Portfolio review of the week - 26th February 2011

On Friday the FTSE 100 finished up 81 points at 6,001, down 1.3% on the week. The Dow Jones Jones Industrials finished up 62 points, or 0.5%, at 12,130, a 2.1% fall for the week and the worst since mid August 2010. Shares rebounded on Friday as the oil price stabilised and the markets began to be reassured that the Libya's 2.5% contribution to global oil supplies could be covered by other oil producers and that Colonel Gaddafi's position was becoming increasingly precarious. The U.K. market declined less than across the Atlantic because of the greater number of oil and defensive stocks in the FTSE 100.


The U.K. market was thrown into turmoil yesterday as the London Stock exchange computer system crashed for 4 hours, meaning trading was suspended for most of the morning.To coincide with the LSE problems, the revised Q4 2010 GDP figures were released by the Office of National Statistics showing a revised 0.6% decline in the U.K. economy (versus previous estimates of 0.5%).


Despite the market panic in the middle of the week, the Contrarian Investor UK portfolio had mixed fortunes but I took some opportunities during price dips to top up on Xcite Energy (XEL) and Weatherly International. I also bought into another North Sea oil company, Encore Oil for the first time (EO.). 


Xcite Energy (XEL) - Xcite had a good rise on Friday and finished the week at 346p, a 1.8% decline. There have been some reassuring noises that a farm in or placing may not be needed to bring the Bentley heavy oil field into production. The interview published by Rupert Cole (CFO) indicates that any fund raising will be on Xcite's terms not on the institutions and that they have several options open to them (http://contrarianinvestoruk.blogspot.com/2011/02/xcites-cfo-cole-confirms-partner-may.html). 


An update from British American offshore (Rowan Companies) who are currently constructing Xcite's rig, the Rowan Norway also confirms delivery of the rig is due June 2011, with operations starting in the North Sea in November 2011 (with the transit time from the Duabi construction site). Looking at the SEDA (standby equity drawdown agreement), there is insufficient funds remaining to complete the final $30 million instalment due on delivery in June. Therefore it would be anticipated that the company would need alternative funds by this date. With the CPR (competent persons report) due early in March, it is inevitable that Xcite will leverage this report to find the funds its needs and this is not necessarily a discounted placing. As I have stated before, using a bank loan or bond offer seems possible. Either way, went it went back below £3.40 this week, it was a great buying opportunity.


http://www.rowancompanies.com/_filelib/FileCabinet/PDFs/Offshore-CM.pdf?FileName=Offshore-CM.pdf
Rig is under construction with delivery expected in June 2011. Contract executed for combined drilling and production operations with an initial term of 240 days followed by a one year priced option in the low $250s. Production fee of $1 per barrel of oil produced is also payable during the initial term. Customer is required to provide security for the initial term totaling $60 million by the date of shipyard delivery of the rig. The first installment of $15 million was received on February 17, 2011. The second $15 million installment is due February 25, 2011, with the final installment of $30 million due upon delivery of the rig from the shipyard. Rig is expected to commence operations in November 2011.
Rockhopper (RKH) - Another bad week the falklands oil explorer, with the shares dropping 12% to 233p. I have covered the fact earlier in the week that the current market capitalisation (£600 million) is daft with what the RKH have already discovered at Sea Lion (http://contrarianinvestoruk.blogspot.com/2011/02/taking-advantage-of-silly-valuations-on.html). But this frontier explorer is out of favour, and the private investor stampede has moved onto pasteur's new for now! With drilling results from the 14/10-4 well due around mid-March, it is inevitable that this share should starting perking up in a couple of weeks time. Hopefully 230p is the new base, but you never know with a Falklands oil stock!


Encore oil (EO.) - I took the opportunity to buy into North Sea oil explorer, Encore Oil this week, given the company prospects and news flow over the next few weeks. There was talk of a takeover this week by Premier Oil, but this seems a bit far fetched.

Encore own a 16.6% interest in the Cladhan North Sea licence with Sterling Resources (73.4%) and Dyas (10%). Drilling is expected to commence within the next few days at Cladhan (Blocks 210/29a & 210/30a) with the flotilla of vessels apparently on its way. The Burgman prospect is expected to spud any day soon using Encore's contracted rig the Galaxy II.

Sirius Minerals - Another terrible week for potash company Sirius, with a 15% to 13p. No bad news, such sentiment. Topped up a little at 12.5p and now we wait!

Bowleven (BLVN) - Bowleven had a good week with the share reiterated as being on Goldman Sachs conviction buy list, despite rumours of issues in Cameroon which now seem to have been largely diffused. Goldman has said that recent share underperformance has created an attractive entry point into the stock - "We view the upcoming drilling campaign offshore Cameroon positively, with recent success at the Sapele prospect helping to de-risk the surrounding acreage,". The target price was cut to 578p from 623p, with drilling at the Cameroon Sapele-1 prematurely halted because of high pressure gas which the drilling equipment was not specified to handle.The shares rose 5% on the week to 335p.

Weatherly International (WTI) - The interim results this week had plenty of encouraging news from this Namibian copper company (http://contrarianinvestoruk.blogspot.com/2011/02/weatherly-international-interim-results.html). Topped up on WTI. I have great confidence that we will see Weatherly shares significantly higher within weeks.

Market moves up after London Stock Exchange closes for 4 hours

With oil prices stabilising as the end game in Libya seems close as regards Gaddafi, markets responded nicely with the FTSE 100 up 90 points to 6,006 and the Dow Industrials is up 65 to 12,130.  Lots of gains across the board. Some degree of risk appetite has undoubtedly returned with a lot of the AIM stocks that have bombed in the last week bouncing., for example, Kurdistan oil explorer, Gulf Keystone was up over 10%.

The London stock exchange was down all morning after a new software system which was installed 2 weeks ago, sprang a glitch. Hopefully when the LSE merge with the Canadian TSX, they can use their software!

Most of the stocks in the Contrarian Investor UK portfolio are having a good day, Bowleven, Sirius, Weatherly, Encore are all up, the only exception is Rockhopper which is down a couple of pence. Nice to see Xcite Energy up 2.5% today after yesterday's top up. Now I need to see some RKH action, up, not down!

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Sense of realism finally hits stock markets

After all the worrying developments from the Middle East, rising inflation concerns both here and in China, oil above $100 a barrel, a bloated U.S. Deficit, Eurozone debt worries and weakening consumer sentiment it was always a surprise that the FTSE was still above 6,000 and the S&P 500 hit a level double its March 2009 low last week. The Ftse 100 fell 64  points today to 6,019 with the big banks falling nearly 4% over worries about European debt. U.S. markets were closed due to President's day.

The Contrarian Investor UK portfolio got a battering with Bowleven dropping to 307p, a pound of its recent highs and Rockhopper finishing at 250p, a drop of close to 140p in the last 3 weeks. Xcite continues to drift lower as we await the CPR document to 344p, it was trading at 400p to buy less than 2 weeks ago on takeover rumours. Now the rumours are more of a 350p institutional placing. Its been a bad month, roll on March!

Bad day at the office for Contrarian portfolio

Hmmm i've had better days! Every stock is down in the Contrarian Investor UK portfolio apart from Rockhopper (after a shocker on Friday) and Angel Mining, so its a case of taking the pain for today. Xcite is recovering from a sharp dive this morning that made no sense at all but it's still down 4%. Bowleven can't stop falling and Sirius has a 10% fall after its poor RNS regarding its Chinese Adavale project partnership.

It's sometimes about courage in your convictions when the portfolio takes a tumble. I have faith that research is correct on all my holdings and that they are all worth much more than today's share price action indicates. Its about taking the rough with the smooth in this game! This is what being a true Contarian investor is about and on some days it can be uncomfortable! Sometimes it takes more than a few days for a trade to come good, but inevitably they will with patience - this game is not about luck or gambling its about "buy and research" then do even more research (and don't believe everything you read on a bulletin board or even a blog!!).

No news again for Contrarian Investor UK portfolio, but tomorrow's another day!

Not one interesting RNS to get my teeth stuck into today for the Contrarian Investor UK portfolio. Surprisingly for a Falklands Islands oil share, even Rockhopper (RKH), seems to be keeping a firm lid on any rumours on the outcome of its latest drill, be they good or bad. Chief Executive, Sam Moody, Chief Executive, at Rockhopper seems to be keeping a tight ship compared with the likes of Desire Petroleum (DES) where we saw 30%+ swings in the share price on leaks, some more accurate than others. Nothing like that with RKH, a few pence here and there but nothing to write home about.

The FTSE 100 retreated 17 points to finish at 5,983 despite some good news from the U.K. service sector in January (services now represent 75% of the U.K. economy) which seemed to indicate that a double dip recession was unlikely due a further economic contraction in Q1 this year.

Shell dropped 3.3% over disappointment that its $18.6 billion profit in 2010 versus $9.8 billion in 2009 was not even higher due to some refinery output issues. Also analysts were expecting a dividend rise which didn't materialise.  At the other end of the spectrum, Glaxo Smithkline (GSK) rose 3.6% to £11.68 as it announced a £2 billion share buy back and an increase in its dividend of 7% to 65p. Sales for the year to 31 December was down to £28.4bn a 1% decline from the previous year, with its main pharmaceuticals business seeing sales drop 11% due to generic competition for some of its key drugs. Pre-tax profits were down to £4.5bn from £8.7bn.

Why Contrarian Investor UK bothers?

I was talking to one of my investment club contacts today and I hear there's been some posts on the iii.co.uk bulletin questioning the motives behind this blog. Ramping, plagarising etc. etc. - pretty distasteful stuff!

If I was writing purely to "ramp" my portfolio then there would be better and less time consuming ways to do it. For example, like other offenders, I could create multiple usernames on the bulletin boards and plug away. I like to think there is some reason arguments for my supposed "ramps". Plus I cover stocks and subjects that I do not even own e.g. recent posts on Irish banking collapse, Google, Apple etc. I do look at the content of bulletin boards for additional information but if I "copy" anything I will always reference the author.

I write the Contrarian Investor on an anonymous basis purely to protect my interests in my job. It is not because I wish to hide behind posts which are ill considered, non-sensical and full of errors. I make a couple of pounds a day from Google Adsense and nothing more. None of the stocks I talk about dramatically rise after I compose a post, so my supposed "ramps" don't work! Though I think Buffett is an amazing investor, I consider myself in the Z list compared with the greats. Always learning from mistakes, and there's always something to learn in this game no matter the number of years.

The reason I write Contrarian Investor UK is because:
1. I love the workings of the stock market and I am fascinated by its herd psychology
2. There are very few places to find information on small cap UK stocks apart from the bulletin boards and there's some good stuff there but a lot of dross too.
3. Unlike the U.S. there are few good U.K. stock blogs with informative content
4. I want to share my knowledge of the stocks I invest in and the significant research I do on them
5. Finally I enjoy writing and it helps me to confirm my investing decisions

I gave up Contrarian Investor UK last July because work was too busy and commuting too long. But I missed the buzz of writing a blog even though it is a constant drain on my free time. Often I think, should I bother. But the odd email of positive support gives me the will to battle on. If the guys on the bulletin boards think I am doing a bad job and they can do better then so be it, perhaps they should start their own blog. I have been very pleased with the traffic to the site this month, 23,000 page views visitors and counting so I guess someone's interested??

Portfolio review of the week - 22nd January 2011

A great deal of volatility in the market to contend with this week but this threw up some good top-up opportunities, particularly in Bowleven (BLVN) and Sirius Minerals (SXX).

Xcite Energy (XEL): After testing 350p early in the week on low volumes, Xcite had a positive move on Thursday and Friday to finish at 368p. There seems to be a very consistent retrace pattern with this company, with the share price dropping by small amounts for several days before stabilising and then starting a move up, presumably instigated by the market makers. Still looking forward to the rig contract signing news and which one by January 31st  - Rowan Norway or Rowan Stavanger. The company have signed a Letter of Intent on the Norway but given a cancellation of a contract with BP on the Stavanger which is already built (Norway would not be ready until October), this could offer great opportunities to start production far earlier in the Bentley field. All conjecture of course, but sounds like a credible alternative. Nice rumour anyway. (POST POST NOTE: See http://contrarianinvestoruk.blogspot.com/2011/01/xcite-rumour-dispelled-rowan-stavanger.html).  I'm looking forward to a very profitable few weeks on Xcite - the share price should be a lot higher than £3.68 on a field of at least 200 million barrels.

Sirius Minerals (SXX): A major announcement this week with the purchase of NE England potash company, York Potash for £25 million in shares and a management restructuring with Chris Fraser (York's founder) taking over as Sirius's new CEO and MD.

A JORC Exploration Target of between 3.3 and 6 Billion tonnes of 67% to 94% polyhalite and 330 to 400 million tonnes of 35%-40% potassium chloride has been established for the currently contracted area within the York Potash Project. This estimate establishes the project as having one of the world's largest deposits of polyhalite at mineable depth.

The shares have had a good run this week, rising 4p or 24% to 20.75p on the York Potash and director buys. I took the opportunity to buy more on the fall during Thursday, since significant news from the company's North Dakota exploration project is expected mid-February which will make 20p look like a bargain. It is amazing to think that Sirius was 3p or so in August 2010.

Bowleven (BLVN) - Finally a rise in Bowleven's shares on Friday with a 3% increase to 380p. All week the shares have been drifting down as investors wait for further updates from the Sapele 1 well in Cameroon. Early Friday, with the share price down again, I took the plunge and bought more shares. With estimates of oil in place already at 65 to 430 million barrels in the Deep Omicron, mean 217 million barrels this company has great prospects for the future.

Imagination technology (IMG) - I have initiated a position this week on the rumours that the Ipad 2 and Iphone 5 will use IMG chips. Unfortunately this is showing a loss currently but Goldman Sachs issued a broker note this week with a £6 target, currently the shares are £3.84.

Angel Mining (ANGM): A poor week for Angel with the share price drifting down to 5.75p. News of the first gold production from the company's Nanulaq mine is due this month (and hopefully it is positive) as well as an update on progress of preparing the Black Angel zinc/lead mine also in Greenland. "To minimise transport and refining costs, the Company will only ship doré once it has produced an optimal quantity. The first shipment of doré for refining is expected to take place in January 2011" RNS 15th December. Did a couple of buys and sells on this one, but still holding a position at 5.8p.

Overall a good week for the portfolio, with Sirius being the star. I reckon Xcite should be the big mover next week, followed perhaps by Angel on some Nanulaq mine news. The Contrarian Investor UK portfolio has had a nice start to 2011, with a profit edging towards £7000 already because of gains on Bowleven and Xcite earlier in January.

Contrarian Investor U.K.'s outlook for the stock markets for the rest of 2010

With the S&P 500 and FTSE 100 up 45% in the last 12 months (4% in the last quarter) and the U.S. market finishing higher 28 days out of 31 in the last month it seems the market's upward momentum is unstoppable. But what seems to be in store the rest of 2010?

THE CASE FOR THE BEARS
1. UNEMPLOYMENT. Although the market was closed on Friday in the U.S., the Labour Department said nonfarm payrolls rose by 162,000 in March, the largest gain since March 2007, although nearly one-third came from temporary hiring for the Census and behind estimates of 200,00 gains. But U.S. unemployment remains stubbornly high and is likely to remiain so for some time as the rate stayed at 9.7% last month, in line with economists' expectations. It is sobering to think that 1 in 10 Americans is out of a job and given corporate America's drive to keep costs low and productivity high, this is unlikely to drop sharply any time soon. f you take into account part-time workers looking for full-time jobs, unemployment is about 17%. In Europe, U.K. unemployment is 8%,  German is  7.5% and French is 10%. 

2. MORTGAGE ARREARS. Around one in four U.S. home owners are in negative equity on their mortgages (i.e. they owe more than there home is worth to their mortgage lender) . Then their are the "shadow inventories" where lenders are unwilling to foreclose on properties because they will have to declare losses on their books and so they are allowing owners who are not paying anything to stay in the property.

3. DEBT. Government debt continues to grow at a significant rate. The U.S. deficit since the beginning of the fiscal year in October now stands at $651.6bn, meaning the goverment are on track for an annual deficit of$1.4tn, more than 10% of GDP, and the highest level since World War II. The US government recorded a budget deficit of $221bn (£147.6bn) in February - the largest monthly deficit in its history. In the U.K., Chancellor Alistair Darling confirmed that the UK budget deficit is likely to be around £167 billion this year with UK national debt balloon to well over £1 trillion. Current UK public sector net debt is £848.5 billion or 60% of GDP. Excluding Financial sector intervention (i.e the bail out Northern Rock, Lloyds and RBS), public sector debt is £743 billion or (52.7% per cent of GDP). Though to put things into context, Japan for example have a National debt of 194% of GDP, Italy 117%, Greece 108%, Germany is 77% and the U.S. is 71% of GDP.

To date, government debt has been able to be financed by countries such as China with large fiscal surpluses who have been buying up bonds like U.S. Treasuries.  Whether this continues if credit agencies move to downgrade countries from Triple A status is another matter. Recently, the problems of the PIIGS (Portgual, Ireland, Italy, Greece, Spain) debt has worried the bond markets. A Greek debt bail out was fashioned last week by the euro zone countries after it struggled to roll over its borrowing requirements as investor appetite for its bonds wained. 

4. CHINA.
In 2008 the Chinese government instituted a $585bn economic and infrastructure stimulus package, helping to continue strong economic growth in 2009. The country now has a population of 1.3 billion people, with income per capita roughly one-tenth of U.S. levels. After the collapse of commodity prices in 2008, aggressive Chinese buying of iron ore, Copper and other industrial products have helped propel commodity stocks like BHP Billiton and Anglo American. Copper prices are up a 160% in the past year and a half. 2/3 of the growth in many of these commodities is expected to come from China. Although, But is there cause to be concerned?

We often hear that speculative bubbles are impossible to forecast until after they have popped. Edward Chancellor's "10 Sign Posts of Manias and financial Crises" has compelling similarities to what we are seeing in China.

"Great investment debacles generally start out with a compelling growth story."
"Blind faith in the competence of the authorities." (do we really trust the Chinese government?)
"A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear."
"Great booms are invariably accompanied by a surge in corruption."
"Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward." (Money supply grew by nearly 30%, interest rates maintained well below nominal growth rates)
"Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts." (Chinese currency, the renminbi, is pegged to the U.S. dollar)
"Crises generally follow a period of rampant credit growth."
"Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned."
"A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious." (Chinese banks are particularly reluctant to report problematic loans)
"Dodgy loans are generally secured against collateral, most commonly real estate."

5. TIGHTENING OF MONETARY POLICY
After a period of extraordinary low interest rates around the world it is likely that interest rates will begin to rise in late 2010 or 2011. China and Australia have already begun tightening.



THE CASE FOR THE BULLS
1. LOW INTEREST RATES AND BENIGN INFLATION FOR NOW
Interest rates around the world look set to remain low for the foreseeable future as inflation remains low despite the huge increase in money supply in countries such as the U.S. and U.K.. This means companies can borrow money cheaply and invest in growth.

2. CORPORATE PROFITABILITY
As workers work harder as they fear for their jobs, productivity is continuing to rise. For example in the U.S., productivity rose 6.9% in the fourth quarter of 2009.  This together with job cuts means costs have been slashed and earnings enhanced.The S&P 500 companies  (excluding financial companies) hold almost $1.2 trillion in cash, or more than 10% of assets, the largest amount since the 1960s. Corporate earnings over the next couple of quarters will be strong particularly if firms deploy this cash to increase dividends or increase share buy-backs.

3. LOW INVENTORY LEVELS

Many companies have worked hard to work down inventory levels during the recession meaning that any increase in consumption will quickly increase orders and hence revenues. 

4. STIMULUS
The U.S. government still has two-thirds of the $863 billion stimulus money to spend over the next 18 months which is good news for infrastructure companies in particular.

CONTRARIAN INVESTOR U.K.'s VIEW
On balance, I am a little worried about things. There are some strong indicators that the second quarter may be strong as productivity and cost cutting continues to feed through. But the second half of 2010 may be more challenging especially if the Chinese "economic miracle" comes off the rails. It will be increasingly a traders market not a "buy and hold". In 2009 you could have bought almost any stock and seen its share price increase and perhaps double or triple but in the later part of 2010 things are going to get tougher especially if the Federal Reserve, European Central bank start to curtail "cheap  money" by increasing interest rates.I will not be committing significant new funds to buy and have plenty of cash on the sidelines to take advantage of any move down. Although stocks are not expensive on traditional valuation metrics such as price/earnings, they are not at bargain levels so although I expect a move up in the U.S. S&P and DOW over the coming weeks, the upside potential is not so high to justify 100% holdings in stocks. Better to have cash for a 5-10% correction to take advantage of any opportunities that arise in favoured stocks.

Anniversary of market rebound gives opportunity for reflection

The Dow Jones Industrials and the Standard & Poor's 500 both bottomed on March 9, 2009. It is incredible to think that 12 months ago, the S&P 500 stood at 672 and now is at 1,139, a 69% increase, the DOW Jones Industrials stood at 6,547 and are now at 10,550 (a 61% increase) and the FTSE 100 stood at 3,532, having increased 58% to today's 5,584. You could have picked up great stocks like Google (GOOG) for $289 (now $558), Caterpillar (CAT) for $23 (now $59), Apple (AAPL) for $83 (now $219), BP (BP.) for £4.29 (now £6.35) and HSBC (HSBA) for £3.04 (now £6.98). Despite having strong balance sheets, good profitability and great in-market positions these stocks were swept up in the negative spiral precipitated by the near collapse of the financial system, as exemplified by the demise of Lehman Brothers in September 2008. It really was the "sale of the century" for those brave enough to take a contrarian position back in the dark days of early 2009. For investors in more specialist vehicles such as commodity related stocks or emerging markets, returns in 2009 have been even more spectacular. For "value" investors, the signs of an oversold market were plain to see - forward price/earnings ration's close to the single digits for the DOW and FTSE, a yield on the FTSE of close to 5% and many quality companies close to cash value. But the fear gripping the market was such that with the exception of investors like Buffett's Berkshire Hathaway (who invested too early in cases such as Goldman Sachs despite highly favourable terms), many chose to stay on the sidelines and waited for a signal of a turn. The volatility even frightened me and despite buying heavily back in March 2009, I chose to take quick profits rather than hold with a hope of higher returns.


So now in March 2010, the investment case is less certain. It may seem a crazy thing to say, but despite all the positive signals that the U.S. economy is slowly coming out of a painful recession, the risks of buying the market are higher than back 12 months ago. Whereas at the peak of the panic, you could have bought almost anything with a reasonable balance sheet, the market is much more tricky now with the big gains in the second half of 2009. Contrarian Investor UK is inclined to stay on the side lines for a time now and let the established positions run. The risk of a correction (albeit modest) is very much concerning me. Bad news has been largely discounted by the market during 2010, but any significant set back in U.S. or European recovery may well be a catalyst for profit taking and volumes are already so low in the U.S. that it suggests that the major players are not active in the market and waiting for a better investing opportunity.