Jeff Saut Presents: Escape From New York
While hybrid cars, solar, wind, ethanol and other alternative fuels will help at the margin, they cannot possibly ramp fast enough to offset the demand from five billion new entrants into the 21st century.
Editor's Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.
I spent last week in New York City attending conferences and seeing accounts. This week I am in Toronto doing the same thing. Nevertheless, last week began with Raymond James' "Canadian Oil Sands Conference." My firm has embraced the Oil Sands theme for more than five years due to our belief that we are approaching the point of peak production whereby the world will begin to consume more crude than can be found. The logic of this view is not rocket science, but the simple assumption that all that has to happen is for the "Chinas" of the world to go from one barrel per capita of consumption to two barrels (America's per capita consumption is north of 20 barrels). While hybrid cars, solar, wind, ethanol and other alternative fuels will help at the margin, they cannot possibly ramp fast enough to offset the demand from five billion new entrants into the 21st century.
The implications of this are significant and will cause a sharp reallocation of crude oil supplies. For example, since there is no near-term, readily available alternative to gasoline, electric utility companies will need to switch from burning crude oil to other fuels to divert their oil for the world's burgeoning gasoline needs. We think this has very positive ramifications for coal, clean coal technology, coal/natural gas to liquids technology, as well as nuclear energy. Interestingly, last week the Dow Jones US Coal Index broke out to the upside and looks higher to me, which is obviously good for my firm's coal stock investments. Clearly solar, wind, thermal, etc. will also benefit from oil's envisioned production peak, but as stated they cannot possibly ramp fast enough to sate the world's increasing demand for gasoline. Moreover, as gasoline prices rise, motor scooters and low-tech transportation should thrive. Mass transit usage should increase, as should telecommuting, and inner city living should revive since lengthy commutes will be costly.
Once more of the world "wakes up" to crude's production peak, there will be a worldwide reevaluation of current, and future, crude oil needs by various governments. We are seeing the beginning of this trend with China already buying foreign reserves for future use, Russia effectively nationalizing some of its reserves, and just a few weeks ago, Hugo Chavez "stole" Venezuela's Orinoco Oil Sands properties from the international oil companies that had paid for, and developed, them. My firm thinks this makes geopolitically safe, and geographically close oil properties pretty attractive. Manifestly Canada's Abathasca oil sands properties meet these metrics, which is why my firm continues to invest in companies playing to this theme.
On Tuesday, I attended Raymond James' "Uranium Conference." The event was kicked off by an acquaintance of mine, Dr. Thomas L. Neff, senior nuclear researcher at MIT and president of Nuclear Security Associates, LLC. It was noted that uranium prices had risen roughly 1600% from their 2000 low price of around $7 per pound. I also learned that in the past few weeks a uranium future's contract has begun trading at prices well above the cash market's current price ($120), implying prices are likely heading higher. With world demand slated to increase as nuclear power plants are built, Tom suggested that the bottleneck wasn't necessarily the mining of uranium (U-235), but the lack of enrichment facilities to process the U-235. While General Electric's (GE) Silex (laser enrichment process), if it works, could change this bottleneck, upward pressure on uranium prices should continue until enrichment capacity is added in sufficient quantities to go to lower tails assay and save uranium.
Tom concluded by saying that the price increases are due to 20 years of underinvestment in primary uranium production capacity, the end of inventory liquidation and expectations of growth. Indeed, with 30 new reactors under construction, the market doesn't need new demand to maintain upward prices. Moreover, with China, Russia and India all pursuing government-sponsored nuclear growth, they will be major net importers of uranium competing with traditional Western users.
While I was in and out of the conferences doing media appearances and meeting with accounts, Wednesday's lunch proved to be the highlight of the week. In attendance was Craig Drill, eponymous captain of Craig Drill Capital, along with four other equally bright portfolio managers. However, the additional two attendees surprised me. They were George "Jerry" Goodman and Dr. Albert Wojnilower. Stock market historians will remember Dr. Wojnilower as part of the Dr. Doom (Henry Kaufman) and Dr. Gloom (Al Wojnilower) "tag team" whose comments moved markets in an era gone by. The markets were in awe of these icons, hanging on their every word. And, Dr. Wojnilower's keen insights are as good today as they were back in the 1970/1980s.
Jerry Goodman, on the other hand, took the nom de plume of Adam Smith, famed economist whose book The Wealth of Nations set the foundation for the field of modern economics in 1776. Best known by said pseudonym, Jerry has penned such legendary books as: The Money Game; Supermoney; The Roaring 80s; Paper Money; and, Powers of Mind. I have often quoted quips from these books and felt privileged to finally meet their author. The lunch lasted roughly two hours where all sorts of topics were discussed. Dr. Wojnilower concluded by stating that he was taught in business school that nobody can consistently predict the future price of stocks in the aggregate. And that, after all these years, he still believes it. Plainly, my firm has demonstrated the wisdom of that statement over the past months given our ambivalence toward the major market averages as they unrelentingly marched higher. Still, my firm is having a pretty good year with our focus on themes and individual stocks. In past missives I have mentioned many such names, and last week another one of my firm's investment recommendations tagged new reaction highs when homeland security company L-1 Identity Solutions (ID) reported earnings.
I continue to like the homeland security theme, and ID Solutions in particular, despite its lofty valuations. As stated by my firm's analyst:
"We reiterate our Strong Buy rating and are bumping our price target to $24. Unmodeled contract wins, several large upcoming opportunities, and high confidence in our forecasts support our view that L-1 is a must-own name in the security space. Despite advancing ~53% since our October 4, 2006 upgrade, we see this as the early innings of a multi-year growth story."
Outperform rated FLIR Systems (FLIR) is another name my firm has favored for the past two years, but that is a discussion for another time.
As for the equity market, it is down 100+ points one day and up 100+ points the next, still the upside momentum remains intact. However, it is worth considering that last Thursday's tumble broke the S&P 500 (SPX) below its rising trendline that has contained every pullback since the mid-March lows. While this "break" may lead to further downside probing, the SPX could still pull back into the 1440 to 1460 zone and be okay. Meanwhile, unemployment claims, the ISM Manufacturing Index and tax receipts were all stronger than expected. The quid pro quo is that housing is weakening again, business spending is slowing, GDP growth is the slowest in four years, gasoline is over $3.00 per gallon, and "real" consumer spending is negative. Not to worry, Ben Bernanke is "printing" money at a 12.8% annualized rate (basis MZM). In fact, the entire world is printing money at a double-digit pace with Europe's money growth hitting a 24-year high. No wonder the world's financial markets are celebrating as liquidity reigns and investors' risk appetites are as large as they have been in years.
The call for this week: Rumor has it that Richard Russell, author of "The Dow Theory Letters" and longtime interpreter of Dow Theory, threw in his bearish "towel" last week and spoke of the speculative third upside phase of the bull market yet to come. While Mr. Russell may have succumbed to the "momentum mash" on a short-term basis, he knows that Dow Theory is all about values since markets always go from levels of vast undervaluation to levels of vast overvaluation and back again. Regrettably, we have never returned to levels of vast undervaluation. Indeed, the SPX is currently trading at 18.4 times trailing earnings, 3.3 times book value and sports a paltry 1.8% dividend yield. These are NOT inexpensive valuations, which is why my firm is ambivalent on the major averages yet remain fairly fully invested on an individual stock basis.
I'll be back next Monday.
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