Shiv139

Metalline Mining: Panic Creates Opportunity

In terms of the economic cycle we are entering the late contraction stage which should last some 6 months. The sector expected to out-perform in this period is Financial Services; because of the significant fundamental risks, diversification is key - stay with XLF; any individual company can hurt bad. Also, stay underweight, or even pass on the sector; there will be other sector opportunities with far less risk later in the economic cycle.

The next cyclical opportunity is IT which should start out performance late Q1 09; this sector has very reasonable valuations about now and should be accumulated. After that is Discretionary, which like financial services has fundamental risks, but unlike financial services I believe the risks are largely priced; but this is a buy later story; Christmas could disappoint the sector this year, given the data flow on jobs and confidence.

Then will come materials, industrials and energy. At this point in time Basic Materials is providing an interesting trading opportunity; and perhaps a short term opportunity (3 to 6 months) too. But I expect the cyclical upturn to beginning and early expansion stage, coupled with the secular well being of the sector, to provide better opportunities in later in 09.

Celgene Becomes a Bargain Once Again

I could not agree more. Personally, I feel health-care offers amazing opportunities right now.

Today energy is in secular ascendancy. After energy, Sam Stovall's sector analysis suggests that the coming secular opportunity will arise in health-care.

The general idea is to identify the present secular bull. The aim is to use economic cycles to position your portfolio to benefit from out-performance in the next up-turn.The energy bull has been running from 2003 and can be expected to run to 2018-2020. The first economic cycle within this secular trend is drawing to a close. Following a cyclical correction, this sector can be expected to out-perform even the out-performers significantly.

The next secular opportunity expected to run from 2018/2020 to 2033/2035 is health-care. The aim is to build positions in this sector for the future. Much of the investment in the energy sector is in place; the rigs have been financed and are being built, refining capacity is financed and expansion of capacity is well underway, exploration of new ultra deep-water opportunities are in full swing.

New money is being deployed in the next secular opportunity (health-care); and it is at this point in time where valuations are closest to green-field.

It's Time For a U.S. Sovereign Investment Fund

I do not believe a US Sovereign Investment Fund is the answer; a nation in surplus I can understand; a nation in deficit; maybe not.

I can see next steps being required as including:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of FNM/FRE/AIG.
3. Combination to create a stronger entity post acquisition like BAC/MER.
4. Active marketing of new capital requirements to SWF’s and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

Trouble Still Lies Ahead for Tech Sector

What are the cyclical opportunities for out-performance? When will the out-performance from secular growth sectors re-commence?

This article looks at out-performance opportunities at a sector level. The aim is to identify where we are in the economic cycle and use history as a guide to seek out the coming sectors of out performance, within the present economic cycle.

The article also applies the sector rotation rationale applicable to an economic cycle to a multi-economic-cycle level; the aim being to identify the secular (16 year; roughly 3 economic cycles) trends. The intent is to identify sectors which are in secular bull formations and which will lead during the next cyclical bull.

Sam Stovall's vision on sectors is used in identifying the typical flow through sectors during the course of an economic cycle.

The conclusions are - out-performance opportunities are in financials & IT. Secular sector to lead the next cyclical bull will continue being Energy after a cyclical correction.

Oil Up $6 to $104

What are the cyclical opportunities for out-performance? When will the out-performance from secular growth sectors re-commence?

This article looks at out-performance opportunities at a sector level. The aim is to identify where we are in the economic cycle and use history as a guide to seek out the coming sectors of out performance, within the present economic cycle.

The article also applies the sector rotation rationale applicable to an economic cycle to a multi-economic-cycle level; the aim being to identify the secular (16 year; roughly 3 economic cycles) trends. The intent is to identify sectors which are in secular bull formations and which will lead during the next cyclical bull.

Sam Stovall's vision on sectors is used in identifying the typical flow through sectors during the course of an economic cycle.

The conclusions are - out-performance opportunities are in financials & IT. Secular sector to lead the next cyclical bull will continue being Energy after a cyclical correction.

Peak Oil - Are We There Yet?

Very well put together article.

The problem with predicting peak oil is that proven, probable & possible reserves are used. The swing factor which can defer peak oil for many, many years is the unknown. To date just about 1/4 of the earth surface has been explored. With technology now available, shallow water and mid water has been explored for some years. We are now well into the age deep and ultra deep-water exploration. It has never been done before because the price of oil never did justify the investment. Driven by demand for oil from emerging markets in India and China, oil prices have now risen well over the marginal cost of ultra deep-water. As a result, there has been huge investment in ultra deep-water. Coming from this economic viability, we will have increased exploration. This combined with technical feasibility & equipment availability, will ultimately bring new reserves. So yes, we will continue to rush towards peak oil; but we are likely several years away.

In the mean time we are in a demand led secular bull market for oil. Increasing demand with supply side concerns have pushed oil prices ahead of fundamentals. Within this bull we have recently entered a cyclical bear. During this period of the cyclical bear (approximately 1.5 to 2 years), I expect oil prices to revert to economic equilibrium (where marginal cost equals marginal revenue - somewhere between $50 and $70 per barrel); at these price levels investment in ultra deepwater is viable.

Then the next cyclical bull within a secular bull will emerge. Over the course of the secular bull (roughly 2003 to 2019), you will see some things happen:

1. Structurally, the world is less energy intense (a $ of GDP has a smaller energy dependency compared to the past) compared with the seventies. The energy intensity of emerging markets will reduce considerably. This will reduce the impact of oil prices on the real economy; this is a net positive because investment can continue at higher price levels because the real economy is able to absorb the higher price with lesser demand destruction.
2. Since oil is a finite resource, there will be many new conservation technologies which will result in demand reduction.
3. For the same reason, there will be new alternative energy technologies which will reduce dependence on oil.

Today, the oil demand curve is generally inelastic; however, we have now reached that part of the demand curve where the price elasticity is high. At these elevated prices, two things will happen in the long term - (a) the demand curve will change from very inelastic to less inelastic as energy alternatives are adopted & (b) the entire demand curve shall shift inwards as a result of shifts to energy alternatives and more importantly, because technologies to improve oil energy utilization will evolve.

From an investor perspective, oilfield services and drillers are very appealing. Integrated Oil Majors, E&P & refiners too, but to a much lesser extent - today most opportunities in exploration and production are led by the State. In addition, in the years gone past, the majors commanded respect because they had the intellectual property & equipment required by the business; this drove nations to production share agreements with the Majors. Today engineering, IP and equipment can be obtained as a service from fantastic companies such as Schlumberger and Transocean. Yet, at this point in time, because of our entry into the cyclical bear, I would wait for valuations to get better before committing to the sector. Trading position (few weeks - risks are low oil is oversold); short term position (few months) risks are high; long term position (a year) risks are high; secular position (12 years) risks are insignificant. Expect a contraction in valuations in oilfield services; but do not expect it to be very harsh; I would say 50% to 65% from peak value is what can be looked for. For drillers, the backlogs created provide a high degree of stability but leverage could end up being a significant risk if new build contracts are terminated (delivery delays & performance are fairly common reasons for termination).

Wall Street Breakfast: Must-Know News

Like the UK FSA, early Friday morning the SEC too has banned short selling for financial services. While stocks can still be shorted; naked short selling is history for now. You can see the full text of the SEC orders at www.sec.gov/news/press....

A significant rally is likely to develop in companies where naked shorts have been high. These would include GS, MS, C to name a few. The financial services sector has a positive catalyst in terms of the additional liquidity provided to the market and initial steps taken to address the solvency issues causing great concern on capital markets. It would take significant foolish guts to short the sector. So for this sector expect a strong rally on account of short covering.

Outside financial services, we can expect to see Energy and Metals recover too; though the exuberance might be muted compared with financial services. Technology is another area where naked shorts have built up since Dell cited concerns on growth. NOTE THAT THE BAN IS ONLY ON FINANCIAL SERVICES, BUT I EXPECT SYMPATHY TRADING IN OTHER SECTORS.

Since the short covering adjustment will be a one time event, it will make sense to adopt a trading position - i.e. use the rally to exit in a few weeks. For financial services, the risks to short term positions, long term positions and secular positions, while considerably reduced, remain elevated. The healing process has begun and much will happen between now and the end game; this will allow building value positions with lower levels of risk (because of better visibility).

Financial Shock and Awe: RTC 2.0?

Will more steps be needed beyond the US Congress plans for a financial fix?

A purchase of paper from solvent entities with a view to an eventual sale back to the market through an auction process is good.

An available buyer will mean (a) improved liquidity (b) higher confidence (c) arrest in accelerating mark to market losses.

This is a good first step because it will ebb the flow of insolvencies caused by liquidity & confidence crisis. One can assume that following an acquisition of distressed debt, the asset acquired will be "off market" until stability returns, otherwise it defeats the purpose. An incidental side benefit will be profitable dispositions which will significantly reduce budget deficits.

Still, this does not entirely address the solvency issue. The risk of disorderly unwinding of insolvents remains high. To prevent a disorderly unwinding it is possible that additional steps might be required. These could include:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of FNM/FRE/AIG.
3. Combination to create a stronger entity post acquisition like BAC/MER.
4. Active marketing of new capital requirements to SWF's and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

Financial Shock and Awe: RTC 2.0?

Will more steps be needed beyond the US Congress plans for a financial fix?

A purchase of paper from solvent entities with a view to an eventual sale back to the market through an auction process is good. Read more about the Congress plans here.

An available buyer will mean (a) improved liquidity (b) higher confidence (c) arrest in accelerating mark to market losses.

This is a good first step because it will ebb the flow of insolvencies caused by liquidity & confidence crisis. One can assume that following an acquisition of distressed debt, the asset acquired will be "off market" until stability returns, otherwise it defeats the purpose. An incidental side benefit will be profitable dispositions which will significantly reduce budget deficits.

Still, this does not entirely address the solvency issue. The risk of disorderly unwinding of insolvents remains high. To prevent a disorderly unwinding it is possible that additional steps might be required. These could include:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of SWF's.
3. Combination to create a stronger entity post acquisition.
4. Active marketing of new capital requirements to SWF's and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

Resolution Meeting - Fast Money Recap (9/18/08)

Will more steps be needed beyond the US Congress plans for a financial fix?

A purchase of paper from solvent entities with a view to an eventual sale back to the market through an auction process is good. Read more about the Congress plans here.

An available buyer will mean (a) improved liquidity (b) higher confidence (c) arrest in accelerating mark to market losses.

This is a good first step because it will ebb the flow of insolvencies caused by liquidity & confidence crisis. One can assume that following an acquisition of distressed debt, the asset acquired will be "off market" until stability returns, otherwise it defeats the purpose. An incidental side benefit will be profitable dispositions which will significantly reduce budget deficits.

Still, this does not entirely address the solvency issue. The risk of disorderly unwinding of insolvents remains high. To prevent a disorderly unwinding it is possible that additional steps might be required. These could include:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of SWF's.
3. Combination to create a stronger entity post acquisition.
4. Active marketing of new capital requirements to SWF's and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

Daily Market Outlook: Early Indications Are for a Modest Rebound

With the risks to solvency remaining high availability of liquidity does not answer the problems. Banks/institutions have a trust issue - can they trust a counter parties with the potential solvency risks. Central banks cannot eliminate this risk.
This solvency risk is only going to reduce through confidence building measures. Confidence will return once the insolvents are out of the market and the remaining banks/institutions well capitalized. Capital is required and no Private Capital is forthcoming because the risk is too high. So governments (not central banks) step in.
I am surprised that the SWF's have not stepped up to the plate. These massive budget surplus nations should have a vested interest in restoring confidence. Without confidence, the $ paper they hold could be significantly impaired in value. If a deficit nation steps up, the action does not necessarily provide a solution as increasing deficits will prove to be inflationary (unless of course the confidence building measure is a success and allows a profitable exit which will reduce the deficit). Since leverage is the issue, I would be far happier seeing budget surplus SWF's take action.
Active steps are being taken to solve the solvency issues (AIG/FRE/FNM); even BAC acquiring MER is a net positive. And yes, even the bankruptcy of LEH is good news. All of these help bring closure to solvency issues. Since it is early in the days of addressing this solvency issue; expect continued fireworks; but the healing process has begun. This together with liquidity will restore the economy to health. But it will take time. Healing has just begun.

Federal Reserve Buys AIG

United States stepped up with an $85 billion loan in exchange for a 79.9% equity stake in AIG.

When BSC was bailed out the question of a moral hazard arose. Yet a LEH buy out was not forth coming. A few days prior, FRE & FNM were rescued. A day later we have AIG rescued. Why?

Now that solvency has become a major issue and is a great danger to both Wall Street & the real economy, how should this be tackled? A central back serves an important function as a lender of the last resort; should the government also act as an investor of the last resort?

The problem, has spread from mere sub-prime to other debt and on to liquidity & now solvency. The de-leveraging of the system is causing all asset classes to contract as positions are wound down. This is probably one major reason why oil stays down despite production costs & Ike (whose impact was limited but certainly not welcome news).

I think a trend is emerging. United States will act as a "lender of the last resort" to prevent damage from liquidity related issues through the Fed's monetary policy including rate cuts as necessary & most importantly the window.

In addressing a crisis arising from solvency related problems - United States will protect Main Street, acting as an "investor of the last resort"; which is not dis-similar to a sovereign wealth fund. So FMN, FRE and AIG are saved but LEH is not. In all cases the moral hazard is avoided simply because the existing owners effectively lose all; this is unlike the first bail out of BSC where the existing shareholders were protected.

My own view is that for a nation to act as a sovereign wealth fund in times of crisis is not desireable; particularly for a nation with spectacular deficits. However in times of unprecedented crisis it might be perceived that such an action is required.

Ultimately, a view might form that if Wall Street institutions (not their shareholders) are saved; in most situations, the administration will secure a good long term return on its investment. And that too with no moral hazard. The entity failing is racked by a confidence crisis, the United States administration can provide the lacking confidence; the synergy from provision of the confidence intangible has an immediate positive impact on the acquired entities valuation and to an extent makes a profitable exit once the crisis is over likely. This avoids getting into a self perpetuating cycle of crises of liquidity-write downs-capital required-confidence-so...

The big risk is that these investments will cause a rising deficit, inflation and interest rate increases. Today foreign investors question the risk of United States financial institutions; tomorrow, if the credibility of the United States as a debtor nation comes into question, there will be hell to pay for the globe.

Had the United States been in a surplus position, the governments acting as an "investor of the last resort" is a no brainer; in the present situation of record deficits, it is a huge risk. In the long run, it might be better to allow the solvency issues to work their way through the system and allow the economy to restore its own health and well being.

Federal Reserve Buys AIG

United States stepped up with an $85 billion loan in exchange for a 79.9% equity stake in AIG.

When BSC was bailed out the question of a moral hazard arose. Yet a LEH buy out was not forth coming. A few days prior, FRE & FNM were rescued. A day later we have AIG rescued. Why?

Now that solvency has become a major issue and is a great danger to both Wall Street & the real economy, how should this be tackled? A central back serves an important function as a lender of the last resort; should the government also act as an investor of the last resort?

The problem, has spread from mere sub-prime to other debt and on to liquidity & now solvency. The de-leveraging of the system is causing all asset classes to contract as positions are wound down. This is probably one major reason why oil stays down despite production costs & Ike (whose impact was limited but certainly not welcome news).

I think a trend is emerging. United States will act as a "lender of the last resort" to prevent damage from liquidity related issues through the Fed's monetary policy including rate cuts as necessary & most importantly the window.

In addressing a crisis arising from solvency related problems - United States will protect Main Street, acting as an "investor of the last resort"; which is not dis-similar to a sovereign wealth fund. So FMN, FRE and AIG are saved but LEH is not. In all cases the moral hazard is avoided simply because the existing owners effectively lose all; this is unlike the first bail out of BSC where the existing shareholders were protected.

My own view is that for a nation to act as a sovereign wealth fund in times of crisis is not desireable; particularly for a nation with spectacular deficits. However in times of unprecedented crisis it might be perceived that such an action is required.

Ultimately, a view might form that if Wall Street institutions (not their shareholders) are saved; in most situations, the administration will secure a good long term return on its investment. And that too with no moral hazard. The entity failing is racked by a confidence crisis, the United States administration can provide the lacking confidence; the synergy from provision of the confidence intangible has an immediate positive impact on the acquired entities valuation and to an extent makes a profitable exit once the crisis is over likely. This avoids getting into a self perpetuating cycle of crises of liquidity-write downs-capital required-confidence-so...

The big risk is that these investments will cause a rising deficit, inflation and interest rate increases. Today foreign investors question the risk of United States financial institutions; tomorrow, if the credibility of the United States as a debtor nation comes into question, there will be hell to pay for the globe.

Had the United States been in a surplus position, the governments acting as an "investor of the last resort" is a no brainer; in the present situation of record deficits, it is a huge risk. In the long run, it might be better to allow the solvency issues to work their way through the system and allow the economy to restore its own health and well being.

Expiring Patents Ignite Biotech Boom

Point - good catch. There are too many bloggers who really have no clue, but do have an opinion. If you ask me, blogs are very dangerous places to use as a source for investment ideas, but a great place to look for sentiment.