Why are the financial markets a nervous wreck? One word: Oil.
Soaring oil prices are popping on every radar screen, dominating every conversation and scaring the living daylights out of investors.
With crude oil in the $45 US per barrel range (maybe even $50 by the time you read this), the stock market has become a hostage of oil and its runaway terror premium.
It doesn’t matter how many market strategists desperately churn out numbers to indicate the economy isn’t all that bad. As long as oil is dominating the psyche of the market, a fall rally for the broad markets now may be a longshot.
Investors just don’t have any compelling reasons to jump into this market with both feet. It’s hard to imagine how a market could find its legs as long as market watchers are mesmerized by the oil-price ticker and consumers whine about the price at the pumps.
Yet, the price of crude is only one of several troubling signs weighing on this market and placing an emphasis on capital preservation.
Market watchers are also losing sleep over a vulnerable U.S. dollar. The fact that the man generally regarded as the world’s greatest investor, Warren Buffett, is betting against the U.S. dollar to the tune of $19 billion in foreign currency investments, through his Berkshire Hathaway holding company, does not bode well for the world’s largest economy.
Buffett upped the ante on his foreign currency investment by a whopping $8 billion in the first half of this year.
Prospects of a weakening U.S. dollar would also be good for gold which, like the broad market, has been trading in a range and looking for direction.
Investors are also skittish over rising U.S. interest rates, terrorist threats, Middle East conflicts, decelerating earnings growth, disappointing job growth in the U.S. and uncertainty over the U.S. election in November.
Some market strategists believe stocks, without a catalyst to drive them, could be stuck in a trading range long term.
Tobias Levkovich, chief U.S. strategist at Citigroup Global Markets, believes the market may not find its legs for a couple of years and he predicts a slight decline for the S&P 500 index for the balance of this year.
“There’s simply not the yeast for the market to rise,” says Levkovich.
Gene Vollendorf of Calgary-based Savoy Capital Management also sees little direction for the market.
Vollendorf believes there are indications that earnings, particularly in the technology sector, “may not meet lofty expectations, although they should still exhibit strong year-over-year growth.”
Among Vollendorf’s top picks is a Calgary-based income trust, Wellco Energy Services Trust (WLL.UN-TSX), a bet on robust activity in the oilpatch.
The Gladiator LP hedge fund that Vollendorf manages boasts a two-year compound annual return of 41.9 per cent (through June 30). In that period, the TSX has an annual return of 9.4 per cent.
For Vollendorf’s top picks, see Pro’s 3 Stars, Page 24.
* HOME RUNS IN THE PATCH: Three stocks in the oilpatch have doubled already this year.
Veritas Energy Services (VER/VER.A-TSX) has been the pick of the crop, gaining 133 per cent year to date. Also up more than 100 per cent are Pebercan Inc. (PBC-TSX) and Aspen Group Services (ASR-TSX).
Canadian Natural Resources (CNQ-TSX) has been the big winner among the large caps with a 28.7-per-cent return year to date.
A word of caution: When the energy sector loses its sex appeal, whenever that may be, look out below.
* MARKET’S DIRTY WORD: One word sure to knock the daylights out of a stock is restatement.
When CP Ships (TEU-TSX) recently announced it was restating financials all the way back to 2002, following Nortel’s lead, the market reacted ruthlessly with a 22-per-cent plunge in a single day on 5.4 million shares.
Good to see investors finally digging in their heels on messy financials.
* NOTHING TO SNEEZE ABOUT: Shares of Calgary-based penny stock CV Technologies (CVQ-TSXV) recently got a boost from Don Cherry. When CV Technologies announced a partnership with the Canadian hockey icon, stock in the company rallied, breaking key resistance after trading quietly for several weeks.
Cherry has become a spokesman for CV Technologies’ lead product, Cold-fX, while CV Technologies becomes a financial supporter of Rose Cherry’s Home For Kids, a charity of Cherry’s late wife.
Shares of CV scored a five-bagger last year, running from 20 cents to $1. Cherry helped push the stock to $0.67 from $0.56 shortly after the news.
* SAGE WORDS: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
HOT STOCK: Orvana Minerals
ORV-TSX $1.05 Up 20 cents (+23.5%) on 626,100 shares (for week ending Aug. 13)
Sometimes, in the dog days of summer in a dog-eared gold market, investors need to be conked over the head with a sledgehammer to be awakened from their slumber. For months now, goldbugs have been shrugging off good gold news, but how could they ignore Orvana’s eye-popping second-quarter results? The Toronto miner boasted earnings of $1,957,325 (two cents per share) from its Bolivian gold operations, a far cry from the year-ago period when the company lost money.
COLD STOCK: TM Bioscience
TMC-TSX $1.24 Down 56 cents (-31.1%) on 2.5 million shares (for week ending Aug. 13)
Four years ago, TM was one of the biotech market darlings, trading at $16 as speculators embraced anyone with a press release with ‘DNA’ in it. Turns out DNA technology isn’t exactly a licence to print money as this Toronto company’s financials and incredible shrinking market cap would indicate. TM lost $3.4 million in the second quarter, forecast modest growth and postponed its target for profitability to late 2005. *Canadian stocks over $1
– Lawrence J. Peter, author of The Peter Principle.
(Gyle Konotopetz can be reached at gyle@businessedge.ca)
