It was quite tense over the past several weeks as it appeared that another debt crisis, this time in Europe, was about to explode. From the recovery highs of mid-January, major indices corrected 8.5% on average to the lows of early February. Tensions have abated and the market has turned up.
This 8.5% correction is healthy and has restored sentiment indicators to much less frothy levels when compared to the readings taken the first week of the New Year. The number of bulls and bears is much more balanced and a positive amount of skepticism has returned. Seasonality also remains intact—although weakness did materialize earlier than usual as February is typically the weak link in the Best Six Months.
Some quick math shows us that there is an ample supply of historically positive months in front of us and time for the market to climb to our annual forecast high of Dow 11,000-12,000. There is stout overhead resistance in the Dow 10,500-10,800 range that could easily be pushed through with additional solid earnings reports and further upbeat economic news.
Stock Portfolio Updates
In spite of the correction and the waning of small caps outperformance (January Effect), the stock portfolio gained 0.1% since last issue. Excluding the substantial cash position and the new position in NGAS, previous stock positions gained 1.1% compared to a 3% loss for the Russell 2000 over the same time period.
EF Johnson (EFJI – Mar 2009) Buy Current
With no positive developments to support it, EFJI has fallen below the buy limit and is attractive at current levels. Since September shares have been prone to wild swings as new contracts are signed and the resultant buzz fades. Current conditions are ripe for a repeat and the longer term outlook remains favorable with more stimulus funding in the pipeline.
Sauer-Danfoss (SHS – Mar 2009) Hold
Shares continue to trade at a substantial premium to the offer received by Danfoss A/S to take the company private and there has yet to be a public update to the status of the deal. Legal investigations are underway, that in all likelihood will be successful in delaying the deal until fourth quarter earnings are released on March 4. If results are stronger than expected then a sweeter deal could materialize. Industry stalwarts, such as Cat and Deere, had a good fourth quarter so it doesn’t seem like much of a stretch to believe that SHS could as well.
FuelCell Energy (FCEL – Feb 2009) Buy Current
President Obama is once again beating the clean energy drum. Although he frequently appears to be going in several directions when he speaks of clean coal, off shore drilling, nuclear energy and renewable sources all at the same time, the one certainty that does exist is his commitment to do something. FCEL is one of the oldest in the industry with well established ties to Washington and it is reasonable to assume that once a path is drawn (probably in pencil) that FCEL will be a beneficiary.
Equinox Minerals (EQN.T – Sept 2009) Buy Current
A $400 million loan facility has been secured on relatively favorable terms. Interest rates range from 4-4.75% over Libor and there are no hedging stipulations. This loan will improve operating flexibility and be used to repay existing senior and subordinated debt. An improving balance sheet, a steady ramp up of mining and process plant operations has the potential to lift EQN towards the top of the global copper mining companies list.
Etruscan Resources (EET.T – Sept 2009) Buy Current
Management is expecting 80,000 ounces of gold per year from its new Agbaou mine when it begins production in 2012 and they do not see the $106 million price tag as a hurdle. However, this good news is being offset by the potentially negative effects that a $10 million common share financing could have on share price. Any weakness can be used to establish or add to a position.
Global Med Technologies (GLOB – Nov 2009) Hold
GLOB has agreed to be purchased by Haemonetics for $60 million, which equates to $1.22 per common share. Once again investigations have been launched, but a 48.7% gain in a little over four months is decent. GLOB may be worth more, but we all know what happens to pigs on Wall Street, they get slaughtered. Hold for deal completion.
African Aura Mining (AUR.V – Nov 2009) Buy Dips
Assay results from the New Liberty Gold deposit drill program are out today and are positive for the first nine holes drilled. The complete report can be viewed on the company’s site: www.african-aura.com
NGAS Resources (NGAS – Feb 2010) Buy Current
On January 14, a position was added to the portfolio on the close at 1.85. Shares were pummeled by the correction, all the way down to 1.36, but have since recovered about half the decline. We are anticipating natural gas strength from the end of February to the beginning of June. NGAS is alluring at present levels.
Almanac Investor Stock Portfolio
ETF Portfolio Updates
Positions in the Banking, Real Estate, Oil and Natural Gas sectors were stopped out on February 4 and 5. Banking and Real Estate seasonal strength never materialized while holding shares of SPDR KBW Bank (KBW) and Vanguard REIT VIPERS (VNQ) for several months. Although both of these seasonalities have several months left we are not going to re-enter these trades.
When gains do not occur during favorable periods there are typically stronger forces at work. Banks are being dragged down by rising loan delinquencies due to high unemployment and exposure to potential sovereign debt defaults. Real Estate could be in for a difficult spring as the Fed will soon complete its $1.25 trillion mortgage-backed-securities purchase program. As they are nearly the entire market now, there is great uncertainty as to who the buyers will be. If mortgages dry up or rates rise sharply sales are likely to decline.
However, the Oil and Natural Gas seasonal trades are looking attractive. As you can see in the charts below of iShares S&P Global Energy (IXC), First Trust ISE-Revere Natural Gas (FCG) and SPDR Oil & Gas Equip & Service (XES) MACD has recently confirmed a buy signal and during the correction all issues held and rebounded from monthly pivot point support levels. Look to enter new positions on dips (likely caused by a rally in the dollar) to levels just above support and below the monthly pivot point.
iShares S&P Global Energy (IXC)
First Trust ISE-Revere Natural Gas (FCG)
SPDR Oil & Gas Equip & Service (XES)
Of the four alternative energy ETFs, only Market Vectors Nuclear Energy (NLR) is not down double digits. Remember, these are non-seasonal, long-term trades with exposure to global markets. They trade in the U.S., so delays and setbacks on energy policy here will have a big impact on price. But our sluggish action will not affect the decisions being made in countries such as China, India and Korea. TAN, FAN, NLR, PBW are attractive at current levels.
Almanac Investor ETF Portfolio
Disclosure Note: At press time, officers of the Hirsch Organization held a position in GMC.
