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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: ild who wrote (26838)	2/21/2005 10:41:02 AM
From: Wyätt Gwyön	Read Replies (2) of 110194

ild, i don't think Wulff is making any kind of timing call in his latest report--i think he just decided to abandon his three-tier buy recommendation system and that's what he means by "Just Buy". my impression is that Wulff is presenting a fundamentally value-driven analysis, which is just fine by me. having said that, if you look at his target prices for the stocks with a Buy reco, nearly all of them are significantly below his target prices. it is worth noting a couple points here: * his target prices are based on an assumption of long-term $40 WTI * once his target prices are reached, he is assuming a forward return of 11% per year at $40 WTI, so reaching a target is not tantamount to "Sell" in light of the above, i would note the following: * $40 WTI is a) less than the current price and the 6yr futures strip average price of $42; but b) more than what most (and perhaps all) sell-side equity analysts are assuming * in his Barron's interview a couple months ago, Wulff said the equities were discounting $31 oil. they're up maybe 15% since that time, so maybe they're discounting $35 oil now. obviously one interpretation of the runup is a recognition by the equity market that prices significantly north of $30 are perhaps here to stay. * my personal feeling is that Wulff is being rather conservative with a $40 WTI assumption. although that is probably rational from a marketing perspective so that investment bankers and other institutional clients take him seriously, the fact that his WTI assumption (and by extension his target prices) is LESS than the current market price means that it includes no optionality premium for potentially MUCH higher energy prices. * also, it does not include an optionality premium for potential takeover targets below the megacap level. * nor does he include an optionality premium that could result from institutions deciding to give something approaching a market weighting to energy-sector profits (energy makes up 8% of cap-weighted SPX today vs 30% in 1980) * in consideration of the above, personally i still think the equities have a lot of upside potential, notwithstanding near-term turbulence that could result from the recent steep runup. so, i am probably going to stay put and take my lumps on a correction.

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