Issue #5 - 2/20/08
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| "There is nothing that (CNBC's Jim) Cramer says that can help people make intelligent decisions. He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World." David Swenson Portfolio Manager for the Yale Endowment ($22.5 billion) As quoted by the NY Times |
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Volume I: Issue #5  See Note below for chart explanation. Editor's Corner Crude Up - Stocks Down Ron Rowland - Editor Despite a few hopeful moments, equity benchmarks drifted down over the last week. Intermediate-term trends remain negative. With economic news continuing to point toward recession in 2008, investors with bullish conviction are increasingly difficult to find. Crude oil futures jumped, finally closing above the $100 mark on Tuesday for the first time in history. Other commodities are breaking records as well, particularly agricultural products. This, combined with action in currencies and bonds, suggests to us that inflation may be an increasingly important theme in the next few months. The Fed and other central banks seem to think they can engineer a soft landing while keeping inflation under control. We hope they're right. Speaking of inflation, the ten-year Treasury yield appears to be breaking out of its recent trading range with a move up to 3.96% at one point today. A re-test of the December peak around 4.2% would not be surprising in the next few weeks. On the short end, Fed funds futures indicate further declines in short-term rates through at least June, with a bottom near 2%. Credit worries are sparking chaos in some corners of the municipal bond market -- proving once again that the debt binge of the last few years will have to be unwound in many places and in many ways. Sectors We now have two sectors with positive intermediate-term momentum. Energy made a big jump in the last week, moving from the middle of the pack to second. Materials held the top spot and grew even stronger. The bottom of the list was unchanged. Telecom, Technology, and Financials showed little movement in either absolute or relative terms. For the moment, at least, the sectors related to natural resources are the clear leaders. Styles The style box stayed negative on all sides in the last week. There was some slight improvement in the MidCap components, while Small Value slipped a bit. These changes were minor, however, and the broad trends remain generally static. The two ends of the market capitalization spectrum, Mega Cap and Micro Cap, share the bottom of the rankings. International Latin America gained more momentum in the last week and is still the only international market showing bullish momentum right now. There was significant improvement across the board, however, especially in China and Emerging Markets. We see two factors driving this trend. First, the unprecedented weakness in the U.S. dollar is giving many foreign markets a boost when viewed in dollar terms. Second, bullish moves in energy and other commodities are improving the prospects for many resource-producing economies such as Brazil, Russia, and Canada. If the commodity price trends persist, it will not be surprising to see more global capital flowing into those markets. Note: The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value. Pick of the Week Ride the Energy Wave with Occidental Petroleum: OXY Brandon Clay  It earned a deserved spot on the U.S. State Department's list of state sponsors of terrorism. The North African regime didn't help its PR problem by supporting terrorist actions against the West throughout the 1990's. Then something happened. In December 2003, Libya came out of hiding. Seeing U.S. military action in Iraq and Afghanistan, dictator Mu'amar Qadafi directed his country on a different course. Qadafi announced he would be laying down Libya's weapons of mass destruction and shipping them to the United States for storage. Libya's action led to the eventual normalizing of relations between the United States and Libya. The rapprochement was historic. Yesterday, economics caught up with diplomacy. On Tuesday, Libya granted Occidental Petroleum (OXY) and Royal Dutch Shell Plc petroleum exploration and production rights in Libya. The formerly-rogue nation wants to increase oil production to 3 million barrels/day, up from 1.74 million barrels today. This is in addition to the increased natural gas production planned by 2015. This is a sizeable deal for Occidental. OXY stands to benefit, not only for the immediate opportunities, but from other prospects in formerly-restricted markets. Improved U.S./Libyan relations allowed this beneficial transaction. Geo-political meanderings aside, Occidental Petroleum has a few more things going for it. The Libyan promise of increased production was on the same day crude oil futures closed above $100/barrel for the first time. Promises of increased production tends to depress oil futures -- not so with the OXY news. Prices rose again today closing at 100.74. More than that, the chart action on OXY shows more upside potential. Look for a steady bounce in the next few weeks from Occidental Petroleum (OXY). Note: Keep in mind that the Pick of the Week is intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell. |
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