DaviesTown.com/blog

A nice documentary found on Bloomberg today on the rising food prices. If you want to download the video, click the link below. It’s a very interesting video. Approximately 45 minutes long.

bb-from-feast-to-famine–thefactsbehindthefoodcrisis.asf

[Posted @ 08:13:55]

Follow up to this post. A nice image is seen this morning:

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The power of technical analysis.

[Posted @ 12:25:29]

Source: http://biz.yahoo.com/ap/080425/oil_prices.html

“Crude prices rose on initial reports that a U.S. ship had fired on two Iranian boats; the news raised concerns that a conflict between U.S. and Iranian forces could cut oil supplies from the region. A Navy spokeswoman said the origin of the boats was unclear.

The news was enough to send light, sweet crude for June delivery up to $119.55 before the contract retreated to settle up $2.46 at $118.52 a barrel on the New York Mercantile Exchange.”

There goes most of the nice candlestick formations I was talking about last night… I guess no clear-cut top afterall… The only ones that look like they’re going to fall are HAL and SLB. I’ll put some money in HAL since it will be essentially unchanged today to make a nice doji.

Strategy:

Last - 46.90 @ 12:56:35
Target - 42.00
Stop - 48.33

I’ll see if I can create a virtual portfolio to track my performance on this blog.

[Posted @ 00:44:32]

Weeee! I’m done my finals. Happy~!

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Top in USO (United States Oil ETF) and oil & gas related stocks? Hmm. That answer is contingent on tomorrow’s price action. One thing is for certain though: if what I’m seeing is correct on the charts, there is a high probability of a top in crude oil and oil & gas related stocks. Here’s what I see:

1. In terms of candlestick pattersn: Shooting stars and bearish engulfings.
2. In terms of overbought/oversold oscillators: Overbought levels.

All charts are WEEKLY charts. Unless oil, gas, and oil and gas related stocks go up significantly tomorrow, there is a very strong tendency for oil and gas related stocks to fall next week!! These are one of those moments when you can just see it happening. Am I certain you ask? Yes, I am certain indeed. Would I put money on this idea you ask? Yes, if prices remaim relatively stable (i.e., relatively unchanged) then I would definitely open positions.

Analysis on THESE — USO then APA, CHK, HAL, OXY, SLB, and finally XOM! Okay. Let’s begin with USO:

Weak signal. Nothing particularly special (except the all time highs) about USO’s weekly chart. I just had to put it up here because it captures the recent price action seen in crude oil.

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Bearish engulfing anyone? The volume isn’t particularly high though. I would like to see volume to exceed last week’s amount at the very least to have this pattern appealing.

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Shooting star anyone? I would like to see CHK to fall a little bit to have a nice doji shooting star. Volume is nice.

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Okay, I want HAL to tank (emphasis added)! Look at this STEEEEEP increase in price over the last four weeks. from 36.28 on the week of March 24th to 47.43 on the close on April 18th. That’s a 30.7% increase over 20 trading days. Hmm. I think when holders of HAL see other oil & gas related stocks falling, they’ll take profits as well… while they still can. That’s my theory anyways.

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OXY! Pretty OXY. They came out with stellar earnings today (April 24th). Earnings of $2.23 beat forecast of $1.98 per share (an upside surprise of ~13%) yet afterhours show little enthusiasm.. Hmm. Interesting.

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Slumbergeeeee~ (without the r =P) NICE SHOOTING STAR! Just lacking volume heh.

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And lastly, I present, XOM: triple top anyone? Glaaadly! =)

[Posted @ 21:57:06]

A follow up to this post on the 22nd of April.

The energy player’s comments hint at the fact that OXY is a good company to hold on to. What prevents me from considering any type of transaction with regards to OXY is that his comments are that of an energy trader. If he’s long OXY, how long is he going to hold on to OXY? Probably until crude oil starts its descent from its highs. Which, in my opinion, will be quite soon.

Source: http://slopeofhope.com/2008/04/from_the_energy_desk.htm

The next several days are critical for energy, and perhaps the overall market. As mentioned previously, Tuesday April 22 marks the expiration of the May oil futures contract. How the commodity closes could provide important insight whether the next stop is $110 per barrel or $125.

Regardless, oil and the equity markets are at a mutually exclusive break point, in my opinion. Hyperbole, you say. Panic, you say. Consider the following: The last $20 per barrel move in oil has added approximately $150 billion to the nation’s annual energy tab, an amount equal to the highly publicized and much anticipated US tax rebate. The problem is that instead of a new TV, it looks like that check is going to go 100% to the fuel bill. Worse, 50% of these funds leave the country to pay for oil imports, a complete economic drag. The velocity of money is significantly reduced via higher energy costs with very little resultant knock-on economic activity. Bottom-line, for the US consumer, higher energy costs can be zero-sum. Moreover, higher US natural gas prices could cost consumers another $50 billion this year and higher costs for oil, gas and coal WILL result in higher electricity prices over the next year, albeit with a delayed impact.

Note that oil prices are actually on track to average $40 per barrel higher in 2008 versus last year, thus costing consumers $300 billion y/y. Of course, these are all the observable “direct” costs. Who knows how much the dramatic increases in energy costs results in higher “indirect” inflation. The point is that there is likely to be much less consumer funds available, particularly for maintaining a household. The change in energy prices will most likely increase the rate of mortgage defaults, as certain homeowners are forced to throw in the towel. It will be interesting to see of the market can continue to rally as the energy impact becomes more pronounced?

The fed faces a significant choice next week. Either cut rates to assist mortgage holders, or fight the oil price increase by keeping firm on rates. Neither prospect is too appealing.

On to oil stocks: One of the purest plays on the higher oil price is Occidental Petroleum (OXY - $85), which this year should produce close to 470,000 barrels per day of high quality and even higher profit margin crude oil. Almost 80% of OXY’s output is oil, with the balance being mainly US natural gas production of 550 million cubic feet (mmcf/d). The company has zero refining (which is a good thing given current poor US margins) and a small chemical arm. At an average oil price of $105 per barrel this year and a gas price of $9, I calculate that OXY could earn $8.50 per share, up a solid 62% from clean, operating earnings of $5.25 per share in 2007. Thus, the stock is now trading at a P/E of 10x 2008 projected EPS. Cash flow could grow an impressive 45% to $11.75 per share versus $8.10 in 2007. Wow! More importantly, I project free cash flow could be over $6 billion this year, or over $7 per share in FCF. Double Wow!. That is after spending $4 billion on growing the business. With only 7% debt-cap, that is a lot of FCF for dividend hikes and stock buybacks (OXY has doubled the dividend over the last five years).

OXY is different from most E&P companies because it has lower capital requirements, which results in much higher FCF, and long life reserves. Reserve life for US oil, which is 75% of total oil reserves, is almost 18 years, which is practically unheard of in the industry. Obviously, if a company runs out of reserves, its earnings and cash flow should be valued less. OXY has long life, which is critical, in my opinion.

OXY is scheduled to report on Wednesday April 24. Consensus is at $1.95. I think they can do closer to $2.00 per share for 1q08. It does not really matter. These are not tech stocks where every penny counts. The point for OXY is that EPS could be up 110% y/y. That is why these stocks are working – the growth in earnings and cash flow is huge. Moreover, EPS are almost certain to be higher in 2q08 given that the oil price averaged only $97 per barrel in 1q08. As we know, it is up another 20% since then. Look, everyone has their favorite exploration and production stock. APA, CHK DVN, EOG are all great names. My point is that they are already up 30% - 50% this year alone. OXY is up only 10% year-to-date, yet OXY almost has more free cash flow than the other names combined (almost, not quite, but the point is the same).

DISCLAIMER: OXY is an interesting idea, not a recommendation. I own the shares, but I know that if the price of oil collapses, so too will OXY’s stock price. Also, ideas may be worth exactly what one paid for them.

[Posted @ 12:58:34]

Here’s a really good post from Tim Knight from SlopeofHope.com regarding commodities. You can see several historical charts of various commodities (Gold, Sugar, Corn, Crude Oil, Wheat).

Link: http://slopeofhope.com/2008/04/commodities_bubble_or_bull_run.htm

and… Markets are closed for the day now! Back to studying.

[Posted @ 12:45:35]

The main thing that concerns me is credibility. Anyone could be anyone on the internet. The text below comes in the form of an email to a bearish chartist who has his own blog. I trust that the email guy knows what he is talking about.

Source: http://slopeofhope.com/2008/04/energy_analyst_remarks.htm

I trade energy stocks for a living after having covered the sector for 20 years on the buy and sell-side.

Oil and OIH now reside in an uncharted world. Specifically, SLB actually misses 1q08 EPS by 5% and the y/y was a paltry 10% (versus 63% y/y in 1q07, 82% in 1q06, 38% in 1q05 and 81% in 1q04); yet, the stock explodes higher yesterday propelling the move in OIH.

My fear in looking at your chart on BHI is that this stock is going back to $100.

Consider oil over the past five years. First driven by low inventories, myth now debunked; then lack of spare OPEC capacity, now debunked; then hurricane issues, debunked; then the Iranian issue, now debunked; then it was all about the dollar – Now debunked. Dollar rallies sharply on Friday, gold goes down, but oil soars to new highs. Oil is on its own mission. The move higher sows the seed of its own destruction, but who knows where the point of pain exists.

Aside from housing, the single biggest reason to remain bearish is oil. The commodity may continue to explode higher until it crushes the economy and US, European and Japanese stock markets. WTI oil averaged $72 per barrel last year. This year could/will be $40 per barrel higher – that’s $300 billion in higher oil costs alone to the US consumer, or almost 3x the so-called stimulus package.

The problem with shorting energy stocks is that fundamentals do favor the pure producers (not so the refiners or big oil).

I am glad we are able to make the connection as I have truly enjoyed your comments, which often exactly capture the mood of the markets.

The next several days are critical for oil and energy stocks. The May futures contract expires on Tuesday April 22. Crude needs a rest, but if it does not pull back at expiration, certain producing stocks are going to break-out to even higher highs. The reason is that the operating leverage for some of these companies is HUGE. The key is to focus on companies with high quality production assets, long reserve lives, AND low marginal tax rates. APA, CHK and OXY are three of the best examples. You have posted on APA, and the chart does look extended, but at $116 oil and $10 gas, the earnings and cash flow is there to back it up. I am not long APA at $140. I am quite long OXY and CHK. The former is perhaps the single best equity play on oil and the latter = one of the best plays on natural gas. I will explain more on these two names in a later missive.

The huge difference between energy, housing and tech “bubbles” is that the energy companies actually have real EPS, cash flows and improvements in net asset value. The numbers at $100 + oil are staggering. For the industry, it is not about the % change in commodity price, it is about the absolute number.

I have been out of the OIH for the last year, after catching big runs in 2004 and 2005. The reason is that despite a great oil price, revenue and EPS growth RATE is slowing for the service sector, which I consider to be a key driver. I admit that I don’t understand the move in SLB on Friday, unless it was option expiration.

On the short side, the higher crude goes the worse it is for the refiners (VLO, SUN, MRO, TSO etc). Product demand in the US is negative, which has killed margins. Also, big oil is quite vulnerable at these levels. As a pair-trade to the producers, it looks worthwhile to be short XOM, with smaller shorts in BP, COP and CVX. The market does not yet know how bad refining earnings will be for the big boys until 1q08 EPS reports next week. Also, if crude going higher cracks the stock market, I project it will take down the big index names like XOM and CVX. The risk for me is that the reverse is also true. Lastly, if oil goes much higher, government is going to be forced to get involved. The window for me is that the so-called market pundits have not started picking up on how devastating the financial flows are for the global consumer at $120 oil.

The math is pretty easy because the US consumes 7.5 billion barrels of oil and oil products each year.

In sum, I have been involved in stocks for almost 30 years and this is the most dynamic, intellectually challenging period I have ever experienced. I will be back with more details on certain names, but in the mean-time, please take a look at the charts on OXY, CHK, XOM, COP and CVX. I value your insights on this sector.