Positive Energy Profiteering.

March 7, 2011

Major market indices were lower last week. The DJIA declined 2.10%, the S&P 500 fell 1.72%, and the Nasdaq lost 1.87%. Growth stocks outperformed value stocks. And the small cap index lost 1.45%. The 10-Treasury yield closed 17 bps lower at 3.42%.
And the Oscar for the Best Unwanted Oscar Notoriety goes to... Merrill Lynch! The 2008 crisis documentary "Inside Job" claimed the Best Documentary Oscar. The film makers lamented that, as of yet, no Wall Street executives have been jailed for their transgressions leading up to the crisis. And the audience was treated to a screen-wide portrayal of Merrill Lynch's logo... I am certain Barry Ritholtz raised his glass.
Earnings season concludes this week. In retrospect, it was largely positive. Companies posted upside surprises in revenue, in addition to earnings. The Q4 revenue beat rate rose to 65%, up 8% from Q3, reports StreetAccount.com. Earnings beats reached 75%, above historical averages, but less than the prior four quarters.
Bears argue that rising input and labor costs, combined with a lack of pricing power, could lead to a decline in earnings estimates. But, the story hasn't changed.
Low inflation. Low interest rates. Improving economy. Upside trend remains intact.
Read a report over the weekend stating that bond markets are trading at a level that is the equivalent of the S&P 500 trading at the 1,900 level-40% higher than today.
In light of last week's correction, we think it likely represents another buying opportunity.
The bottom line is that situations like anarchy in the streets of Tripoli can cause emotional reactions which drag indices lower, but do not have much lasting consequence.
A former aide to Libyan leader Muammar Gaddafi says it's a 'matter of days' before Gaddafi's regime falls. But like any tyrant worth his salt, Gaddafi promises to fight the rebellion until his 'last drop of blood.' This, even as army units continue to defect.
The growing unrest in the country, as well as in Bahrain and the broader region, is roiling markets and boosting oil prices, with crude futures up nearly 9% yesterday to $93.57. A major oil producer, Libya has closed all its ports, and as many as 550m barrels per day of production may be halted. And a growing number of oil companies have suspended their operations there.
Libya represents 2% of the world's oil production. And the International Energy Association reassured markets that global supplies would remain sufficient.
So, while the situation there can roil markets, it does not have the power to tear them down. That said, if this situation went viral and began manifesting in markets like Saudi Arabia, then that escalation that would merit serious analysis.
Not there yet. And with all of the money the Saudi Royal family has to throw at any problems, we don't expect to be.
We have been bullish on energy for months. Like tech, midcaps and industrials, it stands to benefit by global forces currently at work. And now, you begin to understand this bullish sentiment. Energy stocks were the only area within the U.S. economy to post gains amidst last week's correction.
Can't you can feel all of the positive energy?
The price of Brent crude continues to rise, reaching its highest prices in two years. Energy represents a whopping 13% of the large cap indices. So, our energy production and exploration positions continue to profit. And while this energy appreciation is big enough to profit by, it is not big enough to halt the economic recovery. Not yet.
So, those investors remaining positive on energy will continue to benefit. Those without? Not so much. Always pays to be positive. Stay tuned...

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