by Steve McDonald, Bond Strategist, The Oxford Club
Friday, January 11, 2013
In focus this week; steel is shining, $50 oil from Canada and the Slap-in-the-Face Award
The Santa Claus rally boosted stocks in China 16% in December and steel stocks by 18%.
Richard Garchitorena of Credit Suisse recently upgraded the steel sector and stated in a Barrons article that inventories are at levels not seen since November 2011. This according to Credit Suisse could result in mills raising prices and increasing utilization.
Worldwide pent up demand for everything from cars to appliances is driving the new demand for steel and despite the structural issues facing the steel business disciplined supply and a reduction in the stash of steel are seen driving pricing.
Metal miners are also in line to benefit from this new surge in steel. In just two years the miners have lost almost 40% of their value and are trading at just 8.2 times projected profits. That’s less than half the P/E of 19 for steel makers.
The name Barron’s mentioned was Rio Tinto (NYSE: RIO). The numbers are very compelling and they pay a 2.5% dividend with a P/E of just 8.2. According to Barron’s, even analysts who haven’t upgraded the steel industry think Rio is a steal.
$50 Oil From Canada
Every serious long term investor has to be in the gas and oil transformation that is taking place in North America. It will remake the entire economic landscape of the world. But, that doesn’t mean it will be a smooth ride.
The huge amount of oil and gas production in North American that has resulted from the fracking boom in shale has created a temporary supply glut.
The glut is getting so big that Canada was giving oil away for less than $50 a barrel in mid-December. All you needed was a tanker to qualify for these historic low prices.
While this is great news for Asian buyers, it is horrible for the folks who have to find and develop oil and gas reserves.
The same day Canadian oil was trading for $48 a barrel, both Schlumberger (NYSE: SCH) and Baker Hughes (NYSE:BH) lowered their earnings projections for the fourth quarter, citing weaker profit margins in their North American business attributed to excess pressure pumping capacity from the shale oil and gas fracking boom.
Despite fizzling natural gas prices, in the third quarter development companies spent 144% of cash flow on capital expenditures. We will need to see much stronger gas and oil prices for this type of spending to continue.
According to Barron’s, there is plenty of new funding for gas and oil development but Sanford Bernstein says most of it is in the form of debt, and debt levels for exploration and development companies are back to 2009 levels.
The North American oil and gas boom is really happening, and it will reshape the world, but supplies appear to have hit a sizable lump in the snake for now and the industry looks like it deserves a breather until it balances out.
Gas is the future of the North American economy, and it must be a part of anyone’s long term investments, but it will not be anything but a straight up run. This over-supply issue is just one of the many rough spots between here and there.
SITFA: “Greed is Good” Edition
This week the sitfa goes to a Wall Street banker who went on the most expensive cab ride in history; how does five million dollars sound?
It seems a banker was leaving a Manhattan bar following a fund raising event and his car service didn’t show up for his ride back to Connecticut.
So, he had to take a cab. How common!
When he arrived at his home the fare was $294,according ot the cabbie, the banker refused to pay the amount and said he would only pay $200. The cabbie promptly locked the car doors and drove around looking for a policeman to force this banker to pay his bill.
Remember, this guy made as much as $3 million a year!
The banker thought he was being taken back to Manhattan. How fitting!
The banker decided he wasn’t putting up with this and following a scuffle with the cabbie, he took a pen knife from his pocket, the kind you use to open boxes and envelopes, and cut the cabbie’s hand.
Of course, the banker was arrested for assault.
The news hit the New York papers and Morgan Stanley, who has a clause in their contracts that allows them to not only fire people whose behavior brings unwanted attention to the firm, they also have the right to freeze and deny deferred compensation; in this case about $5 million dollars.
The banker of course is crying foul because MS piled all his personal belongings from his office in his driveway, the cabbie is filing a civil suit and Morgan Stanley has an opening for a banker.
All over $94 from a guy that makes millions a year.
That’s a real cheek smacker and well deserved.
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