I revisit the weather, water, and agriculture themes today not only because they have been three of my long-standing themes, but to emphasize why they should continue to be viable investments going forward. Water is by far the most undervalued asset I know, yet it is difficult to find water-centric investments. Clearly, that is not the case with agriculture. As for weather, I began this strategy report with a quote from the weather website “Wunderground” because it makes the point that last week’s Midwest storms had, “The lowest barometric pressure readings ever recorded in the continental United States.” I think the weird weather will continue to be driven by the shift in “The Tropics.” This implies a cold and wet winter. Manifestly, a cold winter, when combined with the anticipated Republican victory, should have positive implications for energy stocks. From our Analyst Current Favorites list I offer the following energy names for your consideration: Alpha Natural Resources (ANR/$45.17/Strong Buy); Hess Corp. (HES/$63.03/ Strong Buy); National Oilwell Varco (NOV/$53.76/Strong Buy); Inergy L.P. (NRGY/$39.26/Strong Buy); and Whiting Petroleum (WLL/$100.44/Strong Buy). I also would have you consider Clayton Williams Energy (CWEI/$59.72/Outperform).
As for the equity markets, after being constructive since the end of June, I turned cautious exactly two weeks ago as we approached last April’s price “high” on the D-J Industrial Average (INDU/11118.49). The senior index stood at ~11200 back then and changes hands around the same level today. However, over the past two weeks we have experienced weakening relative stock strength and numerous distribution days. Additionally, the U.S. dollar has stabilized and the 30-year Treasury bond yield has surmounted 4% (both bearish events). Despite those deteriorating metrics, stocks just don’t seem to want to spill into the 5% - 8% correction I have been anticipating. While I have not given up on a downside correction, I must admit if it doesn’t happen soon, time may be running out for the bears. Indeed, this week begins the best six-month period of the year for stocks (November through May); and with 3Q10 earnings reports beating estimates by 71%, as well as 4Q10 earnings guidance rising, underinvested portfolio managers are experiencing intense performance anxiety. That anxiety should cause them to “flinch,” and buy stocks, if a correction doesn’t arrive soon. Adding to that performance anxiety is an improving economy, for as my friends at the invaluable Bespoke Investment Group write:
“(Last) week’s economic data contributed to further improvement in our Economic Indicator Diffusion Index. As shown in the (nearby) chart, the 50-day rolling net total of better than expected economic reports hit a level of +15 this week. This is the highest reading since early February, and hardly an indication of the economy going downhill.”
The call for this week: I live in Florida and I can tell you November hurricanes are pretty rare. Nevertheless, as of Saturday there were two stirring in the Atlantic as “Shary” and “Tomas” became the 18th and 19th named storms of this hurricane season. And while Shary lost her hurricane status on Sunday, Tomas continues to gather strength. Certainly predicting the weather is as difficult as predicting the stock market, which is why weather is an unknown unknown (aka Katrina). Interestingly, as Donald Rumsfeld evinced, "It's not the certainties that make life interesting; it's the uncertainties. There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things we know we don't know. But there are also unknown unknowns – the things we don't know we don't know.” Or as one old Wall Street wag exclaimed, “It’s not the snake you see that bites you!” Hence, I remain cautious, but not bearish, admitting that time is running out for the bears.
P.S. – Read the book “The Coming Famine: The Global Food Crisis and What We Can Do To Avoid It” by Julian Cribb, which states “Civilization and anarchy are only seven meals apart.”
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