I've been following the election closely for two years. For the most part, politics is a hobby of mine, but in this year's election my interest went much deeper.
I recognized very early that the 2008 vote would be monumental on so many levels and investment opportunities would abound. I even outlined the impact of the policies of each candidate on the market in an election gallery.
Now that the results are in with the Democrats taking significant control of the executive and legislative branches, I want to drill down and explore one investment idea that I believe will ascend above all the rest.
One common theme with all Democrats is that spending is sure to increase. Democrats are firmly in the Keynesian camp of using government spending to solve economic problems. We will see large government expenditures in the short term from the new administration.
Can anyone say "inflation"?
So much of the market is focused on deflation with current valuations based on the expectation of deflating prices. While it's true that the economy is slowing, I am more concerned about inflation.
Now, with a Democrat in the White House, I am convinced that the way to make money in the market is to bet on inflation. Vast sums of dollars will be printed and distributed into the economy to stabilize it. Doing so will weaken the U.S. dollar, increase interest rates and create inflationary conditions.
Front and center with inflation will be two commodity trades: gold and oil. I am not a believer in gold, so I'll stick to the oil trade. If you want to make money in the early stages of the new administration, I suggest you position your portfolio to profit from higher oil prices. That means owning oil stocks, and there are several names to consider:
The focus of last week's preview was on oil and energy companies, and we saw that big oil had a good week, reporting better-than-expected results and record profits driven by high prices in the third quarter. Energy-related companies are well represented again this week and expectations in general remain high.
Early in the week, analysts surveyed by Thomson Financial anticipate that the big earnings gainers will include EOG Resources Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), and Cimarex Energy Co. (NYSE: XEC), which are expected to post profits of $2.24 per share (up 64.7% from a year ago), $1.48 per share (up 52.7%) and $2.26 per share (up 61.1%) respectively. All three of them have offered positive surprises in recent quarters, and analysts on average recommend buying EOG and Anadarko. Other expected big earnings gainers early in the week include Forest Oil Corp. (NYSE: FST), Pioneer Natural Resources Co. (NYSE: PXD), Comstock Resources Inc. (NYSE: CRK), and MasterCard Inc. (NYSE: MA). The earnings of phosphates producer Innophos Holdings Inc. (NASDAQ: IPHS) are expected to have risen 92.3% to $3.37 per share. Innophos beat estimates in the previous quarter by a whopping 210%, and analysts have been impressed with Innophos's lack of debt and pricing gains despite the slowing economy, so, on average, they recommend buying IPHS.
Also early in the week, analysts expect Goodyear Tire & Rubber Co. (NYSE: GT), Kaiser Aluminum Corp. (NASDAQ: KALU), and Oshkosh Corp. (NYSE: OSK) to report that their profits fell 52.9% to $0.33 per share, 45.1% to $0.67 per share, and 41.2% to $0.67 per share, respectively. These companies have tended to beat estimates in recent quarters, and the consensus recommendations of analysts are to buy them. However, PMI Group Inc. (NYSE: PMI), one of the largest private mortgage insurance providers in the U.S., is expected to take another hit as the housing slump drags on. The California-based company is expected to have widened its net loss from $1.04 per share a year ago to $2.43 per share in the most recent quarter. Its shares are down 84.5% from a year ago, and have been trading recently near their 52-week low.
TheStreet.com's Jim Cramer says there's a big disconnect between the trade, orchestrated by the funds, and the real-world demand.
How can anyone actually own oil or natural gas through this relentless assault on price? I know when it was going up, the talk was that all of these new funds were indexing trillions to commodities and it was just going to stay there, and that's why there was a new level of oil demand.
Can those same accounts come in every day and take this relentless pasting no matter what the news? And do they believe the news, that they are losing money today because some storm went to Daytona and not to New Orleans?
Yesterday, I had Jim Hackett, the CEO of Anadarko Pete (NYSE: APC) (Cramer's Take) on "Mad Money at the Half," and he was flabbergasted at the activity in the futures pit and how unrealistic it has become. He's focused on natural gas, where he says the demand at $8 by industry -- the glass makers and chemical companies and steel and aluminum users -- is voracious. But the futures themselves just keep going down, regardless of the demand.
John W. Nichols, who is the co-founder of Devon Energy (NYSE: DVN), died recently. He was 93.
As should be no surprise, his life provides many lessons for budding entrepreneurs. Interestingly enough, his innovations were not necessarily about creating new products. Instead, he was an innovator of finance.
Nichols started his career as an accountant and audited the financials for oil companies. Leveraging this experience, he started an oil company in 1941. With sky-high income taxes, Nichols structured innovative financial vehicles to minimize the bite from Uncle Sam. For example, he was the first to register a public oil & gas drilling fund with the Securities and Exchange Commission.
And it was a hit -- he attracted large sums of capital from wealthy individuals (even Hollywood stars like Barbara Stanwick).
No doubt, Nichols biggest feat was the creation of Devon. He formed the venture in 1971 with the help of his son, a lawyer.
The financial innovation didn't stop as Nichols developed the so-called royalty fund, which became a standard in the oil industry.
It was also a big spur for growth. After all, Devon is today a $43 billion company.
With a turn of the calendar page, we drift into the middle portion of the current quarter, but the earnings season rolls on. Among the many companies scheduled to report quarterly results this coming week are Time Warner Inc. (NYSE: TWX), Cisco Systems Inc. (NASDAQ: CSCO), News Corp. (NYSE: NWS), and Whole Foods Market International (NASDAQ: WFMI). Let's take a look at which companies Wall Street analysts are expecting to be among the top earnings gainers and decliners this week.
Analysts surveyed by Thomson Financial expect the following to report strong earnings growth when compared to the same period of the previous year.
The energy debate rages on as oil and gas futures bounce around with 30% corrections. Which side of the energy debate are you on? Bears say that oil and gas prices are coming back down to earth. Speculators and hedge funds bid them up, global demand is slowing and alternative forms of energy will soon replace the fossil fuels we've come to depend upon. Bulls argue that oil and gas supplies are dwindling at the same time that the emerging market economies (China, India, Brazil and 20 others) need more. As their middle class population builds they too will want cars, air conditioning and electricity and demand will increase. Most oil reserves are in countries with unstable governments and when geopolitical events get ugly, prices tend to skyrocket.
I'm a long term energy bull -- 10% of my money has been in energy stocks for the last several years and today I maintain that allocation for two reasons. First, I believe in five years, oil and gas prices will be higher than they are today. Second, owning energy is a great hedge against other asset classes like stocks, the US dollar, and inflation.
No one knows which way energy prices will go next week or month so I continually rebalance my portfolio. As my energy stocks rise, I trim them and when they fall, I add to them. If my portfolio goes to 12% energy, I sell them back down to 10% and vice versa.
Now comes the easiest part – which stocks do I pick? Easy you say? Yes – because I don't worry about stock picking due to a miraculous new invention I'll discuss below. I own three energy stocks: the U.S. Oil & Gas Exploration & Production Index (NYSE:IEO), the U.S. Oil Equipment & Services Index(NYSE:IEZ), and S&P Global Energy (NYSE:IXC). Through these three stocks, I own about 200 energy stocks in precise allocation percentages to parts of the energy sector, weighted according to my own preferences – 60% is in IEO, 30% is in IEZ and 10% is in IXC. Why pick stocks when I can own them all? Here's what I mean.
TheStreet.com's Jim Cramer says both oil futures and equity futures can move these hot issues. Will the futures pull down the oil and gas stocks today? No, I don't mean the oil futures, I mean the equity futur
Last week when oil exploded, we caught two days of trading that dropped the stocks hard. We caught a bit of a bid in the nat gases likeChesapeake (NYSE:CHK) and Devon (NYSE:DVN) but at the end of the day, but the stocks were truly overwhelmed by the simple fact that they are in the indices.
This pattern has really held down the integrateds: last week Conoco (NYSE:COP) should have exploded, but it couldn't because it is such a big part of the S&P. Chevron (NYSE:CVX) and Exxon (NYSE: XOM) are no different.
The natural gas stocks are not as big a factor, but they can be rocked down without a problem.
I am not saying to avoid looking at the oil futures. They can control the stocks. I am saying that the equity futures tide can take down anything, even when the oil futures spike hard.
TheStreet.com's Jim Cramer says forget calling a financial bottom -- everything you need is right in front of you.
Do you think this week will finally end the oil inventory nonsense? Do you think this week could be the breakout where oil doesn't trade on the slight build or the "heavier than expected" chatter?
I sure hope so.
Yesterday was a horrible market, but midday, when the market was really beginning to roll over, the whole complex turned. This was quite an achievement given the overwhelming collapse of the futures and the propensity of the bears to push things down.
Today with the futures breaching $140 -- remember, I think they're on the way to $150 -- we can see the error of relying on these numbers, which I have said for years now are meaningless. Witness how many times the inventories have been more full than expected and yet oil has doubled.
I want to go back to the cheaper-than-oil stocks, though. Natural gas. Oil has to go down $65 to get to where natural gas is right now. Meaning that historically oil trades at six times the price of natural gas. So natural gas -- forget the season, which is supposed to be bad for nat gas -- needs to come higher.
TheStreet.com's Jim Cramer says these stocks rise because they're doubly blessed. Integrateds fall because they aren't.
So many people have been puzzled why the major integrateds have not moved with the last $30 rally in oil's spot price. The answer?
They can't take advantage of it.
They either didn't believe, and therefore didn't drill, or they have been so in the crosshairs of sovereign lunacy that they haven't been able to. They didn't have the rigs or they judged that the rigs were so expensive that, like 1980, they would look like dopes when oil came back to $40-$50, where many thought it would. (Go back and check even last year's research for price targets, most of which were from the oil companies' themselves.)
Or maybe it didn't matter anyway. So many of the contracts these companies have signed with governments around the world are either being abrogated or just outright confiscated that you have to ask yourself "Who can invest under those scenarios?" Exxon (NYSE: XOM) (Cramer's Take) in Venezuela. Shell (NYSE: RDS.A) (Cramer's Take) and now BP (NYSE: BP) (Cramer's Take) in Russia. You can't continually invest billions and then write it off because the contracts you wrote don't mean anything.
TheStreet.com's Jim Cramer says as crude goes higher, it makes more and more sense to go for other energy options.
Every day that oil goes up, there is a new set of technologies that had formerly been priced out of the market that comes back to life. Let's take wind. Wind, in itself, just seems so stupid. It needs, well, wind. Much of our country doesn't have enough wind to make this economic. There are only certain regions that can really benefit.
But when oil is at $130, SO WHAT! The parts of the country that have a lot of wind are nuts not to do wind. Wind, when properly integrated into the grid, costs 4 cents a kilowatt. The issue has been shortage of everything that goes into a windmill, because nobody in the chain thought it was worthwhile to mass-produce them. So even though the cost is low, no companies felt it was worth it because the market seemed so niche.
In other words, it was the wind supply chain that was the problem, because we only thought in terms of gigantic plants that created energy. But with nuclear not an option -- never will be in this country, if you ask me -- natural gas falling out of favor post-Katrina as being unreliable, and coal simply intolerable because of the climate problems, wind has become the most natural fuel of all.
MOST NOTEWORTHY: Lululemon, National City and Devon Energy were today's noteworthy upgrades:
Thomas Weisel upgraded shares of Lululemon (NASDAQ:LULU) to Overweight from Market Weight as they believe the company's momentum continues following the strong results; the firm maintains a $43 target on shares.
Bear upgraded National City (NYSE:NCC) to Outperform from Underperform citing favorable risk/reward following reports is is considering a transaction with KeyCorp (NYSE:KEY).
JP Morgan raised Devon Energy (NYSE:DVN) to Overweight from Neutral citing solid organic growth with high rates of returns.
OTHER UPGRADES:
Micron (NYSE:MU) was upgraded at Goldman to Neutral from Sell.
Merrill raised eBay (NASDAQ:EBAY) to Buy from Neutral.
Devon Energy (NYSE: DVN) is an oil/natural gas exploration company, with operations in the U.S., Canada, and abroad.
Readers of this space know that one argument forwarded here is that in the era of elevated energy prices, oil/natural gas companies are likely to remain promising plays for the foreseeable future, baring the discovery of a cheap, widely-available, alternative energy. And among oil/natural gas companies, Devon Energy is worth an evaluation.
Analysts like DVN's sizable proved oil/gas reserves of 2.34 billion barrels of oil equivalent. Production volume should increase 4-5% in 2007 and 7-11% in 2008. Analysts also like Devon's strategy decision to sell international assets with lower growth prospects. Meanwhile, the company's overall costs remain reasonable.
The New York Times reports that nobody knows where the price of oil will go next. It quotes John Richels, president of the Devon Energy Corp. (NYSE: DVN), an international oil and gas company based in Oklahoma City, saying $150 a barrel was possible, but so was $55.
To me, the most interesting part of this forecast is that an executive in the industry has no idea where the price will go. As the Times suggests, this is because the price is determined by traders and hedge funds. And these market participants view U.S. equities, housing, credit and currency markets as shaky. By contrast, they see oil and other commodities as a safe haven.
If the Times is correct, then the price of oil will be determined by the direction of U.S. equities, housing, and currency and whether these traders and hedge funds continue to see oil as a store of value. If you think that housing prices will rise in 2009; that the U.S. economy is in for robust growth and a balancing budget in 2009; and that peace will break out in the Middle East then those traders and hedge funds are likely to sell oil and buy dollars -- dropping the price to Richels' $55.
MOST NOTEWORTHY: Oil and gas explorers and producers, GSI Commerce and Gazprom Neft were today's noteworthy downgrades:
Credit Suisse downgraded Devon Energy (NYSE:DVN) and Forest Oil (NYSE:FST) to Neutral from Outperform following a reduction in the firm's 2008 natural gas outlook.
Jefferies downgraded shares of GSI Commerce (NASDAQ:GSIC) to Hold from Buy as they have become more cautious on margins given the company's increasingly heavy online discounting through this holiday season.
Gazprom Neft (OTC:GZPFY) was downgraded to Sell from Hold at Deutsche Bank on valuation, as they believe the recent rally is not supported by fundamentals.
The focus of 
John W. Nichols, who is the co-founder of 
and 
. He also operates 
The energy debate rages on as oil and gas futures bounce around with 30% corrections. Which side of the energy debate are you on? Bears say that oil and gas prices are coming back down to earth. Speculators and hedge funds bid them up, global demand is slowing and alternative forms of energy will soon replace the fossil fuels we've come to depend upon. Bulls argue that oil and gas supplies are dwindling at the same time that the emerging market economies (China, India, Brazil and 20 others) need more. As their middle class population builds they too will want cars, air conditioning and electricity and demand will increase. Most oil reserves are in countries with unstable governments and when geopolitical events get ugly, prices tend to skyrocket. 
TheStreet.com's 
.gif){kind=logo}
The .gif){kind=logo}
Best & Worst in Money 2008: Most shocking financial collapse
Closing Bell: Stocks slump as AMD, AT&T, GM and Merck decline
Global Q&A: A rocky road, but profits ahead
