Federal Money Is Fueling The Bull Market - The AIA Advocate Newsletter

In This Issue:

Federal Money Is Fueling The Bull Market

Disasters Create New Opportunities

“No Nukes” Is Good News For Conventional Energy

The Bottom Line This Month

Over the past month, this old world has taken quite a beating. The volatile Middle East and North Africa (MENA) region continued to boil in political conflict. At the same time, Japan suffered a double natural disaster plus a nuclear emergency that seems to be getting worse. Oil prices also continued to move up.

As each new strain arrived, we expected the stock market to plunge. Although there were a few moderate declines, when all the gyrations were tallied the Dow was actually up 2.3% for the month. The Nasdaq rose 1.4%.

The resilience of the stock market reveals that it has a great deal of underlying strength. Although it’s possible that stocks are nearing a breaking point that will be triggered by an additional shock, we think prices are more likely to rise in the coming months.

Federal Money Is Fueling The Bull Market

The stock market is holding its own in the face of adversity because the economy is bouncing back from the recession. Corporate earnings are rising, manufacturing is starting to pick up again, the weak dollar is boosting exports, and interest rates are remaining low.

Nevertheless, the positives for the economy are base hits not home runs. We are seeing nothing like the strong recoveries of the past. In addition, housing is continuing to slip, unemployment is remaining high, oil and food prices are rising, and the dollar is weakening. So, why are stocks doing so well?

We think the answer is, billions of dollars of the Fed’s stimulus and bailout funds are making their way into the market. That’s not surprising since stocks are currently the only investment game worth playing. Real estate in most regions is comatose. Commodities are doing well, but most investors stay away from them. Bonds are pariahs. And, for all its glamour, the precious metal market is small. At the same time, fixed income returns are so low nobody wants to keep cash on the sidelines.

The winner by default is the stock market. It’s another reason to think the bull has further to run. But, as we said last month, we must expect some corrections along the way. One of them already seems overdue.

Disasters Create New Opportunities

The human suffering and property destruction we are seeing in MENA and Japan are heartbreaking. At the same time, the steps people in those areas are taking to solve their problems are inspiring. As investors, we can participate in their efforts and help ourselves at the same time.

We think the biggest changes the disasters will make are in the use of energy. For the next few years, at least, the nuclear power revival will probably be tabled. There may never be another nuclear plant constructed in Japan. China will probably finish the 27 nuclear complexes under construction, but they may be the last. It looks like the German people are also turning thumbs down on nuclear. The same may be true in America despite President Obama’s support for the industry.

“No Nukes” Is Good News For Conventional Energy

With nuclear power on life support, the only energy sources currently able to take its place are coal, natural gas, and oil. Of the three, oil is the least competitive. Oil also looks less reliable since so much of it comes from troubled countries where supplies could be interrupted.

That leaves coal and natural gas on the bidding table. Two leading suppliers and one exploration and development company for those fuels look especially good to us:

Arch Coal (ACI) is America's second largest coal producer. http://finance.yahoo.com/q/bc?s=ACI+Basic+Chart The company has over 3.9 billion tons of reserves in 19 mines located in both the eastern and western parts of the U.S. In addition, much of the company's coal is the low-sulfur variety that sells for a premium price.

Some readers may doubt the potential of coal because burning it creates large quantities of the greenhouse gas, carbon dioxide. It's a valid concern.

However, new carbon capture and storage technologies promise to solve the greenhouse gas problem. Although the technology isn't yet used on a large-scale, we think it will be soon. And since coal is the world's least expensive energy source, there is plenty of margin available to invest in new cleanup technologies and still remain competitive.

Meanwhile, the U.S. has 1,493 coal-fired electric plants it will be using for at least another decade. In fact, U.S. electrical companies plan to increase their coal-fired capacity by 30% over the next five to eight years. The additional demand can only bolster Arch's bottom line.

EnCana (ECA) is a leading Canadian natural gas company we have recommended in the past. http://finance.yahoo.com/q/bc?s=ECA+Basic+Chart With nuclear power in limbo, we think EnCana’s prospects are especially good.

EnCana owns or leases over 12.7 million acres with proven natural gas deposits of 12.8 trillion cubic feet (Tcfe). The company believes it has another 39 Tcfe of gas yet to be tapped. Those numbers are probably only a fraction of what the company may be able to recover using new shale gas technologies. In 2010, the company set a goal to double its production over the next five years.

The abundance of shale gas has thus far been a mixed blessing. As with any supply/demand commodity where the supply suddenly increases, the price of natural gas has been falling. However, the low price is prompting countless businesses and homeowners to switch to natural gas from much more expensive oil. We don’t think it will be very long before the demand for gas once again catches up with the supply. It will happen much faster if, as we believe, the electric power industry uses a great deal more of it in the future.

Longer term, we think natural gas will also see greater use in transportation. UPS already runs its trucks on natural gas. The public has yet to switch to natural gas for transportation primarily because few filling stations carry the fuel. However, the availability will increase as rising oil prices give natural gas a big cost advantage over gasoline or diesel.

We also like EnCana’s prospects because it is very efficient. The company has its exploration, extraction, and distribution systems finely honed to maximize profits. All in all, we think EnCana is heading for a prosperous future.

Transocean (RIG) is the world’s leading offshore oil and natural gas drilling contractor. http://finance.yahoo.com/q/bc?s=RIG+Basic+Chart The company specializes in technically demanding situations including drilling in deep water and operating in harsh environments. Of course, those are the places where any significant new supplies of oil and gas may still be found.

The tougher the job, the more likely it is that Transocean will get the contract. In September 2009, Transocean drilled the deepest oil well in history at a depth of 35,050 feet in the Gulf of Mexico. That milestone put Transocean in the running for many new contracts in the deep waters off Africa and Brazil where new energy fields have been discovered.

Transocean also excels with innovative technology and novel drilling procedures. Particularly valuable is the company’s proprietary dual drilling process, which significantly reduces the time necessary to complete a well. Since drilling projects at sea can cost well over $1 million a day, the ability to do a job quickly gives the company a big competitive advantage.

Underwater energy exploration and development work is not without dangers. In April 2010 while drilling in the Gulf of Mexico, an explosion on the company’s Deepwater Horizon killed 11 crewmen and then sank. The disaster also led to the worst offshore oil spill in U.S. history.

Although the Deepwater Horizon was leased to BP at the time, Transocean is named in several lawsuits, and it can also expect government fines. These problems will probably continue for many years.

Nevertheless, after all of Transocean’s problems are considered, the fact will remain that no other company is as well equipped to extract oil and natural gas from the world’s undersea reserves. We think that capability will lead to many profitable years for the company.

Morningstar summed it up best in a March 29, 2011 report when it said, Transocean “still presents the most compelling risk-reward prospect among drillers.”

Note: ExxonMobil (XOM) and BP Plc (BP), that we featured in recent issues of this newsletter, are still on our recommended list. Both companies have excellent long term outlooks in our energy-hungry world.

The Bottom Line This Month

We can’t remember a time when the world suffered as many shocks as it has over the past few months. Given the trauma, we worried that the stock market might drop like a rock. Instead, it weathered the storm very well. We think that indicates that stocks have a great deal of underlying support.

The political turmoil in the Middle East and North Africa, plus the disasters in Japan, are changing the fortunes of several energy companies. Nuclear power is now out of favor in many countries. Filling the void will be coal and natural gas. That’s good news for Arch Coal, EnCana, and Transocean.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time...


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Posted 03-31-2011 4:39 PM by Research & Editorial Staff