Ramblings of a Portfolio Manager- Whither oil?
Memorial Day Weekend is in the rear view mirror and, predictably, we had a run up in gasoline prices ahead of the kick off to the unofficial start of summer. AAA had widely predicted that Americans would drive more miles over this weekend than the same time last year, the first year-over-year increase in two years. The pre-holiday run in gasoline prices had at least one politician, CT Attorney General Blumenthal, calling for an investigation into the price rise. AAA estimates that Americans drive approximately 800 billion of their annual 2,922 trillion (27%) annual mileage in the 100 days between Memorial Day and Labor Day. Interestingly, that period represents 27% of the total driving days in the year. Taking off our cynical hats for a moment, we make the assumption that Attorney Blumenthal has seen this data and is, in fact, an efficient market hypothesis adherent who simply cannot fathom the irrationality of the timing of the price rise. The fact is that demand for refined products, like gasoline, do tend rise over May through August timeframe, while demand for high sulfur distillates, like heating oil and diesel, tend to decline. Overall, US oil consumption tends to be relatively flat over the year, all else being equal. Given a fixed amount of refinery capacity in this country, then, the simple laws of supply and demand would dictate that in the short run, gasoline prices would rise with demand until refineries adjust their output mix to match, while prices of less refined products would correspondingly drop. Why refineries don’t recognize the annual pattern and proactively adjust ahead of time is beyond the scope of this Ramblings. We do, however, share Attorney Blumenthal’s skepticism that gasoline should enjoy a permanent premium during the summer months. Of course, we also smile when the price of oil, a global commodity, spikes ahead of an expected cold spell in Chicago or New York.
The larger question is why world oil prices have risen so much in recent months? Oil has climbed approximately 76% since its mid-February low of $34/bbl and has essentially traced the rise in the US equities market since. Americans represent approximately 25% of world oil consumption and that includes industrial (manufacturing, utilities) as well as personal (autos & home heating) consumption. An expected seasonal increase in US driving and hope for a recovery in the US economy, then, can only be part of the story. The fact is many factors influence the spot price of oil including the US Dollar, expected world economic demand, and just a dash of speculation. Like equity markets, energy and commodity markets are to a large degree discounting mechanisms. Right now they are discounting greater demand down the road, although we suspect there is a fair dose of speculative premium in the current spot price.
Monday, May 25, 2009
Monday, May 18, 2009
Ramblings of a Portfolio Manager 5-18-2009
Ramblings of a Portfolio Manager or How "Cowboys and Indians" Became an Investment Strategy
As we write this, the Bombay Stock Exchange is halted from yesterday 40 minutes into trading with the Sensex, the proxy index for the Indian Stock Market, up 17%. Over the weekend India held elections with the incumbent ruling coalition remaining in power and gaining seats in Parliament at the expense of the rival Communist party. The decisive victory raised optimism that a strong coalition would be able to push through economic reforms, which would boost the domestic economy and foreign investment. The Sensex is now up 77.5% from its March low and 48% year to date and the Rupee is at a 5-month high. With China’s Shanghai index up 45% year to date, the so called “Chindia” trade has far outpaced the US stock market averages, the best of which, the NASDAQ, is up a “mere” 12.4% in comparison.
Arbitrage opportunity or reason for concern? With the world’s two largest emerging markets outperforming the US stock indices one needs to question why: Markets are discounting mechanisms and what they discount is the future direction of their respective underlying economies. Since the US consumer has traditionally been the largest market for the exports of these two countries, how can their economies prosper without a corresponding recovery in ours? Are the markets saying, then, that China and India will emerge from this global recession ahead of the US or without it? Or are they just plain wrong? Conversely, are they pointing to a recovery in our economy that US portfolio managers just don’t see? We tend to favor the latter explanation.
The global economic picture has become more of a two-way street over the last decade meaning that the US, China and India are more co-dependant than ever before. So if their respective stock markets are correct, then our largest emerging market trading partners may, for the first time, “help” us out of our economic difficulties. Yet despite the significant rally since March 6, many US portfolio and hedge fund managers remain “underinvested.” Which means that, if the emerging markets are correct, our little recent run-up, which many have dismissed as only a bear market rally, could have legs still.
As we write this, the Bombay Stock Exchange is halted from yesterday 40 minutes into trading with the Sensex, the proxy index for the Indian Stock Market, up 17%. Over the weekend India held elections with the incumbent ruling coalition remaining in power and gaining seats in Parliament at the expense of the rival Communist party. The decisive victory raised optimism that a strong coalition would be able to push through economic reforms, which would boost the domestic economy and foreign investment. The Sensex is now up 77.5% from its March low and 48% year to date and the Rupee is at a 5-month high. With China’s Shanghai index up 45% year to date, the so called “Chindia” trade has far outpaced the US stock market averages, the best of which, the NASDAQ, is up a “mere” 12.4% in comparison.
Arbitrage opportunity or reason for concern? With the world’s two largest emerging markets outperforming the US stock indices one needs to question why: Markets are discounting mechanisms and what they discount is the future direction of their respective underlying economies. Since the US consumer has traditionally been the largest market for the exports of these two countries, how can their economies prosper without a corresponding recovery in ours? Are the markets saying, then, that China and India will emerge from this global recession ahead of the US or without it? Or are they just plain wrong? Conversely, are they pointing to a recovery in our economy that US portfolio managers just don’t see? We tend to favor the latter explanation.
The global economic picture has become more of a two-way street over the last decade meaning that the US, China and India are more co-dependant than ever before. So if their respective stock markets are correct, then our largest emerging market trading partners may, for the first time, “help” us out of our economic difficulties. Yet despite the significant rally since March 6, many US portfolio and hedge fund managers remain “underinvested.” Which means that, if the emerging markets are correct, our little recent run-up, which many have dismissed as only a bear market rally, could have legs still.
Monday, May 11, 2009
Ramblings of a Portfolio Manager 5-11-2009
Ramblings of a Portfolio Manager or you can learn a lot from at tattooed teenager with a nose ring.
We’re speaking specifically of Teen Retailer Hot Topic, which caters to budding Vampires and others seeking the Goth lifestyle. Over the years we’ve been on both sides of this trade—being both long and short at different times. For the better part of this year we have held the stock long and have been rewarded—HOTT’s customers tend to be fast food workers and, as we all know, the likes of McDonald’s and Taco Bell have benefited from the “trade down” effect and so have not contributed significantly to the rising tide of unemployment. Last Thursday, however, HOTT experienced a good old fashioned sell on bad news reaction. It seems expectations for April Same Store Sales had been ratcheted up so high that the Company could just not deliver and the stock was “rewarded” with a 20% sell-off on the day.
There is a larger issue beyond the fickle nature of teen shoppers at work here. We’ve noticed that, in the last two weeks, the content of CNBC’s daily tripe has morphed from the daily dalliances of our narcissistic Commander-in-Chief and his Cabinet to actual, old-style reporting on companies and their earnings. Combined with the single data point from HOTT, this is important as it signals to us that the Market might finally be focusing on fundamentals rather than trading in knee-jerk fashion on every tidbit of news emanating from Washington. We hope so as this will favor stock picking over sector bets going forward. Of course, how many times have we heard a self-serving portfolio manager on TV declare a “stock picker’s market?” Just like a broken watch, perhaps this time the talking heads will be right. Hang onto your voodoo dolls…
We’re speaking specifically of Teen Retailer Hot Topic, which caters to budding Vampires and others seeking the Goth lifestyle. Over the years we’ve been on both sides of this trade—being both long and short at different times. For the better part of this year we have held the stock long and have been rewarded—HOTT’s customers tend to be fast food workers and, as we all know, the likes of McDonald’s and Taco Bell have benefited from the “trade down” effect and so have not contributed significantly to the rising tide of unemployment. Last Thursday, however, HOTT experienced a good old fashioned sell on bad news reaction. It seems expectations for April Same Store Sales had been ratcheted up so high that the Company could just not deliver and the stock was “rewarded” with a 20% sell-off on the day.
There is a larger issue beyond the fickle nature of teen shoppers at work here. We’ve noticed that, in the last two weeks, the content of CNBC’s daily tripe has morphed from the daily dalliances of our narcissistic Commander-in-Chief and his Cabinet to actual, old-style reporting on companies and their earnings. Combined with the single data point from HOTT, this is important as it signals to us that the Market might finally be focusing on fundamentals rather than trading in knee-jerk fashion on every tidbit of news emanating from Washington. We hope so as this will favor stock picking over sector bets going forward. Of course, how many times have we heard a self-serving portfolio manager on TV declare a “stock picker’s market?” Just like a broken watch, perhaps this time the talking heads will be right. Hang onto your voodoo dolls…
Monday, May 4, 2009
Ramblings of a Portfolio Manager 5-4-2009
Ramblings of a Portfolio Manager
Sell in May and go away? It didn’t start that way. Now it’s Monday and for only the third time this year the market didn’t sway in a big way. Oi Vey!
Poetic though it may be, this speaks volumes about current market sentiment. We’ve had a 30%+ rally in the major stock market indices, earnings season is winding down, while over the weekend Barron’s resumed it’s usual negative tone, Warren Buffet gave a dour assessment of the US economy, and new cases of N1H1—the new PC (Pig Code) for Swine Flu—emerged in Norway and Italy. Still the market is reluctant to sell off. It seems just about everyone, from technicians to big mutual fund managers to cab drivers and Westport, CT doctors, is expecting a significant pullback in the markets, which suggests that it is likely not to happen, at least when everyone is expecting it.
To some all this may seem surreal but we are reminded that one of the first rules we learn as investors is that markets are discounting mechanisms. In November and March they were discounting a depression. Now they are discounting something less. It’s only natural, then, that they should be higher than they were when sentiment was about as low as it could go. Markets don’t just fall because they have gone up a lot, just as they don’t go up because they have fallen a lot. Where the markets go from here should and will be dictated by the economic outlook that investors see ahead, not the stock prices they see behind them.
What is surreal to us is that all of a sudden an Italian industrial concern (Fiat) is seen as a model of efficiency and business acumen; a model that can help fix the ailing US auto industry. “Fix It Again Tony!” That was the cry of the Italian automobile owner of the 70’s and 80’s. Let’s hope the cry of the 10’s isn’t “Fix It Again Tim,” as in Geithner, for this new market sentiment is based, in large part, on the assumption that the problems of the major US banks are in the rear view mirror, whether that mirror be made in Detroit or Milano…
Sell in May and go away? It didn’t start that way. Now it’s Monday and for only the third time this year the market didn’t sway in a big way. Oi Vey!
Poetic though it may be, this speaks volumes about current market sentiment. We’ve had a 30%+ rally in the major stock market indices, earnings season is winding down, while over the weekend Barron’s resumed it’s usual negative tone, Warren Buffet gave a dour assessment of the US economy, and new cases of N1H1—the new PC (Pig Code) for Swine Flu—emerged in Norway and Italy. Still the market is reluctant to sell off. It seems just about everyone, from technicians to big mutual fund managers to cab drivers and Westport, CT doctors, is expecting a significant pullback in the markets, which suggests that it is likely not to happen, at least when everyone is expecting it.
To some all this may seem surreal but we are reminded that one of the first rules we learn as investors is that markets are discounting mechanisms. In November and March they were discounting a depression. Now they are discounting something less. It’s only natural, then, that they should be higher than they were when sentiment was about as low as it could go. Markets don’t just fall because they have gone up a lot, just as they don’t go up because they have fallen a lot. Where the markets go from here should and will be dictated by the economic outlook that investors see ahead, not the stock prices they see behind them.
What is surreal to us is that all of a sudden an Italian industrial concern (Fiat) is seen as a model of efficiency and business acumen; a model that can help fix the ailing US auto industry. “Fix It Again Tony!” That was the cry of the Italian automobile owner of the 70’s and 80’s. Let’s hope the cry of the 10’s isn’t “Fix It Again Tim,” as in Geithner, for this new market sentiment is based, in large part, on the assumption that the problems of the major US banks are in the rear view mirror, whether that mirror be made in Detroit or Milano…
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