Tuesday, March 1, 2011

Technically Precious with Merv

For week ending 25 February 2011

Despite all the turmoil gold was not able to get into new high territory. It will be interesting which way for gold next week.



Looking at the long term P&F chart we still have not negated that previous bear signal although as mentioned at the time, the bear needed a move to the $1305 level for confirmation, which it did not do before the rally. The two P&F levels to watch would be the previous $1305 level for the bear confirmation or the $1440 level for the bull continuation confirmation. The two levels are some distant apart but that’s the long term for you.

As for the usual indicators, they remain very positive (surprise) with one cautionary indicator. Gold closed the week well above its positive sloping moving average line. The long term momentum indicator remains in its positive zone and above its positive sloping trigger line. However, the actions of this indicator give us reason to be cautious. Although gold almost reached new high levels the momentum indicator has been lagging very badly suggesting much weakness in the strength of the gold price move. I’m almost afraid that if things turn around it might get nasty. The volume indicator remains quite positive, however, so maybe we need not worry but that’s only a maybe. For now the long term rating remains BULLISH.


With the action over the past few weeks the intermediate term is once more smiles. Gold is above its positive sloping moving average line. The intermediate term momentum indicator remains in its positive zone above its positive trigger line. Here, as in the long term, the indicator is showing weakness in its move. It barely reached the level of strength that gold had during its reactions periods during the Oct to Dec lows, and those levels were during down periods, not during a rally high. So, we need to be on the watch for a reaction in the price and as mentioned above, any reaction just might get nasty (I hope not but who knows?). The volume indicator remains overall positive and remains above its intermediate term positive trigger line. All in all the intermediate term rating remains BULLISH. This is confirmed by the short term moving average moving ever higher above the intermediate term average.


The short term rally has been on fairly good strength but the emphasis is on short term. The short term momentum indicator has been quite strong moving above the short term peaks of the previous tops but it looks like the move may have exhausted itself. The momentum had entered its overbought zone and has now dropped below the overbought line. This is often an indication that the move may be over, although it may be just a very temporary rest. Much depends upon the actions over the next day or so.

You will notice that I use the 13 day RSI as my short term momentum indicator and different time periods for my intermediate and long term momentum. MOST technicians that use the RSI use this 13 or sometimes 14 day RSI for ALL of their analysis. I’m probably one of the very few that uses a different period RSI for my intermediate and long term analysis. As we see, the short term is very positive while previously I showed that from an intermediate and long term perspective the momentum is very weak. I’ve never been able to justify for myself the use of a short term indicator to gauge the intermediate or long term market perspective but I guess others are able to handle that satisfactorily. So, where are we from the short term perspective?

Well, as you can see on the chart gold remains above its positive sloping moving average line. The short term momentum indicator remains in its positive zone very, very slightly above a positive trigger line but already below its overbought zone and heading lower. The daily volume action continues to be low, which is not encouraging during a bullish rally. I have been criticized (probably fairly) for using only the daily volume as posted by the COMEX trading but I assume that as long as I stay consistent in where I get my data that using some overall global volume from several sources will not give me any better volume information. What I look for is volume variation over time rather than some absolute daily value. After all, these things can be manipulated wherever one gets the information from. For now the short term rating remains BULLISH, confirmed by the very short term moving average line remaining above the short term line. The next day or two will tell us if this rally is really over or not.

As for the immediate direction of least resistance I think that is probably in the process of changing towards the down side but I’ll go with the lateral until better indication. The aggressive Stochastic Oscillator remains stubbornly at a very high level inside its overbought zone but can’t stay there forever. A turn to the down side will most likely suggest a negative market ahead.


Although silver continues to out perform gold and has moved decisively into new high ground all of the indicators are basically similar to that mentioned for gold, for the various investment time periods. The major difference in the indicators is in the Stochastic Oscillator. For the silver SO, it has already moved lower and has breached its overbought line to the down side. It has given us a very short term negative divergence in the process and is in much worse shape than the gold SO, but that may change fast if gold should turn lower. For now, as with gold, silver ratings remain BULLISH for all three time periods.


From time to time I show the chart of gold going back to the start of the great bull market but rarely do I show how the AVERAGE gold stock performed during the same period. The Merv’s Gold & Silver 160 Index provides an Index of the AVERAGE weekly performance of the 160 Index component stocks. This Index was first developed in 1993 but I have just shown you the performance during two bull and bear cycles, although the latest bull cycle may not yet be over. The Index includes the top 100 gold and silver stocks traded in the North American markets (based upon market value) plus 60 additional, more speculative stocks.

The two bear markets are interesting in that they declined almost the same amount, -68% in 1996/98 and -70% in 2008. As for the bull moves, the first major bull lasted 9 years and gained an average of 6553% while the second bull move has SO FAR only gained 560% (just for note, the Penny Arcade Index gained 2040% during this same period, since the 2008 lows). The question now is, will it continue to about a 6553% gain to be equal to the previous bull? If so that would be projecting this bull to continue to about the 56000 level, 10 times the latest Index value, that would suggest we are only one third of the way to the next top (from the 2008 low). I am not predicting such move but it is an interesting suggestion.

By comparison, how have the major North American Indices performed during this same period? First, it should be noted that both the PHLX Gold/Silver Sector Index and the AMEX Gold BUGS Index did not bottom out from their initial bear market until late in 2000. By that time the 160 Index had already gained over 100% in value. During the two similar bear market periods the PHLX lost 72% and 66%. During the first bull move the PHLX gained 390% and in the latest move is ahead by 220%. As for the BUGS, it lost 83% and 67% in its two bear moves while gaining 1326% and 245% in the bull moves. It should be noted that these major Indices are calculated whereby the major influence on their value is based primarily upon a few high value (high quality) stocks and most of their Index stocks have little effect on the Index value.

One can make a general conclusion here, first that regardless of the “quality” of the gold or silver stocks they loss just about the same amount during a bear market. However, the lower quality stocks seem to far outperform the high “quality” stocks during a bull market. One might therefore make a general statement that one should speculate in the lower quality stocks during a bull market and get out and relax during a bear market. That’s where technical analysis comes in, timing to get in and timing to get out. The buy and hold strategy just doesn’t work. If one bought the PHLX Index during 1996 they would only be ahead 50% now, after holding for some 15 years. What a performance?

To close this section I just want to suggest that in the future when you hear or read analysts comparing the performance of gold stocks with reference to ANY of the major market Indices, they are not talking about the vast majority of stocks out there but are talking about only a few very large high quality stocks that are the major influence on these Indices. The two may not be the same thing.

Merv’s Precious Metals Indices Table

It should be noted that the Index values for the FTSE Indices are for the period Thursday to Thursday. For some reason my data vendor does not provide the most recent data for these Indices. I would welcome suggestions for obtaining same day Indices values for the FTSE gold Indices.

Well, that’s it for this week. Comments are always welcome and should be addressed to mervburak@gmail.com.

A Standout Oil Stock

Baker Hughes Inc. (NYSE: BHI) — This large-cap oil well services company rose to a new high last week, hugging its 20-day moving average line in the face of selling in other oil-related sectors.

The oil well services sector is strong due to the need for global exploration to offset the possible reduction in the flow of crude oil from the Middle East. BHI is uniquely situated as one of the largest oilfield services companies, and S&P has a “four-star buy” on the stock.

Technically, last week’s break to new highs puts BHI in a strong position to rally to a resistance point at $80 within three to four weeks, making it one of this week’s best stock picks.

Trade of the Day - BHI Stock Chart

MacroMaven's Stephanie Pomboy: QE3 Is Coming, Short Retail, And Get Ready For More Mortgage Mayhem

MacroMavens' Stephanie Pomboy doesn't believe the recovery is good for the long haul, and she's recommending Treasuries and gold.

When Barron's interviewed Stephanie Pomboy at the end of 2008, she was pretty gloomy about the U.S. economy. That hasn't changed. Contrary to the bullish camp, which expects a strong economic rebound, Pomboy sees no evidence to support a durable recovery. Pomboy is president of MacroMavens, a Manhattan firm she founded in 2002 that specializes in analyzing macroeconomic themes and their investment implications. Her favorite plays include Treasuries -- which, she maintains, will rally once more economic data reveal a tepid recovery at best -- and gold. The 42-year-old analyst views hard assets as a hedge against what she expects will be the dollar's continuing weakness.

Barron's: Let's start with your macro view of the economy.

Pomboy:Not surprisingly, given my skeptical nature, I am dubious about the strength and durability of the recovery. The markets are clearly perceiving that the recovery has moved from, let's say, tentative to solidly durable, and that's been manifesting in various markets since the beginning of the year. But I'm skeptical for a variety of reasons. The stimulus is going away. You have this seasonal-adjustment hurdle that really moves from very low in January to very high in March and April.

Could you elaborate?

The government basically assumes that, every March, retail sales go up, let's say, 12% from the month before. So it makes for a very high threshold. If you get retail sales up only 10%, that number hits the tape as minus 2%. Another challenge is the year-on-year comparisons, which will be tougher as the year progresses. So all of those things conspire to present weaker data in the months to come, to say nothing of how we've now got these twin drags again of higher interest rates and higher commodity prices. So you have fundamental drags on the consumer at a time when employment and wage growth aren't really there to provide offsets. (more)

Oil's next danger zones

Whether you produce the stuff, refine it, consume it or speculate in it, it's impossible to separate oil from political risk.

Today the focus is on Egypt and Libya. Tomorrow, it could be Algeria, Saudi Arabia or Nigeria that triggers a price shock.

The supercharged price of crude is part of a new normal, where political risk trumps the old law of supply and demand.

“Oil increasingly comes from unstable parts of the world,” pointed out geopolitical risk expert Ian Bremmer, president of Eurasia Group. “It’s the Persian Gulf, it’s West Africa. It’s the Caspian. Those are not places we vacation. Those are places over time that are more and more unstable.”

And in this uncertain environment, politics matters more than market outcomes, Mr. Bremmer said.

In the grand scheme of things, Libya is a relatively small oil player. It’s the 18th-largest producer in the world and ranks ninth in proven reserves. The world can easily cope without its oil.

The concern, however, is that Libya is a harbinger of what may lie ahead in the Arab world, where democracy is stunted and small elites control the vast oil wealth.

As instability moves up the ranks of oil-producing countries, the price spikes are likely to be longer and more intense.

“It’s been so hard to predict where the next domino might be. If you look at a map, you’ve got Egypt, Tunisia, Libya,” remarked James Hamilton, an economics professor at the University of California-San Diego. “Algeria would be another possibility. And they’re a bigger oil producer than Libya.”

The damage so far seems to be contained. But the risk of further disruptions remains “pretty considerable,” Prof. Hamilton said. Just imagine, then, what the impact would be if the turmoil hit production in Saudi Arabia or Iran, the world’s No. 2 and No. 4 producers.

“If it were to end up in some place like Saudi Arabia, of course that would be a whole new ball game, in terms of the potential disruption to world supplies – bigger than anything we’ve ever tried to get through,” Prof. Hamilton said.

Here we take a look at the world’s crude hot spots, and rate the potential for unrest. (more)

Golden Fireworks About To Begin

The gold bull is now on the verge of launching the most spectacular up leg of this 10 year bull market. This spring we should see the final parabolic rally of the massive C-wave advance that began in April `09 with a test of the 1980 high at $860.

First off let me explain gold's 4 wave pattern (and no it has nothing to do with Elliot wave).

Gold moves in an ABCD wave pattern, driven not only by the fundamentals of the gold market (which I will get into in a minute) but also by the emotions of gold investors and the thin nature of the precious metals market.

The A-wave is an advancing wave that begins and is driven by the extremely oversold conditions created during a D-wave decline (more on that in a second). A-waves can often test the all time highs but rarely move above them. Usually they will retrace a good chunk of a D-wave decline.

The B-wave is a corrective wave spawned by the extreme overbought conditions reached at an A-wave top.

The C-wave is where the monster gains are made. They can last up to a year or more. The current C-wave is now almost two years old. They invariably end in a massive parabolic surge as investors and traders chase a huge momentum driven rally.

Of course as we all know parabolic rallies are not sustainable. So the final C-wave rally ends up toppling over into a severe D-wave correction as the parabola collapses. This is about the time we hear the conspiracy theorists start crying manipulation. In reality all that has happened is that smart money is taking profits into a move that they know can't be sustained.

Then the entire process begins again.

golds wave pattern

Next, let me show you the fundamental driver of the secular gold bull. It's probably no surprise to most of you that the Fed's ongoing debasement of the dollar is one of the main drivers of this bull. But let me take this one step further and show you how the dollar's three year cycle drives these major C-wave advances and how the move down into the dollar's three year cycle low always drives a final parabolic C-wave rally.

Let's begin with a long term chart of the dollar. I've marked the last 7 three year cycle lows with blue arrows. The average duration from trough to trough is about 3 years and 3 months. As you can see the dollar is now moving into the timing band for that major spike down in the next 2 to 3 months.

dollar three year cycle

The extreme left translated nature (topped in less than 18 months) of the current cycle gives high odds that the final low when it arrives will move below the last three year cycle low. That means that sometime between now and the end of May we should see the dollar fall below the March `08 low of 70.70.

That crash down into the final three year cycle low will drive the final parabolic move up in gold's ongoing C-wave advance. Every major leg down in the dollar has driven a major leg up in gold since the bull began. I really doubt this time will be any different.

dollar gold

I will be watching the dollar over the next couple of months for signs that the three year cycle low has been made. Because once the dollar bottoms and begins the explosive rally that always follows a major three year cycle low it will initiate the severe D-wave correction in the gold market. Gold investors will want to exit at the top of the C-wave if at all possible and avoid getting caught in the D-wave decline.

There is a developing pattern on the gold chart that once it reaches its target will be a strong warning for traders and investors to exit so they don't get caught in the D-wave profit taking event as the parabola collapses.

This T1 pattern is a four part pattern with the first and second legs up being almost equal in magnitude, separated by a midpoint consolidation that allows the 200 day moving average to "catch up". The current T1 has a target of roughly $1650ish once gold breaks out of the consolidation zone.

T1 pattern

The fourth part of the pattern is the D-wave correction which should retrace to test the consolidation zone between $1300 and $1425. At that point the next A-wave will begin and we'll repeat the whole process all over again.

Let me be clear though. I have no desire to buy gold. I doubt I will ever buy another ounce of gold again. The real money will be made in silver during this final C-wave advance and in the miners (I prefer silver miners).

During the last major moves higher in the gold market, miners, which are leveraged to the price of gold, stretched 35% to 45% above the 200 day moving average. At the latest peak the HUI was only 25% above the mean - a strong clue that this was not the final C-wave top.

hui final leg up

I expect we will see the HUI stretch 40 to 60% above the 200 DMA at the final top later this spring. But like I said, I really have no desire to buy gold or the major gold miners. The real money is going to be made in silver and silver miners.

Silver has been exhibiting exceptional strength compared to gold for 7 months now. The consolidation on the silver chart is much larger than on the gold or gold miner charts. I expect that massive consolidation to drive silver up to test the old 1980 high of $50 by the time gold puts in its final C-wave top.


The time to get on board is before gold breaks out of the consolidation. Once it does the parabolic move should be underway and your chances of a significant pullback to enter the market will decrease significantly.

Will Stockpiling Save You Money?

After watching the price of boxed pasta climb 70% over the last six months, Kelly Moore decided to take radical action. When her local grocery chain put the boxes on sale for 16 cents each, the Whitmore, Mass., mother of three bought 50 – six months worth. Savings: $72, at the cost of a few shelves in the basement pantry.

Although experts say it's risky, many consumers have reacted to rising prices by stocking up. It's a hard trend to track, but enthusiastic stockpilers have been sharing more strategies on shopping sites like The Grocery Game , FatWallet and Frugal Village since the first notable round of price increases came through in September. Wholesale clubs, like BJs and Costco have reported rising sales and traffic, which analysts attribute in part to consumers buying extra. And during the holidays, surveys indicated shoppers were buying for themselves as well as others, both to take advantage of sales and to ward off higher prices in the future, says Jeff Green, an independent retail consultant.

It's an expected reaction, says Richard Ebeling, a professor of economics at Northwood University in Midland, Mich. Consumers naturally stock up when they fear a shortage – think milk, snowstorm – or when rising prices push the boundaries of their budgets. The headlines have been screaming about rising commodities prices and food shortages for months, and retailers from Macy's ( M: 23.90, +0.30, +1.27% ) to McDonald's ( MCD: 75.68, +1.24, +1.66% ) have announced higher prices in the spring. The price of coffee has doubled in the last year, cotton is 80% higher than it was six months ago, and in January alone chocolate jumped 15%.

Even so, the price tags may not end up as shocking as consumers fear. Economists expect inflation to be about 2.5% this year, an increase from last year's 1.4%, but still fairly low. Companies' own stockpiles of raw materials, and a reluctance to pass on all of their increased costs to consumers still struggling from the recession, means that many prices won't go up before August -- and then, they may not go up by much, says Adrienne Tennant, a retail analyst at investment bank Janney Montgomery Scott.

There's also an unintended consequence of stockpiling, says David Bell, a professor of marketing at the University of Pennsylvania's Wharton School of Business: You'll actually end up using more of what you've stockpiled than you would otherwise. In theory, doubling the number of soda cases bought would result in a supply that lasts twice as long, but it's more likely that you'll go through it faster, or simply be less frugal about its use with extra on hand. You could even end up throwing out food that expires, rejecting out-of-fashion items, or simply forgetting about the cans of corn stashed behind the hats and mittens in the basement.

Still, buying before prices rise can be smart – in small doses. Most supermarket and drugstore items go on sale just once every 10 to 12 weeks, says Teri Gault, founder of The Grocery Game. If you're loyal to a certain brand, buying extra when you spot a sale is smarter than paying full price the following week when you're actually out. On fashion, retailers sneak in bigger price increases on trend items because consumers can't easily monitor cost like they do for wardrobe staples such as trousers and T-shirts, says Tennant. Many of those items are available now at end-of-season clearances, and can be picked up for a song. And avoiding hyped-up eBay ( EBAY: 33.51, -0.12, -0.35% ) prices on discontinued items by stocking up is usually a sound strategy, too.

Ultimately, the decision may come down to cash flow. If charging six months worth of dry goods means paying extra interest charges on credit card debt, it's not worth the savings, says Randy Allen, an associate dean for The Johnson School at Cornell University. If not, then the savings may be more welcome. Moore says the money she has saved stocking up helps her better budget for other expenses… like the brand-name jeans her middle-schooler is sure to want for back-to-school.


By Carl Swenlin, Decision Point

Yesterday the U.S. Oil Trust ETF (USO) switched from a Trend Model neutral status to a BUY signal. The signal change occurred when the 20-EMA crossed above the 50-EMA. Erin covered this briefly yesterday, but I thought it would be good to expand on the subject a bit more.

While our official market posture is determined solely by our mechanical models, we can still step back and take a broader view of technicals and fundamentals, and determine how much confidence we have in a given signal.

On the chart below it is fairly obvious that, prior to the riots in the Mid-East, USO was starting to roll over due to general and unspecific secular forces. (See the decline to the rising trend line and the weakening PMO.) Even the short rally resulting from the Mid-East riots failed to disrupt the underlying weakness. A new low was made this month and the rising trend line was penetrated to a significant degree.


Then came a huge price jump caused by the escalation of problems in Libya, which produces three percent of the world’s oil. It was this move that generated the buy signal.

Now let’s zoom back and look at the weekly chart. First note the parabolic price rise in 2007 and 2008, followed by the total price collapse. Out of that collapse USO has begun what is called a basing pattern, which is very typical of what can happen after a collapse. These basing patterns can last for years, and I think it is a bit early to say that this one is about to end.


Bottom Line: Secular forces have kept USO contained in a long-term trading range, and prices were drifting down within that range before the Libyan situation provided a short-term disruption of the flow. I think that some further dire developments (not at all out of the question, of course) will be required to effect a long-term change in direction in the price of USO.

Trading ranges, as a rule, generate whipsaw signals, and that has been the case for this one. My guess is that the current buy signal will result in one more whipsaw. The top of the trading range represents our maximum expectation for this rally.

Is This Oil Spike Temporary?

$1 Trillion Global Water Market Forecast For 2020; Global Freshwater Demand Expected To Exceed Supply By 40 Percent By 2030

Famed especially for the excellence of its peacekeepers and ice hockey players, Canada's water experts are now increasingly needed to help countries elsewhere brace for drought, flood and unsafe water problems looming on a 15 to 20 year horizon.

Within a single generation, recent studies show, water demand in many countries will exceed supply by an estimated 40%, with one-third of humanity having half the water required for life's basics. In flood-prone places, meanwhile, catastrophic flood events normally expected once a century - similar to those recently witnessed in Pakistan and Australia - can now be expected every 20 years instead.

This photo shows an innovative road construction where storm runoff is captured into a grass swale in Auckland, New Zealand.
Credit: Hans Schreier, University of British Columbia

The anticipated crises create a fast-growing need for technologies and services to discover, manage, filter, disinfect and/or desalinate water, improve infrastructure and distribution, mitigate flood damage and reduce water consumption by households, industry and agriculture - the biggest water user by far at 71% worldwide.

And Canada is well positioned to mobilize and share worldwide its extensive experience gained stewarding 9% of the world's freshwater supply.

Representing an important step in that process, some 300 scientists, policy-makers, economists and other stakeholders convene in Ottawa Mon. Feb. 28 to Thurs. March 3 for an international meeting hosted by the Canadian Water Network (CWN) showcasing latest world research findings as well as proven news tools, ideas and best practices for optimizing water management.

The One Sector You Must Own for the Next 10 Years :ATW / BHI / BP / COP / CVE / CVX / DO / GIFI / HAL / KPELY.PK / NE / PDS / RDS.B / RIG / SDRL / STO

As markets correct, every sector will be affected. But some have shown their ability to bounce back and grow ever stronger. Higher lows and higher highs characterize their relation to the markets. No sector has been more successful in tracing this sort of history than the energy sector.

What to buy? In the oil business, in particular, it might be easier to answer the question, "What not to buy?" A better answer may be that there will always be some lucky wildcatter who succeeds by a superior gut feel for a property or a source of capital, but in fact the easy finds are gone. For that reason, over the years I have switched my emphasis, at least among the E&P crowd (the explorers and producers) to the biggest and best-capitalized of the multinationals. It takes billions of dollars today to stay in this business. A company needs deep pockets to withstand the occasional run of exploratory bad luck in order to reap the rewards of successful discovery down the road.

Of course, big doesn’t mean expensive. You can still buy some of the best names for single-digit PEs – rarer and rarer – or for low-teen PEs. Most pay dividends that are way better than CDs or money market funds and raise those dividends regularly. In addition to the E&P firms, there are scores of quality drillers, rig-builders, and other servicing firms, a like number of pipeline outfits, ever more natural gas firms, and some superb coal companies. There are only a handful of uranium firms of any size but lots of “penny dreadfuls” for your consideration, and there are the alternative energy providers, be they biomass, solar, wind, geothermal or pie-in-the-sky.

I am a big fan of the oil service firms and rig-builders because they can do well whether it's the majors or the minors who find success in the oil patch -- and, indeed, whether or not any of them find success! If I'm an oil drilling rig provider, you pay me up front whether or not you ever find a drop of oil. And if you go bankrupt because you never find a thing? Too bad, so sad, someone else rents my rigs.

I’ll talk about the coal, gas, refiners and uranium firms in a follow-on article, but for now let’s dive right into Big Oils and those who provide them what they need to find the oil and gas:

The Bigger the Better

EXXON MOBIL (XOM) is certainly the class act of American-based oil companies. If you had bought XOM 20 years ago this month, you'd have paid (split-adjusted) between $12 and $13 a share. It closed a little above $85 on Friday. Back then, you’d have received 68 cents a share every year in dividends. Purchasers today would receive $1.76 a year. Those who bought it 20 years ago have received more in dividends – by far – than they paid for their shares. It’s nice to play with the house’s money! The best-run companies find a way to keep making money no matter the external environment. EXXON has deep pockets, a superb balance sheet, excellent management and a broad enough downstream infrastructure to be able to explore, then develop, the oil fields, then refine the goo they pump into different products which they market directly to end-users like you and me.

Would I buy the shares of XOM right now? No. But then I bought them for our Growth & Value Portfolio back in June at $59.30 a share. At this point I will be placing a trailing stop – I don’t know how high it can go this time around but I’d like to protect that profit – with the idea of simply buying it back the next time people lose interest in the oil stocks. Will I buy for $59.30 again? Probably not but, then, I’m in the business and watching the markets all day every day, so I can trade a bit more easily. And I don’t mind buying at a higher low and selling at a higher high! If you’d rather play golf or sell cars or do something else with your time, you might just buy and hold. It certainly hasn’t hurt anyone who has done so in the past.

I suggest you also consider ROYAL DUTCH SHELL (RDS.B) for your own due diligence. You like big, solid, diversified? You got it here. RD scans the globe for drilling opportunities and spans the globe in refining and marketing finished product. Selling just above $71, up from $40 back in June, it pays nearly 5% and sells at 15 times trailing earnings. You don't get more blue chip than this. Again, I’m holding off on new purchases for now but ten years from now I’ll wager we’d rather have been in RDS.B than out of it.

Three more recent purchases have been France’s TOTAL PETROLEUM (TOT), Norway’s STATOIL (STO) and Canada’s CENOVUS (CVE.) STO is only up about 3 points from our purchase price and TOT about 5 points. CVE has run a little further, up 10 points already. I’d view any pullback in STO and TOT as a chance to buy brilliant companies and a 5 to 7 point pullback in CVE an excellent entry point. There are plenty of others but you could do worse than to start with STO and TOT and catch the others on any decline. At lower prices, I’d be a buyer of CONOCOPHILLIPS (COP) and CHEVRON (CVX) too. Having bought BP in the low 30s I’d even buy more of them at that price.

Drillers and Oil Service Companies

Then there are the oilfield services companies. In the oil business, you use up and wear out a lot of equipment and the guys who replace it for you and the guys who rent you the rigs make big money as long as you're looking. Whether you find oil or not, oilfield services firms make money. It's the looking, not the finding, that counts to them.

For the producers and explorers discussed above, I've been able to buy them, sell them at a fine profit and buy them back today at the same price I originally bought them. That's a little more difficult with the service companies -- they keep getting bought out at a premium!

But they are regularly replaced by newer entrants, and often available for less than their true worth. As I wrote back when the BP spill made our government first dither, then over-react to show they were sort of in charge, then dither again, in an article titled BP's Gift to Investors: Cheap Energy Stocks, I noted that just about every driller was knocked down along with TRANSOCEAN (RIG), which may or may not have had some culpability for the spill. But I guarantee that DIAMOND OFFSHORE (DO), BAKER-HUGHES (BHI), HALLIBURTON (HAL), SEADRILL (SDRL), GULF ISLAND FABRICATION (GIFI), ATWOOD (ATW), WEATHERFORD INTL (WFT) and NOBLE (NE) weren’t anywhere in the area, yet investor over-reaction knocked them for a loop, as well! Heck, PRECISION DRILLING (PDS) got knocked down a bit and they are a huge land driller.

Today, I am not buying any of these, but we did load up on WFT and SDRL at much lower prices back in September. If I could add to our positions in SDRL anywhere around 30 and WFT anywhere around 18, I’d do it in a minute. Our old favorite KEPPEL CORP (KPELY.PK) has been a “relative” under-performer since the BP mess, rising from 13 to just 18. I’m looking to buy more KPELY on any decline that takes it down even a couple of points. And I’m looking at a couple of other, lesser-known names right now but I have to finish my due diligence on them before I can recommend them for your consideration.

That’s a pretty good start on a two different industries within the larger energy sector. Next up, we’ll talk about pipelines, coal and uranium, with maybe a dash of alternative energy firms, as well...

Gold, Dollar, Stocks & Sentiment at Major Pivot Point

So far 2011 has been an interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.

Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities. It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.

SPY (SP500 Price Action) – 60 Minute Chart

This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?

Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.

sp 500 sentiment

Price Of Gold – Weekly Chart

Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.

Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be interesting year to say least…


Dollar Weekly Chart

This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).

In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.

us dollar

Weekend Trend Report:

In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.

I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals.

Last week we say a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.

Stocks Rise as Buffett Eyes M&A; Oil Falls, Dollar Index Drops

U.S. stocks rallied, extending a third monthly gain, as billionaire investor Warren Buffett said he’s looking to make acquisitions and reports signaled a strengthening American economy. Oil retreated as Saudi Arabia offered to make up for lost output in Libya. The dollar slid.

The S&P 500 advanced 0.6 percent to 1,327.22 at 4 p.m. in New York and rose 3.2 percent in February. The Stoxx Europe 600 Index rose 0.8 percent. The Dollar Index lost 0.5 percent to 76.898, the lowest level since Nov. 5, while the yield on 10- year Treasuries rose less than one basis point to 3.42 percent. Crude fell 0.9 percent to $96.97 a barrel. Oman shares sank the most in 25 months as political unrest spread to the Sultanate. Dubai’s index slid to the lowest level since 2004.

The S&P 500 rebounded after last week’s 1.7 percent drop after Buffett told shareholders his “trigger finger is itchy” for deals, spurring speculation that an upswing in takeovers will accelerate. Blackstone Group LP agreed to buy Centro Properties Group’s U.S. shopping centers for $9.4 billion, two people familiar with the matter said, while Ventas Inc. plans to buy Nationwide Health Properties Inc. for about $5.7 billion in a record takeover for health-care real-estate investment trusts.

“It’s a constructive environment,” said Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $741 billion. “Whenever Warren Buffett’s talking about putting money to work, that’s going to have a positive impact on people’s views and on the market.”

Consumer Spending

Buffett isn’t the only investor with an itchy trigger finger. Announced takeovers of U.S. companies have totaled $161.9 billion so far in 2011, 66 percent more than the $97.4 billion through this date last year, according to data compiled by Bloomberg.

Class B shares of Buffett’s Berkshire Hathaway Inc. climbed 2.8 percent as the company also reported a 43 percent gain in quarterly profit to the highest since 2007 on derivative gains and earnings from the acquisition of Burlington Northern Santa Fe, the railroad purchased last year.

“Our elephant gun has been reloaded, and my trigger finger is itchy,” Buffett said of the outlook for deals in his annual letter to shareholders on Feb. 26. The company’s cash holdings rose to $38.2 billion at year-end, the highest in three years, compared with $34.5 billion as of Sept. 30.

Nationwide Health Properties rallied 9.7 percent, the most since May 2009, while Ventas slipped 3.1 percent. Trading in Centro Properties was halted in Australia.

Economic Data

Stocks also gained as the Institute for Supply Management- Chicago Inc. said today its business barometer rose to 71.2 this month, the highest level since July 1988, from 68.8 in January. Figures greater than 50 signal expansion. The gauge, which was projected to fall, exceeded every estimate of economists surveyed by Bloomberg News. Separate government data showed personal incomes climbed 1 percent and inflation remained below the Fed’s long-term forecast.

Federal Reserve Bank of New York President William Dudley said in a speech in New York that the “considerably brighter” economic outlook isn’t yet reason for the central bank to withdraw its record monetary stimulus. Fed Bank of St. Louis President James Bullard said in a CNBC interview that oil prices would have to go “substantially higher” to be a concern to U.S. economic and a weaker dollar can help growth temporarily.

Fed Chairman Ben S. Bernanke will testify to the Senate Banking Committee tomorrow.

The cost of protecting U.S. corporate bonds from default dropped for a third day. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1.2 basis points to a mid-price of 81.89 basis points, according to index administrator Markit Group Ltd.

European Stocks

About five shares gained for every two that fell in Europe’s Stoxx 600. Syngenta AG jumped 2.6 percent after the Indian government announced tax breaks for investments in fertilizer projects and a rival announced an increase in sales of agricultural chemicals. Siemens AG climbed 3.6 percent after the company was said to be weighing an initial public offering of its Osram lighting business. HSBC Holdings Plc, Europe’s biggest bank, slid 4.7 percent after earnings missed analysts’ estimates.

The dollar depreciated against all but three of its most- traded counterparts, slipping 0.4 percent per euro. Europe’s single currency appreciated 0.5 percent versus the yen and 0.4 percent against the Swiss franc before the European Central Bank meets to discuss interest rates this week.

Krona Jumps

Sweden’s krona jumped 1.5 percent against the dollar to the strongest since August 2008, after central bank Governor Stefan Ingves said in minutes of the Feb. 14 meeting published today that the chances of monetary tightening at every meeting this year have risen and signaled individual interest-rate increases may be bigger than those executed thus far.

The Bloomberg GCC 200 index fell 0.8 percent to the lowest level on a closing basis since Sept. 4. Oman’s MSM 30 Index sank 4.9 percent and the Dubai Financial Market General Index slid 3.8 percent

The MSCI Emerging Markets Index advanced 0.7 percent. The Bombay Stock Exchange Sensitive Index climbed 0.7 percent as India’s government pledged to trim its budget shortfall while boosting spending on projects needed to sustain economic growth.

Oil erased gains after climbing as much as 2.1 percent to $99.96. Chief Executive Officer Khalid Al-Falih said the Saudi Arabian Oil Co. is ready to compensate for any shortfall in crude supply. Most ships picking up Libyan oil cargoes have done so successfully in the past week, said Bob Knight, head of tankers at Clarkson Plc, the world’s largest shipbroker.

Brent crude also fluctuated between gains and losses, recently trading down 0.2 percent at $111.08. The average price for U.S. regular gasoline at the pump gained 2.1 cents to $3.354 a gallon on Feb. 26, AAA, the country’s largest motor club, said on its website. The record pump price, reached in July 2008, was $4.114.

Cotton jumped the daily limit of 7 cents, or 3.8 percent, after China, the world’s largest producer and consumer, reported lower production last year. Copper climbed 0.9 percent to $4.4965 a pound in New York.

Panic Buying, Unrest, and Hoarding Drives the Ag Sector

food priceRecord Food Prices. Global food prices reached record levels last month as the weather around the globe adversely impacted crops. High food prices have already sparked protests across the Middle East and North Africa. The trend in price data indicates that upward pressure on world food prices is not abating. The FAO Food Price index reached its highest level since records began in 1990, topping the peak of 224.1 set in June 2008.

Weather continues to play a large role in disrupting harvests around the globe. Harvests have been at record or near-record for the last two years for many commodities but grain stocks have not caught up with the growth in demand. The recent broad-based crop disappointments occurring in numerous countries means it will take years to rebuild a good supply buffer which would insure food prices remain moderate.

Panic buying and hoarding. Due to the recent unrest and protests many countries are substantially increasing grain imports and food subsidies. Bloomberg noted last month that “unrest is starting again” as a result of rising food prices. They report three people were killed and 420 injured in protests over milk and flour costs in Algeria. The Tunisian President tried to end a month of protests by promising lower prices for bread, milk and sugar, before leaving the country.

The Serbian government said it will consider an export duty on wheat to discourage shipments. South Korea said it plans to increase the supply of some food products to help control prices. And India halted onion exports in December after prices more than doubled in a year.

The Financial Times published an article last month entitled “Panic buying fears send crop prices higher”. Javier Blas, Financial Times Commodities Editor, noted:

First, the crop failures; second, the export restrictions; and third, the initial food riots on the back of rising prices. Now food importing nations are responding with a steep increase in purchases and hoarding, driving agricultural commodities prices even higher.

This latest development mirrors the 2007-08 food crisis, when the cost of agricultural commodities from wheat to corn hit all-time highs. At that time, the first three stages led finally to panic buying, which was the straw that broke the camel’s back.

As happened three years ago, the accelerated buying is coming from a broad spectrum of developing nations as governments react to growing social unrest about rising domestic food prices. . . The extra purchases are particularly large in North Africa and the Middle East, regions which are more dependent on international markets for food supplies.

Ethanol & Social Stability. The relationship of social stability and food prices is in part a function of how much of an individual’s income is utilized for food. In developing countries it is not unusual for food costs to constitute a third or half of an individual’s income. In North America food costs constitute around 10% of income. The Financial Times published charts on the major grains used to feed the world – rice and wheat are by far the largest crops on a calories per capita consumption basis:

wheat price rice price rice and wheat
crowding out food

With regard to corn, energy policies adopted in a number of countries have mandated or provided economic incentives to convert corn or sugar cane into ethanol, an alternative fuel. Almost 39% of last years U.S. crop was used for ethanol, and next year that percentage is expected to increase according to the USDA.

At the projected level of consumption year-ending corn stocks will total only 5.5 percent of consumption – the lowest level seen in decades.
us corn stocksCorn stocks cannot be reduced much below that level and still maintain a functioning grain pipeline of supply. Higher corn prices – possibly much higher prices – could play a role in allocating scare supply. (charts courtesy Wall Street Journal and Reuters)

La Nina. Adverse weather events account for many of the agricultural sector problems. The flooding in Australia as well as the droughts in South America and China have been blamed on ‘La Nina’ - an abnormal cooling of the waters in the equatorial Pacific Ocean.

The La Nina pattern ‘wreaks havoc’ with weather patterns across the Asia-Pacific region according to meteorologists. When the pattern is present the chance of drought in grain-growing areas of the U.S. increases substantially (see map below), something we will need to monitor in the upcoming planting season.

This winter China's key wheat growing province of Shandong is facing its worst drought in at least 40 years, attributed to the La Nina event, putting further pressure on politically sensitive food prices. China’s food prices have been surging for months. Dry weather and unseasonable temperatures are forecast in the region well into spring. In addition, Russia’s whet belt has not recovered from last year’s drought and yields are expected to suffer again during the coming growing season.

weather phenomenon

This La Nina pattern is unusual in that it is one of the most intense in the last fifty years according to weather experts. Many of the computer models have the pattern slowly breaking down over the next several months, although some experts predict that the pattern will last well into the fall of 2011 if not longer.

The map at right indicates areas and crops or commodities potentially impacted by the La Nina weather pattern, courtesy the Financial Times.

Investment Implications. From an investment standpoint we think the longer term price trends are very positive for both agriculture and energy sectors reflecting changing supply and demand fundamentals. These are not price ‘bubbles’ or short term disruptions – in our opinion they reflect longer term global trends which are creating significant investment opportunities.