Thursday, April 29, 2010

An Opportunity in the Making?

Any hard asset investor can hardly call themselves such if they don't have at least one oil stock in their portfolio (this, despite the fact it's gooey, slippery, and definitely not hard).  I recommended some oil companies in late 2008 and early 2009 which were extremely profitable.

However I am looking at another potential setup in the fairly near future (anywhere from a few weeks to several months).  Something to keep in mind, anyway.

The sentiment towards oil itself has been gaining strength, with speculators holding a huge number of open long contracts the past several months - the past few weeks have been holding steady at well over 110,000 open long contracts.

While looking at only the number of open contracts aside from anything else is not a great idea for trading oil, it is a nice piece of data to show where overall sentiment is sitting.  As of right now, it's pretty elevated - I'm not saying we won't see another surge up in oil, but upside in the immediate future should be fairly limited.

The particular stock I'm looking at isn't an obscure name by any means (they are the biggest in their industry), and they have been tossed around for years now by major publications.  That being said, most of these guys were recommending the stock before it took a 75% hair cut along with the market.  It is still under 50% of what it was at the oil peak in 2008.

The company is on the higher end of fairly-valued right now, but fairly valued nonetheless.  As of today, it trades at under 9x Price/Earnings, 1.33 Times its Book Value, and 2.36 x Gross Revenue.

Cash-flow is fairly strong, with a 4x net interest coverage on all outstanding debt from free cash.  The company has retired a large chunk of its debt over the past 2 years (over $5 Billion), and seen 2 years of revenues above $10 Billion (from $2.8B, $3.9B, and $6.4B in 2005, 2006, and 2007, respectively.).

All in all, revenues are up, the cash position is strong, assets are generating tons of cash, and demand for the product they offer is growing steadily with growth potential reaching far out into the future.

The company is one I'm sure you've heard of before.  Transocean (RIG on the NYSE), headquartered in Switzerland (for tax purposes), and with the largest fleet of underwater drilling ships on the planet. 

This is not an easily entered industry - It is extremely capital-intensive ($500 + Million to build a drilling ship), which offers an excellent natural barrier to entry against a wave of new entrants/competitors.  Furthermore, the type of clients that Transocean deals with aren't fly-by-nighters or small-time companies where taking their business may be a bet on receiving payment.  Transocean's customers include Chevron, Exxon, and many of the other big players exploring and tapping underwater reserves - Most of these guys have stockpiled tons of cash over the years and are hungry for new projects to keep revenues up as older project output dwindles.

From the technical side, it doesn't look like the stock has a high-potential for further upside in the immediate future.  As far as sentiment tops go, the recent major push by the Obama administration encouraging underwater drilling is a re-enforcing signal of an interim top in positive psychology.  As sad as it is to say, the oil spill in the gulf of Mexico is as fitting an occurrence as could be in the wake of that sentiment (remember, the State is always a late-comer).

This should provide a mid-term negative backdrop for the stock to settle into a more opportune price-level and make a great addition to a long-term core portfolio.

I'll keep you updated on this pick and let you know when I'm going to scoop up some shares.  At this point, the stock looks to be building for a major move with downside potential being far greater.  That being said, key resistance is at $93.25/share, and a daily close above that mark would indicate a major bullish breakout potential in the immediate future.

Have a great weekend everybody!  As always, if you have any questions or comments you'd like to send me directly instead of posting on the blog, I can be reached at


Wednesday, April 28, 2010

A Minor Top Is Nigh

The Greek "crisis" continues to unfold almost uniformly to our expectations, and its ramifications for the EU as a whole are certainly not painting a rosy picture for the coming decades.

The first order of business is to deal with the still-open STD short.  I picked this bank back in December because it was a mirror of the overall psychology toward the finances of Greece itself, being a mammoth-sized financial institution (relative to Greece's overall economy).  Many readers sent emails and posted comments doubting this choice, and even the severity of the debt crisis that is unfolding.

This debt crisis is not a Greek, PIGS, or Euro problems alone - the entire world is going to soon enter another deflationary cycle after this reflationary pause is complete.  I don't feel there is much time left ticking on the reflation clock.  The market has ridden to exceptional highs, over 7.75% higher than our ideal retracement target of 1132 on the S&P500 (at its recent highest peak).  A very respectable opportunity to close out open long positions is at hand, and I suggest taking advantage of it with at least a large chunk of the core funds you don't want to put at unnecessary risk.

Today's break of recent key support opens the path for another sizable drop in Greek bank stocks, and further tensions in the EU

As for the broad markets as a whole, they are far overdue for at least a minor correction to shake off the extremes in positive sentiment we are seeing today and pull some more chasers into another small leg up.

An ideal retracement point on the Dow is around 10,800 before another leg up.  That being said, most are expecting at least another leg up, so there is a chance that a more major top is in the could erase 1/3 or more of the rally since March '09.

Speaking of Sentiment Extremes:

The credit contraction continues as M3's negative move accelerates even further.

As for the broad markets themselves, some small nonconfirmations of momentum and price could be indicating that larger move down.  Coupled with sentiment levels this is not a healthy stock market to be long in for the short term.  Once a small correction has occurred we will re-assess the situation and see where we can expect another minor leg up or more downside.  If the next day brings an immediate push down, the case for further downside is strengthened as this weeks bar would be a reversal bar (

The precious metals run-up seems to be drawing to an end.  The HUI hit the Fibonacci .618 retracement of the first larger down-move from December 2009.  It could not maintain a close above, and turned down in the last hour.   The initial ideal target has been met to mark the correction complete, however one final push up and a new high in 4 days would mark it complete in price target range and time as well.

One further piece of evidence that this move is corrective and not part of a larger trend up is that the slope of the move up is only 54% as strong as the down-move that preceded it.  The impulsive move ahead still seems to be more probably to the downside, and a significant one at that.

The non-confirmation between gold and silver should rectify itself with silver pushing to another final high.  The minimum corrective target at this point is $18.18 with further potential up to $19.00 and slightly above.  If this scenario plays out silver should immediately reverse and rapidly approach a new low for the move below $14.50 / oz

Have a great Thursday and Friday, and enjoy your weekend!

Derek Blain

P.S. Comments or Questions?  Email me at