Good Time Charlie's Got The Blues 

The lyrics to this song starts out with "Everybody's gone away.  

Said they're driving to LA. 

There's not a soul I know around.  Everybody's leaving town."

Well I kinda felt like that today as Ellen is on Holiday and it is real quiet here at the office.  We were very productive, but won't bore you with the details.  Let's just say my "To Do List" has not been this up to date since last year. 

Some of you asked if those pictures were actually my kids.  Yes, that was Kristin and Jack.  They will sue me if they ever actually read this drivel, but with any luck I will be dead and gone and no longer paying taxes. 

I volunteered to go home and check on the dogs at lunch today since Devin and Jack had a multitude of errands to run.  The dogs were Ok and the house seemed very normal almost pre-flood normal. 

Oh yeah I forgot to tell you I saved an old lady who fell in our pool over the weekend.  I let the old lady out and needed to run for the garage for a couple of tools (I know most of you know me and do not believe I was using tools this weekend, but it was true.).  When I came back there was this 100 year old plus lady swimming circles in our pool.  Of course I am talking about Lucy our 18 year old poodle.  She is blind, deaf and wears a diaper (A quality of life I look forward to.).  I jumped into the pool and saved the girl.  When I told Devin later she actually was upset with me for letting her alone in the backyard.  I tell ya I get no respect.  

We have seen WTI (West Texas Interday) crude oil break through $125 a share a while back and come back down to 93ish today.  (Brent crude followed the same tracking but runs about 10 more a barrel.)  We would not say this is a bottom for oil, but it makes checking out some of the players in the market a bit more interesting.

Let go drilling for some decent oil stocks. 

As we have mentioned before, on any given day we get about 40 e-mails, blogs, news pieces about the various sectors of the market.  We have a folder in our MS Outlook called BAGAKOAA where we store all our nuts until its time to write the blog in the evening.  As we speak there are about 112 e-mails in there.  In doing a Google Desktop search for oil and energy, we gleaned that the best, highly pimped oil stocks are Hess, CVX, BP, XOM and COP. 

Now if we are hitting a bottom of this correction (though we thinkest was have a wayest to goist-even I find that annoying.) we want to get back to a balanced portfolio.  We want to get back to a diversified account.  We will keep about 25% in bonds, 20% in gold and silver (mostly gold after the margin calls last month.)  The rest will be equities. 

In the equity sector, we want to balance the portfolio in 5 sectors.  Remember our mnemonics BOATS.  B=Banking, O=Oil and energy, A=Aerospace and Industrial, T=Techs and Internet, and S=Speculative and Shoes-retail.  So now we are thinking we need to start hunting for Oil Stocks.

We will be using a lot of criteria to choose one or two core oil stocks.  By core, we mean we will not be flipping this anytime soon (18-24 months), we will weight the dividend yield rather heavy, we will use the Buffet Evaluation number cruncher, we will tolerate up to 12% on the down side, and it will be about 5% of our equity portfolio (but we will ease into it in 20% increments).

Ok here we go.  I put in CVX into the Morningstar quote page.  It closed at $99.91 a share generating a forward P/E ratio of 7.8%.  It generates a 3.15% dividend yield.  Its price to book is below our sweet spot of 2.0 which we like.  But let's do quick comparison with the rest of the sector by clicking on the competitors tab.  There we have 25 global oil companies to compare CVX to. 

There are very few surprises on the list.  The valuations indicate we are on the right track with the list above Hess, CVX, BP, XOM and COP.  Using the Buffet Number Cruncher we see an annual 10 year return of between 9 and 17% with CVX.  Not too shabby.

Hess Oil HES has little dividend yield, a forward looking P/E of 8.5, and a P/B of 1.3.  It's balance sheet seems to be healthy and its fundamental are in line but not as nice as CVX.  Now when we crunch the number, HES comes out looking like a better value with 10 year annual returns of 13 to 21%.

BP is undervalued but we can't figure out where its best opportunities lie.  Are they Russia, Iran, China?  They don't seem to know either.  Let's just choose to take a geopolitical pass on this one.

XOM throws a decent 2.38% dividend yield.  The current price of $79.71 creates a P/B of 2.6 and a P/E of 9.1.  Its price to book and price to sales as compared to CVX is a little rich, other than that fundamentals look nice.  Now when you crunch the numbers, the strong ROE drives the 10 year sustainable returns quite high.  All the way to 26.1%.  If you use the historical basis to look forward with earnings the 10 year annual return is 2.9%.  If you have been reading this any length of time you know we like companies with a strong ROE as it is a good indicator of how well management manages the resources they have at their disposal. 

Lastly we have COP and I know a couple of you have COP.  The dividend yield based on today's closing is a healthy 3.67%.  The forward looking P/E is 8.3 and the P/B is 1.5.  Its revenue history and margins leave a lot to be desired.  When we run the numbers, we go to negative territory.  The 10 year return is between a minus 4 and a minus 8%.  We had to dig, but that is a reflection of a pitiful year in 2008 when they lost 11.06 a share in earnings.

After checking a few things in the SEC pages and some news clippings, we like XOM followed by HES followed by CVX.  We are looking at long positions (Not options although there a couple deep in the money that look sexy.) with the following entry prices:  XOM@78.50 and HES@68.25 and CVX@97.50.  We will take the first two we get.  If oil comes down agin tomorrow we could catch all three which would make too heavy in that sector.  PLEASE do your homework.  These are great companies, but are at the whim of OPEC, weather, and geopolitical issues.  So becareful before you put that "Tiger In Your Tank". 

Oh yeah as we say say know where to get in and where to get out.  We will stop XOM@70.00 and HES@61.50 and CVX@78.00.  Our guesses for year end are XOM@75 and HES@70 and CVX@86.00.

What Is A Resistance Point

One of our regular readers suggested we take a look at what we mean when we say a support level or resistance level and how they are determined.  A support level is a price level the stock appears to have a hard time falling through based upon historical pricing.  The resistance level is just the opposite.  It is a price level the stock appears to have trouble breaking through to a higher level. 

Our reader was specifically asking about AAPL as one of the talking heads out there said AAPL could be headed towards is support level of $270 a share.  I looked at the chart and do not see a support level at $270.00.  Now I am not a chartists and I do not know what parameters this person is choosing to find their chart patterns. 

Here was my response to our reader:

"Here is a quickie on AAPL

I put in the 270 resistance line even though I don't see it.  I use a 6 month and one year daily chart as well as a one year weekly chart when I look for patterns.  On this one year daily, I don't see a 270 resistance so "they" are using another chart or an algorithm I just don't know.  I use a Bollinger Band with 20 data points and 2 standard deviations aka BB 20 2 2.  This helps me visualize the range the stock is trading in.  Look at August through September you can see how the price helped form the upper end of the Bollinger Band (From about 242-292).  Then in February (Remember our current soft patch began on February 19) you can see where the price left the upper end of the Bollinger and drifted to its 50 day average then back up but then back down through its 50 day and the bottom of the Bollinger Bands.  That is when we got most people out.  I got back in in late April but then dropped out again.  Now the stock is below its 50, 100, 200 and the bottom end of the Bollinger.  More importantly it fell through a 322 ish support level (the top black line) and could be headed to what we see as the next support line of 294ish.  Note the 8 days of above average volume on the down side out of the last ten trading days.  That is called inertia in the wrong direction.

I also look at 3 month options to get a feel where the deep big money thinks the stock will be.  From that angle the September price is being set about $320.  In fact the September 250 call can be bought for about $68 a contract.  It could be an interesting play is you have about $7,000 to wager.  That would be a deep in the money call, but fairly attractive.  Mmmmm?"

Salve Lucrum