Weekly Market Commentary
McIntyre, Freedman & Flynn
By Tom McIntyre
July 18, 2011
Last week saw the stock market fall for the usual reasons of government incompetence here and especially in Europe. This was offset by merger news in the energy patch, which dramatically helped our holdings there. Thus I remind everyone that the stock market ultimately prices in fundamentals and not sound bites from either politicians or billionaires who cannot find an interview they don’t want to give.
As the charts above illustrate, last week saw the Dow Jones Industrial Average drop 1.4% while the NASDAQ Composite, despite stellar earnings from Google, dropped by 2.5% over the outlook for future economic growth.
The Markets & Economy
I can tell you that it has become far past tedious watching the President negotiate (if presenting no plan is negotiating) with his counterparts in the Republican Party. One would think that watching many of our European friends consume themselves with how to avoid a government default would give us a hint with our own budget issues.
Accordingly, while the increase to the debt limit will occur perhaps in time for August 2, the real question is will there be any attempt to rein in federal spending, which is running at around 25 to 26 percent of GDP. This level has not been seen before in peacetime and certainly cannot be maintained.
It is sad to see both the confrontational tone and threats to the elderly over such items as social security checks (unfounded because as we all know, Social Security is not funded with general government receipts - but through our payroll and employer withholdings.) What happened then to the money? President Obama confirmed the bad news last week. All of the so called social security money for all of the previous years has been lent to the United States government. Whatever happened to Vice President Al Gore’s lock box?
Americans understand that something must be done, and now is as good a time to start as any, but the political reality is that nothing can be done until the results of the 2012 elections. Either we will go the way of the socialist nations of Europe or we will take back control of our destiny.
In the meantime, the economy continues to downshift as evidenced by multiple lowering of economic forecasts since last week. How a slower growing economy will produce a dramatically lower unemployment rate or an increase in government receipts is something that only Warren Buffet can answer. I can tell you though, that wishing something to come true for political reasons is not enough, and it will not be this time either. Look for the employment numbers to remain disappointing for the foreseeable future and for the President to continue to offer more of the same “borrow and spend policies” to prop things up until after the election.
What to Expect This Week
The economic data is light, with some reports later in the week on leading economic indicators, and some regional manufacturing reports. All of this will be overwhelmed by the emergency European Union meeting on Thursday (do they ever have a meeting which is not an emergency affair?) and, of course, the direction in which our debt talks go this week. It is safe to say when politics is the lead story, the stock market will have trouble gaining traction.
Finally, our look at the weekly report (see chart below) from the Economic Cycle Research Institute confirms that the slowdown is coming as the year over year growth rate is at plus 1.7%, but with no signs of turning up anytime soon.
The second half uptick in GDP growth is just a fantasy in the imagination of the few remaining White House economists.
NATURAL GAS STOCKS…
PDC EPD SWN
Natural gas stocks were in the news last week following BHP Billiton’s surprising takeover of Petrohawk Energy for $12.1 billion. BHP is paying a 65 percent premium over where Petrohawk was trading before the deal was announced. This is an enormous premium, and the way that Wall Street is going to value natural gas related stock is fundamentally changing.
We have been touting the benefits of natural gas for the last couple of years and now our portfolios are reaping the rewards. The three most notable natural gas related stocks that we own are Southwestern Energy, Enterprise Products and Pioneer Drilling. All three of the stocks traded higher last week. There was also some company-specific news on Enterprise and Pioneer that we would like to discuss.
Pioneer Drilling completed a 6-million-share secondary offering last week, pricing it at $14.50. Surprisingly the shares rallied sharply on Friday and the offering turned out to be very successful as the stock traded over $15.50. This is unusual trading for a stock having recently finished an offering and should bode well for the near-term trading of the stock. Look for the Company to use the proceeds to expand their fleet of oil and natural gas rigs.
Enterprise Products increased its quarterly cash distribution to $0.605, from $0.575 last week. This is the 37th distribution increase since EPD’s initial public offering in 1998 and the 28th consecutive quarterly increase. We love the consistent cash flows that Enterprise is generating in this market, and view this stock as a core holding for years to come.
We expect the positive news flow to continue in the natural gas industry and believe our clients will benefit from the exposure. We believe this sector is still fundamentally undervalued, and natural gas will become a much bigger player in our country’s energy policy going forward. We are buyers of Pioneer Drilling, Southwestern and Enterprise on any weakness.
PDC Three-Month Chart EPD Three-Month Chart SWN Three-MonthChart
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