Every week at the Wall Street Transcript, the Portfolio Managers we speak tell us what possible indicators are showing where the market is headed. For some it is economic indicators, like the behavior of Fed or the price of oil. For Thomas Au of R.W. Wentworth & Co., however, the current market climate can be observed through the lens of cultural signifiers. For example, Britney Spears’ hemline:
Mr. Au: You may have heard of the so-called hemline indicator? The hemline indicator started in the 1920s and they were talking about the length of ladies skirts. The hemlines rose also in 1920s in tandem with the stock market, until they reached a certain point, then they fell basically all through the 1930s, which also correlated with the indices.
Actually, this past year, we saw a hemline indicator that suggested that at least the US stock market is again at its peak. I’m referring to the fact that Britney Spears’ hemline rose to the point where, to put it delicately, her dress left nothing to imagination.
What happens is when morals are loose, that’s usually a sign that money is loose and money that was maximally loose about a year ago is now being tightened, the Fed rate cuts notwithstanding. The tightening is being seen in the weakening dollar and also in the tighter lending standards by banks vis-a-vis subprime and mortgage loans generally.
It’s even being seen in the cultural sense in the fact that Britney Spears lost custody of her kids to the father, who was seen as a better parent. This is an unusual event for a mother, but it’s basically saying that the American public has had enough.
For the full interview with Mr. Au, including his complete take on the current market climate and stock picks, click here.
Our other special focus this week is on the Leisure space. We spoke with Steven Wieczynski of Niclaus & Company, who talked a little bit about his speciality in the leisure sector: cruises. He talked about the combination of rising oil prices and a boredom factor with the Carribean have made it a tough time for cruises.
For our full interview with Mr. Wieczynski, including a complete sector overview and stock picks, click here.
Lodging has had a volatile year this year- a strong first half followed by a hard second half. In our special focus on lodging this week, we spoke with analyst William Truelove who talked to us a little bit about where the lodging sector stands today.
TWST: From a market perspective, Will, has the group done what you thought it would?
Mr. Truelove: The first half of the year was fantastic, but that market was very conducive to M&A. It was almost a discussion of how many hotel companies would be left standing in the public marketplace. Since the summertime and the credit market meltdown, you have had a complete retraction in the names. Beyond that, I think that the market does also perceive that not only are the takeout premiums gone, but, as Rod mentioned, we are also in somewhat of a decelerating growth environment. It is still good growth but just not accelerating as fast. Concerns are about earnings going forward. When you combine those two, the market action has been far different from what we anticipated. While I would say the business environment has fallen in line with what we thought, I would also say that we completely missed this year’s market reaction.
For the full roundtable forum on the Lodging sector, including a complete sector outlook and stock picks, click here.
Our other special focus this week is on Natural Gas. Despite the political and fear issues present in today’s market, the price of natural gas seems to be staying a lot more stable than that of oil. Analyst Fadel Gheit of Oppenheimer & Co. Inc. says why:
TWST: Why haven’t we seen the same reaction in gas prices, given all the political and fear issues that have boosted oil prices?
Mr. Gheit: Natural gas is more of a regional commodity; oil is more global. Any international crisis will have an impact on oil prices, but obviously would not have the same impact on natural gas prices. The disparity between gas prices from different regions is magnified significantly higher than the disparity in oil prices. For example, the gas price in Argentina is between $1 and $1.50; the gas prices in the US and Europe are between $6 and $7. The gas price in Equatorial Guinea or West Africa in general or in the Middle East could be less than $0.50 or even lower… It is basically infrastructure and the lack of transportation that makes gas more regional. The prices are determined by supply and demand based on a regional, not on a global basis.
For the full interview with Mr. Gheit, including a complete overview of the market climate for natural gas and stock picks, click here.
One of our special focuses for this week is on Oil & Gas exploration and production. We sat down with a roundtable of analysts who cover this space, and talked about the future of oil- and where the next big find will be.
For the full roundtable discussion, including a complete overview of the sector and stock picks, click here.
We spoke this week with Fred Astman and Scott Hood, chairman and president, respectively, of First Wilshire Securities. They spoke to us about a number of companies that First Wilshire invests in, but the one that really got them going was the company IMAX (IMAX), who make the enormous movie screens we all know and love.
For the full interview with Mr. Astman and Mr. Hood, including an in depth look at their investment strategy and more stock picks, click here.
As we said in our earlier post, the Royalty Trust space has been in trouble this past year. However, companies are trying to do all they can to adjust to this turbulent climate. Gordon Tait, analyst at BMO Capital Markets, has more on what companies are trying to do:
TWST: Given that difficult environment, what have the companies been doing to adjust to it?Mr. Tait: They have been doing a couple of things. As gas prices fall, it impacts their cash flows. In order to keep their balance sheets intact, without stretching them too far, they have to bring their distribution levels down to reflect the weaker operating environment. A lot of them have cut their distributions to prevent them from getting too onerous. They don’t want to keep their distributions artificially high when their cash flow is reduced or falls. When you are buying a royalty trust, you are becoming an owner of the cash flow. Like any other owner, you enjoy the good times and you enjoy rising cash distributions. You get strong cash flows and rising distributions, but you have to take the down side. When cash flows fall because commodity prices fall, you have to cut back on the amount of cash you are paying out.
For the full Royalty Trust issue, including interviews with 13 different CEOs and stock picks, click here.
While sometimes not in the habit of advising individual investors, the money managers we speak to weekly do occasionally give us here at TWST a few words of wisdom about the current investment environment:
For our full investment strategies report, complete with more market advice and stock picks, click here.
We talked this week with Michael Fox, JPMorgan’s Senior Equity Research Anaylst for the business services sector. He covers the commerical real estate services space, and told a little about this mostly fragmented sector. He did have high praise for a few companies, and one of those was CB Richard Ellis (CBG).
TWST: Give us a quick overview of why you like CB Richard Ellis. What’s the story? Where are their growth opportunities?
Mr. Fox: CB Richard Ellis has built a well-diversified platform largely from the brokerage business and about two-thirds of its revenues or slightly more than that come from the Americas. I think the biggest opportunities for the company are in Europe and Asia, where it has very strong footprints and it should continue to gain market share. The other major opportunity is growing its global outsourcing business that it bolstered with the Trammell Crow acquisition. It now has relationships with 85% of the Fortune 100. This is a great opportunity because Trammell Crow built those relationships in the United States and now with the global platform of the combined company, these relationships can grow on a global basis. That’s going to be a tremendous revenue growth opportunity over the next few years. In addition, the revenue from outsourcing is much more stable than the transactions business. It’s the type of business that once you win it, you usually have it for a long time and it’s not cyclical. It also leads to a lot of transactions business.
For the full interview with Mr. Fox- including a complete overview of the commerical real estate services sector, and more stock picks, click here.
With the recent suprime scare, there has been quite a bit of a downturn recently on the residential side of building materials. However, an anaylst we spoke to this week feels that the downturn may still have lower to go, and may extend into commerical building materials as well.
TWST: What’s the evidence that we’re beginning to see a commercial downturn?
Mr. MacGregor: We do a lot of surveying of privately owned construction materials companies across the United States. We’re hearing of slowing orders, some programs being deferred. Some of this is to be expected. If you look at the historical data, commercial construction spending, certainly in retail, tends to lag residential construction by 12 to 18 months. Intuitively it makes sense. You build a number of homes in a new area, after which you need to build strip malls and other commercial infrastructure that would accompany that type of residential buildout. If you are not building houses for a period of 12 to 18 months, the construction of commercial retail really begins to slow down rather dramatically; that is where we are now. As far as office space is concerned, that generally tends to be a little more associated with slowing in the economy. We’re seeing more evidence of that on the coasts than we are in the middle of the country, but my guess is that it won’t be very long before we see this trend spread to the central regions.
For the full building materials issue, with a complete overview of the sector and stock picks, click here.
