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As Energy Prices Rise, Fight Back With Investments

Lately, it seems like every time I turn the TV to news, finance or political programming, you hear consumers and politicians whining about the recent run-up in energy (particularly gasoline) prices. Although this complaining seems to be partially justified, few have answers to the continuous rise in demand and market assessed risk that remain the force behind rising fuel costs. In a capitalist economy, you have to accept the fact that markets set the price. Higher demand and risk mean higher fuel prices. If illegal price gauging activity is present in the marketplace, then by all means Congress and the justice system need to take action. However, in the previous 30 investigations led by the FTC, there has been no conclusion of wrongdoing.

Instead of sitting on your hands, upset about the higher cost of your summer vacation, hedge against fuel price inflation by investing in energy companies. As a sector, energy has performed well this year, especially oil exploration & drilling companies and refiners. These stocks are only beginning their upward summer trends. Baring a significant political or economic change in the industry, energy stocks should continue to increase in price, running up another 50% or more in some cases. Profiting from investments during inflation in energy prices helps to hedge your earnings and protect your wealth and purchasing power. Here are some ideas for investors:

If you are conservative in your stock selections, go with a typical big name driller or refiner. Some names to look at include Valero Energy -VLO- (still extremely undervalued using valuation measures), Marathon Oil -MRO-, Transocean -RIG-, or Exxon Mobil -XOM-.

For investors desiring higher earning potential, I recommend some energy plays abroad. Recently, international oil and gas companies have experienced significant stock price advances. Nevertheless, many of these companies remain undervalued when taking into account their projected earnings and revenue growth rates. Some companies to consider include Buffett-owned Chinese giant PetroChina -PTR- (AKA China National Petroleum Corporation, a stock I will discuss in my China sectorsnap later this week), Argentine emerger Petrobras Energia Participaciones S.A. -PZE-, and the Brazilian integrated Petroleo Brasileiro -PBR-.

Yet another reason to avoid American automakers

As if their overall strategy, quality and labor hassles weren't enough to deter investors, GM now admits that the SEC is investigating the firm's use of financial hedging tools, as well as possible restatements of earnings derived from GM's former banking arm.

Previously, I blogged about what I felt was unfair criticism towards GM. Although I certainly didn't recommend the stock, I suggested that it might be a viable option in the future and was unfairly linked to the slumping Ford and Chrysler. Despite these recent allegations, I still believe GM is in better overall shape then Ford, who is now saddled with some $167 Billion in debt. GM's $46 B certainly isn't a good number, but it comes at one third of the amount Ford has, making it a much more attractive stock for private equity and investment firms.

Judging from the recent news though, I would continue to keep clear of US automakers until Detroit proves it can maintain profitability over a 2-quarter period.

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Both Japanese carmakers recently experienced undeserved price declines over the past few months and possess appealing valutaions

When will Carter and Greenspan just shutup?

I don't know what it is with former famous political leaders, but they seem to be having a problem keeping their mouths closed. Just a few days ago, former President Jimmy Carter went off as saying "the current administration is the worst in history". Later, Carter claimed he was only referring to the Bush Administration's foreign policy.

But, like Greenspan, what good did these comments really do for the country? Confidence is already near all-time lows, set when guess who was President-Carter himself. A vast majority of Americans in both parties know how poorly Bush has done in respect to foreign policy, so why does the former maligned leader feel the need to state the obvious? Considering his track record, Carter has no room to criticize or talk.

Today, former FED Chairman Greenspan decided to tell the world that China will have a big sell-off at some point. Well, no kidding! Anyone who follows economics and investing understands that China is due for a correction at some point. Did Greenspan really find it necessary to state the obvious as well?

However, I fail to see where this "big" correction will come from. If you take into account the P/E ratios over the projected five-year earnings growth rates in China, the stocks seem more appealing then those in the United States. Yet, Greenspan seems to ignore key numbers such as this all too often. To be critical of China, when you have been linked directly to many of the problems the US Economy currently faces, takes one arrogant and senile former economist and politician.

Carter and Greenspan need to go play a round of 18 and accept the fact that they failed during their tenures.

(Chile)ng Economic Trials

In a recent Wall Street Journal column, a reporter chronicled the upcoming problems the Chilean economy faces. Like several other developing nations, Chile's economy seems to have become over-reliant on a single industry. In this specific case, Chile's recent economic boom has been fueled largely by mining commodities, especially considering how copper has tripled in the past 5 years or so.

However, Chile is dissimilar in the methods it has taken to combat the volatility derived from commodity markets by using investment techniques on a percentage of revenue generated from taxes on the economy. With tax revenues higher during years of commodity price increases, Chile has been able to develop a system that invests a percentage of taxes during this period into foreign investments such as government bonds. Although it would generally be wiser of them to place this money in equities, I applaud the finance and economics ministries for even coming up with such an idea that generates guaranteed return on money they don't need to spend.

By hedging against these fluctuations in Chile's economy, stability and long-term upward growth can more easily be secured. Many of the dividends and repayment of these funds will be invested into innovation so that the country becomes competitive in other sectors such as Technology, Financial Services and Consumer Products. All too often, developing countries focus on short-term profits, economic growth and end up spending instead of accruing or building their wealth. You will be hard pressed to find any country that has a better long-term economic strategy and focus on innovation and techonological improvement then Chile.

As with any government, the diffulty to balance the budget always poses a threat and concern among politicians and citizens. Chile's comprehension of the peaks and valleys associated with commodity dependence help create barriers against recession or stagflation. There are always issues and programs that need financial support, but tighter spending leads to a more balanced budget and higher levels of fiscal responsibility. Maybe US Politicians can learn something from our Chilean allies.



Note: GDP for Chile rises significantly after 2002.

How common investors can get in on Private Equity

For yet another year, Private Equity buyouts are expected to set a new record on Wall Street. Although the "rich get richer" theory applies, investors of all levels and experience have seen the benefits of leveraged buyouts. Rumors and announcements of LBOs stemming from Private Equity capital has driven stock prices dramatically higher, making these firms pay more for each acquisition or considered target. Although investors have little control over the situation and some may not want to lose ownership of the company they are part of, these Private Equity deals provide payouts of premiums that more then make up for these feelings.

Private Equity has remained an elitist group over time, with high barriers of entry. Until now. Presently, PE firms either trade sections of their firm publicly or have planned IPOs set to unveil before the end of this fiscal year. If you are looking for an immediate venture into ownership of a PE firm, you can try Fortress Investment Group (FIG), Apollo Group or KKR, the noteworthy firm that recently announced a bid for TXU. Investors with patience may want to wait for IPOs expected from the two most powerful and well-known firms in the PE world, Carlyle Group and Blackstone Group.

To some, it may seem confusing as to the reasoning behind Private Equity firms going public, especially because of their namesake. Thinking critically about how these firms derived their name, they still possess the ability to keep restructure and overhaul acquisitions in private. Disclosures in financial statements are a specific concern to some analysts, but the numbers will never fully display how the firms turnaround or fail with individual acqusitions. In addition, the acquisitions acquired by these financial barrons are likely to benefit because they are allowed to operate like a separate entity without the pressure of growing an artificial number such as a stock price.

Buyer beware though, as this article explains, PE firms stock growth after three years of their IPO is only 39% compared with normal growth of 45% for other companies. Also, as Adam Lashinsky writes, these PE firms are forced to cater to those pesky investors which they try to avoid so adamantly in the process of their business. Another possible red flag of the firms center around the use of stockholder's equity instead of debt. While the practice is generally seen as favorable and may be the case in some of these IPOs, the possibility of maxed-out debt could be extremely detrimental to the overall growth in earnings and health of the firm.

Should Orbitz go public?

Blackstone group, one of the famed private equity firms, recently announced they are taking Orbitz Worldwide Inc. public. This seems like an odd time to do so considering the high level of competition among online travel agencies, price wars between the airlines and rising costs due to elevated fuel prices.

Orbitz reported an increase in bookings of 38% last year, along with revenue of $752 Million. Looking at those numbers, one might be inclined to buy this IPO. However, if you look at the net income, Orbitz claimed a loss of $146 Million. This makes me question how the company derived that $752 Million in revenues; Orbitz makes profit by taking money off the top of flights, hotels, and cars other companies provide. If that revenue amount included the actual total flight, hotel, and rental costs, Orbitz might be cheating itself by going public at this juncture. Perhaps, investors are the ones who will get cheated if they fail to look at these numbers closer.

Even if Orbitz generated that $752M in revenue solely from its commissions, where do these high costs come from that created a net loss of more then 1/7 of these revenues? It makes you wonder if the costs can be cut or controlled, especially once full disclosure of financials is needed. In addition, revenue may slump this summer if fuel prices remain high and are built into plane ticket or car rental prices.

It isn't usually smart to go against Blackstone and underwriters such as Morgan Stanley, Goldman Sachs, and UBS, but I will be searching for more information before I jump on this IPO bandwagon.

Are Biofuels contributing to inflation in the U.S.?

With the steady rise of demand for biofuels due to subsidies and governement regulations, displacement of crops may lead to higher inflation in food prices. According to Shane Romig of the Associate Press, Argentines are not all happy about the government's new ethanol/bio-diesel plan.

Although few would argue against the environmental benefits of ethanol and other crop-based fuels, economic feasibility has long been in question. This article makes an important point in that diversion of crops towards fuel will likely lead to higher food prices. Despite vast differences in wealth, Americans in the lower and bottom middle-class could possibly face drastic changes to their food purchasing habits.

This may go a long way to show that hydrogen fuel-cell and other alternative means such as batteries may ultimately replace Ethanol as the mobile energy for the future.

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Protectionism is a double-edged sword

Sen. Hilary Clinton continues to lead the protectionist rampage on the political front, she has yet to provide any hints as to her solutions to the various problems that are certain to arise should she win and enact her regulations. Protectionism has both positive and negative effects, the later of which Clinton ignores.

I doubt anyone questions the concern over the amount of outsourcing that has taken place since the early 1990s. Something needs to be done to revitalize the US economy, that isn't debatable. The methods for achieving the end means is where politicians and economists seem to differ.

Clinton tends to suggest that Protectionism will help keep jobs inside of US borders, lower the trade deficit and ultimately act beneficial to the overall economic well-being. She doesn't seem to realize that the trade deficit has no net affect on the United States. Entities and people trade, not countries. She should be more focused on U.S. GDP Growth rates because various factors influence trade, including tariffs, tax rates in respective countries and currency conversion rates.

If you look at Hilary's plan, implementing policies to force companies and Americans to buy home-grown products will certainly result in significant spikes in inflation. She doesn't seem to have any grasp of this concept. If strong tariffs or other protective measures are enacted, those goods that will be then produced by workers in America will most definitely be higher in price due to the wage and benefits difference.

Another key consequence on protectionism is a stronger US Dollar. Although some argue that would be beneficial for the United States and her citizens, this would only hold true when trading or converting currency or wealth with other countries. An inflated currency has proven to be part of the problem with outsourcing because a higher USD makes foreign imports cost less and become more attractive. This is a central factor in the massive import problem the US faces. Should the USD fall relative to the Asian currencies, which it still has yet to do, demand for US exports will rise dramatically.

The double edge sword comes into affect if the US Dollar were to fall too quickly, lowering the value of personal wealth and ultimately creating inflation simultaneously. By any means, the situation is complex and fragile, something Sen. Clinton needs to realize soon.

To be or not to be...Protectionist

There is a very fine line for the subject and cringe at those who believe it should be one extreme or the other. Senator Clinton has already established herself as a major protectionist, but I wonder what the other candidates stances are on this issue. If Clinton continues on this rampage, she will certainly alienate conservative or pro-business, pro-market Democrats as well as Republicans. During this time of economic prosperity and concerns over whether it will last, she might play herself into a defeat during the Democratic Primary.

With global trade and economic dependence, protectionism will be a key issue in the economic debates for both the primary and general elections. I'm interested to see how big pro-Wall Street politicians like Giuliani feel about this subject. Giuliani is by far the best candidate for Wall Street, or so those who work there believe. His extensive background in business and business law should certainly aid him throughout the Republican Primary. Whether the financial outlook looks bleak or solid, he can use his vast experience to persuade voters that his economic policy will either strengthen or maintain the future.

Whichever party wins, I hope Congress and the financial and economic experts in their cabinet and in key organizations (FED, FOMC, etc.) deter any candidate from going one way or the other. Too much protectionism, such as Sen. Clinton is proposing, will create a steep increase in inflation, decrease US exports as well as imports, and put a significant strain on our diplomatic relationships around the globe. By the same token, failure to create and maintain low-wage jobs will also create economic and social problems such as high unemployment and more dependence on government welfare and tax dollars. Additionally, Wal-Marts will continue to force their suppliers to venture outside of the US to keep up with the low prices they demand, directly affecting the job market.

Protectionism is a touchy subject, one that will not become any easier to figure out as the US economy becomes more reliant on globalization. Creating a limited protectionist platform sounds like the most effective route to counter this problem. Although it will create subjectivity, most who follow the economy can agree that neither extreme would ultimately be beneficial for America. Free trade needs to be emphasized, but some low taxes can offset enough jobs from being sent overseas.

Good numbers for the U.S. Economy

More good numbers came out today, suggesting a recession is not likely in the near term for the United States economy like some economists such as Paul Krugman and Barry Ritholz. Let's start with the bad numbers.

Pending Home Sales came in at -4.9% against projections of 0.4% increase due to spring buying habits. Part of this number may be due to the cold snaps felt throughout the early part of the spring. I wouldn't be surprised to see that number rally this month.

Now on to the good news. The ISM Manufacturing Index rose to 54.7%, a new 52-week high. With the good manufacturing numbers came a sharp decline in bond rates, a move that will help support the stock market's rally.
Source: Marketwatch

Yesterday several strong numbers came out including personal income and DPI, each rose by 0.7%. Improvement in income leads to higher consumer spending and eventually GDP growth, corporate profits and a bullish stock market. The PCE inflation measure was flat, signaling slowing inflation. This is key considering inflationary worries and concern over the FED hiking rates if inflation maintains high levels. Gold prices also dipped, strengthening the dollar and lowering commodity prices.

U.S. to be free of Middle Eastern Oil by 2012

Last night, Interior secretary Dirk Kempthorne was on CNBC touting a new offshore oil drilling program that would put to work 48 Million Acres in the Gulf of Mexico and off the coasts of Alaska and Virginia.

"Department officials estimated that the entire plan could produce 10 billion barrels of additional oil and 45 trillion cubic feet of additional natural gas over the next 40 years."

This would effectively provide enough energy for the US to completely cease its importing of oil from any Middle Eastern Country according to the Interior Secretary. In addition, they plan to make sure that certain environmental standards are being met:

"The proposal includes measures to protect against damage to coastal areas from oil spills and other accidents. It would not allow drilling within 50 miles of the Virginia shore and would wall off an additional “obstruction zone” near the mouth of Chesapeake Bay."

However, environmentalists are criticizing the plan for not being protective enough:

“The Bush administration is zeroing in on the most environmentally sensitive areas for offshore drilling,” said Richard Charter, a lobbyist for Defenders of Wildlife and co-chairman of the National Outer Continental Shelf Coalition. “These areas that they are characterizing as buffer zones are woefully inadequate when you consider that the Exxon Valdez oil spill traveled hundreds of miles in a matter of weeks.”

My thoughts on this issue are that it would be great for our own economy, hurt the purchasing power of the Middle Eastern countries, lower the price of oil in general and really help create a more energy independent country. The problem is, I do worry about potential oil spills and tend to question the safety of these offshore oil rigs with the oceanic environment. I feel split because nobody can guarantee environmental protection with these oil fields.

SOURCE: Kudlow & Company, New York Times