Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday November 9th):

... A man has rigged up a turkey trap with a trail of corn leading into a big box with a hinged door. The man holds a long piece of twine connected to the door that he can use to pull the door shut once enough turkeys have wandered into the box. However, once he shuts the door, he can’t open it again without going back into the box, which would scare away any turkeys lurking on the outside. One day he had a dozen turkeys in his box. Then one walked out, leaving eleven. ‘I should have pulled the string when there were twelve inside,’ he thought, ‘but maybe if I wait, he will walk back in.’ While he was waiting for his twelfth turkey to return, two more turkeys walked out. ‘I should have been satisfied with the eleven,’ he thought. ‘If just one of them walks back, I will pull the string.’ While he was waiting, three more turkeys walked out. Eventually, he was left empty-handed. His problem was that he couldn’t give up the idea that some of the original turkeys would return.

4:25 PM, Nov 2, 2009 --

• NYSE up 45.5 (0.7%) to 6,784.94.
• DJIA up 76.7 (0.8%) to 9,789.
• S&P 500 up 6.63 (0.64%) to 1,043.
• Nasdaq up 4.1 (0.2%) to 2,049.

GLOBAL SENTIMENT

• CIT makes it official. CIT Group (CIT) filed for bankruptcy protection Sunday with broad support from its debtholders, but taxpayers will lose the $2.3B invested in CIT, marking the first definitive loss in the government's rescue of the financial system. Nearly 90% of CIT's bondholders voted in favor of the prepackaged bankruptcy, which CIT says will enable it to reduce total debt by $10B, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability. Bondholders will receive about $0.70 on the dollar, a number that could have fallen as low as $0.06 had CIT entered a freefall bankruptcy. With $71B in assets and $65B in liabilities, CIT's bankruptcy ranks among the largest in corporate history. (CIT's bankruptcy filing)
• Goldman wants Fannie's credits. Goldman Sachs (GS) is in talks to buy up to $1B in tax credits from Fannie Mae (FNM) for an undisclosed amount. But the government - which controls Fannie - is reluctant to approve a deal that would allow Goldman to reduce its tax bill "given the animus held by many lawmakers toward big Wall Street firms in general, and Goldman in particular." Fannie and its rival Freddie Mac (FRE) loaded up with billions of dollars in the credits - which were created to spur investment in low-income housing - during the boom years, but now have no use for them.
• Comcast/GE near deal. Sources say a deal giving Comcast (CMCSA) control of GE's (GE) NBC Universal could be announced as soon as next week after a tentative agreement was reportedly reached Friday. GE would contribute $12B in debt to the new entity, and retain 49% ownership, while Comcast would kick in "several billion dollars" and its stable of cable networks for its 51%. Talks with Vivendi, which owns 20% of NBCU, continue to center on how to arrive at a mutually acceptable valuation - and are currently the main roadblock to a deal.
• Denbury picks up Encore of $4.5B. Denbury Resources (DNR) agreed to acquire Encore Acquisition Co. (EAC) in a transaction worth $4.5B including the assumption of $1.25B in debt. Denbury will pay $50 for each share of EAC - $15 in cash and $35 in stock - a 35% premium to Friday's close. "All of our operations are in the Gulf Coast. It is good to expand to another area, to get a footprint in another location like the Rockies," Denbury CEO Phil Rykhoek said, noting the combo will have one of the largest reserves of crude among independents. Denbury plans to sell off some non-core oil and gas assets next year to pay down its debt. JPMorgan (JPM) will provide Denbury with a new $1.6B line of credit and another $1.25B in bridge financing.
• Lupus drug passes critical 2nd trial. Human Genome Sciences's (HGSI) experimental lupus drug Benlysta was successful in a second large clinical trial, paving the way for approval of the first new treatment for the disease in 50 years. While not as strong as the results from an initial study, the results released Monday should be enough to secure FDA's go-ahead. Hopes for Benlysta have been growing since initial results were released in July, surprising many experts who had been sceptical given the previously poor track record of new lupus treatments. HGSI +41% premarket.
• Pfizer eyes Protalix. Pfizer (PFE), is reportedly considering a JV with Israel's Protalix, and may even buy the company. Protalix developed the ProCellEx system for producing medical proteins through genetically engineering carrot cells; the method is up to 90% cheaper than other methods. Last month Protalix said its experimental drug to treat Gaucher's disease, Uplyso, was successful in a late-stage clinical trial. If approved, it would compete with Genzyme (GENZ) blockbuster Cerezyme.
• The cost of doing better. UAW rank-and-file dealt Ford (F) a fatal blow, overwhelmingly rejecting proposed contract concessions that would bring its costs in line with GM and Chrysler. "This was a tough sell from the beginning," a professor who specializes in labor issues said. "Ford was caught in between doing better and advertising that, and the UAW already giving Ford concessions." Sources say Ford will continue talks with the union to find ways to cut costs, but may look to move some production to lower-cost locations if it can't remain competitive in the U.S.
• Goldman secretly bet on the housing crash. In 2006 and 2007, Goldman Sachs (GS) sold more than $40B in mortgage-backed securities to pension funds, insurance companies, labor unions and foreign financial institutions, while failing to disclose it was betting heavily on a sharp drop in U.S. housing prices. While some say the omission may be a violation of securities laws, Goldman says it had no obligation to disclose its internal hedges.
• Kelly tells BofA 'no thanks.' Bank of New York Mellon (BK) CEO Robert Kelly was reportedly asked to become Bank of America's (BAC) next CEO, but said he's not interested in the position. While BofA's search committee hasn't ruled out hiring an insider - with Gregory Curl and Brian Moynihan the current favorites - the Kelly feelers reflect the board's growing interest in outside candidates.
• Nest egg keeps growing. U.S. companies are holding on to more cash than in any time during the last 40 years, according to a study by the WSJ. In Q2, the 500 largest nonfinancial companies held 9.8% of their assets ($994B) in cash and short-term investments, up from 7.9% ($846B) a year earlier. Firms are hoarding cash to ensure they can cover day-to-day costs after credit markets froze up last year, catching many off guard; their unwillingness to spend during the downturn is another factor increasing the bulge. In the short-term, large cash balances are a curse for the economy, but analysts say a strong cash position will enable companies to transition more quickly into growth mode when reinvestment begins.
• Full speed ahead in Asia. Asian factory activity grew again in October, with China hitting an 18-month high, suggesting the region is on an economically solid footing and will likely lead the global recovery. In comments released along with the official version of China's PMI, a government researcher said China's economy could grow 9.5% in Q4.

Earnings: Mon. Before Open

• Cooper Tire & Rubber (CTB): Q3 EPS of $0.77 beats by $0.11. Revenue of $794M (-1.1%) vs. $715M. (PR)
• Dean Foods (DF): Q3 EPS of $0.34 beats by $0.01. Revenue of $2.77B (-13.2%) vs. $2.94B. (PR)
• Ford (F): Q3 EPS of $0.26 beats by $0.38. Revenue of $30.9B (-2.5%) vs. $28.3B. U.S. market share +2.2% Y/Y. Expects full-year 2009 U.S. industry sales of 10.6M, consistent with previous guidance. Shares +4.3% premarket. (PR)
• Humana (HUM): Q3 EPS of $1.78 beats by $0.01. Revenue of $7.72B (+8%) in-line. (PR)
• Loews (L): Q3 EPS of $1.08 beats by $0.19. Revenue of $3.74B (+25.9%) vs. $3.35B. (PR)

Today's Markets

Asian markets were mostly lower Monday. Europe shares are trading higher at midday, and U.S. futures have moved higher overnight.

Buy-recommended Encore Acquisition Company (EAC) offers unlevered appreciation potential of 15% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $44 a share. On July 14 we reduced NPV from $48 when we reduced estimated Present Value of North American Natural Gas by 20%.

Released late July 28, second quarter results demonstrated strong recovery in unlevered cash flow (Ebitda) from the first quarter not only with oil price, but also in lower than expected operating cost. Volume is resisting decline despite reduced drilling. The turn in Ebitda may be the start of a new trend. Futures prices for oil over the next six years provide another sign of change after crossing the 40-week average into an uptrend at the end of May.

Canadian Income and Small Cap stocks are trend setters with all seven in our coverage in an upward stock price trend defined by price above the 200-day average. Low McDep Ratios give fundamental support. Buy- recommended Canadian Oil Sands Trust (COSWF.PK) has the appeal of long-life oil outside the U.S. and its income potential rises with oil price. Shorter-life, oil-oriented Canadian Income Trusts, namely hold-rated Penn West Energy Trust (PWE), Enerplus Resources Fund (ERF) and Pengrowth Energy Trust (PGH), have joined the stock price uptrend by crossing above their 200-day average.

Adding to McDep Ratio coverage in April and classified in our newly designated Top Line Cash Payer group, Freehold Royalty Trust (FRHLF.PK) has been in a stock price uptrend for weeks. Looking past the next few months of excess natural gas supply, investors in the past few days have taken $US stock price into an uptrend above the 200-day average for Canadian Small Cap Birchcliff (BIREF.PK) and Canadian Income Trust Peyto (PEYUF.PK).

Value-enhancing transactions justify an increase in estimated Net Present Value (NPV) to $48 a share from $44 for buy-recommended Encore Acquisition Company (EAC) and to $18 a unit from $17 for 52% publicly-held Encore Energy Partners (ENP), in our opinion.

Announced June 29, EAC entered a deal to acquire $375 million of oil properties in Oklahoma and natural gas properties in East Texas. Also announced on June 29 and earlier in May, EAC transferred $244 million of oil and gas properties to ENP. On June 29 and earlier in June, ENP sold in two public offerings a total of about 11 million units for about $160 million. Earlier in March, EAC cashed in oil hedges for almost $200 million and essentially redeployed the proceeds in the latest acquisition.

Among small cap and income buy recommendations, we project rising volume for Canadian Oil Sands Trust (COSWF.PK), a stable trend for Dorchester Minerals (DMLP) and natural decline for Encore Acquisition (EAC), Hugoton Royalty Trust (HGT) and Cimarex Energy (XEC) (see charts Canadian Income Trusts, Small Cap Independent Producers, Top Line Cash Payers, and Bottom Line Cash Payers). Inevitable natural volume decline works to tighten supply and boost the price of oil and natural gas.

Because price changes are usually more important than volume changes, cash distributions turn from a declining trend for the past year to a rising trend for the next year (see charts Quarterly Distributions). The wide variation from quarter to quarter in past distributions implies that differences in the near future are difficult to pinpoint.

The stock of buy-recommended Encore Acquisition (EAC) is trading above its 200-day average again for the first time in more than nine months. While stock price is the catalyst for us to restore our buy recommendation, a low McDep Ratio provides the fundamental rationale. By our analysis, EAC stock offers unlevered appreciation potential of 17% to a McDep Ratio of 1.0 and levered appreciation potential of 27% to Net Present Value (NPV) of $44 a share.

Among other stocks in this weekly analysis, the U.S. Royalty Trusts and the Canadian Income Trusts offer some of the lowest McDep Ratios while the stocks remain out of favor with stock prices below the 200-day average. Income stocks sometimes have their own cycle. Contrarian investors may take advantage of the delay as ultimately income stocks respond to the same fundamental factors that are improving for the independent producers.

Hold-rated Encore Acquisition Company (EAC) offers unlevered appreciation potential of 32% to a McDep Ratio of 1.0 and levered appreciation potential of 56% to Net Present Value (NPV) of $44 a share. Released today, first quarter results reflected high fixed costs that caused unlevered cash flow (Ebitda) to decline by more than half from the fourth quarter of 2008 while oil and gas price declined by a third.

The quarter just ended may have been a low point as we project revenue gains and cost containment in the quarters ahead. Those projections support estimated NPV when viewed by unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil. Pointing to expected oil price recovery, futures prices for the next six years averaged US$66 a barrel recently.

MarketWatch recently had an interesting piece on contrarian investment strategies, highlighting the fact that many of the contrarian managers who were hit hard last year are now netting some strong bounce-back gains.

"As the market has bounced back in recent weeks, [several] contrarian-style funds, with their bargain-minded ways, have been outperforming," writes MarketWatch's Sam Mamudi, discussing well-known contrarian managers like David Dreman, Bill Miller, and Marty Whitman.

Q1 2009 Earnings Call

April 29, 2009 11:00 AM ET

Up from depressed levels, Canadian producer Birchcliff Energy (BIREF.PK), hold-rated Berry Petroleum (BRY), hold-rated Encore Acquisition (EAC) and buy-recommended Cimarex Energy (XEC) are getting some momentum going in the stock market. Birchcliff and Berry are trading above the 50-day average stock price while Encore and Cimarex are trading at narrowing discounts to the 50-day average.

A recent price trend reversal for oil and possibly for natural gas is especially welcome as each of the companies is actively developing new energy supply. Cimarex offers low financial risk and strong natural gas appreciation potential. Encore has moderate financial risk and Berry higher financial risk while both hold undervalued long-life oil reserves. Birchcliff has built an extensive inventory of undeveloped natural gas acreage in Alberta that may ultimately be attractive to a larger company.

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

Next up is Touradji Capital ran by Paul Touradji. Touradji is one of many well-known 'Tiger Cubs' who started their own firms after leaving Julian Robertson's Tiger Management. We've already covered many of the 'Tiger Cub' funds including Stephen Mandel's Lone Pine Capital, Andreas Halvorsen's Viking Global, Lee Ainslie's Maverick Capital, Chase Coleman's Tiger Global, Chris Shumway's Shumway Capital Partners, and John Griffin's Blue Ridge Capital.

Estimated Net Present Value (NPV) of $44 a share is about 50% higher than stock price for hold-rated Encore Acquisition Company (EAC). Released last night, fourth quarter results displayed lower unlevered cash flow (Ebitda) driven by crude oil and natural gas prices.

In a sign of the times, once promising reserves expected to be recovered by an innovative High Pressure Air Injection (HPAI) technique were written down as uneconomic at year-end oil price. Management now looks to tried and true water flooding and potential carbon dioxide injection for its recovery of large unproven volumes in its largest oil field, the Cedar Creek Anticline.

Q4 2008 Earnings Call

February 11, 2009 10:00 am ET

Natural gas price may have set its low for the cycle on January 15. If so, it follows the low for oil set in late December and for stock prices of oil and gas income and small cap stocks set in November and early December. It is a fact that those lows have held so far. It can only be an opinion that those lows would hold longer.

Even if it takes longer to set the lows, we are confident in the appealing investment value offered in our buy recommendations Canadian Oil Sands Trust (COSWF.PK), Cimarex (XEC), and Hugoton Royalty Trust (HGT). In case it does take longer before an uptrend resumes, our remaining recommendations are rated hold, including Penn West Energy Trust (PWE), Encore Acquisition (EAC) and San Juan Basin Royalty Trust (SJT). Similarly, unrated stocks in our coverage that also have low McDep Ratios offer long-term value for an investor to capture today subject to the risk of delayed gratification. Latest median McDep Ratio for seventeen stocks is 0.65. Median Distribution Yield estimated for the next twelve months for thirteen income stocks is 8.9%.

Oil has been in the headlines a lot lately and I’ve been watching from a distance until yesterday. My proprietary system issued a buy signal on USO yesterday but there are a few caveats I want to talk about before we go all in this sector. First off, we put in a higher low last week at 28.42 with volume being quite heavy during the selling of the last couple of weeks. We also have a reverse head and shoulder pattern forming which, if it plays out, should have this chart trading in the mid 45’s sometime in the next month or so. Individual issues in this sector should fare much better and a few I’m looking at are:

Small cap oil and gas producers, more sensitive to selling pressure in December, may have more appreciation potential in January. Buy-recommended Cimarex Energy (XEC) is concentrated on natural gas, has almost no debt and has an experienced leader, Mick Merelli, who has made money for investors over two decades.

Hold-rated Encore Acquisition (EAC) has long-life oil reserves, moderately high debt and an experienced leader, Jon Brumley, who has made money for investors over four decades. Hold-rated Berry Petroleum (BRY), pumping oil for 100 years, has built-in growth in undeveloped reserves along with high debt.

This is the Third Quarter 2008 edition of our ongoing hedge fund tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F's here.

The other funds we've already covered include: