Agora Financial’s Rude Awakening

Jump to Comments

Dubai, UAE

*** 134 points down and volatility remains the order of the day,
*** Oil weighs on submerging markets in the Middle East,
*** Another Rude pair trade to consider and plenty more…    

Joel Bowman, reporting from Dubai in the Persian Gulf…

The world’s largest market is acting like a big baby, stomping its feet and lashing out in a wild flurry of volatile daily mood swings.

Yesterday’s melee produced another triple digit swing for the Dow Jones Industrial Average; the eighth time the feisty index has jerked 100 points or more over the last twelve trading days. After rallying around 4.5% so far this month, the group of thirty took a relatively small hit, ending the session 134 points in the red. We say “relatively small” because the average daily move so far this month is around 175 points.

Yes, it’s a topsy-turvy world we live in. It’s a place where stocks go up on terrible jobs reports and oil falls while war is waged over a crucial pipeline; where the dollar rallies, even as the Fed pumps billions more into existence, and where gold plummets as investors flee from its safety and protection to catch falling knives over in the financials.

Still, nobody would be so naïve as to accuse the market of being a rational beast. It is, after all, merely a representation of the emotions and wishes of the millions of hands that feed and are fed by it. And those hands, we must remember, are not always operated by the brightest of brains.

“Take a look at how dumb the average person is,” goes the old saying, “and then consider that half the population is not even that smart.”

One catalyst for August’s exuberant rally must surely be the fall in the price of oil. Now officially in a bear market, having come over 20% off its high, the world’s grease is touching levels not seen for…well, at least a few months. But as the tide flows on one shore, it must surely ebb on another.

Here in the Middle East, for example, the markets have been punished in recent weeks. The Dubai Financial Market General Index slumped below the 5,000-point mark for the first time since October to officially enter a bear market of its own – down over 20% from its January high. 

Emaar Properties PJSC, the giant developer responsible for a good deal of the silly-looking buildings here, fell to its lowest level since 2005 on speculation the property market is approaching bubble territory. Tamweel, the largest real estate finance provider in the UAE, fell 1.82%. Banks led the losses in Abu Dhabi, with the National Bank of Abu Dhabi and First Gulf Bank freefalling 5.24% and 5.23% respectively. 

Although local markets have rebounded slightly in early trade this morning, it is clear they are far from healthy…and certainly not “decoupled” from demand in the west, as many would have had us believe when the US first started hitting the skids.

No, from shore to shore, desert to door, it’s a crazy world we live in.

So, what’s the long and short of it all? Where can one turn to make a buck out of this mess? Perhaps it’s time for another Rude Awakening pair trade. Not sure what that is? Well, Obama was a good long idea, for instance…as were Iron Man and the Beatles. Hilary, The Love Guru and the Swinging Blue Jeans were all duds.

We’ll leave all that and more for Chris Mayer to explain as he offers a new Rude pair trade below. [Following is an edited, condensed version of Part II of the speech Chris gave at this year's Agora Financial Investment Symposium in Vancouver. If you would like to hear the full conference, including all the specific plays divulged in the explosive breakout sessions, you can grab a copy of the audio set right here.] Enjoy…

—- Special Report Finally Uncovered —-

Hidden Government “100-F Documents” That Let You Predict Which Stocks Will Go up or Down

Discover how one small group of Americans uses government-mandated “100-F Documents” to easily predict gains or losses for any household-name stock in America…

On at least 58 different dates , each year…

And how you can now use these same secret documents to post returns as high as 400–600% over the weeks ahead. Details Here   

——————————————–

A Golden Age of Opportunity, Part II
By Chris Mayer

If you could have gone long and short in a democratic primary pair trade, a good long would have been Obama, and a short would be Hillary. If we apply the pair trade idea to movies, we would have gone long “Iron Man” and short the “Love Guru.” Iron man became one of the top 10 grossing movies and the Love Guru has been a flailing disappointment. Applied to music, if you go back to 1960s you would want to go long the Beatles and short the Swinging Blue Jeans.

In the markets too there are a lot of obvious long/short ideas. For example, the obvious long, certainly over the last year or two, has been energy. There have been lots of opportunities in energy, and a lot of these things are ideas that I recommend in my letters, Capital & Crisis and Mayer’s Special Situations.

For example we were in Canadian Natural about a year ago and we’ve doubled our money. Shell Gas was a big opportunity too. There has been a lot of success in that play, and we more than double our money there.

I say these things because the market has been lousy over the last 12 months. I wrote to my readers that it’s been like peeing on an electric field in that it gives you a lot of positive and immediate feedback. But even though the market in 2008 has been painful, there have been a lot of opportunities where we were able to double our money.

So where will the next opportunity be? I think there will still be good opportunity in energies, especially in some of the smaller exploration companies that have exciting projects. Some of the pipelines, for instance, look very interesting and there is tremendous opportunity offshore.

First, let’s look at the obvious short: financials. Bear Stearns, Lehman Brothers, and many others…that has been obvious short. Airlines have also been hammered along with anything too highly leveraged.

Charlie Monger likes to talk about this idea of always inverting. First, let us start with a question: What can you do to make a lot of money in the stock market? Charlie would say to invert the question and ask yourself instead, “If I wanted to loose as much money as possible, what would I do?” Then you simply answer that question…and don’t do it. He also likes to say, “Tell me where I’m going to die and I won’t go there.” It’s simple, sure, but it’s amazing the amount of insight you will get for using just that simple tool.

Lets go back to long and short ideas and look at some ideas going forward. One basic idea that I like that I’ve been thinking about is that the high cost of energy creates an opportunity for the “energy saver.” The idea here is that the traditional manufacture and machine company that help their customers use energy more efficiently, will be the beneficiary in a world of higher energy costs.

Lets think about it in the abstract. If you were to create a new machine that cut energy use 20% and you sell it, the first guy that has your machine he has a great advantage. Suddenly he can undercut his competition, and he is still more profitable then they are. So then what happens? His competitive all think we have to have that and so then everybody else has it and so that advantage is competed away. It’s great if you are the guy selling the machine, but not so great for the guy that has to buy it.

So I’ve been building a database in these kinds of companies. A specific example of a company I recommended is company called Astec Industries (NASDAQ:ASTE). I’d describe it as a collection of companies that make equipment for building infrastructure. For example, they make big rock crushers and screening equipment for the mining industry. They make asphalt factories and components and equipment for asphalt paving, road building and all other kinds of stuff. They also have an interesting system called the “double barrel green” system, which allows for making asphalt at a much lower temperatures. This in turn allows contractors to use more recycled materials and to eliminate smoke and smell. It also makes asphalt last longer, so it’s cheaper and better. But the best part is that it reduces fuel consumption up to 20%, because oil is a big cost component in making asphalt. So this company is selling all that it can make of that system and the environmentalist love it. The states are buying it, so that’s one example of one of these energy saving systems.

Another one they have is this drilling rig that allows companies to drill for oil and gas pockets with minimal disturbance in the surrounding area. About 40% of the oil of this country is past over right now because conventional rigs are unable to turn until they reach depths of 3,000-5,000 feet. Astec has a rig that can turn at depths as shallow as 300 feet and it allows you to drill horizontally out to a mile in any direction. So from one punch of whole on the ground, you can service a two-mile area.

This is huge for a lot of shell gas, where the gas there is very shallow. That’s exactly where they’re targeting it. Astec has double their capacity to sell these rigs and their selling as many as they can make. The bigger picture story is the infrastructure story and Astec benefit from the desperate need we have for roadwork in the US. We know that US infrastructure now is notoriously poor and you have probably seen the American civil engineer report card floating around where everything gets a C or a D or an F. The US Department of Transportation s deems that 160,000 miles of roads are “unacceptable.” They say 153,000 bridges are structurally deficient or obsolete and we know what happened when bridges collapse, like what we had in Minnesota.

So this can be a big issue next year for a couple of reasons. One is that the national highway trust fund goes broke next year. The next president has to deal with it one way or another. Democrats have made a big issue with infrastructure. Now, you can imagine thinking like a politician. (Well, maybe that’s saying a little much!) A politician would look at this and say \ with the weak economy and people out of work - a lot in the Midwest – let’s have a huge public works projects building and rebuilding roads. The case is very strong, too. We do have a real need here. It is not just a political thing.

Interestingly, from 1982 we’ve had a 20% increase in population, a 36% increase in the number of drivers, a 52% increase in vehicles and a 95% increase in a number of miles traveled. All the while, we only added 6% to our highway system.

What’s more, it’s a much bigger story abroad. When you look at the number of new highway miles built from now to about 2020 you see US and Europe represent a tiny little sliver on the overall chart. But look at China and India. They require 42,000 miles of highway and 25,000 miles of highway respectively. 67,000 miles of highway is a lot of asphalt. That’s a lot of machines and it’s going to have a big impact on global markets and Astec, who are selling to these markets. It is no surprise to learn that their first quarter sales were up 80% and their international sale grew 35%. Still, they
missed earnings estimates by a penny and their stock dropped 8%. That’s the kind of market we are in.

We also have a good owner operator here in Don Brock, who started the company and he owns 12% of the stock.

As for the short side, I just wanted to quickly mention one market that is sort of captive to high energy prices, and that is hotels. It is an industry I always keep an eye on, and it is starting to get very interesting out there. The main idea is that business confidence is a great leading indicator to gauge future revenue per room, which is a key metric for hotels. In 2002 we saw business confidence plunge, followed shortly after by revenue per room. Now we are again at the place where business confidence dropped at levels we haven’t seen since 2002, but as far as revenue per room is concerned, we still have a lot of room to fall. If the economy continues on its present trajectory, we will probably see travel budgets getting slashed.

One example, to give you a specific name, is Marriott International Inc. (NYSE:MAR). It is an interesting company to look at because Marriott has revised their earnings two times in the last 3 months…downward. Wall Street’s estimates, however, are still pretty aggressive. The Street has them increasing their earnings 15% by next year. I just don’t see how that is going to be possible.

So, we’ll see how this “long Astec, short Marriottt” idea turns out in a year or two from now.

The market is bound to be pretty rough going for a while, but we can’t give up the search. I think there will be plenty of interesting opportunities out there for us to consider.

[Joel's Note: To get the inside track on the opportunities Chris uncovers for his readers during the turbulent months ahead, we recommend checking out his investment service, Mayer’s Special Situations. Right now, Chris has identified a way you can turn every dollar into fifty using a little know program known to insiders as the “Chaffee Royalty Program.” Read On Here For Details

——————————————–

[Rude Endnote: Well be back tomorrow with more of your daily musings. Until then, perhaps you would like to weigh in with your opinion on where things are headed. Have commodities reached the end of their run-up? Or is this just the calm before the real chaos? Do you think the US economy is in recovery mode? Or are we about to really feel the pain of recession?

Send your comments and pithy scribes to the address below and, as always, keep a look out for your 5-Minute Forecast, en route from Baltimore to your inbox shortly.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com