The Rude Awakening
Wall Street, New York
Wednesday, August 30, 2006 ------------------------- - The energy complex gets a little more complex,
- Examining the phenomena of divergence and how to
invest wisely,
- What you had to say about the crumbling
infrastructure and plenty more...
------------------------- Eric Fry, reporting from Laguna Beach, CA... We're not sure what it means - or if it means anything at
all - but we are intrigued by the fact that oil is falling
a lot and oil stocks aren't. It's true that the Energy
Select ETF (XLE) of oil stocks has slipped 3% from its
early August highs, but it hasn't slipped lately. 
In fact, over the last two weeks, XLE has managed to gain a
little ground, even though crude oil has dropped nearly 5%.
Technical traders refer to such divergences
as...well...divergences. The problem is that one never
knows exactly which asset is diverging from the other. If, for example, one assumes that crude oil is diverging
from oil stocks, a technician would label this phenomenon a
"bearish" divergence and would expect oil stocks to soon
begin falling, just like crude oil. If, however, one
assumes that oil stocks are diverging from crude oil, a
technician would label this phenomenon a "bullish"
divergence and would expect oil prices to recover. We favor the latter scenario, both because we remain long-
term bulls on crude oil and because the short-term investor
sentiment towards the energy sector has become excessively
negative. We would not advise pawning your car to buy oil stocks, but
pawning your etch-a sketch might be a reasonable idea.
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By Eric J. Fry A few days back, we asked you, the Rude Awakening faithful,
to identify your favorite infrastructure stocks. As usual,
you responded with several excellent ideas. An American
company called Insituform Technologies garnered the most
nominations. But a couple of Australian companies also picked up an
endorsement or two...from Aussies, of course. "Dear Joel," a fellow Aussie writes, "In response to your
request for nominations of a 'best infrastructure stock'
I'll nominate an Australian company! With yourself
conducting this search, there is some hope that the Rude
Awakening will lift its sights beyond US companies. "Firstly," the Aussie reader continues, "I like Babcock &
Brown Infrastructure. (BBI.ASX). The company recently
announced its report for the 2005-06 financial year. In the
12 months it has lifted its market cap from $A 1.6 billion
to over $A 2.3 billion and has distributed 13.25 cents a
share to its shareholders (that is a yield of 8.3% on its
30 June 2006 closing price.) "BBI is a genuinely global company, owning infrastructure
not only in Australia but also in the USA, Great Britain,
Spain, Portugal, France, Germany and New Zealand." Next up, Rude reader, Patrick Fremont of Norwalk, Ct.
suggests, "You may consider URS Corporation. Over one-half
of its work is related to local, state, and federal
infrastructure spending. Entering into a slowing economy,
the spending from government/municipal agencies is more
reliable than spending in the private sector, whose cash
flows may be impacted by declining economic growth. In
addition, one time-honored way for the federal government
to stimulate the economy is through public works (fiscal
policy). I like the added stability of significant
government derived business." Mr. Fremont's recommendation carried the following
disclosure: "We may own shares now or in the future in URS
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Automotive King and you let 2000% gains get away! http://www.isecureonline.com/Reports/VPI/EVPIG909 --------------------------- "What about CVRD (RIO/, the giant Brazilian mining
company?" another reader asks. "They are the largest
producer of iron ore in the world and have negotiated
higher prices on their product annually for several years.
They are also looking to buy Inco, which would make them
the largest nickel producer too. We're going to need a lot
of steel for all this reconstruction and I think that CVRD
will be on the better side of the supply-demand equation." "Dear Joel, thanks for the free newsletter," writes Rude
reader Michael Favorite. "My infrastructure pick is Watts Water (WTS). I believe
that it is probably expensive at 16 times earnings but
growth is good and a stop at 27-28 makes sense, the
dividend is a bit punk at 1%. They are doing a fair amount
of business in China (which probably sounds sexier than it
is), has products that are used to get water from there to
here and could become rather exciting in the right
investment environment (Lord knows when that might be). Returning to the Australian theme, another Rude reader
writes, "My favorites in the Infrastructure segment of the
market are Macquarie Infrastructure Trust (NYSE: MIC), and
Macquarie Global Infrastructure Total Return (NYSE: MGU);
Both of these "stocks" provide dividends in the 6%+ range
and are also performing well on a growth pattern as well.
They both have a wide range of solid infrastructure stocks
in their respective portfolio and so can be considered
quite solid as investments." Stay tuned for feature installments of the Group Research
Project!
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