggests a high earnings expectation, which will most likely disappoint this year in the context of a still hazy global recovery picture, and weak consumer spending. The earnings release and outlook from Citigroup, Inc. (C) & JP Morgan Chase (JPM) and IBM Corp. (IBM), etc. this week do not seem to have suggested otherwise.
So, it is quite sufficient to say when complacency and speculation has returned en masse, commodities and emerging markets will likely to be better bets than U.S. stocks and bonds.
And as the famous Wall Street adage goes, “VIX low, time to go”.
Video Source: Yahoo TechTicker
Tags: Bullish Consensus, China, Commodities, Contrarian Investor, Debt Crisis, Debt Interest, Default Risk, Dr Doom, Dr Marc Faber, Emerging Markets, ETF, Euro Debt, Global Investors, Gold, Implosion, India, Interest Costs, Ireland Italy, Italy Greece, Jim Rogers, Money Management Firm, Money Printing, oil, Rate Of Return, Risk Stocks, Stocks And Commodities, Term Investors
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Beware “nosebleed” valuations, says John Mauldin
Tuesday, December 8th, 2009
John Mauldin of Millennium Wave Investments says (via Yahoo Finance - Tech Ticker) long-term investors should ignore the temptation to get a piece of the stock market action. In his view there is only one metric to consider: valuations. At this moment, stocks are too rich for his blood - “nosebleed” is the term he used.
Mauldin said: “There’s lot of other things you can do while you’re waiting for valuations to come down.” According to Yahoo Finance - Tech Ticker, his recommendations include fixed-income and dividend-yielding utility stocks. He also thinks buying real estate for rental income is a smart move now that housing prices have come down so dramatically.
Source: Yahoo Finance - Tech Ticker, December 4, 2009.
Tags: Advertisement, Buying Real Estate, Dividend, Dividend Stocks, Fixed Income, Investments, John Mauldin, Metric, Millennium Wave, Nosebleed, Smart Move, Stock Market Action, Temptation, Term Investors, Utility Stocks, Valuations, Yahoo, Yahoo Finance
Posted in Markets | No Comments »
Jeremy Grantham: Beware of terminal paralysis
Thursday, February 26th, 2009
As the stock market indices are flirting with key charting levels and we are waiting for Mr Market to show his hand, it is useful to get an update on the outlook from Jeremy Grantham.
Grantham, chairman of Boston-based GMO, was a great skeptic between 1999 and October last year when he started propagating “hesitant and careful buying”. His latest thinking has just been reported in an interview with CNN Money as quoted below.
“Meanwhile, GMO chairman Jeremy Grantham is more upbeat - though he does expect more pain to precede any recovery.
“Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.
“‘That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ‘74 or ‘82,’ says Grantham. ‘I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.’
“Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.
“Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.
“Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.
“‘If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis - you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.’
Source: Eugenia Levenson, CNN Money, February 25, 2009 (hat tip: Investorazzi).
Tags: 19 Years, Bear Markets, Blue Chips, Cnn, Cnn Money, Crests, Global Economy, Gmo, Jeremy Grantham, Paralysis, Patience, Quagmires, Rebounds, Skeptic, Stimulus, Stock Market Indices, Term Investors, Valuations, Worst Case
Posted in Economy, Markets, Outlook | No Comments »
Yale’s Swensen: “Extraordinary Opportunities in Distressed Debt
Monday, January 5th, 2009
Legendary Yale University Endowment investor, David Swensen, says there are extraordinary investment opportunities in the credit world and is “pursuing a recovery” by acquiring distressed debt.
“There are some really extraordinary opportunities in the credit world,” said David Swensen, the school’s investment chief, in a phone interview from his office at the New Haven, Connecticut, university. “Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels.”
Among Swensen’s core principles identified in “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment” (Free Press, 408 pages, $35) is the importance of diversifying holdings while focusing on equities. In a recession, the advantages of diversification get overwhelmed by investors’ selling equities in favor of U.S. Treasury bonds in a “flight to quality,” he said.
“When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors,” he said.
In the current environment, distressed corporate securities can produce “equity-like” returns, Swensen said.
“You want to make sure you’re with companies that have the ability to survive in a really tough economic environment” he said, declining to name any of the companies.
Until financial institutions resume lending, the economy will remain stagnant, Swensen said.
“I don’t think the Fed or the administration has figured out how to fix credit markets,” he said. “We are going to experience economic and financial stress as long as the credit markets are broken and it’s not until we start seeing the credit markets functioning properly will we be able to see a path to economic recovery.”
Swensen advocates federal guarantees for deposits in money- market funds as a way to encourage investment in the vehicles that buy corporate debt.
Source: Bloomberg.com, January 2, 2009
Tags: Advantages Of Diversification, Bank Loans, Connecticut University, Corporate Securities, Credit Markets, David Swensen, Distressed Debt, Equity Exposure, ETF, Federal Guarantees, Financial Stress, Institutional Investment, Investment Grade Bonds, Money Market Funds, New Haven Connecticut, Term Investors, U S Treasury, U S Treasury Bonds, Unconventional Approach, University Endowment, Yale Endowment, Yale University
Posted in Bonds, Credit Markets, Economy, Markets | No Comments »
