T. Myers

Jeremy Grantham on 'The Curse of the Value Manager'

Comon guys, please note the phrase "strong value bias". Grantham is not necessarily looking at the slope of the change in earnings, the RSI or momentum. Value bias generally means that he will be buying for sustainable earnings, or earnings power, for the strength of the business model and for the competitive advantages the company has developed. This theory is almost entirely contrary to momentum of any sort. Even if Mr. Grantham is even a few years ahead of schedule, he has surely explained that he is creating value for the long term. By the rule of 72 and the record for the best value investors he should be doubling his money roughly every 5 years or 14.5% pa. Please look at his record and his methods. And as for the S&P at 700, he will not be buying the S&P 500 or Spyders - that is the broader market and its not what he is paid to do.

Then there is cash. A wonderful asset. Unfortunately, in the US it is losing its value at around 8.5% annually as per Shadow Govt Stat's read on the pre-Clinton CPI. In the long run, strong brands with pricing power are the best way to retain and create value.

The Long Case for Chevron

Before jumping into a dividend play without looking at the underlying fundamentals. Yes it is cheap, but it deserves to be cheap. Look down the road not just at dividends paid. Will they be able to pay the dividends further on down the road - with CVX this is highly probable. However, what does it mean for the stock? The majors are essentially in liquidation. 3/4 of the company is a refiner. A big stinky dirty business that requires some cap ex. The only benefit to the business it the US NIBY policy so that capacity cannot be readily expanded. But there are problems on the horizon for this business as the middle east moves up the value chain from strictly E&P to refining, commodity chemicals and the like. The problem still exists that they must feed this end of their business. The 3.2.1 crack spread has rebounded from its lows of 6.30 last year so this end of this business is reasonably profitable. But it is still subject to enormous swings that are not kind to capitally intensive businesses. In the long run, they will no longer be the low cost provider as the middle east vertically integrates. For the remaining 1/4 of their business they engage in exploration and production of crude oil. Here is a simple piece of information, CVX has not increased its reserves since 2004. Couple this with inflation in the cost of oil services as demand for these services increases and you have real problems. At some point your capex on probability weighted basis becomes too expensive. To some extent this is what you are seeing now. Its precisely why these companies are dividend plays. Now look at list of countries where these companies are going just in order to MAINTAIN their reserves (I warn you some of these are a bit scary): Angola, Australia, Bangladesh, China, Indonesia, Kazakhstan, Republic of Congo, Thailand, Trinidad and Tobago and the US. This is hardly the safety and security associated with dividend plays. And in a way the majors are bets on declining energy prices and cracks widen, capex moderates and high cost fields are shuttered.