The Rude Awakening
Vancouver, Canada
Friday, July 28, 2006

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• When prudence doesn't pay and the idiots bank the
  bucks,
  
  
• A roving report for you from the Agora Financial
  Wealth Symposium in Vancouver,
  
  
• Mr. Fry's lost travel docsument, the Reserve doors
  about to close and more...

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Eric Fry, reporting from the shores of Laguna Beach...

Your New York editor should be issuing this dispatch from
British Columbia...not from Southern California. He should
be in Vancouver, absorbing the wisdom and insights of the
Agora Wealth Symposium...not in Laguna Beach, absorbing
life-threatening ultra-violet rays. He should also be in
Vancouver to dine on some of North America's finest
seafood, while sharing bottles of Muscadet with his
colleagues...not "scarfing" burritos at Wahoo's Fish Tacos,
all by himself.

A navigational error did not cause your editor to arrive
yesterday in this Pacific Coast town about 1,300 miles
south of Vancouver. Let's call it a mental error...

He lost his passport. No passport; no trip to Vancouver.

The passport probably lies somewhere amidst the U-haul
boxes, kitchen appliances, mattresses and G.I. Joe action
figures that fill the garage of your editor's new Laguna
home. When he packed up his belongings for the long trek
out West from New York, he remembered that he would need
his passport for the Vancouver trip. That's why he removed
the vital travel document from its usual location and
stashed it in a "safer" place. So safe is this safe place
that your editor, himself, cannot locate it.

An excess of caution, it seems, caused him to commit the
precise mistake he sought to avoid.

In the investment sphere, your editor has committed a
virtually identical error on numerous occasions. Like a
financial Oedipus Rex, he has sometimes tried so hard to
safeguard against a tragic result, that he has
inadvertently produced the exact result he sought to avoid.
He has sometimes taken actions to avoid a tragic outcome,
and by so doing, taken the precise actions required to
produce the tragic outcome he sought to avoid. For example,
he has sold out the lowly valued stock of a terrific
company – at a loss – simply because the stock was falling.

Often, the "dangerous" stocks he sold rebounded and climbed
to much higher levels. Your editor's motives were pure, and
his intentions were prudent. But that doesn't mean he made
the right decisions. Clearly, outcomes do not determine
prudence, or the lack thereof. Good investment decisions
can produce poor outcomes, just like bad decisions can
produce fortunate outcomes.

Often, selling losers is a great idea, especially when the
"losers" are reporting serious fundamental difficulties.
The adage, "Cut your losses; let your profits run," is not
merely on an old one, but a VERY prudent one. (And even if
those losers subsequently rebound). Even so, the lowly
valued stocks of excellent companies are better bought than
sold. In other words, the long-term investor usually wants
to buy into panic selling, rather than join the panic
himself.

[Joel's note: Fortunately for team Rude, one traveling
editor made it up here to keep an eye on proceedings for
you. A few of my fellow managing editors and I have been
taking notes furiously and compiling daily summaries for
you so you don't miss a beat. Check out the first two days
right here with more to be added shortly.

Day One – Greg Grillot of Whiskey & Gunpowder reports:

Day Two – Kate "Short Fuse" Incontrera of the Daily Reckoning reports

--- ***Final 3 Days*** ---

The Agora Financial Reserve Is Still Open...Just

The Agora Financial Reserve is open...join now and get all
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http://www.isecureonline.com/Reports/AFR/EAFRG716
 
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Lost in Laguna
By Eric J. Fry

Short-term, reactive trading is the domain – and the
downfall – of hedge fund managers. Long-term investors, who
enjoy the twin liberties of time and anonymity, can afford
to ignore short-term sell-offs...or  better still, buy into
them.

For the last several weeks, many panicky hedge fund
managers have been dumping stocks they should have been
buying. They have been dumping the stocks of oil refiners
that sell for six times earnings, or the stocks of oil
service companies that will double their earning over the
next two years.

Amidst the panic-selling, your editors dispatched several
Rude Awakening columns to urge the opposite course of
action. "Oil stocks are cheap," we bluntly declared in the
column of June 20th. "Skittish hedge funds are selling oil
stocks; intrepid individuals should be buying them...Large
cap oil stocks seem downright cheap – both in relation to
the prices of crude oil and gasoline, and in relation to
the rest of the stock market. For example, the S&P
Supercomposite Integrated Oil and Gas Index (which trades
on Bloomberg under the symbol: S15IOIL Index) trades for a
mere eight times annual earnings – or less than half the PE
ratio of the S&P 500."

Conveniently, the oil sector began rallying almost
immediately after the column appeared. Chevron and Tesoro,
two of the "cheap" stocks that we identified in the June
20th column have both rallied more than 17% since then.
Nothing gratifies quite so gratifyingly as instant
gratification...But now what? Should investors grab their
instant gains or let them ride?

The answer is both. A short-term trader should grab the
profit and never look back. A long-term investor should let
'em ride...and never look back. Even after the recent run-
up, most major oil stocks remain enticingly cheap. In fact,
some oil stocks actually became cheaper over the last few
weeks, even though their prices rose. CononcoPhillips
(NYSE: COP) provides a striking case-in-point.

At the start of the year, COP changed hands for $58.18, or
6.7 times its trailing twelve month (TTM) earnings of
$8.69. Today, the COP share price is 17% higher than it was
in January, but its PE ratio is LOWER, thanks to a run of
stellar earnings reports. After reporting a breathtaking
$3.09 a share for the second quarter, COP's TTM jumped to
$10.79...which means that the stock is selling for only 6.3
times TTM. For reasons that escape your editor, major oil
stocks like COP cannot seem to garner the double-digit PE
ratios they would seem to deserve.

Six times earnings is a low valuation...very, very low. It
is the sort of valuation that one normally finds only among
Wall Street's walking wounded. But Conoco exhibits all the
usual vital signs. Indeed, it appears to be an exemplary
financial specimen.

The company posted a 65% jump in profits during the second
quarter, thanks to high oil prices and lush refining
margins. Conoco received an average of $64.34 a barrel
during the quarter, while earning more than $16 on every
barrel of oil it refined. The price of crude is even higher
today, and refining margins are even wider. Yet, the COP
share price has been rising only modestly.

"At the moment," we observed in the June 20th column, "most
investors harbor an extreme and irrational fear of oil and
oil stocks. They are afraid of Chevron and Murphy Oil and
Tesoro and all the other lowly valued oil stocks. They fear
that these stocks, even though they sell for only eight
times earnings, and even though they are reaping the
benefits of high energy prices, might continue to slide
lower. Investors are simply afraid to believe what lies
right before their eyes."

Some of the fear has dissipated...but a large residual
distrust remains. Oil stock prices are climbing grudgingly,
despite robust earnings growth. The graph below tells the
tale: Even though the S&P Oil and Gas Index (the white
line) has been rising steadily for more than three years,
its PE ratio (the green bars) has been FALLING. That's
because earnings are rising even faster than the price of
the index itself.

COP will not be the only oil company to report a
"surprisingly" strong second quarter. In a world of $75 oil
and $16 refining spreads, Conoco's booming profitability is
hardly a surprise. The only surprising thing about COP is
that it still sells for 6 times earnings.

[Joel's Note: It's true that even the most well-
intentioned, prudent investors, will sometimes be caught
unawares in the cruel trading universe. But is there
anything you can do to mitigate the downside of this
unfortunate reality? Well, actually, there is. You can make
the same trades as someone who has not booked a single
loser all this year. Sound too good to be true? Have a look
at the track record on this fellow for yourself:

The Maniac Resource Trader
http://www.agora-inc.com/reports/RTA/ERTAFB23

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And the Markets...