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Don't waste your time listening to the Fed / The Commodities carnage / Buy these stocks baby

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August 05, 2008 – Comments (3) | RELATED TICKERS: SYUT , CRI , BABY

I have an amazing time-saving tip for investors out there.  Don't bother reading about or watching reports on the Federal Reserve's meeting today.  You know why, because the Fed is going to do the same thing with rates today that it will do with them for the entirety of 2008...NOTHING.  

Despite all of the hawkish talk from several governors, I have been saying for months that the Fed is absolutely powerless to raise interest rates in the current economic environment.  First of all, it's always unlikely that it will raise them before a Presidential election, but that's been talked about for a while now.  The main reasons why I believe the Fed Funds Rate will remain at its current level at least into the spring of 2009, if not longer is that the Fed is not going to raise rates with the unemployment rate rising like it has been and I expect it to continue to.  

Furthermore, more than anything Bernanke and his friends over at the Federal Reserve and the Treasury want to see the U.S. housing market stabilize and banks re-capitalize themselves.  Neither of these things can happen, or at least it is much less likely that they will, in an environment where the Fed is raising rates and making money more expensive.  Hear me now and believe me later, the Fed will not raise rates until March 2009 at the earliest.

Personally, I am much more interested in hearing what Tricket and the ECB say about the European Union's rates on Thursday.  Even though the ECB raised rates by a quarter point last meeting, I suspect that it will stand pat as well with the recent break in the price of commodities enabling Trichet to cave in to the politicians who have been hammering on him to leave rates alone.  I would be very surprised if it does, but in the unlikely event that the ECB raises rates, it would be bad news for the U.S. dollar.

 

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Wow, commodities have taken quite a beating over the past several weeks.  It appears as though the slowing global growth that the Fed was hoping would bring some relief to sky-high prices is finally kicking in.  At least that is what traders who are hammering the commodities market causing stops to kick in and funds to liquidate their positions want everyone to think.  

Is global growth slowing, probably?  Having said this, I still strongly believe that even reduced demand growth for oil globally will still outpace supply growth.  For me, oil is a long term play on the increasing significance that emerging markets will play in the global economy, the fact under-investment and maturing major oil fields will hamper supply growth, and the fact that long term the fundamentals point to a weakening U.S. dollar. 

My total exposure to the oil sector is at roughly the same level as or slightly higher than it was before this whole meltdown began, but I have been rolling out of my smaller positions and adding to positions in my favorite companies in the sector.  I’m rolling my new theory of placing fewer, bigger bets on my absolute favorite companies.

On the E&P side my favorite (which I cannot name right now) is a fairly conservative company that gets most of its oil and natural gas from conventional sources, has been placing hedges and paying down debt, and pays a solid dividend with a low payout ratio.  All of these things should provide it with much more downside protection than the companies that are more aggressive or non-conventional plays like oil sands.

I continue to like drillers as well.  Credit Suisse has an interesting bullish note on drillers this morning.  Back in January, the firm estimated that Brazilian oil company Petrobras and its partners would need 9 to 21 deepwater rigs to tap their reserves in its SantosBasin find and possibly as much as 28 rigs under their “blue sky” scenario.  

The increasing demand for deepwater rigs by Petrobras was a big part of why I have been so bullish on drillers that have exposure to this sector.   Well, it appears as though Credit Suisse’s analyst was way too conservative here, which is great news for drillers.  Petrobras recently announced that it is looking to contract a whopping 40+ deepwater rigs, only 12 of which it currently has contracts for.

The demand for deepwater rigs will remain strong for a long time, unless we see a mind-blowing, long term pullback in the price of oil.  The recent weakness in the sector provides an excellent entry point for drillers.

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Speaking of global growth, I came across an interesting interview with a great investor this morning, Pimco's Mohamed El-Erian (see article: El-Erian: Buy more foreign stocks).  In short, El-Erian recently wrote a book in which he postulates that that the U.S. consumer is in big trouble and that consumer spending will slow dramatically, but that this does not necessarily spell doom for the global economy because the growing middle class in emerging markets is becoming such a force.  He says that while a typical U.S. investor has 80% of their stock holdings in U.S. companies, they would be much better off having a third in the United States, a third in industrialized countries outside of the U.S., and a third in emerging markets.  

Of course, this decoupling theory is nothing new, but the article is definitely worth checking out.  If what El-Erian says is true, it is quite bullish for commodities in the long run.  I am considering adding this book to the list of ones that I want to buy.  The main reason why I haven’t bought it already is the advertisement that I saw for it in a financial paper the other day.  At the bottom of the ad, it had a testimonial from a famous person who had read the book and was saying how great it is.  Who is this person you ask?  Alan Greenspan gruppppp (excuse me I just threw up in my mouth).

El-Erian's new book

I plan on reading a cool new book on economics that is in the mail as we speak first anyhow.  If anyone it is interested it’s called Flying on One Engine.  It’s a compilation of current economic essays put together by one of my favorite journalists Bloomberg’s Tom Keane.

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Quick Hits

- Baby stocks may grow up fast:  How's this for a round about way of getting to a point.  This is a link to a Reuters article on a Barron's article about a piece written by Bespoke Investment group.  Whew.  Basically, Bespoke believes that the recent surge in births in the United States (2007 saw the largest number of babies born here since 1957) that stocks catering to young ones will do well.  It is created an index of companies that will benefit from this trend which includes Synutra International (SYUT), Martek Bioscience (MATK), Carters Inc. (CRI), The Children's Place (PLCE), LeapFrog Enterprises (LF), Natus Medical (BABY), and Kimberly-Clark Corp. (KMB).

 

Deej

Long PBR/A

3 Comments – Post Your Own

#1) On August 05, 2008 at 2:09 PM, kdakota630 (29.50) wrote:

Let us know how those books are when you get through each one.

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#2) On August 05, 2008 at 3:58 PM, DemonDoug (77.82) wrote:

I guess JNJ (shampoo, bandaids, soaps) and PG (Pampers) are too big to be included for baby stocks in that article, eh?  Speaking of PG, Earnings increase by 33% at PG.

PG is more fairly valued now than it was at 60/share, but i'd rather have PG than that other list of stocks that index has (I bet that index does have PG and JNJ, but their website hasn't published the full index.)

I will admit my confidence has been shaken a bit by the pullback in oil, people talking about new speculation rules coming into place knocking down the price of oil.

I have another theory though.

China has temporarily shut down a lot of its plants and cars to clean up the air for the olympics, which starts on friday, and lasts about 2 weeks.  Ending date: 8/24.  If oil hasn't started rising by then again, it will after that weekend (8/24 is a sunday).  This is temporarily lowering global demand.

Further, any price reduction in oil and gas will lead to increased consumption again.

It would be nice for my caps score, however, to see oil back up to 150 sooner than later. :)

Price target: 160/bbl by 1/30/09.

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#3) On August 05, 2008 at 11:58 PM, feiled (28.04) wrote:

Nice post - love the Bernanke comic!

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