Glad I Didn't Buy $5 million in GE
4/16/08
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Wednesday, April 16, 2008
Editor's Corner 
Glad I Didn't Buy $5 Million of GE
Ron Rowland
Earnings season is now in full swing. The first few days were lackluster, producing no surprises. Then on Friday, General Electric (GE) caught everyone off-guard with their earnings shortfall and reduced expectations for the year. This was especially worrisome since GE had not issued any warnings.
Even CEO Jeff Immelt was surprised, having bought $5 million worth of GE stock in the open market in early March. The rapid deterioration sent shivers through the market. The recent 24-hour collapse of Bear Stearns is still fresh in the minds of many investors. GE is an extremely large enterprise, and its effects were registered in numerous broad market measurements. Still, the bulls are taking comfort from the fact that market reaction wasn't any worse.
This season's second big surprise came yesterday after the close. This time it was a positive surprise as Intel (INTC) reported better-than-expected sales, increased profit margins, and raised guidance for the year. Additionally, JP Morgan Chase's CEO, Jamie Dimon, said that the end is near for the credit crisis. As a result, the market was strong today, helping most sectors overcome their losses of the previous week. However, there are many earnings yet to come, and many more chances for companies to reveal negative surprises.
The yield on 10-year Treasury securities rose to 3.7% today, the highest level of the past five weeks. The bond market is at a crossroad: government securities offer little yield and little appreciation potential while corporate bonds still carry significant risk. The trade is near an end for one road while the path is not clear for the other road. We expect investors want to see an improving landscape before moving heavily back into corporate bonds.
Sectors
Though the broad market was down last week, there were some advancing sectors. Energy was the best performing sector of the week and recaptured the top spot in our rankings. Crude oil closed at $115 today after the weekly EIA report indicated that nearly all energy-related inventory levels dropped. Utilities also gained ground this past week. Industrials took a steep tumble thanks to the earnings disappointment from General Electric (GE). GE represents about 19% of the domestic Industrials sector, so when GE drops more than 13% in a week, it impacts the entire sector. Financials also suffered another decline last week, causing some investors to fear a return to the March lows.
Styles
Last week many of the style categories edged into positive territory in our momentum rankings. We suggested they were in a precarious position and could easily slip back into negative territory. With last week's broad market decline, that is exactly what happened. There are numerous changes in the relative strength rankings as well, but they are still tightly bunched and capable of further changes in the upcoming weeks. Although the quantifiable differences are rather minimal, it is interesting to note that the Mid-Cap categories now occupy the top three slots.
International
Our investment philosophy has always been based on the fact that the financial markets are not monolithic -- they consist of many pieces that do not move in unison. Each week, our ranking charts illustrate that fact. This philosophy can be taken a step further by saying that each of our categories are not monolithic. A case in point is the Pacific-excluding-Japan category in our global rankings. It was one of the worst performers last week and is near the bottom of our rankings. However, this category also happens to include one of the world's best-performing markets at this time -- Taiwan. That is part of the weakness of using averages. Market averages hide the above-average and below-average sectors, styles, and regions. Sector and regional averages in turn hide the above-average and below-average industries and countries in those categories.
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.
"The hardest thing to understand in the world is the income tax."
Albert Einstein (1879-1955) Theoretical Physicist
Pick-of-the-Week
Natural Resources Rising with Coal: CNX
Brandon Clay
Clean energy is all the rage. In 2006, Al Gore presented his Hollywood spin on global warming, An Inconvenient Truth. The press took it from there. Now that everyone knows what carbon offsets are and which cars have the best MPGs, Green has become mainstream. Despite the press, Green has not become the gold standard in energy consumption. Still decades away from the new world order of energy, sometimes economic reality takes a while to catch up to marketing spin. Green may be the politically-correct topic at cocktail parties, but coal is the economically-correct vehicle for investors.
Coal has been an energy source for millennia. Prehistoric Chinese are said to have used coal for heating. According to Roman historians, Britain burned coal in the first century. Throughout history, coal has been the primary source of heat in homes. Then industrialization hit the western world. In the nineteenth century, coal use expanded as it fueled fires throughout Europe and the United States. Then, around 1900, oil replaced coal as the primary source of energy for heating.
Still, coal is the number #1 source of energy for electric power plants in the world. Rapidly industrializing nations like China are still dependent upon coal for energy. Overall global consumption has not diminished either. Coal fuels 48% of electricity plant generators. And the trend is heading upward -- probably for the next 30 years. Despite the deafening rhetoric, coal is not going away anytime soon. Investors should take notice. One of the best places to invest in coal is Consol Energy (CNX). Consol is a growing global leader in coal production and distribution. Compared to larger coal companies, Consol has kept expenses low. Their profit margins are running at 7.5% versus Peabody Energy (BTU) at 5.8% and Westmoreland Coal at -4.3%. Moreover, their diversified offering in oil, timber, and energy services continues to deliver results to their growing bottom line.
Consol's prospects look good too. Because they own 70% of their coal reserves they are less hampered by mining acquisition costs. Management is taking advantage of global demand. Growing exports at over 18% a year, Consol is well-positioned for continued growth in the international energy market.
The chart suggests investors are starting to take notice. Today, CNX broke through overhead resistance. There does not appear to be anything else to stop it. Natural resources are near the top of our rankings right now. We're not promising a meteoric rise, but the fundamentals support continued appreciation in the sector. Consol will be a great place to grab those gains if they happen. For an economically solid play on coal and natural resources, go with CNX.
All the best.
Note:
Keep in mind, the Pick of the Week is usually 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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© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.
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