It would seem that the January effect could be making a comeback (albeit only for this year). Essentially the January effect was/is an anomaly where by stocks experience a general increase in the month of, you guessed it, January. A commonplace explanation for this effect has been that investors ditch losers (stocks not people, don’t worry Palin you’re safe for now) in December to create a tax loss to help offset any gains. In recent years the January anomaly has become increasingly weaker, perhaps due to an increase in tax advantaged investment vehicles (such as a tax sheltered retirement plan) or perhaps due to the fact that investors are anticipating the effect well in advance.
But this year losses have been so catastrophic and I think it is very possible that the market did not correctly account for the year end tax shelter selling. After all there are 301 stocks with a market capitalization over 1 billion USD that are down over 50% this year!
“I hope we surprised you,” said OPEC President Chakib Khelil after he announced yesterday that OPEC would cut production another 2.2 million barrels per day in light of falling oil prices and rapidly rising inventories. NOPE!
With oil below $40 OPEC is desperate. But unfortunately for them, and fortunately for the rest of us, the 13 country free trade hating cartel does not control enough of the world’s black crack to fix prices (they are missing the big bad Russian bear). Oil prices today are ruled by shifts on the demand curve, not shifts in the supply curve and OPEC is powerless to control demand in the short term. Also, to the advantage of the West, the cartel has been traditionally plagued by oligarchic game theory-esce problems; that is, not all nations abide by their quotas.
Where does oil go from here? Anyone who “knows” for sure is probably just guessing. It all depends on the depth of the world recession, the flight to quality (appreciating US dollar), and how aggressively OPEC ends up cutting production. In my opinion we could easily see 30 dollar oil given the world outlook and recent inventory numbers.
But I think the oil boom and bust has a very important lesson for America. Now is the time to divest into technologies that will enable us to import less oil and take advantage of more sustainable energy sources such as wind and solar. Oil’s eventual ascent above 100 is inevitable in the long term given the rather stringent supply and unavoidable climb in demand due to population growth and raising standards of living. The smart money is in companies that can take advantage of pricey oil in the future.
My advice to the cartel, stop trying to manage supply, let oil prices fall as they may; cheap oil will stimulate the world economy and you guys will be able to make more money in the long run. My advice to America, cheap oil is not sustainable; we need to either start developing alternative fuel sources now or start preparing to fight China, Russia and India for the world’s dwindling supplies. In my opinion, oil is a stupid thing to go to war for given how possible it is to develop substitutes. We all saw what happened in Iraq; let’s use our brain and not our brawn in 09’.
I can’t feel bad about buying CBI at these prices (6.79 as I write this).
Overview
Chicago Bridge and Iron (CBI) is an engineering, procurement and construction (EPC) company with a global presence. The company has about 17 k employees and essentially services customers in the hydrocarbon, power, water, and mining sectors. I know what you are thinking - construction? global? And you want to buy this thing! But before you throw this EPC into the trash, take a look at the numbers.
The Numbers
When there is a global financial crisis (like now) I want to be in stocks that are not going to have to open up new lines of credit or do any type of debt financing. That is why I like CBI. The company has continually reduced its LTD-cap, from 35% in 2000, to 17% in March of 2008 to 5% today. Moreover, the company has got 242 million in cash (the market cap is only 647 million dollars at current prices). Furthermore, and most importantly, CBI has 1.4 billion dollars in unused bank lines. (see slide below from Q3 corporate report)
Also enticing me to buy CBI is the company’s impressive backlog- $6.2 billion of backlog with 704 million dollars of new backlog last quarter(see below). In addition to that, CBI is well positioned to take advantage of a move toward liquefied natural gas, wind power and nuclear energy.
Conclusion
CBI is really cheap right now - but it may stay that way for a while. I think this is a bargain name for anyone looking to invest, but not necessarily a great play for someone looking for a quick trade. The firm has caught some bad luck with its UK operations and will most likely not be profitable this year. But revenue is growing, and the company has tons of money it can call upon in the forms of letters of credit. In short, CBI is a really cheap way to play the future energy infrastructure market.
