Trends I'm Watching

Will Oil Stay Cheap?

Trend: The fall in oil prices is temporary. Demand will grow much faster than supply unless an alternative energy breakthrough occurs.

SUV sales increase

Sales of gas-guzzling trucks and SUVs, which have long been the main source of profits for Detroit's auto makers, plunged earlier this year as gasoline topped $4 per gallon. Light truck sales were down 39% in October, but dealers say there have been signs of life in the segment in recent weeks. (Nov 26, CNN Money)

The new middle class wants the American Lifestyle

Charles Hugh Smith  says: despite the current "head fake" of $2/gallon gasoline, petroleum supplies are still limited/in decline even as 2 billion new consumers gear up for their share of the energy-intensive Western lifestyle of autos, heat, air conditioning, malls, office towers, etc.

Price Declines are temporary

Simmons & Company reports:

■ Like the financial crisis, the energy crisis is real.
■ It has been building for years.
■ Supply is waning, demand is soaring.
■ Oil price collapse marks serious risk that demand will pull ahead of supply.
■ Once stocks get too low, we will have a run on our energy bank.

Fossil Fuel Production Rates

Food for Thought

The collapse of energy prices will boost demand.

The financial crisis and economic slowdown affect will reduce investment in energy efficiency.

Economic worries are diverting attention from strategic energy security and environmental challenges.

ETF Trends: 52, 13, and 4-Week Top Performers

Trend: Ultrashort ETFs (SSG, SDK, REW, SFK, EFT) provided the top gains for the most recent 52-week period.

The 5 ETFs with the best 13 week performance through 11/28/2008 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name	Ticker	Category	Holdings	Morningstar	Last Price*	1-Wk	4-Wks	13-Wks	YTD	52-Wks	3-Yrs	5-Yrs
UltraShort Semiconductor ProShares	SSG	Specialty - Technology	holdings		$147.93	-19.52	28.01	121.47	164.69	153.97	N/A	N/A
UltraShort Russell MidCap Gr ProShares	SDK	Growth	holdings		$144.57	-26.61	8.94	98.59	129.39	126.83	N/A	N/A
UltraShort Technology ProShares	REW	Specialty - Technology	holdings		$115.06	-18.47	16.58	85.13	115.82	112.41	N/A	N/A
UltraShort Russell1000 Growth ProShares	SFK	Growth	holdings		$123.46	-18.20	7.75	69.71	100.58	102.26	N/A	N/A
UltraShort MSCI EAFE ProShares	EFU	Income	holdings		$139.18	-17.94	-1.99	35.08	89.37	99.88	N/A	N/A

Trend: Short commodity ETFs (DTO, DEE, SSG, SMN, BOM) provided the top gains for the most recent 13-week period.

The 5 ETFs with the best 13 week performance through 11/28/2008 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name

Ticker

Category

Holdings

Morningstar

Last Price*

1-Wk

4-Wks

13-Wks

YTD

52-Wks

3-Yrs

5-Yrs

PowerShares DB Crude Oil Dble Short ETN

DTO

Specialty - Natural Resources

$100.96

-2.79

48.95

208.09

N/A

N/A

N/A

N/A

PowerShares DB Commodity Dble Short ETN

DEE

Specialty - Natural Resources

$62.54

-2.48

29.46

138.43

N/A

N/A

N/A

N/A

UltraShort Semiconductor ProShares

SSG

Specialty - Technology

holdings

$147.93

-19.52

28.01

121.47

164.69

153.97

N/A

N/A

UltraShort Basic Materials ProShares

SMN

Specialty - Unaligned

holdings

$77.27

-26.41

10.07

120.43

91.67

78.28

N/A

N/A

PowerShares DB Base Metals Dble Shrt ETN

BOM

Specialty - Natural Resources

$60.06

-4.71

13.51

113.58

N/A

N/A

N/A

N/A

Trend: Short commodity and long gold ETFs (DTO, DEE, SSG, GDX, DGP) provided the top gains for the most recent 4-week period.

The 5 ETFs with the best 4 week performance through 11/28/2008 tracked by Morningstar are highlighted below.

Source: MSN Money Exchange Traded Funds (ETFs) Performance Tracker

Name

Ticker

Category

Holdings

Morningstar

Last Price*

1-Wk

4-Wks

13-Wks

YTD

52-Wks

3-Yrs

5-Yrs

PowerShares DB Crude Oil Dble Short ETN

DTO

Specialty - Natural Resources

$100.96

-2.79

48.95

208.09

N/A

N/A

N/A

N/A

PowerShares DB Commodity Dble Short ETN

DEE

Specialty - Natural Resources

$62.54

-2.48

29.46

138.43

N/A

N/A

N/A

N/A

UltraShort Semiconductor ProShares

SSG

Specialty - Technology

holdings

$147.93

-19.52

28.01

121.47

164.69

153.97

N/A

N/A

Market Vectors Gold Miners ETF

GDX

Specialty - Precious Metals

holdings

$26.57

15.37

26.83

-29.41

-42.02

-41.76

N/A

N/A

PowerShares DB Gold Double Long ETN

DGP

Specialty - Precious Metals

$16.00

3.90

25.20

-10.61

N/A

N/A

N/A

N/A

Infrastructure Stocks Rebound

Trend: Government spending on infrastructure in 2009 will boost the stock price of companies that win contracts. 

House Majority Leader Steny Hoyer, the second-highest ranking member in the House, said the government is going to put money in infrastructure projects to spur spending and create jobs.

Nick Hodge at Wealth Daily recommends several infrastructure stocks that may have hit bottom. Excerpts below.

Link: Infrastructure Stocks

To get an idea of how to capitalize on this opportunity, you first must know what is included under the broad umbrella of 'infrastructure stocks.' I'd put the following sectors in that category:

• construction and engineering firms

• suppliers of concrete, steel, heavy equipment

• water infrastructure companies

• transmission companies/electric utilities and

• green infrastructure companies

I'd be looking for companies that dabble in more than one of those sectors, and have a successful track record of doing so.

Here's a list of the infrastructure stocks that I like, and that have sold-off dramatically over the past few months:

Obama ETFs

Trend: Alternative energy and infrastructure ETFs stand to gain from President elect Obama's economic plans.

ETF Expert Gary Gordon recommends ETFs that will rise from Obamas economic plan. Excerpts below.

Link: ETF Expert: Obama Plan Affects Infrastructure ETFs, Oil ETFs and Alt Energy ETFs.

...President-elect Obama gave us a glimpse of his economic team, substantially lifting equities. And on Monday (11/24/08), we received greater certainty about the Obama job creation plan.

Not surprisingly, many of the items that Obama mentioned the most on the campaign trail, as well as in the outline of the job creation plan (i.e., infrastructure and alt energy), outpaced the markets at large. Here's a rundown on how the 5 Obama ETFs performed over the last 2 trading days.

5 Obama ETFs
				Approximate	11/21-11/24
Powershares Dynamic Energy Exploration (PXE)					23%
iShares Goldman Networking (IGN)					13%
iShares MicroCap (IWC)					10%
iShares Medical Devices (IHI)					8%
Powershares Clean Tech (PZD)					16%
Average Gain in 2-Day Rally					14%
S&P 500 SPDR Trust (SPY)					13%

There's not a lot of genuine rationale behind the movement, beyond a bump in confidence. That said, the President-elect is going to get most of what he asks for from a Congress that is heavily in his corner.

And that means...  when Obama says we are going to be rebuilding the nation's physical infrastructure in a greener, cleaner way, you can expect Powershares Clean Tech (PZD) to benefit. PZD is a "greener" take on infrastructure. “Cleantech" companies are those that derive the majority of their business from products or services that improve productivity or performance while reducing costs, resource consumption, pollution and toxicity.

It also means that, while Obama stresses the sensible creation of alt energy, he's aware that the country must also gain access to some traditional sources of non-renewables, including natural gas. And that means good things for the PowerShares Dynamic Energy Exloration Production Fund (PXE).

This energy ETF is geared to smaller companies, rather than "Big Oil." With very attractive P/B and P/E ratios, and probable stimulus for small businesses, PXE stands to benefit from both the search for offshore oil as well as the acquisition of natural gas, an alt energy favorite.

Stocks with Strong Relative Strength

Trend: Stocks in the healthcare and biotech sector are among the few that have hit new highs in the falling market of the last several weeks.

Harry Boxer at MarketWatch says that stocks with strong relative strength in the face of a weak market tend to perform best when the market turns around. Here are five such snapback candidates, all of which happen to be in the healthcare and biotech arena -- four of which have made new 52-week or multi-year highs in the last several weeks.

Link: Five snapback candidates for a market turnaround - MarketWatch.

Emergent BioSolutions

EBS has been continually making new 52-week highs and now, at around 20, is near its recent new all-time high at 21.50. The stock has been in a steady uptrend since the end of last year, increasing more than four-fold from about 4.5. Despite some intermittent steep pullbacks that were very short-lived, the stock forged higher and continues to remain above its moving averages and trendlines, and could very well have an upside spurt if the market turns around.

Right now the stock is at the top of its one-year channel, so if it does break out to the upside of that channel, you could project something in the high 20s, and then in the mid-to-highs 30s longer term. Short-term support is around 16.5 and beneath that around 13.

 

LHC Group

LHCG has recently broken out to new all-time highs and is currently in a flagging/consolidation formation with underlying technicals extremely strong. The stock remains above its moving averages, price support and trendlines. Currently in the mid-range of a steep seven-month upchannel, the stock could get into the low-to-mid 40s if it reaches the top of the channel. The long-term measured move (which is based on measuring a prior move, as stocks tend to move in equal legs) could get it into the 55-60 zone. Short-term price and moving average support is in the 29-30 zone, and beneath that at the breakaway gap at around 28.

 

Osiris Therapeutics

OSIR , which reached its 52-week high at 20.20 back in September after breaking out of a beautiful year-long base pattern, is coming back from a sharp pullback in October. The comeback has seen the stock jump from about 10.5 to 19. The stock is currently backing and filling and consolidating in a nice bullish flag pattern above the moving averages, with strong On Balance Volume (a measurement of accumulation intensity) and a bullish technical pattern. A breakout over 20-20.25 would take the stock to new 18-month highs, and could trigger additional strength, perhaps back up to test the early 2007 highs near 29. However, there is some resistance to get through at the March 2007 spike rally high at 22.5. Beyond 29, if the stock makes new highs, the projection would be the mid-to-high 30s. Support is around the 15-15.5 area.

 

PetMed Express

PetMed Express (PETS), which is involved in medications for animals, recently broke out of a two-year base pattern. It is currently backing and filling, but underlying technicals are making new highs in a very negative market environment. This stock has a chance of extending its gains, taking out the 2006 high around 20.20 and moving substantially higher over the intermediate term. It's got a 2.5-year base pattern that could support a large move -- so beyond 20.20 the measured move could take it up towards 26.5 and then possibly 34.5. Support is at 15.75 and beneath that the late October reaction low around 14.5.

 

Questcor Pharmaceuticals

Questcor Pharmaceuticals (QCOR), one of our favorites for the last year or so, has dominated the relative strength lists for the last several weeks and is one of the strongest stocks on the Street right now, making new 13-year highs and approaching the all-time highs set back up 1995. A takeout of the 9.5 area, which is the all-time high going back to 1995, could result in a spurt into the low- to mid-teens. Beyond that, the targets are 17 and then 25. Short-term support is at 7.50 - 7.60, which is the last reaction low and 40-day moving average. Closing below that would be negative, as the stock has moved below its 40-day moving average on three occasions in the last three months, but has always reversed intraday to close above it.

Safe Harbour: Closed End Bond Funds

Trend: Most closed-end funds are trading at a discount to the underlying securities.

Steve Christ at Wealth Daily describes closed-end funds and Safe Harbor Savings Accounts. Excerpts below. 

Note: Some municipal bonds may be hurt by uncertainty about the investment-grade ratings from the monoline insurance companies.

Link: Closed End Bond Funds

...closed-end funds issue a limited number of shares. That means the number of shares outstanding in them is fixed.   So closed end funds trade like a stock, bought or sold minute-by-minute with a price driven by market sentiment.

That's a key difference and why I say closed end funds can be bought on sale.

Here's why.

Because the market value of a closed end fund  share changes throughout the day, its price doesn't necessarily reflect the net asset value of its holdings. In fact, it rarely does.

As a result, share prices of these funds trade at either a discount or a premium to the securities underlying them. And when they trade at a discount to their NAV they have essentially gone on sale, taking some of the guess work out of buying them.

Now in "normal" conditions, the typical closed-end fund trades at anywhere from a 2 to 10 percent discount to its net asset value. However, in today's volatile environment of forced selling many these funds actually trade double-digit discounts now making them increasingly attractive investments.

Closed End Funds Meet Safe Harbor Savings Accounts

The most popular of these closed-end funds are those that invest in municipal bonds. They are the basis of what I call "Safe Harbor Savings Accounts." In them, you will find not only find a hefty yield, but very little risk.

But that's not the best part about these closed-end funds.

Better yet, the interest from "Safe Harbor Savings Accounts " is exempt from federal income tax and in many cases, state and local taxes as well. So they provide an income stream the boys in D.C. can't get their hands on unless you sell the bonds for a capital gain

That makes these ‘savings accounts" one of the easiest tax shelters on the market today—-especially now that they have hit the sales rack.

Predictions

Trend: A number of influential predictors have been dead wrong about the 2008 financial crisis.

Arthur Laffer is a supply-side economist who became influential during the Reagan administration as a member of Reagan's Economic Policy Advisory Board (1981-1989). He is best known for the Laffer curve. (via Wikipedia).

Laffer is famous for his free-market optimism.

Peter Schiff, president of Euro Pacific Capital Inc., adheres to the principles of the Austrian School of Economics and the Ludwig von Mises Institute. Schiff points to the low savings rates of the United States as its worst malady, citing the transformation from being the world's largest creditor nation in the '70s to the largest debtor nation at the turn of 2000. (via Wikipedia)

Schiff goes against the herd opinion and is ridiculed.

Link: Peter Schiff vs. the World, 2006 to 2007 - BusinessWeek.

Ben Steverman at BusinessWeek says: 

What’s unnerving to me about this video is how certain both Schiff and his critics are that they are right. Obviously Schiff was proven right, to his credit. But at the time, you could agree with Schiff’s general critique of the U.S. economy (that the country is too indebted, for example), but you could find little evidence that it would get as bad as he predicted.

That’s one reason everyone else looks so baffled on this video: At the time, Schiff often sounded like he was from another planet. His view of the world so differed from both the market consensus and from certain supposedly objective measures of the U.S.’s financial strength.

I don’t think the lesson of the financial panic of 2008 is “always listen to Peter Schiff” or “we need better prognosticators.” It’s “you never really know what’s going to happen,” and “pay attention to evidence, not predictions.”

The Impact of Deleveraging

Trend: Deleveraging is softening demand and weakening spending and growth, while lowering inflation and energy costs.

John Mauldin has predicted the current downturn and now explains how it will evolve. Excerpts below.

Link: The Problem With Deleveraging - Thoughts From The Frontline - InvestorsInsight Publishing.

Just as consumers used debt to buy "stuff" they wanted now, so did businesses, banks, and governments. It powered a huge global growth boom. The Great Unwind will have the opposite affect, softening demand and weakening spending and growth. What leveraging did for growth, deleveraging will take back. It is likely to be a long, Muddle Through trip.

The IMF now projects that the developed world will slow by a collective 1% next year, dragging world growth close to zero. The export growth that has been powered by a cheap US dollar is destined to slow as world demand falls.

The good news? Oil prices are likely to fall even more, which will free up some money to be used in other ways. The ISM data showed that prices paid are falling, making inflation less likely. The US government deficit, under Democratic control, is likely to be $2 trillion in 2009, a staggering number to be sure. Without the pressure of inflation, and with the threat of outright deflation, it may even be that such a deficit can be managed. In the short term, this massive debt will provide a stimulus, lessening the effects of a deep recession.

The sad thing is that our children will be saddled with the debt for a very long time. Hopefully we spend it on things like infrastructure, which will be of some use to them, rather than on an endless stream of consumer stimulus packages that simply add to current debt.

As investors, businesses, and employers/employees, we will have to deal with the outcome of a major resetting of consumer spending. Unemployment will rise. Whatever stimulus package is enacted will mostly be used to draw down debt, and not actually spent. Businesses all over the world are going to have to rethink their growth plans to the extent that they were based on ever-rising US consumer spending. Earnings are going to be under real challenge in most industries. This is going to become more obvious as time goes by, and is going to challenge whatever bear market rally can be mounted.

All is not gloom and doom. The last major recession and problem period, in the '70s, saw a number of new businesses start and prosper (Microsoft, Apple, Intel, etc.). Businesses that have access to capital are going to be able to take market share and come out of this recession in much better shape. It is just a recession, after all, and will end. But I would suggest keeping your powder dry and being nimble. There are opportunities which will arise, as they do in every downturn. Just don't expect this recession to be like any past recession. Make your plans accordingly.