Sentiment Stays Bullish but Something seems Different.

The twisted, tortuous tale of ethanol as the great hope for an energy-independent America holds an object lesson for us all. What I wrote in my most recent article for SA, on a different subject, holds equally true here:

Entrepreneurs make money; early investors make money; and later investors make money if the business model is a good one and is able to adapt to changing conditions. But bureaucrats and politicians? They take money, they don’t make it! By the time a light bulb goes off over their heads to ride a successful wave, the wave has passed, friends. And they are left out at sea, after dark, with some mighty hungry sharks.

After visits with technologists at an explorer and three trusts in Calgary, we have confidence in our assessment of attractive investment potential signaled by McDep Ratios of 0.87 for Birchcliff Energy Ltd. (BIR), 0.91 for Freehold Royalty Trust (FRHLF.PK), 0.95 for Peyto Energy Trust (PEYUF.PK) and 0.95 for Penn West Energy Trust (PWE).

BIR is for investors looking for high growth subject to higher risk. The remaining three income stocks have strong resource value at the same time they expect Canadian taxation changes in 2011. All are applying newly developing techniques of multifrac horizontal drilling (HZ) to unlock oil and gas accumulations more profitably. Neither fracturing nor horizontal drilling is new, but the combination of multiple fracture treatments with horizontal drilling is sweeping Canada after having been advanced in the Barnett Shale natural gas drilling in Texas. In its Analyst Day presentation, PWE illustrated in a deliberate oversimplification how 8 single frac vertical wells costing $8 million might be replaced by one multifrac horizontal well for $2 million (see slide below). We think HZ is promising for individual companies without depressing industry pricing from too much long-term supply. We’ll have more to say about each of the four stocks in future analyzes.

November 11, 2009

GBP USD Falls after Bank of England Releases U.K. Economic Forecast

Excessive volatility hit the GBP USD early this morning following the release of the Bank of England’s forecast for economic growth and inflation. In the report, the BoE warned that the U.K.’s economic recovery was just beginning and continuing strength during the recovery period remains “highly uncertain.”

Since the global financial crisis began, the BoE has at times been aggressive in fighting the recession while at other time drawing …
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Random Posts

• 09/09/09 -- European Session: USD Stabilizes
• 04/15/08 -- Buy Penn West Energy Trust (NYSE: PWE)
• 09/10/09 -- Daily Futures Commentary September 10, 2009
• 02/03/09 -- Eyeing Up the Gold Market
• 06/15/09 -- Jay Norris Video Commentary June 15, 2009
• 03/27/09 -- Daily Futures Commentary COMMODITIES March 27, 2009

Canadian Income Trusts are in a good position to make money for investors after adjusting to the Halloween Betrayal of 2006, the Alberta royalty overreach of 2007 and the global financial follies of 2008. Each of the six stocks in our coverage is in an upward fundamental volume trend per unit adjusted for debt reduction and high income distributions (see chart Volume per Unit, below). The adjustment casts the trusts in a better light when reported volume is divided by adjusted units that have been declining for most of the trusts (see chart Units Outstanding, Adjusted, below). Bumps in the trend prior to the market peak last year reflect acquisitions.

The three largest conventional trusts acted as consolidators of smaller trusts in the face of changing trust taxation in 2011. Now those trusts are focused on reinvesting more cash flow. Considering our latest comparative analysis, Enerplus Resources Fund (ERF) retains a low McDep Ratio of 0.79 after we reduce estimated Net Present Value (NPV) to US$32 from US$36 a unit.
The largest income stock, Canadian Oil Sands Trust (COSWF.PK), has our buy rating, while the other five also offer attractive appreciation potential indicated by low McDep Ratios.

• Enlightened-American Portfolio: +33.5% YTD (my actual IRR, including cash balance)
• DJIA: +10.7%
• Nasdaq: +29.7%
• S&P 500: +14.7%
• DJ Wilshire 5000: +16.9%
• Russell 2000 (smallcap): +12.7%

All the major indices, except for the Dow Jones Industrial Average, booked losses ranging from 3% - 9% for the month of October. Our portfolio lost half a percentage point, despite the volatility in energy stocks. Much of the steady performance was attributable to the continued build of cash. In some instances, such as Intel (INTC), these cash-outs were forced as our call options expired in-the-money.

• No new positions taken.
• We were called out of our Intel position at $16 per share. We missed roughly 20% upside due to writing this call option but sometimes that happens when writing options. At the time, we wrote the option, Intel was trading around $15 1/2 and we had successfully sold a string of INTC calls to good benefit. While it may be easy to rue this move in hindsight, investors must not forget the lessons of this bear market -- cash on hand may be a less desirable but never regrettable option.
• Our Yamana Gold (AUY) position was reduced by 25% due to being assigned on our $9 Oct calls. We have been writing $9 calls on AUY for a year, thus booking good gains before getting called this past month. Gold mining stocks in general are good candidates for options-writing due to their historical volatility, which means bigger upfront premiums and relative assurance that general drops in stock prices will be reversed at some point in the near future.
• I reduced one position in the current portfolio by 25%, the details of which are revealed only to premium subscribers. Find out more about Enlightened American Premium here.

Our cash position currently comprises 46% of the total portfolio. While I am not enamored with this situation, I continue to hold cash rather than compromise our standards for investing. During huge rallies, it is easy to get caught up in the euphoria and feel a subtle urge to join the party. However, Seth Klarman has proven in the past that it is possible to outperform the markets even while holding huge chunks of cash. In fact, that is precisely what we have done this year, as the Enlightened American portfolio is now beating all the major indices, including the red-hot NASDAQ, despite 30%+ cash holdings for most of this year.

October 31, 2009

U.S. Dollar Posts Strong Gain Ahead of Next Week’s Major Reports

The U.S. Dollar posted a strong gain after bearish economic reports Friday morning triggered a massive sell-off in U.S. equity markets. Investors were encouraged to dump higher yielding assets for the safe haven Greenback. Two different reports indicated a drop in consumer spending and sentiment. U.S. Personal Income was flat but Personal Spending indicated that consumers are still paying off debt and saving their money. The drop in the Michigan Sentiment showed that …
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Random Posts

• 08/21/09 -- US Session: Bear Market Rally On Positive US & European Economic Data
• 06/10/09 -- US Session: Dollar Rebounds Off NFP Data While Political Controversy Hurts Sterling
• 04/15/08 -- Buy Penn West Energy Trust (NYSE: PWE)
• 05/29/09 -- Asian Session: Orderly Decline in Risk Sentiment
• 12/26/08 -- Fool’s Gold – Technical Analysis in the hands of a Fraud
• 09/04/08 -- Gold Futures Dirty Secret (Part 2)

On 22 October 2009 Reuters reported that Korea National Energy Corporation will purchase Harvest (HTE) for C$1.8B or C$10 per unit. On 12 December 2008 I wrote, “For these reasons Harvest appears to be fairly cheap and a good opportunity.” This article will examine the anatomy of the trade and opportunities for redeployment of capital.

PEAK OIL