Tuesday, June 21, 2005

Oil that is, black gold, Texas tea.

So, where to invest? Stock market P/E is too high, the yield curve is flattening, Greenspan is raising rates, no obvious tech breakthroughs: it looks bearish. Bonds are risky when interest rates rise, maybe short term and money market are OK, but pay little. Real estate is showing signs of a bubble - half of new Calif. mortgages are no down, variable rate, interest only - a recipe for disaster if the market takes a dip or interest rates rise.

Oil stocks are promising. World oil production seems to have peaked. It's been years since discovery of a major field. OPEC is pumping all it can and still prices are rising. China and India are buying more and more cars, and building more and more roads. How high would gas have to go for Americans to cut back? Are you gonna ride the bus if gasoline hits $3? No? How about $4? Still no? I'm thinking maybe $8 gas would have an impact. What is now a $40 fill-up would become a $120 one. That might give folks pause.

But there's oil stocks and there's oil stocks. We need (non-gov't) ones with reserves, reserves in safe places where they won't be nationalized or taken in war. Let's have a look at some US oil companies.

CompanyReservesMkt Cap$/BblP/E
ExxonMobil (XOM)12,623$379B$3014
ChevronTex (CVX)8,668$123B$149
ConocoPhillip (COP)5,137$81B$169
Marathon (MRO) 720$18B$2514
Amerada Hess (AHC)782$10B$1312
El Paso Energy (EP)136$7B$51N/A
Anadarko (APC)1,131$19B$1712
Devon (DVN)636$23B$3611
Unocal (UCL)681$18B$2613
Burlington (BR)588$21B$3613

Crude oil is currently selling for about $60/barrel, so all these companies are trading well below their oil asset value. These companies have other assets as well, such as natural gas, refining and retail. The four with oil reserves priced in the teens and low P/Es are: CVX, COP, AHC and APC. All operate globally. COP has a stake in LUKOIL, the Russian giant. Prices today: CVX $59, COP $59, AHC $107 and APC $82. I bought some APC and later sold it at a profit. Wish I'd kept it.

Saturday, June 18, 2005

Vic Bremson: Some new investment strategies

Dear family and Friends,

This is the latest in my searching for a good investment strategy in crazy times. I am changing some opinions about things.

I continue to rethink my concerns about the future and still have major misgivings about future interest rates. I am beginning to suspect that we are not having higher interest rates and inflation because there is the possibility that we are about to re-enter into a recession. My theory would go something like the following. I think Microsoft and Boeing will help the Seattle area.

  1. Companies are not investing money into expansion in the United States or elsewhere. This is keeping pressure off of liquidity issues and are keeping interest rates down. It also means that possibly these companies do not expect the business expansion to continue.
  2. Older people, are not investing in equities, they are struggling to find interest investments that will give them a living return. This is also keeping the cost down. They have tremendous wealth but don't know where to put it. The younger people are taking the risks. Real Estate still seems safer to people than other equities.
  3. China and Japan continue to buy US paper and probably have to for some period of time. I think China will sooner or later have some serious problems which will put further recessionary problems on the rest of the world.
  4. There is a body of opinion that I have been reading that suggests that China is building up a strategic inventory of oil and natural gas, just like us. This is putting at least short turn pressure on oil prices. I suspect that when oil prices begin to fall that natural gases will also fall.

My conclusions still take me to the following directions in my own investment strategies.

  1. Stay with the big rich global companies that pay decent dividends. I continue to like the American Fund Capital Builder. It is a major piece of my investment strategy. I probably will buy more.
  2. Stay out of junk bond funds. I believe they will get hurt especially if I am right about recession.
  3. I continue to believe in health care, some energy-not over loaded and REITs. I think technology companies will not do great in a recession. I plan to look for a good fund that specializes in alternative energy companies as a long term play.
  4. I would not invest in any emerging fund that has a major play in China. Their banking system is too weak. I think I will slightly increase my position in emerging funds.
  5. I am moving towards preferring large consumer type companies over value stocks right now. Proctor and Gamble, Colgate, etc. I suspect that entertainment companies will also do fairly well. People won't give up their television.
  6. All bond funds should be limited to 2 years or less. There is a good investment in US inflation bonds right now that will get you about 4%. A bond ladder makes little sense right now because of the yield curve.
  7. Stay diversified and alert. Expect a major adjustment in the summer based upon reduced earnings reports.

I know the interest earnings will hurt on the high yield bond funds. I would rather go with REIT preferred that pay decent dividends.

What are your opinions?



Friday, June 10, 2005

General Motors

GM has been in the headlines lately, and not in a good way: announcing losses, credit downgrades and layoffs. A lot of their troubles hve been laid at the door of the United Auto Workers union, but I think this is mistaken. GM has invested much of their research money in pie-in-the-sky hydrogen power, parts division Delphi has had an accounting scandal and GM had to to pay Fiat $2B because of a put option. Much of their new design effort has been in the Cadillac division, and they are much improved but ugly as sin. All of these are management problems.

All the press is bad and everyone is down on the company: a good bullish sign for the contrarian. The valuation is shockingly low: trading well under book value. Their price/sales ratio is an eye-popping 0.09, meaning that the entire company is valued at only nine percent of a year's sales. Market cap is a measly $19B. Investor Kirk Kerkorian has snapped up 7% of the company - and he is usually a savvy investor. So from a value approach, the company is a buy.

To unlock the value, the company needs to be taken over and the current management tossed out. Cars, which have seen little technological change, are starting to evolve in a big way. More and more is computerized. Hyrid power plants and new high-efficiency electric motors may soon mean that the gas engine is just used to charge the batteries.

Here is my modest suggestion: Microsoft should buy a controlling interest in GM. MSFT have $37B in cash. Toss out the old-time management and put in some tech-savvy hotshots. Sure, there is a union contract to renegotiate, but I think that is doable if management gets their act together. GM closed this week at $34.51.

Monday, June 06, 2005

Apple does Intel

Well, well, well - they finally did it - the x86 Mac. The Mac will be powered in future by the same Intel x86 (or AMD) chips that Windows PCs use. Apple CEO Steve Jobs said that their new hardware will not run Windows, and that Mac software will not run on a Dell, but surely some enterprising company will market a product that makes it so.

Apple have famously shot themselves in the foot with CPU choices over the years. First the 6502 chip on the Apple II was on the anemic side. Then the Lisa/Mac went with the 68000 breaking compatibility with Apple IIs. And then on to the PowerPC which is losing the performance race to x86.

I actually think this is a good move for Apple. Their stylish hardware will now be available for the many who would like to run Windows. Their stylish software will now run on computers that are more common than Apples. The Mac has always been a stylish luxury good, this will (IMHO) revive their market share in the computer industry. But I'd wait a quarter to buy - sales will be way off on the lame duck G5 models and the stock price should take a hit as a result.

AAPL closed today at $37.92. I'm suggesting that it will be lower after they report results 13-Oct-05 5:00 PM, and after that it may be a buy.