Late last night and early this morning, while
Suddenly and without warning, the computers began executing and tallying a rush of buy orders from counterpart computers all over the globe.
The buy orders were for every kind of energy contract light sweet crude oil, natural gas, heating oil, gasoline, Brent crude oil, Northwest Europe gasoil, and propane.
The buy orders came in waves during the evening hours after
And, naturally, with each new wave of buying, energy prices rose further, recouping large chunks of their losses from earlier in the week.
Why?
Because a major fire has broken out at
Because there are even more concerns about the surging demand for oil and gas during
And because OPEC has predicted tighter crude oil supplies in the months ahead not a forecast to be taken lightly.
Sound familiar? It should. Because these are the same symptoms of the same fundamental supply-and-demand imbalances that weve been telling you about all along. And theyre the same powerful forces that have been driving oil and oil stocks through the roof for the past three years.
Meanwhile, even before this mornings surge in oil prices, the Oil Service HOLDRS Trust (OIH), which Ive been tracking for you here, seemed ready to follow.
This, too, is now a long-familiar image: A solid uptrend … a sharp correction … and then, as if on queue, a new rush of buyers.
This trend is not guaranteed. It can change, and if it does, well do our best to let you know. But as Larry explained yesterday, the worldwide supply-and-demand pressures that are driving energy prices higher have been building up for decades. Theyre not going to disappear in a week.
Your best strategy? Simple: When we reach the upper limits of a trend, take some profits. When we reach the lower limits, add.
Some general guidelines:
- No matter what, keep a substantial portion of your money in 3-month Treasury bills or a money market mutual fund that specializes in Treasuries.
- Consider allocating a comfortable portion of your money to Canadian royalty trusts. Theyre not risk free. But they can give you up to triple the income you can get from a Treasury bill. Plus they provide the potential for some superb capital gains.
- If you have some funds earmarked for speculation, consider the extremely high profit potential of energy stock options. But stick with the purchase of options (no option writing), and you stay focused on the big-picture trend, you can make a not-so-small fortune.
How is all this going to affect the rest of the world? It already is, as Tony illustrates …
Plethora of
Retail Warnings
Part II
by Tony Sagami
The parade of retailers taking down their Q3 forecasts is getting longer by the day. Here are the latest Im adding to my list.
Hot Topic not so hot. Hot Topic turned in weaker second-quarter earnings and significantly chopped its Q3 and Q4 forecasts. It sliced its Q2 number by a penny. It warned that it would only make 15 to 18 cents in Q3 and 30 to 38 cents in Q4. Those numbers are far below the 27 and 38 cents, respectively, that Wall Street was counting on.
Shortage of kid money. Childrens Place, a chain of upscale child clothing and toy stores, is also suffering from the Q3 blues. Childrens Place reduced its Q3 profit forecast from $1.03 to 86-91 cents instead.
Limited sales at Limited Brands. Limited Brands delivered an in-line Q2, but expects a very weak Q3. How weak? The company sees negative same-store sales in August and expects to lose 1 cent per share in Q3. Wall Street was hoping for 6 cents of profit. For full-year 2005, Limited is now forecasting $1.36 to $1.38 of profits, below the $1.40 Wall Street target.
Clothes arent the only weak area. Home furnishings retailer Bombay Company reported a worse-than-expected Q2 loss and warned that it wont turn a profit for the full year. For the year, Bombay now expects a 6- to 12-cent loss instead of a 2- to 8-cent profit. Historically, a robust real estate market is accompanied by a robust home furnishings and furniture market. Is this a sign that the real estate rocket could be running out of fuel? Think about it.
Even video game sales! Video game retailer GameStop warned that it expects its Q3 same-store sales to fall by 8% to 10%. Q3 profits will be in the 18- to 20-cent range instead of the 21 cents Wall Street expects. And for the full year, it will earn $1.30 to $1.40 instead of the $1.42 Wall Street is counting on.
Google announced that its going to sell up to 14.8 million of its shares, which, at current prices, would raise around $4 billion.
Interestingly, Google went public almost exactly one year ago. At that time, the Google IPO was for 19.6 million shares at $85.
Heres what bothers me: As of June 30, Google had about $2.95 billion in cash. What I want to know is: What the heck is Google going to do with all that money, adding up to roughly $7 billion?
I suspect they are going to use it to finance the purchase of some other over-priced dot-com, such as Baidu.com.
My view: The smartest thing Google could do is sit on that cash and buy their own stock back after it loses 50% of its value. I say that because that is exactly the type of haircut that I believe Google could suffer.
The smartest thing you could do, if you own Google, is to copy what Google management is doing: Sell its shares.
Can Hewlett Packard Buck
The Dell, Gateway Trend?
Hewlett Packard shares jumped this week on better-than-expected Q2 results. But the devils in the details …
Devilish Detail #1: The companys PC division contributed a $163 million operating profit, a 700% jump from a year ago, on a 9% increase in sales. Why and how?
Gateway CEO Wayne Inouye provided the answer in his own report last week: HP is slashing prices very aggressively. Theyre essentially buying market share.
Devilish Detail #2: Sales of desktop computers were actually down. It was strictly the sales of notebook computers that actually grew.
Devilish Detail #3: HP used some good, old-fashioned financial window-dressing to make its report look better:
- Inventory increased by $180 million in the last quarter and now stands at $6.6 billion.
- In the last year, accounts receivable grew by $299 million to $8.8.
- Interest and other earnings jumped from negative $87 million to positive $119 million in the last 3 months. Thats a $206 million swing. Wall Street didnt ask, and HP didnt tell, what other is.
- Add it all up: $180 million inventory + $299 million accounts receivable + $206 million = $685 million. If you back that $685 out from HPs reported $1.1 billion of profits, HP would have missed by a country mile.
Devilish Detail #4: Even though HP is the second largest computer maker in the U.S., its bread-and-butter is its printing division. The problem: This divisions quarterly profits dropped from $836 million last year to just $771 million, and its profit margins dropped from 14.8% to 13%.
Lets just call it a coincidence, but the PPI numbers included the news that computer prices dropped by 2.1% in July.
Hewlett Packards stock was sharply higher today, but I dont buy their fancy financial footwork. I consider todays rally a great excuse for anybody that owns HP to get out while the gettings good.
The Federal Deficit
Is a Joke.
But Its Not Funny
by Martin D. Weiss, Ph.D.
They say the governments red ink is going to be only $314 billion this year, and thats supposed to be small.
Now the facts …
|
Fact #1. |
$314 billion is not small. Its still huge regardless of the size of the economy. |
|
Fact #2. |
The so-called improvement in the deficit has nothing to do with prudent fiscal policy. Its strictly a temporary fluctuation driven by an equally temporary recovery. |
|
Fact #3. |
The economic recovery is actually lame and limp compared to previous recoveries. |
|
Fact #4. |
Even assuming interest rates do not jump and corporate profits do not slump, the same people that told us this week the deficit has improved the Congressional Budget Office are also telling us that, in future years, theres likely to be no further improvement. Estimated total red ink for the next ten years: A whopping $2.1 trillion. |
|
Fact #5. |
The $2.1 trillion estimate is also jury-rigged. For example, it includes your Social Security surpluses as part of their revenues. |
|
Fact #6. |
While the White House and Congress are debating loudly about the shaky future of Social Security, theyre sulking quietly about the far shakier future of Medicare. Include a realistic forecast of Medicare deficits, and the federal deficit swells by another trillion, or more. |
Just a few months ago, we issued a major warning to investors that Fannie Mae shares were on the brink of collapse. Now, that collapse has begun.
Reason: A growing minority of investors, especially real estate and mortgage industry insiders, are beginning to realize that the two biggest threats to companies like Fannie Mae rising loan rates and falling loan quality are now about to smack these stocks down.
So theyre not waiting. Theyre clearing out now while they still can.
Last week, at the Money Show held in Washington, D.C., investors asked me some tough questions:
Q: Recently in the oil market, weve seen a lot of fires and shutdowns hitting all at once. Isnt that just a coincidence?
A: No. Virtually everyone in the oil industry producers, tankers, refineries is maxed out to 100% of capacity. And theyre using marginal equipment and cutting corners on preventative maintenance. So breakdowns and bottlenecks are no coincidence. Theyre the natural outcome of stretching systems to their limits.
Q: How do I make a killing in this market?
A: By not getting killed.
Q: Let me rephrase that. Lets say I have most of my portfolio in conservative investments. But now, I want to peel off some money to swing for the fences. This oil market should be my opportunity. But I dont want to spend the money for Larrys energy service. What do I do?
A: You peel away only the money you can afford to lose, say, 10% of your liquid assets. Thats your play money. Then you avoid all instruments that can expose you to unlimited risk. So if you lose some, most, or even all of your play money, your keep-safe funds are totally insulated.
Q: Wheres the leverage in the oil market?
A: There are three layers of leverage. The first is the oil market itself. Like youve seen, its more volatile than ever. That alone gives you more leverage.
The second is special categories of oil stocks. When oil rises, you want your stocks to jump. For example, were looking at companies with undervalued oil reserves that are ripe for takeover. And were looking at oil service companies.
The third is options. When oil rises, oil stocks can jump; when oil stocks jump, oil stock options can go through the roof.
Q: I tried options before. But I lost money. Is there a way to invest in options without ever losing money?
A: No. But you can improve your chances if you stick to a few simple guidelines.
Q: Do you expect inflation to get worse and the U.S. dollar to fall?
A: Yes. Thats why I think you should put some of your money in gold investments and some overseas as well.
Q: In the German Weimar Republic, after World War I and before Hitler, inflation got so bad that people needed a wheelbarrow to cart their money around. At the rate were going, isnt this type of thing likely in the United States someday?
A: No. Take a time machine back to Germany of that era. Then look around you. What do you see? You see factories in ruins, railroads and rolling stock in shreds. The capacity to produce goods is physically destroyed. Thats the first difference with today.
The second difference is more subtle: We have a free and open market where U.S. and foreign investors can dump their bonds or loans, drive interest rates higher and FORCE the Fed to clamp down on inflation.
Q: How high do you think interest rates will go in the United States?
A: In the last cycle, the Fed Funds rate rose to 20%. This time, its perfectly reasonable to anticipate a rise to 12%.
Q: So far, youve been right as rain about short-term rates going up. Theyve now risen from 1% to 3.5%. But long-term rates have gone sideways or even down. How do you explain that?
A: Its not that unusual: First, short-term rates surge. Then long-term rates follow, with a time lag. And the longer the lag, the sharper the subsequent rise. A key factor: Selling by foreign bond investors.
Q: In an e-mail recently, you mentioned you have a money management company. What other Weiss companies are there?
A: The Weiss Group, Inc. has four separate subsidiaries:
Weiss Research, Inc., publishes Money and Markets, my Safe Money Report, Larry Edelsons Real Wealth Report, Your Money Report and several other newsletters.
Weiss Capital Management, Inc. (800-814-3045) has approximately $400 million in individually managed accounts of individuals, corporations and pension funds.
Weiss Ratings, Inc. is the nations leading, independent rating agency. In a study by the U.S. Government Accountability Office (GAO), we were ranked number one in America for the accuracy of our insurance ratings. And more recently, based on data from Investars.com, Weiss Ratings has also been ranked number one in America for the performance of its stock ratings, as reported in The Wall Street Journal.
We also have The Weiss School, a pre-K, elementary and middle school. We started it originally for Anthony in 1989, with just eight students in a one-room school. Larrys three children joined a few years later. Now it has over 250 students and should soon have many more.
I have always believed deeply in education. So did my father and mother. Maybe that helps explain why the entire Weiss Group is dedicated to providing education at many different levels. I hope we can continue to do so for you and your family.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2005 by Weiss Research, Inc. All rights reserved.
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