LiveRocket Week 1 2007 Performance

THE MOOD OF THE MARKET
The theme is that the party is winding down, but hopefully without surprises. What is upsetting the guests?
1. Inflation keeping interest rates high or erodes corporate profits. A higher minimum wage is inflationary. But materials costs are falling. Corporate profits will remain strong, but not acclerating.
2. Housing market collapse will not be contained. This is two things, really. The first, that the hiring and spending related to construction building will stress out the economy. (It won't help, that's for sure.) The second part, that falling housing prices will stop the US consumer. The combination will definitely slow consumer spending.
The market wants a rate drop and the Fed isn't going to give it anytime soon. So the market will be jittery.
My concern is the liquidity in the market. The last cycle was 100% driven by cheap liquidity. The Housing market was able to take the liquidity to a new extreme by pushing mortgage rates really low by removing risk premiums (by unloading the mortgages onto Pension funds and other countries).
Can the Fed re-inflate the economy via lower rates? Definitely. But last time it required a year of 1% rates before the economy responded. And the response was a massive housing bubble and other asset bubbles (like gold).
I think that the Housing market won't return, no matter what. First, because it wiwll be too late to stop the building wave of defaults and foreclosures. Also because the same suckers won't return. And lsatly, because I think that rates can fall but mortgage rates won't fall as much. Defaults and bankrupting lending institutions will mean that mortgage companies will require some risk premium.

OIL
Goodbye oil sector? Did we stay in when we should have jumped out?
Based on the 15% crash in oil prices, you would think that oil is in oversupply. In fact, the opposite is true. This week's EIA report says that oil inventory is lower than same time last year:
*Crude Oil (Ex. SPR) is DOWN 1.2% from last year.
*Total Motor Gasoline is UP 0.7% from last year (though demand is growing).
* Kerosene-Type Jet Fuel is DOWN 6.5% from last year.
*Distillate Fuel Oil (cumulative) is DOWN 0.1% from last year.

And that is without a major cold front (the mid-west excepted). A cold front would have reduced inventories even further. I take this as a sign of growing overall demand. Put another way, the US economy is cooling but its total oil consumption has risen. Wait for the snowwstorm that is expected in New York next week, and watch oil reverse.
The combination of mild weather and a US economic slowdown make hedge fund traders assume supply will exceed demand. They are wrong, partly because they discount the surging Indian and Chinese oil demand, but that doesn't matter. Hedge funds drove the price >$73 and they can drive it down.
Whether oil goes up a few more dollars or down a few more, it isn't going higher than ~$60. And if oil doesn’t go up, what does that mean to oil equipment and services companies? It is hard to expect price acceleration, for one thing. At this time, however, our companies will continue to see growth versus last year because of the contracts they have signed that have locked in much higher prices.
Comparing theory and reality, I will point out that ESV posts actual up-to-date contract details. http://www.enscous.com/UploadFiles/File/12-15-06%208K%20Rig%20Status.pdf
In Jan/Feb, ESV's contract rates increase $790K per day. An average 40%+ increase in prices. And these are pure profit increases. ESV will be adding nearly $750M per quarter to its bottom line starting this quarter. Doesn't sound like a drop in oil prices is affecting its business yet.

OVERVIEW
The drop in our oil services/equipment stocks have hit our portfolio really hard. We are down 3.5% in just 3 weeks.

AMX – No real news. After hitting a new high of $46+, it crashed today -3%. Earnings release in early February, so we must wait.

ATW – Regained some ground. It has a forward PE of 5 and a current P/E of 16. This is not overpriced for a company growing earnings by 230%. The RSI is almost 30 – a sign of overselling.

CLB – A 20% drop from its recent high of $92. The degree of selling is obvious with CLB – the RSI is below 20. They have a 33 PE which will drop to 24 next month (if they hit their target).

CSH – Down a hefty 3% today. Earnings are the 25th. Wait and see.

CTSH – Getting hit by concerns about IT spending.

DIGE – Up a solid 4% today. The CDC is recommending HPV testing and DIGE has the only test. Kaiser HMO is doing the same, as are European Insurance companies. It’s just a matter of time.

ESV – Up 1.7% today. ESV was added to the S&P 500, which is nice. The COO sold 10,000 shares recently, for what it’s worth. Wachovia downgraded ESV because of natural gas concerns. This doesn’t matter to ESV because they have moved out of the Gulf of Mexico and Natural gas drilling is less than 33% of their business and shrinking.

HOLX – Down on no news.

ILMN – No real news. Interestingly, ILMN’s chief competitor, AFFX, dropped almost 7% this week.

INFY – Flat.

MDR – Down 12% this week. What’s fascinating here is that MDR is not tied to oil. Moreover, their operating costs will fall due to accelerating some asbestos related costs.

NUAN – After hitting 12.5 this week, it pulled back sharply.

OCN – After hitting $16 this week, OCN pulled back.

PCP – Lots of upgrades (BofA, Merril Lynch) and a new 52 week high. Credit Suisse raised the target price to $87. PCP is very tied to Boeing which continues to do well.

TIE – Flat. TIE can’t seem to get the market’s attention. They announced that their costs will be dropping dramatically due to their ability to increase titanium sponge production (it’s like a steel maker finding a cheaper source of iron ore). Harold Simmons continues to buy shares in his own company (another 50,000 this last week). TIE sold a stake in a company and earned $39M on a sale price of $75M. They signed a contract to sell 2,500 tons of titanium per year, that’s about $200M per year in sales. That alone is a $0.25 per share boost, but no change in stock price. The only negative is that oil drillers use titanium, so that may be pushing the price down.

TRID – What a volatile stock. After falling to $18 this week, it bounced back to $19.5. As flat panel prices drop, pressure on margins picks up. But as prices drop, volumes will pick up, offsetting margin pressure and ASP pressure with sales volume increases.

UCTT – No news, but stock looks solid.