“Painful Ups and Downs”
by Jeffrey Saut, Chief Investment Strategist, Raymond James
October 3, 2011
“One hour after beginning a new job which involved moving a pile of bricks from the top of a two story house to the ground, a construction worker in Peterborough, Ontario suffered an accident which hospitalized him. He was instructed by his employer to fill out an accident report. It read –
‘Thinking I could save time, I rigged a beam with a pulley at the top of the house and a rope leading to the ground. I tied an empty barrel on one end of the rope, pulled it to the top of the house, and then fastened the other end of the rope to a tree. Going up to the top of the house I filled the barrel with bricks. Then I went down and unfastened the rope to let the barrel down. Unfortunately the barrel of bricks was now heavier than I, and before I knew what was happening, the barrel jerked me up in the air.
I hung on the rope, and halfway up I met the barrel coming down, receiving a severe blow on the left shoulder. I then continued on up to the top, banging my head on the beam and jamming my fingers in the pulley. When the barrel hit the ground, the bottom burst, spilling the bricks. As I was now heavier than the barrel, I started down at high speed.
Halfway down, I met the empty barrel now coming up, receiving several cuts and contusions from the sharp edges of the barrel. At this point, I must have become confused because I let go of the rope. The barrel came down, striking me on the head. I woke up in the hospital. I respectfully request sick leave.’”
... The Toronto Star
“Painful ups and downs” have become a way of life for investors during the past few months. In fact, there have been nine swings of 5% (or more) from intraday highs to lows over the last eight weeks, yet the S&P 500 (SPX/1131.42) has gone virtually nowhere. Indeed, the SPX closed at 1119.46 on 8/8/11 and is resting just 12 points higher than that this morning. Unsurprisingly, most of the quarterly decline occurred in the 10 trading sessions between 7/27/11 and 8/9/11, which lopped some 17% off of the SPX. Since then, the SPX has been trapped in a trading range between ~1100 and ~1230. The mid-point of that range is 1165 and by my count the index has crossed above and below that mid-point 35 times over the past two months, causing one old Wall Street wag to ask, “Can you spell whipsaw?” Whatever the reason, the index was down 14.33% for the 3Q11 and off roughly 10% year to date, punctuated by the SPX’s 64-point plunge from last Tuesday’s intraday high into Friday’s close. Interestingly, it wasn’t the economic news that caused the four-day dive because of the 18 weekly economic releases, 14 came in better than expected. Nope, the culprit for the “painful ups and downs” has clearly been Greece, and the European mess, as chronicled by the lynx-eyed folks at the Bespoke Investment Group. To wit:
“Most European markets close at 11:30 AM here on the East Coast, and the performance of stocks here in the US when Europe has been open versus when Europe has been closed has been striking. As shown in the chart below (see page 3), the S&P has averaged a daily decline of 0.25% from the prior close to 11:30 AM ET since July 7th, while the index has averaged a decline of just 0.05% from 11:30 to the close. Had you bought the S&P at the close every day since 7/7 and sold the next morning at 11:30 AM, you would be down 13.14%. Had you bought at 11:30 every day and sold at the 4 PM close, you would be down just 3.31%. Since basically the July 4th holiday, bulls here in the US would have been much better off taking mornings off instead of trying to trade while Europe has been open. This trend will likely continue as long as you’re reading about Europe with your morning coffee.”
To be sure, trying to trade in such a whipsaw environment has been detrimental to your wealth, which is why we have been pretty circumspect in recommitting capital until the equity markets prove the August 9, 2011 intraday low of 1101.54 was THE low for the balance of the year. That said, we have recommended select stocks, with decent dividend yields, that our fundamental analysts thought had fallen to unsustainable lows during the “panic selling” of early August. Names often mentioned in these missives are: EV Energy Partners (EVEP/$71.68/Strong Buy); Healthcare REIT (HCN/$46.80/Outperform); and LINN Energy (LINE/$35.66/Strong Buy), to mention but a few. We have been particularly enamored with special situations where investors were not valuing a particular asset within a company’s portfolio correctly. Recall, that is what led us into EVEP last March when it was determined Wall Street was not ascribing any value to the partnership’s ownership of 230,000 acres in the little-analyzed Utica Basin resource. Since then, the Utica Basin has become an increasing focal point for energy investors.
The increased Utica attention was sparked by Chesapeake Energy’s (CHK/$25.55/Market Perform) 2Q11 earnings announcement as the company described its Utica discovery by stating:
“Based on its proprietary geoscientific, petrophysical and engineering research during the past two years and the results of six horizontal and nine vertical wells drilled, Chesapeake believes that its industry-leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15 -$20 billion in increased value to the company. ...As a result of its analysis, the company believes the Utica Shale will be characterized by a western oil phase, a central wet gas phase and an eastern dry gas phase and is likely most analogous, but economically superior to, the Eagle Ford Shale in South Texas.”
Remember that undeveloped resource plays back in March were changing hands for $2,000 - $2,300 per acre. Thus, EV Energy Partners’ Utica holding should have had a valuation of more than $450 million, not to mention what the property is worth if you value it at the $15,000 per acre the Eagle Ford properties are fetching.
