Here is what you are facing... can you "win" this Tug of War ?
... I don't think so.
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Mutual Funds
Sep 15, 1999
Mutual Funds Counting On Oil Patch's Strength
By Len Hollie
A scant six months ago, crude oil prices were languishing near $10 per barrel and widespread gloom was forecast for all oil-related businesses. The word bankruptcy was often mentioned.
What a difference a rally can make.
Through Monday, the Oil Producing and Exporting Countries (OPE C) crude oil daily basket price ended at a whopping $22.38 per 42-gallon barrel. On March 9, it ended at $10.96 per barrel.
Crude oil futures prices on the New York Commodity Exchange (Comex) ended Tuesday near $24 per barrel, the highest level since February 1997.
What gives?
Charles Ober, portfolio manager of the $1.13 billion T. Rowe Price New Era fund (NASDAQ:PRNEX - news) , says crude oil prices declined due to an absence of negatives and some positive moves by OPEC. 'There had been a lack of demand from Asia and OPEC upped production,' says Ober. 'In addition, there was a lot of speculative trading in the futures market. But now, there are more positives. Asia is recovering and OPEC production has been taken out.'
The energy group includes major and independent oil refiners and marketers, natural gas suppliers and pipeline companies, and oil service companies that supply the rigs and drilling equipment for oil exploration.
'The energy sector is up over 100% in six months,' says Steven Lehman, portfolio manager of the $1.5 billion Federated Utility fund (NASDAQ:LBUTX) . Energy holdings, including natural gas, comprise 24% of the portfolio. 'Investors over-reacted when the stocks were on the downside and they may over-react now that prices are very high.'
Lehman believes the energy group is over-bought right now, particularly going into the September 22 OPEC meeting in Vienna. The expectation is that OPEC will honor its pledge to curb output through next spring.
'The energy group is due for a pull back,' says Lehman. 'We're seeing companies such as BJ Services (NYSE:BJS - news) that is up 138% year-to-date. Schlumberger (NYSE:SLB - news) is up 53%, and Kerr McGee (NYSE:KMG - news) up 60%.'
Lehman notes that natural gas is up more than 50% over a year ago due mainly to incremental demand from new power plants, which use natural gas for fuel almost exclusively.
Portfolio managers say the rapid price ascent in the energy group has caused them to trim their holdings.
'We're stepping back from the group because it is so over-bought,' says Lehman. 'We'll start taking profits and won't put any new money into the sector. We'll be taking money out of those companies that are up 50% when the S&P is only up 10%.'
Other managers agree.
'We're discriminating between the winners and the losers, and we're selling some of the losers and buying some stocks that we think still have room to rise,' says Ober, who declined to say which stocks he was buying and selling.
The energy sector comprises 43.5% of the fund's portfolio. 'We're looking to trim our stakes in companies that we believe are up well in advance of their fundamentals. But there are others, including some of the independent companies that were on the verge of bankruptcy. So you can justify the rise in those companies.'
In fact, looking further out, John Segner, portfolio manager of the $285 million Invesco Energy Fund (NASDAQ:FSTEX - news) , says crude oil prices are poised to remain strong.
'The International Energy Agency (IEA) is forecasting worldwide demand of 77 million barrels per day (bpd) next year, leaving only three million bpd overhang in the market,' notes Segner. 'Refineries are at full utilization now. Typically, about two million barrels are lost out of natural depletion, and we expect to lose three million barrels out of depletion next year. So, capacity utilization is tight and getting tighter, and capacity has not grown as fast as demand.'
Segner says he's also trimming his holdings.
'We're constantly trimming the portfolio,' he says. 'In February and March, we trimmed our exposure to Apache Corp. (NYSE:APA - news) because it had gotten too big. It more than doubled.'
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Times like these; is what "makes, or breaks traders".
You have major forces behind the money flows in the OSX here talking about locking in gains, not putting new money into the OSX etc. One huge, huge factor here; is that many energy funds, or funds with large energy holdings here; have near record returns for their funds year to date. With the unknown of Y2K, another Fed Rate Hike, OPEC, a correction in crude prices etc. all looming here; these fund managers are locking in these historic gains. This is not a good thing... Sure, there are plenty of savy fund managers who on an individual stock picking basis, still see value and will be strongly buying into this retrace; but this is a Big Money Tug of War, that the little guy can not easily win.
Not being arrogant here; but I plan on making 35 to 50% total portfolio returns here; directly into the face of this OSX Tug of War & potentially strong correction. I stepped aside much earlier on the OSX stocks as the disparity of fundamentals vs. valuations in small & mid cap E&P's to OSX stocks was an anomaly imho.
While I do not think the OSX correction will be nearly as dramatic as some Fund Managers think; actually I think it will be more of a mild retrace, a bit of a dead money transition, versus any major selloff. But, as a "trader" - who wants - "Dead Money" ? ...there are individual stories here who will run 20%, 30%, 50% during the next 60 days potentially; while the OSX Tug of War sorts itself out. Why fight a battle you can not win - let them (OSX Bulls & Bears) kill each other, then come back to cherry pick the bodies...
This is a time to be a stock picker; and to perhaps not have as broadly a diversified portfolio as one might normally have.It is also a time to look at the companies & stocks that are under the Institutional Radar Screens for the most part - the small caps. There are valuation anomalies here; as well as stocks that have dramatically rising fundamentals, or individual event driven stories; those are the stocks to own in times like these; and owning them here, will open up dramatic opportunity later when the OSX enters it's fundamental sweetspot of ownership & trading.
This is what it's all about... the contenders, get separated from the pretenders very quickly here...
Strap the helmets on tight; it's going to get real interesting here... and there will be lots of $ made, or lost very shortly. |
