Friday, December 31, 2010

What Oil and Gas are Telling Us Now

Right now, oil and natural gas prices are stretched to their limits.

Rarely before in history has oil been so expensive while at the same time, natural gas prices so cheap.

You can see this price differential in effect by looking at this chart, which divides the price of one barrel of oil by the price of one million british thermal units (mmbtu) of natural gas:

It’s helpful to use these types of ratios – that is, the price of one commodity divided by the price of another – to scrub out dollar and currency market fluctuations. It gives you a purer look at the actual relative value of one commodity vs. another.

The only other time natural gas was as relatively cheap to oil as it is right now happened in last half of 2009.

And in just four months, natural gas prices doubled: (more)

Home Prices Are Still Too High : Peter Schiff


Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.

Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.

Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized. (more)

Top 11 Value Stocks for 2011

Broadly speaking, stocks were a fine investment in 2010. True, the market lagged the jaw-dropping returns to be found in, say, gold, which jumped about 25%, or silver, up 75%. But the S&P 500 ($INDU) is set to close 2010 with a 13% gain -- something that was almost unthinkable as recently as September -- and we'd gladly take returns like those again in 2011.

Wall Street's average price target on the S&P 500 has it tacking on another 11% over the next 12 months, according to Bloomberg data -- with plenty of ups and downs along the way, naturally. That has us inclined to play defense in our 2011 stocks picks, with an eye toward bargain stocks paying generous, sustainable dividends.

We screened the S&P 500 for stocks trading at deep discounts to the index by forward earnings, currently at 14.6, according to market research firm Birinyi Associates. We also looked for price/earnings-to-growth (PEG) ratios well below the S&P 500's figure of 1.6, according to data from Thomson Reuters. (PEG reveals how how a stock is valued relative to its growth prospects. (more)

Marc Faber: Treasurys Are A "Suicidal Investment"

Marc Faber, who just like Nassim Taleb has never hidden his disdain for investments in US-backed paper, is back to bashing Treasurys, although with logic diametrically opposite to that espoused by those such as Morgan Stanley who see rising rates as a sign of economic growth. "This is a suicidal investment,” Faber told Bloomberg in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S. long-term bonds.” As for equities, Faber increasingly sees a Zimbabwe outcome: “If you print money, the currency goes down and the S&P 500 goes up. By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror.” Not Wall Street thought. By the end of 2011, bankers will most likely be looking at the second consecutive record bonuses year, and by then will have enough gold safely stashed away in non-extradition countries to where the host organism may finally be allowed to die in peace.

Treasury 10-year note yields will rise to 5 percent from yesterday’s level of 3.349 percent, Faber said, without specifying a time frame. As bonds fall over the next decade, he said investors should buy precious metals, real estate or equities. U.S. debt has returned 5.7 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index.

Treasuries fell today as reports showed initial jobless claims dropped more than forecast, U.S. businesses expanded at the fastest pace in two decades and pending home resales beat expectations. The yield on the benchmark 10-year note advanced 0.04 percentage point to 3.39 percent at 1:54 p.m. in New York, according to BGCantor Market Data.

Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 then climbed 10 percent to its record of 1,565.15 seven months later, and ended the year up 3.5 percent.

Rising Oil Prices Make E&P Profitable

The Energy Report: Your area of coverage is exploration and production. Do small caps and large caps trade similarly? Do they follow similar patterns?

Phil McPherson: Yes. In the exploration and production (E&P) space as a whole, it's a pretty simple business model. The size of the company is basically a reflection of the ability to accelerate that business model. And your ability to execute and meet timelines usually has just as much of an impact on your market cap as the success or the failure of the actual oil and gas (O&G) play. I'm covering many California companies, including Berry Petroleum (NYSE:BRY), Plains Exploration & Production (NYSE:PXP) and this small oil producer that I stumbled across, NiMin Energy Corp. (TSX:NNN). I think they all have the same type of idea. But in terms of how they trade, every company is in some ways going to trade as does the commodity. So you're going to go up and down on certain days because oil's up and oil's down. I used to joke with people that you could announce the best well in the world, but if oil prices are down, your stock is going to go down. A small cap of $100 million to $500 million trades more on the net asset value (NAV) or the value of the perceived potential of your properties. When you get to that $500 million– $2 billion area, you start looking at a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) or cash flow multiples. When you get to be large cap, you're really more of an earnings story; then you start thinking about P/E ratios and cash flow ratios.

TER: Do inflationary pressures point towards higher oil prices?

PM: With the economy recovering, and as more people feel that the double-dip recession is not going to happen, oil prices are tending to stay stronger. However, it seems to me the tail is wagging the dog right now, with the U.S. dollar going down and the price of bonds being up, and the yield being extremely low. To me, it has more to do with the price of oil than necessarily the pure supply and demand fundamentals, because we still have excess supply of oil via OPEC. If you're bullish on oil or bullish on the economy, then you use those dips as opportunities to gain more exposure. (more)

Dow Dog Dividend Champions

Several articles, both here on Seeking Alpha and elsewhere, have recently discussed the “Dogs of the Dow” strategy, which calls for buying the 10 highest yielding companies in the Dow Jones Industrial Average at the end of the year. I decided to compare the Dogs (along with the rest of the components in that index) to my listing of Dividend Champions/Contenders/Challengers, which can be found here. (Note that the November 30 listing will be replaced after Friday's market close.) My thinking was that investors might want to consider not just the current yield, but also the history of each company increasing its dividend on an annual basis, as well as the payout ratio for each company.

The data below is from Yahoo, with the exception of the number of years of dividend increases. The projected Dogs are in bold, although it's worth noting that slight changes in the last few trading days of 2010 could easily cause Intel (INTC) or Procter & Gamble (PG) to take the place of General Electric (GE) among the Dogs.

In terms of reliable dividend increases, the Dogs appear to have a mediocre record at best, with three Champions (25 years or more), one Contender (10-24 years), and one Challenger (5-9 years). Note that both Pfizer (PFE) and GE declared increases in 2010, but their total 2010 dividend payments were less than was paid in 2009, so any new streak will have to begin in 2011. Kraft Foods (KFT) froze its dividend rate in 2008, prior to its acquisition of Cadbury, and Merck (MRK) and DuPont (DD) simply have not raised their payouts for many years. The payout ratios for Pfizer and Verizon (VZ) appear to be distorted by depressed earnings figures, so this should also be a concern to potential investors. (more)

BNN: Top Picks

Sri Iyer, Senior Portfolio Manager and Head of Global Investments, Guardian Capital, shares his top picks.

click here for video

Get Ready For A Year Of Volatility: More Flash Crashes, Fed Hating, Civil Unrest And Bad Weather

Oh boy is 2011 going to be an exciting year! Some things that I think might happen:

-Volatility is going up across the board. If you have the stomach for the swings that are coming across all markets there is a ton of money to be made; balls and timing are all that are necessary. The markets will create dozens of opportunities to make and lose.

-There will be 50 days with a swing in the S&P greater than 1%. There will be 10 days where gold swings $50. There will be two days with a drop greater than 100 bucks. Most of the big moves will be down moves. Bonds will not be spared the volatility.

-Gold will be higher a year from now but off its peak. At some time in the fall, gold will be near 1,800 and the New York Times will do a front-page story that gold is on its way to 2,000. That will be the high point of the year.

-Copper will continue to rise. This metal will benefit as the poor man’s gold. Why buy an ounce of something for $1,600 when you can have a whole pound of something else for only $5? The logic is compelling only because there is no logic. Increasingly, it will become understood that money does not hold value. Copper will do a better job of storing value then a Treasury Bond.

-The US bond market is in for a heck of a year. The 30-year will trade at BOTH 3% and 5%. Higher rates will come early in the year, then the deflation trade will come back into vogue. (more)

Stocks down slightly as investors lock in 2010

NEW YORK -- Stocks dipped Thursday as investors locked in their positions at the end of the year.

While U.S. markets fell slightly, stocks are set to end 2010 on an upbeat note: The S&P 500 index and the Dow Jones industrial average are both up 14 percent for the year, after dividends, thanks to record corporate profits. The Dow is back to levels last seen in August 2008, prior to the heat of the financial crisis, while the S&P might just eke out the best December in 20 years.

Some investors are taking the last week of the month to sell and notch their profits. Others are selling stocks or funds that have lost money in order to reap the tax benefits.

The Dow Jones industrial average was off 15.67 points, or 0.1 percent, to 11,569.7. The S&P 500 edged down 1.9, or 0.2 percent, to 1,257.88. The technology-focused Nasdaq composite index fell 3.95, or 0.2 percent, to 2,662.98. (more)

New Unemployment Claims Fall

The New Unemployment Claims number is usually one of the last indicators to start improving after a recession. But once unemployment claims start to fall, job growth and strong economic expansion are never far behind.

And today, New Unemployment Claims finally broke through the critical 400,000 level for the first time in 2 ½ years.

That's an incredibly bullish sign for investors. It means 2011 is likely to be a very good year for stocks as Americans start going back to work and consumer growth picks up.