Absolut-ly Bad Trade

 

Last week, the Financial Services Authority (FSA) finished a long investigation, and confirmed what Wall Street insiders already knew: that the large and unexpected jump in the price of oil on June 30th, 2009 was caused by a single trader.

Between the hours of 1:22 and 3:41 am, a highly intoxicated senior broker at PVM Oil Futures purchased 7 million barrels' worth of crude oil futures - equivalent to 69% of the global market for oil.  The trader, Mr. Perkins, unfortunately has no recollection of the event as he subsequently experienced a blackout.

Shortly after waking up at 6:30 am, Perkins did what anyone would do under similar circumstances - he sent a text message to his supervisor, explaining that could not come into work as he had to care for a sick relative.

Unwinding the massive orders lost PVM 9.8 million USD.

As a result of his binge, Perkins was ordered to pay a fine of 72 thousand pounds, and had his license revoked for 5 years.  In truth, not a bad penalty for momentarily changing the world, and for a great story to tell for the rest of your life.

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"Mr. Perkins poses an extreme risk to the market when drunk."

The Financial Services Authority

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A Barrel of Reality

BP, formerly British Petroleum, has been making headlines for weeks with its outrageous 35,000+ barrel per day ocean-based spill. With President Obama calling for revenge (at least publicly), and congressmen berating BP executives while vainly attempting to maneuver them into admitting guilt, some say that the offshore oil market is finished. Others add that the rise of alternative energy vehicles is now assured. Still others say that BP is a great buy. This article is a dose of reality all around.

I am a big fan of alternative energy. Wind and solar power have come of age, and can successfully compete with traditional sources like coal and hydroelectric power for electricity generation. Alternative energy vehicles, however, are simply not at the same level.

Despite all the hype about alternative energy vehicles, how many recharging stations do you actually see on your way home from work? How many people do you know who run electric vehicles for personal use (not just for corporate image)? Major alternatives to electric, such as fuel-cell cars, have been “in the works” and “soon affordable” since I visited Ballard Power’s (BLDP) office 11 years ago.

Although fuel cell and electric vehicles hold great promise, they simply aren't ready. No one wants to wait 20 minutes to "refuel" their car. No one wants a low-cost commuter vehicle that goes 35 miles per hour. Nor does anyone want to pay a year’s salary for a car that goes the same speed as their existing car.

Like personal computers, alternative energy vehicles will truly take off once cost and functionality reach reasonable levels, and once the infrastructure to maintain them is in place. Until then, oil and its producers maintain a bright future.

As for BP, should you buy or sell? Although BP looks tempting at these levels, I should remind everyone that the inglorious well is still leaking thousands of barrels per day. Until it’s actually capped, my money is going into more reliable opportunities; like, for example, this disaster's beneficiaries, Chevron (CVX) and ConocoPhillips (COP).
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“Already those who have seen this new model are acclaiming it the finest car of any type yet produced for city and suburban use. You, too, will be delighted with it.”
Advertisement for the Detroit Electric Car Company, 1920.

Two Stocks I Like – Alternative Energy

Although people continue to debate the existence of global warming, good investors should leave the debates aside and focus on reality: demand for alternative energy has risen significantly in recent years, and will likely continue to do so. Clean energy solutions are more practical and cost effective than ever before, and industry is embracing the savings and public relations improvements that clean energy offers.

Two companies that stand to gain large amounts of new business as demand for alternative energy increases are the well-known companies General Electric and Dow Chemical (I own both).

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General Electric (GE) is one of the largest companies in the world, and the only remaining original component of the DOW 30 Index. It is a technologically sophisticated company with diverse fields of business, giving it an annual GDP larger than the entire country of Israel. GE is a leader in (among other things) nuclear power generation, wind turbines, hydroelectric power, and components for many sources of alternative energy.

GE suffered during the credit crisis of 2008 (especially due to the investment arm GE Capital), and although the stock has come back 100% from its lows it is, in my opinion, still selling well below its true value.

GE Statistics (at time of writing):
Price $18.30 USD
P/E 18.15
Return on Equity 10.11
Dividend Yield 2.19%

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Dow Chemical (DOW) was incorporated in 1897 and now employs over 52,000 people. DOW is already a huge supplier of residential and commercial insulation and weatherization products (including the ubiquitous Styrofoam®), and is always working on new and innovative energy-saving solutions. In 2009, Dow introduced solar shingles. Dow is also currently developing advanced Carbon Dioxide scrubbers for commercial use.

Dow stock has tripled since its low in 2009 in anticipation of the return of substantial revenue, giving it a ridiculously expensive-looking P/E ratio of 93. Nevertheless, DOW has incredible revenue generating capabilities, and I believe that in a few years today’s price will look like it was a bargain.

DOW Statistics (at time of writing):
Price $18.30 USD
P/E 93.2
Return on Equity 3.16
Dividend Yield 2.00%

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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

Two Stocks I Like - Oil and Gas Industry

When it comes to stocks, I’m of the Peter Lynch School, which says that you shouldn’t purchase a stock unless you can, a) rationalize your purchase in few sentences, and b) draw what the company does with a crayon. These companies fit the bill.

I have no idea whether these stocks will go up or down in the next 6 hours, days, or weeks, and don’t know anyone who does. My intention is to hold them (I own both) until at least the peak of the next market cycle, or until the company proves to be something other than what I thought (for example, the dreaded words, “accounting irregularities.”)

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Tidewater (TDW) – Tidewater is an offshore oil and gas drilling support-company that owns a fleet including 126 new vessels, making it one of the youngest fleets in the industry. Its ships have low downtime and an excellent safety record. The company has almost no debt, great return on equity, and the stock price is cheap – single digit P/E and close to book value. The company has been buying back shares.

Because Tidewater’s worldwide fleet is mobile, they can sail to wherever the work is. This company is also a manly man stock, with photos of oceangoing vessels all over the annual reports. While this latter point isn’t actually a reason to buy, I enjoy it nonetheless.

Barack Obama recently expressed an interest to expand offshore drilling in the United States: this is not a sufficient reason to buy Tidewater. Buy a stock because the company is great -- not because of a politician, the weather, interest rates, or any other transitory reason.

TDW Statistics (as of writing):
Price $46.81
P/E 6.67
Return on Equity 16.75%
Dividend Yield 2.12%

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Chevron (CVX) – one of the world’s largest and most recognizable energy companies. Chevron owns assets worldwide including Australian natural gas, Canadian oil sands, offshore sites in Brazil, and sites in Nigeria, Kazakhstan, and Tahiti, amongst others.

Recently, Chevron announced that its earnings had declined due to losses from weak refining prices in 2009: something I believe is unlikely to be repeated in the foreseeable future. Chevron’s debt level is low (lower than most energy companies), it has actively been buying back shares, the stock is reasonably priced, and its return on equity is excellent. In addition, its international operations help prevent currency shock.

CVX Statistics (as of writing):
Price $72.80
P/E 11.83
Return on Equity 13.86%
Dividend Yield 3.69%

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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.