We had a wonderful time at our meeting today! I want to thank everyone for coming and making for an excellent conversation the delight of the afternoon. I really feel that we are all developing as traders and investors and each meeting makes us better at our art. We had a total of 7 attendees: (from left to right) Kevin Day, Jeff Harrington, Hien Nguyen, Tommy Schultz, VJ Arjan, Earl Landry, and Larry Rosenfield (who came later on in the meeting).
The Rise of the Bad Apples
Kevin Day commented on the amazing rise of the following stocks, AIG, Bank of America, Citicorp, Fannie Mae, and Freddie Mac (AIG, BAC, C, FRE, FNM). These 5 stocks have accounted for 40% of the entire trading volume for the NYSE exchange. Perhaps this is the greatest short squeeze in history? There is no fundamental evidence for this rise. In fact, it is no secret that AIG, FRE, FNM have billions of dollars of bad assets on their books. Kevin was commenting that it often happens that there is no fundamental reason for a stock to rise or fall in the market. It, therefore, will benefit one to follow the trend. As an old market adage goes, the trend is your friend. Earl Landry bought into Fannie Mae and is up several hundred percent since his buy.
Three Bullish Reason
Kevin also went ahead to comment on the market conditions for the next 9 months:
- Cash is returning to the market from the large institutions and banks who have been waiting on the sidelines (The days after Labour Day have historically been such days)
- Easy year-over-year comparison of economic news and earnings environment
- Flight to quality due to excessive valuations for many low-quality stocks
- Overall, we should see large blue chip stocks with relatively low P/Es start to rise with large volume surges. Eastman Kodak (EK) is such an example; this stock is up 72% in the last month alone! (Kevin Day with his incredible “nose for the market” saw this very situation coming nearly 2 months ago at a previous meeting)
Gold Plays
Hien is a gold and currency trader and has predicted very specific price levels for gold in the near term. She feels that the price will go to 1032, and then retrace to 964. She has determined these price levels with trend and Fibonacci lines. She told us that it is unlikely that gold will pass much past $1,000. Below is a graph:
Jeff Harrington’s Oil Plays
Jeff Harrington, whose sheer brilliance I continue to admire time and time again, has a few oil plays that ought to be considered by any serious oil investor. Schlumberger Limited (SLB), National-Oilwell Varco (NOV), McDermott International (MDR). He also explained the favourable discovery for British Petroleum of the "Giant" oil find in the Gulf of Mexico and how this find fairs well for the above mentioned companies.
MDR and RIG build the offshore oil platforms. Deep water drilling is the final frontier of oil exploration.
Below is an email personally written by Jeff Harrington explaining in great detail his opinion on this matter:
Depths in the Gulf are now in deeper than 1 mile of water and some are in 2 miles of water. Drilling in the Gulf is going into what is called the Lower Tertiary geological formation, which formed between 23 and 65 million years ago. Note that the massive Cantarell field off the Yucatan (partially in the gulf) was formed from the asteroid impact that wiped out the dinosaurs some 65 million years ago. This is an extremely deep rock formation, more than 5 miles below the sea floor! In fact, the BP find this week is considered the worlds deepest oil well at just over 35,000 feet. This rock structure is considered to be 'over stressed' and is incredibly hot. Heat, of course, is a necessary ingredient in the formation of oil and is the reason why oil sands in Canada and oil shale in the Rockies are literally locked in the rock and not pumpable, but must be 'mined'. The tolerances of deep water drilling are approaching that of the aerospace industry and is incredibly expensive. One oil well costs $100 million (domestic on-shore wells can be as cheap as $10-100k by contrast), and usually requires multiple wells to be drilled before oil is found. With construction of a rig and all the other costs, a well can run $1 billion+. But, with $70 oil and 3 billion barrels, the BP find is worth $21 billion. Oil of $70+ a barrel is required to make these ventures profitable.
Anyways, the same can be said of the San Juan basin off the coast of Brazil. It is in waters of 2 miles deep plus another 5 miles of rock. The San Juan and Gulf of Mexico are the last frontiers of oil exploration that is open to the oil majors. I fathom that we will eventually drill in the deep oceans, but am unaware of what the oil prospects are in 2-3 miles of water. But it makes sense, when organisms in the water die, they sink to the bottom of the ocean. With so much bio-mass contained in the oceans, it seems certain that there are pools of oil locked in the oceanic crusts. In fact, the massive Middle East oil fields originated from an ancient sea called the Tethy's sea (Ocean), which closed when Africa slid into Europe and Asia. (http://en.wikipedia.org/wiki/Tethys_Ocean).
For more information on the formation of oil in both the Tethy's Sea and the Gulf of Mexico, Google search 'anoxic events'. It is now widely believed that most of today's fossil oil reserves formed in several distinct anoxic events in earth's geologic history. The Gulf of Mexico house the worlds second largest anoxic areas that forms when rainwater run off from farms flows down the Mississippi and feeds massive algae blooms in the Gulf that basically kills all marine life because it saps oxygen out of the water (hypoxia). This algea eventually dies and sinks to the bottom of the Gulf and forms a dense soup that will become oil.
MDR and RIG will be beneficiaries of the offshore oil boom as they are the only companies that I am aware of that have the technological expertise to put these rigs together.
SLB and NOV are the guys who help service the drillers by providing the mud and pipes. Their stocks are more volatile b/c the servicers are the first to be impacted by pull backs in oil prices. My outlook on oil long term is incredibly bullish and is the reason why I have maintained my positions in COP and RIG. COP is a more risky company and thus has a lower stock price, but has a higher yield. Plus, their 10% stake in LUKOIL is helping them out b/c it allows them to play in Russia, which is currently a lockout country.
Another company that I will get back into soon is CHK, natural gas prices have remained in the toilet due to over supply from the Barnett, Marcellus, Haynesworth, and other domestic shale plays. But, NG will be a part of this nations, and the worlds, energy plans We are in a period of 'cheap natural gas' due to so much supply but it too will end.
VJ Arjan’s Trading System
VJ Arjan was discussing his trading system to Hian and Jeff who were inquiring about what strategies to use. He sets Sundays up for the days he lays down his strategy in the currency markets. He finds key entry levels based on support levels, trendlines, Fibonacci levels, and momentum indicators. He will then set up entry orders among the major currency, most of which are likely not to be executed. The first portion of his trade is very small and he pyramids the positions which are consecutively larger and larger until the price level reaches half of the profit target. Subsequently, his goal is to start exiting positions for the last half of the trade. While in the trade, he wakes at 4AM (CST) which is when the London markets trade and simply moves his stops.
Santa Fe Gold Corporation (SFEG)
The name says it all. This play is probably going to yield fruits very soon. According to the figures published by the company the average grams of gold per ton, there is very little question that the riches are there. Jeff Harrington was stating that traditionally large companies like Freeport-McMoran (FCX) or Newmont Mining (NEM) have an average of 1-2 grams of gold per ton. In the mine owned by SFEG, there is estimated to be 20-60 grams of gold in each ton! It is a matter of time before the needed permits are procured and the mining will begin (as well as the riches).
The Coming China Wars
VJ Arjan and Tommy Schultz were discussing the upcoming problem of China. Here is a list of things that need to be addressed for starts:
1. Low wage, high quality work by highly disciplined, uneducated, and non-union work force – when 5% of the population wax rich on the effort, the sweat-equity effort, of 95% of the population which remains impoverished, tensions are sure to brew
2. Minimal worker health and safety regulation – It is customary for at least 10 persons to be admitted to a hospital for poisoning in major cities and towns on a DAILY basis. The pollution in their rivers are so grave that it may soon become necessary for China to import water from other countries. Tommy Schultz stated that even importing water may not be necessary; China has the reputation for piracy and counterfeiting. They may just steal filter technology to filter polluted water.
3. Government-sanctioned system of counterfeiting and piracy – Currently the world black market accounts for 7% of the world’s GDP. Of this percentage, 5% comes from China. Currently 12% of the world’s GDP comes from China. The government knows that cracking down on piracy would lead to massive unemployment among Chinese workers. So to appease the world, they crack down on some counterfeiting operations from time to time, but know that they must sustain these “industries” if they are to keep appreciating at 10% per annum.
4. Racism – The “Hanification” of the Urumqi – The Chinese government has been systematically flooding the western region of China that is home to ethnic Muslim Urumqi. This area also happens to be incredibly rich in resources. The Urumqi have been retaliating and this is being reported in the press as a terrorist activity.
Obamacare
Larry Rosenfield, who is himself a physician from Tyler, TX, commented on the national health-care debate. The government, not just the American government but most governments, do things without thinking of the full ramifications of its actions. In the current bill, there is definitely a lot of pork and many political motives involved. However, the health-care system is inherently corrupt.
- It is true that insurance companies raise premiums when you get sick
- It is true that the medical system favours dollars over doing the right thing
- It is true that the reason for the high cost of health care is because the system oftentimes has the patient pay multiple times for one service, even though it only needs this service once
He thinks that the fair option would be for everyone to buy into Medicare and Medicaid. Most Medicare/Medcaid patients, however, are very eager to take advantage of this system. They take free government checks by qualifying (they do not work) and they do not pay taxes to fund the system. In Larry’s words, these patients “game the system.” This must be stopped, however, if Medicare/Medicaid wants to avoid bankruptcy in the very near future.
The next meeting will be on Sunday, October 4th, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
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