Gold: An Ugly Chart in Just About Any Currency
January 27th, 2010 | Posted by goldMost commentators living in the States have made a big ado about Gold breaking to a new all-time nominal high back in the fall of 2009. I didn’t buy into the mania and wrote an article titled Three Reasons Gold Might be Making a Head Fake that was published on November 10, 2009.
The primary point of the article was that Gold was struggling to hit new highs against most major world currencies. Sure, the precious metal had rallied impressively when denominated in Dollars. But you have to remember that the Dollar lost roughly 16% of its value in 2009. For that reason, I chose to look at how Gold was doing when priced in Yen, Euros and Swiss Francs.
At that time I noted that Gold had failed to break to new highs in these currencies. The new highs did eventually come in late November, but ALL of them were immediately followed by strong retrenchments/ corrections, confirming my views that Gold was in fact making a headfake and not ready to blast into the stratosphere as many Gold bulls predicted.
Gold then promptly plummeted from $1,225 to $1,100 in about two weeks’ time in early December. With the precious metal (denominated in Dollars) continuing to correct today as the Greenback strengthens, I thought it was worth reviewing how the precious metal is faring for those outside the US.
Let’s take a look.
Gold, as priced in Euros is on the literal edge of a cliff. If the precious metal doesn’t bounce strongly off of its current support (7.60 or so) or enter a lengthy consolidation period, we could be seeing Gold (priced in Euros) down around 7.00 or even 6.50 relatively quickly (much like the gut-wrenching drop that occurred in early 2009). This chart is not a pretty site.
What about Yen?
Here we see Gold (priced in Yen) making what looks like a clear double top. This too is bearish. And with Gold slicing through support at 10.00 the next real support is down around 9.50 or even 9.00. Again, not a pretty site and we need to see a strong reversal if Gold (priced in Yen) has any hope of maintaining its gains since July 2009.
And finally, Swiss Francs:
This chart actually doesn’t look too bad. Gold (priced in Swiss francs) looks to have held support and is not entering a consolidation stage. However, I do want to point out that if Gold breaks below support, there’s a long drop down to 10.50 or even 10.00 (much as is the case in the Euro). So this chart, while not as bad as Gold priced in Euros’ could get very ugly very fast if Gold weakens against the Swiss Franc.
Thus, we see that Gold priced in multiple world currencies has formed several very ugly charts. This does not bode well for the Gold bugs as it indicates that the recent correction in the precious metal is not solely related to the US Dollar’s strengthening. Instead we see paper money in general outperforming the precious metal.
This could be signaling an end to the stimulus/ easy credit that has fueled much of the rally in commodities and stocks over the last year. But all of these charts bear watching in the coming weeks.
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1-27-2010
Citigroup reiterates buy; raises estimate
Yahoo Inc., owner of the second-most-used Internet search engine in the U.S., reported fourth-quarter sales that topped analysts’ estimates after the close of trading Jan. 26. Excluding revenue passed on to partner sites, sales were $1.26 billion. The company’s total sales fell 4.1% to $1.73 billion, yet still edged out its own forecast of $1.6 billion to $1.7 billion.
Citigroup analyst Mark Mahaney said on Jan. 27 that Yahoo’s $1.73 billion in gross revenue and $457 million in earnings before interest, taxes, depreciation and amortization, or EBITDA, beat his respective estimates of $1.66 billion and $427 million and Wall Street consensus views of $1.67 billion and $433 million; Yahoo’s GAAP earnings per share (EPS) of 11 cents was in line with his estimate as well as the street consensus view. Mahaney said in a note that Yahoo’s first-quarter guidance was mixed vs. the Street estimate: the company’s midpoint gross revenue forecast of $1.63 billion topped the Street expectation at $1.61 billion, but its midpoint EBITDA forecast of $365 million missed the Street projection at $400 million.
Mahaney said the big story for Yahoo is display advertising, which surged 26% quarter-over-quarter to $503 million. He noted that most (though not all) of the company’s ad verticals are recovering, pricing is “firming up”, and Yahoo has key inventory for advertisers.
The analyst kept his 2010 EPS estimate at 47 cents, but raised his 53 cents forecast for 2011 to 56 cents. He has a $22 price target on the shares.
Kaufman Bros. upgrades to buy from hold
Kaufman Bros. analyst Aaron Kessler raised his rating on shares of Internet retailer Amazon.com Inc. on Jan. 27. He said in a note that the stock has corrected 15% from recent highs, and he believes it now offers an attractive risk/reward for investors.
Kessler said he expects Amazon to post strong fourth quarter results on Jan. 28, adding that his GAAP EPS estimate of 77 cents is 7% above the Wall Street consensus view. He also expects Amazon to continue to gain market share, “driven by its value proposition of low prices, free shipping, high trust factor, and added selection”.
The analyst maintained a $155 price target on the stock, indicating “approximately 30% upside” from current levels.
Wells Fargo keeps market perform
Caterpillar Inc., the world’s largest maker of bulldozers and excavators, said on Jan. 27 that fourth-quarter earnings fell 65%, and forecast 2010 profit that trailed analysts’ estimates. Net income dropped to $232 million, or 36 cents a share, from $661 million, or $1.08, a year earlier. The company said profit this year will be about $2.50 a share; analysts, on average, estimated earnings of $2.70.
Wells Fargo analyst Andrew Casey said in a Jan. 27 note that Caterpillar’s fourth-quarter adjusted EPS of 41 cents topped his estimate of 28 cents, which matched the consensus estimate of Wall Street analysts. Relative to his forecast, Casey said the company beat estimates on a lower-than-expected tax rate, which offset a slightly lower operating profit performance.
Casey noted that Caterpillar management was bullish on its 2010 revenue growth prospects (the company sees sales and revenues rising 10%-25% from 2009), but its midpoint 2010 $2.50 EPS view missed the consensus forecast of $2.72 and his $3.20 estimate.
On the “lower quality” fourth-quarter results, beneath consensus guidance, Casey expects the stock’s performance will be “flat to negative”.
Standard & Poor’s Equity Research maintains buy on ADS
Toyota Motor Corp.’s American depositary receipts tumbled the most in a year on Jan. 27 after the company halted U.S. output and sales of eight models because of a part that spurred a 2.3 million-vehicle recall.
Toyota’s move covers the top-selling Camry and Corolla sedans, along with the Avalon and Matrix cars; RAV4, Highlander and Sequoia sport-utility vehicles; and Tundra pickups.
Standard & Poor’s equity analysts Efraim Levy and Erik Kolb maintained a buy opinion on Toyota’s American depositary shares on Jan. 27. The analysts said in a note that though they remain optimistic regarding growth prospects and market share gains for Toyota, they were concerned with the near-term impact from this action. The analysts were said the duration of the production shutdown is unknown, which could impact Toyota’s near-term profits.
“We also note this move could also hurt already constrained inventories, and any tarnishing of the brand could benefit competitors such as Ford [F],” the analysts wrote.
Mexico’s Carlos Slim Builds a Dazzling Art Palace
January 26th, 2010 | Posted by innov(This story has been corrected to include the name of Telcel, the Mexico unit of America Móvil that will be located in Carlos Slim’s new urban development.)
For many years, Mexican billionaire Carlos Slim lived a deliberately understated lifestyle. He toiled in a windowless, bunker-like office surrounded by leather-bound history books, colonial-era paintings, and baseball paraphernalia. His most personal luxuries in the concrete structure appeared to be Cohiba cigars and monogrammed shirts.
As his telecom empire expanded and his wealth ballooned, Slim spruced up his surroundings and accumulated an art collection that today includes 66,000 pieces, from 15th century European masters to the second-largest private collection of sculptures by Auguste Rodin outside of France.
Now Slim, whose estimated $59 billion net worth makes him one of the world’s richest people, is building an art museum in Mexico City.
Imagine a gleaming aluminum cube that has been stretched and twisted so that it soars 150 feet into the sky, its thrusting, curving upper contours reminiscent of the bow of a ship. It’s a design that is at once whimsical and structurally daring.
The 183,000 square-foot Soumaya Museum, with exhibition space on five levels, is going up in a former Mexico City industrial district where General Motors operated an automobile assembly plant until the 1990s. Named after Slim’s late wife, the museum is part of a 12-acre urban development that will include two 22-story conventional office towers, including the corporate headquarters for Slim’s business conglomerate, Grupo Carso, and Telcel, the Mexico unit of America Móvil, his Latin American wireless phone company. There will also be a small shopping mall, two upscale apartment towers, and an underground theater.
The entire project was designed by Mexican architect Fernando Romero, 38, who before setting up his own practice in Mexico City worked for four years with the Office for Metropolitan Architecture under Pritzker Prize-winning architect and urbanist Rem Koolhaas in Rotterdam.
Romero, who is married to Slim’s daughter, also named Soumaya, has won praise in international design competitions. He is well regarded in Mexico’s architectural community. “I don’t know if having a famous father-in-law is such a good thing at this early stage of his career, but some of his work is very provocative and fresh,” says Bernardo Gómez-Pimienta, one of Mexico’s leading architects.
Slim’s Soumaya Museum is the latest eye-catching showcase for the art collections of wealthy patrons, a global phenomenon that José Maria Nava, head of the undergraduate architecture department at the Iberoamerican University in Mexico City, where Romero studied, calls “buildings as spectacles.” Nava adds: “It’s part of a trend that has become very common worldwide—architecture featuring very complex, undulating geometries made possible by computer-aided design, a kind of digital baroque.”
Four years ago, Slim asked Romero to design a new building for the Soumaya collection, which had outgrown its 15-year-old home in a century-old converted paper factory in an older part of the city. “We wanted to translate his vision and his art collection and this historic moment when Mexico has become part of a more global economic network,” Romero says of Slim, whose business empire spans all of Latin America. His mobile telecom company—just one of his many businesses—has nearly 200 million clients.
Romero came up with 10 designs. “The client is a civil engineer himself, and has been putting up very rational buildings all of his life,” Romero explains. “But over the last 10 years, he started becoming more interested in contemporary architecture and decided he wanted to do something extremely contemporary.”
To deal with the structural challenges of the chosen design, Romero turned to the Los Angeles offices of Ove Arup, an engineering firm known for its work on the Sydney Opera House, the Centre Pompidou in Paris, and the Beijing Olympics’ Bird’s Nest and Water Cube venues. Romero knew Arup from their collaboration on the Rem Koolhaas-designed Casa da Música concert hall in Porto, Portugal, completed in 2005.
Each of the museum’s 28 columns is different. “We curl steel plates into tubes and then we give the right curvature to each of them—each column has different properties, depending on the weight of the building that it will be supporting,” Romero says. (In keeping with Slim’s penchant for vertical integration, a company he owns that builds offshore oil rigs is manufacturing the steel columns.)
Last June, when construction already had begun, Romero brought in Gehry Technologies, an engineering/design firm founded by legendary architect Frank Gehry. A half-dozen engineers, software whizzes, and architects using 3D aerospace design technology have been working with Romero to design a workable external skin for the unusual structure.
Romero originally wanted to create a façade of Carrara marble, reminiscent of the glimmering surface of the Taj Majal. “Marble is coming back to industrial design. Some of the most influential designers are using marble,” he says.
Slim wanted something more modern, so they settled on shiny aluminum. The museum will be covered by more than 16,000 hexagonal aluminum plates arranged in a complex, computer-designed honeycomb pattern.
Estimates of $34 million have floated through the architecture community, a number Romero would not confirm or deny. The museum is expected to open to the public by the end of this year, after only a year of actual construction.
Romero hasn’t made a public presentation, and most of the drawings circulating on the Web don’t reflect the final design. It’s possible that the young architect, charged with an ambitious commission that most designers don’t get until they’re at least in their 50s, wants to avoid second-guessing from his peers. Slim, a lightning rod of criticism for his immense fortune and domination of Mexico’s phone industry, may well be pleased to let the building twist mysteriously out of the ground in the final form that he and Romero have so meticulously planned.
January 26th, 2010 | Posted by goldAbout a month ago, the option market advertised a sale on gold. When we wrote about it in a Desktop column (“Post-Holiday Gold Sale,” we considered the likelihood of a sell-off to the midway point of gold’s July-December rally. Basis the February COMEX contract, that would mean a drop to the $1,068 level or so.
Bulls looking for below-market entry points were selling February puts, struck at $1,070, as a sort of limit order “with benefits.” The benefit, of course, was the premium—then $14.30 an ounce—collected for writing the option.
With January now drawing to a close, gold’s see-sawed higher and lower. On Friday, February gold got down to $1,081.90 before settling at $1.092.50. Given the volatility of the past three trading sessions, a bullish bounce is likely sometime today, but guess what? Those puts are about to die out of the money (COMEX options expire on the fourth-to-last business day of the month preceding the delivery month of their underlying futures).
COMEX/CME Gold (Feb. ’10)
That’s good news for the put writers. At last look Friday, the options settled at $2.10. Remember, a diminution in option premium is a plus for the seller, as less and less of the premium collected upon its sale needs to be expended to cover the writer’s liability.
Unless gold decides to shed another $25 today, these puts are likely to remain unexercised. And that means put writers got paid $1,430 a contract just for placing limit orders to buy futures.
That’s quite a deal: making 1,430 simoleans for not entering the futures market. If only we had a robust derivatives markets that would similarly afford cash rewards for politicians to forgo entering electoral contests.
A guy can dream, can’t he?
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Why Chile’s Gold Riches Are Worth Fighting For
January 26th, 2010 | Posted by gold// <
We write too much about gold, according to some of our readers. “What about silver?” is a plaint we’ve heard more than once this past week.
Okay, what about it? Like gold, the silver market was holed by news of Chinese bank tightening. Does that mean the silver ship is sinking? Well, no. At least not yet.
The talk about a three-year government spending freeze and the dollar’s buoyancy isn’t helping the silver bulls’ cause, either. This morning’s reports on consumer confidence and home prices were a mixed bag that apparently didn’t contain enough bullish goodies. At last look after the reports were digested, spot metal was off about 13 cents to $16.84 an ounce.
Cash silver is trying to maintain itself above the same support level held between May and August 2008 before a breakdown to the $8-$9 tier. The market opened today near oversold levels, at least as measured by volatility and stochastics. Other key technical indicators, such as MACD and relative strength, turned bearish last week.
Momentumwise, silver’s on the skids, having fallen below its 10-, 20- and 50-day moving averages. There’s a lot of downside room, however, before the market hits its 200-day average at $15.66. The last time silver tested its longer-term trend was the mid-July 2009 setup for a run that peaked in December.
On that basis, spot metal needs to stay above $16.80 today to offer much encouragement to bulls in the near term. A decisive break below that level will give the bears the confidence to push for a test at the key $15.97 retracement level.
Of course, there are some bulls hoping for just such a sell-off to give them a buying opportunity.
Now, that’s what’s going on with silver.
COMEX/CME Silver (Jan. ’10)
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Stock Picks: Apple, Texas Instruments
January 26th, 2010 | Posted by stock1-26-2010
UBS Financial keeps buy; raises estimates
Apple Inc. reported a 50% jump in first-quarter profit after the close of trading Jan. 25, buoyed by holiday orders for the Macintosh and iPhone. Net income advanced to $3.38 billion, or $3.67 a share, as sales increased 32% to $15.7 billion.
On Jan. 26, UBS analyst Maynard Um said that adjusting for Apple’s new reporting methodology, first-quarter results were essentially in line with his estimates, though cash flow and Mac sales were much better than he expected. (In September, the Financial Accounting Standards Board approved a change in rules that lets companies record revenue earlier from products that combine hardware and subscription services, such as the iPhone.)
Um noted that the company sees second quarter revenues of $11 billion-$11.4 billion, margins around 39%, and earnings of $2.06-$2.18 a share. With the change in accounting, Um said a key question is “how conservative [the company's] guidance is”.
The analyst raised his estimates to show modestly higher margin assumptions and a lower tax rate. He hiked his fiscal 2010 (ending September) EPS projection to $11.82 from $11.68 and his fiscal 2011 estimate to $12.88 from $12.03.
R.W. Baird upgrades to outperform from perform
Texas Instruments Inc., the second- largest U.S. chipmaker, said after the close of trading Jan. 25 that fourth-quarter net income rose to $655 million, or 52 cents a share, from $107 million, or 8 cents, a year earlier. Sales jumped 21% to $3.01 billion. The company also said first-quarter profit will be 44 cents to 52 cents a share. Analysts in a Bloomberg survey predicted earnings of 44 cents.
R.W. Baird analyst Tristan Gerra on Jan. 26 upgraded Texas Instruments shares, saying it is “too early to sell ahead of our expectation for an EPS peak” in the 2010 third quarter. Gerra said in a note that recent checks point to “continued lead time extension, highlighting a continued recovery in true end-demand, further pushing out inventory normalization in the channel”.
“TI’s valuation is very attractive, in our view, following a significant pullback in the shares this month, leading the stock to trade at a discount to the S&P 500 and peers,” the analyst wrote.
The analyst also raised a price target on the shares to $30 from $28.
Oppenheimer downgrades to perform from outperform; lowers estimate
Oppenheimer analyst Carl McDonald said his analysis suggests health insurer Cigna significantly underpriced its Medicare Private Fee-For-Service (PFFS) products in 2010. He wrote in a Jan. 26 note that enrollment likely will grow a lot faster than expected, but Cigna’s 2010 EPS estimate “should have to come down” while the company will also have to inject more capital into its subsidiaries in order to maintain risk-based capital ratios, limiting available cash for share repurchases. But McDonald also noted that until Cigna recognizes higher-than-expected Medicare costs, there will be a short-term benefit.
The analyst cut his $4.10 2010 EPS estimate to $4.00, and reduced his $39 price target to $38.
Plains Exploration & Production Co. (PXP)
Morgan Stanley downgrades to equal-weight from overweight
Morgan Stanley analyst Stephen Richardson cut his rating on shares of Plains Exploration & Production Co. on Jan. 26, saying the improved outlook for the natural gas producer is now reflected in the stock price.
The analyst said in a note that he still sees 18% upside to his base case value of $40 per share, but the shares discount more of this improving outlook and reserve upside.
“With much of the 2009 catalyst calendar played out, we expect PXP to “re-load” for 2010,” the analyst wrote.
Richardson said he views Plains as better positioned today to deliver production (around 10%) and reserve (around 15%) growth over the coming cycle than any time in its recent history. He said that while he is confident in management’s ability to generate prospects and interest in the stock, he does not expect further near-term outperformance in the shares.
Oil-Field Services: An Uncertain Investor Outlook
January 26th, 2010 | Posted by stock1-26-2010 The apparent stability of oil prices above $70 a barrel and forecasts of higher natural gas prices are making energy companies more confident about increasing spending. That’s good news for oil-field service providers, but analysts don’t think they will be able to raise their prices for services and equipment rentals until the second half of 2010. And companies’ year-over-year earnings comparisons aren’t expected to improve until the second quarter of this year.
Shares in the sector have had a good run from the beginning of the fourth quarter into late January. The Philadelphia Oil Service Sector (OSX) is up 7.7% from its Oct. 1, 2009, close at 185.71, finishing at 199.92 on Jan. 25. But it has closed as high as 216.61 on Jan. 8.
But the two largest companies in the sector kicked off fourth-quarter reporting season with disappointing results. Schlumberger (SLB) on Jan. 22 posted 67¢ in income from continuing operations, down from $1.03 a share a year ago, on a 16.4% drop in revenue to $5.74 billion. Schlumberger’s results did beat a consensus forecast of 64¢ a share among analysts.
Halliburton Co.’s (HAL) earnings, reported on Jan. 25, were nearly halved to 27¢ from 52¢ a share a year earlier, but they beat analysts’ consensus estimate by one cent after excluding a tax-related charge. Halliburton said on its post-earnings conference call that it expects the devaluation of Venezuela’s currency to cost the company $30 million in exchange losses in the first quarter, with an additional $10 million in dollar-denominated income tax in the country.
Other big industry players are on deck. Baker Hughes International (BHI) and Weatherford International (WFT) are scheduled to report earnings on Jan. 26, with Smith International (SII) scheduled for Jan. 27.
Drilling activity in North America seems to be outpacing a rebound in other parts of the world, thanks to the growth prospects of U.S.-located unconventional natural gas deposits—those found in tight rock formations, which require more advanced production techniques than conventional gas assets. The number of rigs drilling in the U.S. rose 14% in the fourth quarter from the third but was down 41% from a year ago, while Canadian rig count jumped 46% from the third quarter but fell 29% from a year ago, Credit Suisse Equity Research said in a Jan. 19 report. The increase in the rig count isn’t reflected in consensus estimates and should drive potential upside for earnings for most of the service companies that Credit Suisse covers, the note said.
Outside North America, there wasn’t the typical yearend spending rush, and that may mean more modest revenue growth in the fourth quarter than analysts anticipate. But the rig count rose 4% from the third quarter, led by a 16% increase in Africa, Credit Suisse said.
Improving returns from U.S. shale gas plays will continue to drive gas production growth with improved efficiency, Friedman Billings Ramsey said in a Jan. 12 research note. But unused capacity in the land rig fleet will prevent significant hikes in daily rental rates for rigs this year. Some investors are warming to natural gas-focused service and drilling companies, but they won’t be encouraged by a lack of pricing improvement in the sector, the note said. FBR
com/research/stocks/snapshot/snapshot.asp?symbol=FBCM’>FBCM) believes investment in U.S. oil properties will provide the “strongest and most surprising” growth in the industry this year and predicted well services contractor Key Energy Services (KEG) should be one of the largest beneficiaries.
There is talk of pricing strength in specific markets, primarily for the larger hydraulic fracturing jobs, where pressure pumping is used to loosen tight rock formations in which shale gas is trapped, says Geoff Kieburtz, an oil service analyst at Weeden & Co. in Greenwich, Conn.
BMO Capital Markets said in a Jan. 20 research note that it now expects quarterly earnings of large-cap oil-field service companies to bottom earlier than expected, in the fourth quarter, given recovering profits in North America and signs of improving international activity. BMO raised its sector rating to outperform and boosted its producer capital spending growth assumptions from 5% to 12% in 2010 and from 15% to 20% in 2011.
While onshore capital spending won’t return to 2008 levels for a a few years, FBR expects offshore expenditures to bounce back to 2008 levels by 2011. Deepwater growth will mostly compensate for the decline in spending on continental shelf gas. An increase in deepwater spending that is almost triple expected growth in onshore spending will drive offshore spending overall at a rate of around 15% for the next few years, according to FBR. The firm said it prefers offshore drillers with exposure to jackup rigs, which generally operate in shallow waters less than 400 feet deep, to those with a deepwater focus, since a clear bottom in the jackup market means that many idle rigs will be able to be put to work, increasing rig owners’ cash flows.
Day rates for floaters, which are rated to drill in water depths of 10,000 feet or more, have fallen from up to $550,000 to $350,000 in the Gulf of Mexico, with comparable declines in the North Sea and offshore Africa, says Tim Guinness, chairman and chief investment officer of London-based Guinness Atkinson Asset Management. He notes, though, that rates remain much stronger than they were from 1998 to 2002.
“The next two years are going to be a grinding period for service companies. They will find contracts coming to an end, and having to roll them over at lower rates than they had been getting,” he says. “At the moment, rates may have bottomed, but they aren’t going to recover rapidly because you have oversupply that needs to be worked off.”
The return of relative stability in oil prices has spurred oil producers working in North America and overseas to restart projects they slowed down or completely deferred a year ago, says Kieburtz at Weeden & Co. While prices are no longer falling, the renewal of existing contracts at lower prices will continue to have an adverse impact on international companies’ profitability for at least a couple more quarters, he predicts.
“The rig count bottomed at a higher level and started rising at a faster pace than we had anticipated.” he says, based largely on reduced service costs. “If we start to see pricing increase for oil-field services, how far can it move up before it can halt increases in production?”
Brad Handler, an analyst at Credit Suisse and author of the Jan. 19 report, also expects to see oil production grow this year, but he believes national oil companies overseas will spend more money than the major integrated companies will.
The improving economics of natural gas are making producers in the U.S. more willing to spend to expand production, he says. Many exploration and production (E&P) companies have indicated plans to spend 15% to 20% more this year because they believe they’ll be paid for the growth. Their willingness to increase spending is based not only on higher productivity of shale reservoirs in Arkansas, Texas, Pennsylvania and elsewhere but also on their ongoing access to capital markets, where they raised a total of $25 billion last year by issuing debt and equity, says Handler.
Optimism among E&P companies could change very quickly, however, if economic data turn negative and raise concerns about the strength of industrial demand, says Handler. Credit Suisse (CS) analyst Jon Wolff expects onshore production to rise 200 million cubic feet per day and liquefied natural gas (LNG) imports to average 600 million cubic feet per day more than they did in 2009. “If we’re right, that’s a little bearish for gas prices,” says Handler.
Guinness is very bullish about natural gas, expecting the price to climb to between $6 million and $7 per million cubic feet this year. But he’s wary of oil-field service stocks, based mostly on what he sees as rich valuations. Large-cap names such as Schlumberger, Halliburton, and Weatherford all appear fully valued at this point in the cycle, he says, priced more for a recovery in 2011.
He owns a position in Transocean (RIG) but doesn’t like the fact that the price-to-earnings multiple has risen from 7.3 times 2009 earnings to 8.2 times 2010 earnings because of a lower earnings estimate. Guinness worries that the multiple may be much higher if earnings deteriorate further in 2011.
“If we’re right, we’ll see these stocks trade sideways for a bit until [earnings improve substantially]. There’s a lack of visibility as to what 2011 is going to look like,” he says.
Bogoslaw is a reporter for BusinessWeek‘s Investing channel.
Mr. Market Lays a Trap for Commodity Bears and Deflationists
January 25th, 2010 | Posted by goldThe behavior of Crude, Gold and Silver as of late would have the casual observer believe that the whole commodity “story” is under serious threat. However, beneath the scenes nothing could be further from the “truth”.
Real commodity prices, that is spot prices or those for immediate delivery, are only a fractional percentage from their multi-week highs and the inflation premium between TIP 10 yrs and non inflationary protected 10yrs is more or less where it was just one month ago. Either which way there certainly has not been enough of a change in spot commodities or inflation premiums to suggest that a “fundamental” change has taken place in the commodity story. Until proven otherwise commodities are still in a bull trend.
CRB Spot Commodity Index
click to enlarge
US 10yr Breakeven
Therefore it would appear that the fall in commodity “heavyweights” such as oil, crude, and silver are not justified and that the weakness should be seen as a buying opportunity rather than the start of a material move to the downside.
To us the market is doing its best to keep weak hands out of the market and lead commodity bears/deflationists into a neatly concealed trap!
Disclosure: Long DBC, SLV, TBT
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Will Higher Interest Rates Kill the Gold Bull?
January 25th, 2010 | Posted by goldThe whole flap this past week over possibly replacing loose money Ben Bernanke with a dollar defender like Paul Volcker makes one wonder just what will happen to gold when the interest rate handle is eventually cranked. There are two possible investor reactions: “Oh my, they’re going to defend the dollar, I’d better sell my gold” or “Oh my, there’s an inflation threat, I’d better buy some gold”. Most of the commentary I’ve been seeing tends to be of the first type – if they start to defend the dollar, gold will go down.
What happened as the previous gold bull came to its end in the 1970s? Well, if you chart the two, the USD vs the prime rate over the end game for gold’s bull market back then, you see this:
Clearly investors seemed to be thinking more along the lines of choice #2 above – rates and gold responding in unison to an inflation threat. The interest rate climb, which took place over nearly 10 years, ignited gold from $35 to $850. The dollar eventually did a huge climb to match the interest rate climb, but this was many years behind the rate climb – beginning in 1980 and peaking in 1985.
In our current situation, we have not even begun to raise rates, which suggests an even more powerful climb ahead for gold than we have seen thus far.
Disclosure: Author holds a long position in GLD
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