Friday, November 2, 2007

fed, dollar, japan, narrow market, oil etc.

Fed cut rates again -- is it me or have you noticed that most bank stocks are hitting new lows. I have told you repeatedly that fed cuts will not save the problem industries but it will make the good industries soar -- think energy, industrials, technology, materials, etc.

Everyone still freaking out about the dollar -- there are 3 factors that drive the dollar -- 1. interest rate differentials; 2. investment return expectations and 3. fund flows. right now the focus is on interest rates and maybe fund flows (those focused on trade deficit) but return expectations are also important -- our rates might be low but if our asset returns are high then money will flow to the US. we might not beat asia but we should do well vs. europe in terms of return competitions.

Japan is your only hedge. Given increased corelation of assets throughout the world -- i.e. hedge funds have bid up the value of most assets around the world -- nothing is really cheap right now according to many smart folks so if the markets drop then all will drop -- no safe havens is the theory. That has largely been true this year except for a key exception -- Japan. The yen carry trade unwinds whenever stocks get smacked. Unwinding a Yen carry trade means investors buy Yen -- that leads to good returns for anyone with Yen assets -- like a Japanese equity fund. if you want to have some part of your portfolio up on the day the markets get whacked then please buy some Japan stocks.

the secular value investor portfolio is doing very well this year -- as of today I am outperforming the S&P 500 by over 800bps. That is due to large holdings in Asian funds up 40% this year plus a holding in energy stocks like the vanguard energy fund up a similar amount. some strong individual stocks this year such as NVT, GOOG, MMP, EPD, and a bunch more. in some ways I'm brilliant for having these exposures but in many ways I'm just in the right place at the right time -- I like growth and so does the market. You may have noticed that very few stocks are doing well right now -- if you don't own something like GOOG or CME or that ridiculous horse FLIR then your portfolio might be sad. Technology is huge -- a couple of months ago energy went on a huge tear. industrials, commodities, etc -- even utility stocks have been strong. narrow markets last longer than people expect but eventually that which is bid up gets dumped.

oil -- part of the increase is dollar driven -- priced in dollars world wide if the price of oil doesn't rise as the dollar falls then the price of oil is being effectively cut for most of the world -- can't have that given the current supply demand situation for oil so the price rises.

lots of talk about oil driven by geopolitical issues or speculation by hedge funds or whatever -- bottom line is that there is a shortage of oil. It will last until more oil is produced than is demanded. when will that be? who knows. I don't think it will be soon -- that's why I own CLB and other energy stocks (VGENX). It will take time to find oil and to set up production infrastructure, etc. finding the oil is the hard part -- production at existing wells declines each year which adds to the difficulty in really ramping up supply. supply is in ugly places that like to tax oil companies so that even at current prices it may not be worth it to drill for oil. that's why you see such large share buybacks at most of the large oil companies -- they find it hard to effectively spend any more on finding or producing more oil.

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