BlastInvest
Blast Investor Real-time Plus           by Henry Lu

Big Picture on Stock Market Selloff

04/15/2005


Dow suffered 191 points loss today. NASDAQ dropped almost 2% today. US stock market has been terrible over past few weeks.

BIRTP model portfolio performance has been tough as well with -2.40% loss year to date in 2005. Oil stock CHK WLL corrected hard in sector-wide weakness. WLL suffered sharp price drop from its production short fall (Note: Blog thread on WLL [hidden link] ).   GKIS and CEI all dipped below BIRTP entry price. EXX sold off sharply recently, partly due to GM bad earning and partly due to high oil price or the negative tone in the recent annual report pre-announcement (Note: Blog thread on EXX [hidden link] ). The only bright spot in BIRTP model portfolio is USG, which had big run up recently due to news of positive asbestos bill development.

It is easy to be nervous because of all the short term setback. However, to succeed with long term oriented value investing, we can not be distracted by the volatile short term market movement. Let's step back and look at the big picture of the current stock market and review BIRTP model portfolio investment strategy.

Current Stock Market Average Valuation is Not Cheap

SP&500 index trades at about 17x average PE today. Although this valuation is not terribly expensive, it is not that cheap either.

Over past 100 years of US stock market history, market usually bottomed at average PE of 10. That happened in 1974 or 1929 or 1980. We are not there yet, not even close over past 5 years even though the technology bubble bursted in 2000. In a major stock market bottom, we should see plenty of big cap stable companies trading at PE of low teens. Now look at this: Coca-Cola (KO) PE 20, Walt Disney (DIS) PE 24. Even worse, a no-growth stock like Sun Microsystems (SUNW) is still trading at premium PE of 19.

What is the Overall Earning Outlook of US Stock Market?

Even though the current stock market valuation is not that cheap, if earning is good, market should do fine.

Are we going to get excellent overall earning outlook in the next few years for the US stock market in general? Unfortunately, my answer is no. My take is that US stock market earning overall is decent, but not good enough to trigger a bull market. This market is still digesting the past bubble over-valuation coupled with poor earning outlook.

Here is one reason of my not-so-enthusiastic earning outlook: the rising oil and commodity prices.

The Booming Commodity price


Commodity and oil market has been booming since 1999 and the high commodity price is taking toll on overall stock market earnings. Companies need to pay more for the things needed in business: steel, copper, oil, natural gas etc. Historically, when commodity market is shining, stock market does not do very well, and vice versa. In 1960's and 1970's, oil and commodity had bull market run for nearly 20 years while Dow Jone index went nowhere for nearly 20 years. From 1980 to 2000, the stock market soared while oil hit as low as $15.

The Bull Oil and Commodity Cycle Could be Very Long

Jimmy Rogers is famous investor who co-founded Quantum Fund together with George Soros. In his recent book titled "Hot Commodities", he is predicting that the current commodity bull market can last until 2013 strictly due to supply and demand.

In one chapter of  the book titled "Goodbye, Cheap Oil", he clearly lays out the reasons why oil and natural gas bull market can last until next decade. This is as simple as supply and demand: rising demand coupled with declining supply.

The supply of oil and natural gas was diminished partly due to extremely low oil and gas price in 1990's. Over past 35 years, there was no major oil discovery in the world and the old oil fields deplete. Oil and natural gas production level of a well does not stay flat over the life of a well. The production level of a well actually declines gradually due to geophysics of oil well until the reserve is fully depleted. Even there is new oil field discovered, it will take a decade after the discovery to actually produce oil! Increasing supply to meet demand is a very difficult and slow process.

Coupled with declining supply, the demand of energy from China doubled since 1990 consuming 8 percent of world's oil in 2004. US economy is growing with increasing oil demand year over year while US oil production has seen sharp decline over past 50 years.

Still the oil price is not that high on historical basis. Even with today's oil price of $50 a barrel, the oil price is still significantly lower than the inflation adjusted peak price of $90 a barrel in 1970's.

Focus on Dirt Cheap Stocks and Booming Commodities Market

Stocks do not go straight up or go straight down. There will be huge run up or sharp sell off in short term. While market is not in good shape, this is and will be wonderful time for long term oriented value investors.

Commodity price is volatile. Just like stock market, commodity price does not go straight up or straight down. Although oil price weakened recently, I firmly believe that oil price is not going back to cheap oil price below $40 a barrel. As long as oil and natural gas price stay high, WLL and CHK will do fine in its business. As painful as the recent sharp sell off in energy stocks, WLL and CHK are still very cheap and my investment strategy is to continue to stay long term oriented in them.

In the short term, it is very hard to know when a stock will go up or go down. I do not know at what price GKIS or USG or WLL or CHK will trade next month. But I do know that valuation and earning matters and investing in cheap stocks trading significantly below market average will be rewarding in the long run.




Blast Investor Model Portfolio Update

(as of 04/15/2005)

Model Portfolio - Performance


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
Portfolio 12/31/04 value
 $141,981.00
2004 SP&500 Performance 8.78%
2004 Portfolio Performance 59.53%
2005 SP&500 YTD Performance -5.72%
2005 Portfolio YTD Performance
 -2.40%


Model Portfolio - Open Positions
Symbol Last Shrs Value Paid Gain
ADGO.OB 1.24 9,000 $11,160.00 0.78 $4,130.00 +58.75%
CEI 16.27 1,500 $24,405.00 16.63 -$560.00 -2.24%
CHK 19.35 1,100 $21,285.00 13.90 $5,985.00 +39.12%
EXX-A 1.28 6,500 $8,320.00 1.638462 -$2,350.00 -22.02%
GKIS 15.07 1,500 $22,605.00 15.68 -$925.00 -3.93%
LIBHA.PK 4.55 1,200 $5,460.00 5.10 -$670.00 -10.93%
NRG 32.29 335 $10,817.15 23.05 $3,085.40 +39.91%
SOHU 16.16 700 $11,312.00 24.882857 -$6,126.00 -35.13%
USG 41.22 950 $39,159.00 18.425789 $21,634.50 +123.45%
WLL 31.85 600 $19,110.00 22.683333 $5,480.00 +40.21%
$$CASH -35,056.3 -$35,056.30 - - -
11 symbols Total(USD):
$138,576.86




Model Portfolio Transactions
Date  Type Symbol Shares Price Comm Amount Notes
Feb 28, 2005 Buy GKIS 1,500 15.68 10.00 23,530.00
-
Feb 28, 2005 Sell NTES 150 41.88 10.00 6,272.00 +14.22%
Feb 25, 2005 Buy CEI 500 16.39 10.00 8,205.00
-
Feb 25, 2005 Sell NRG 335 38.42 10.00 12,860.70 +66.57%
Jan 31, 2005 Buy CEI 1,000 16.75 10.00 16,760.00
-
Nov 24, 2004 Sell HRB 350 47.35 10.00 16,562.50 - 12.31%
Nov 4, 2004 Sell NTES 100 46.50 10.00 4,640.00 + 27.05%
Oct 19, 2004 Buy EXX-A 1,500 1.60 10.00 2,410.00
-
Oct 6, 2004 Buy EXX-A 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%

Date  Type Symbol Shares Price Comm Amount Notes
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-
Dec 31, 2003 Buy LIBHA.PK 1,200 5.10 10.00 6,130.00
-
Dec 31, 2003 Buy ADGO.OB 22,000 0.78 10.00 17,170.00
-
Dec 31, 2003 Buy HCA 500 42.00 10.00 21,010.00
-
Dec 31, 2003 Buy WRP 700 18.30 10.00 12,820.00
-
Dec 31, 2003 Cash In -
-
-
-
 89,000.00 Inception