Dog Days of Summer

The dog days of summer are here again and as the July heat warms us up, our stock portfolios have been frozen by uncertainities in the financial markets, panic selling and the irrational trading activity of investors around the world.

It is an understatement to say that 2008 has been a very challenging year to be an investor. At this point in time, the best advice is to research your portfolio holdings and develop a deeper understanding of why you made the investment in the first place. Some dogs with fleas will surface and should be put out of their misery before they cause more harm to your portfolio returns. On the other hand, some real gems will also become more apparent and should be bargain hunted before the rest of the market wakes up. Commodities have been the one area in the investment world that continues to rise, although some so called "experts" want us to believe that they are also a bubble ready to burst. The one difference between commodities and other bubbles like the technology and real estate ones is that the fundamentals of supply and demand are backing this rise in price. With emerging markets like China, India, Brazil, Russia, etc. all expanding at astounding rates there has been an insatiable demand for energy to drive this growth. Problem is that most large oil fields around the world have reached peak output and some are now in decline. So essentially you have demand increasing and supply decreasing. This is the main reason you have seen energy prices double over the last year. The second fundamental occuring is the depreciation in the US Dollar which commodities are priced in. As the US government continues to attempt a rescue of its economy by printing greenbacks, they are actually creating one of the highest inflationary periods of recent history causing the price of the commodities to continue to rise. Finally, you have a very unstable political climate in the world today. Iran and its fundamental opposition to the US and Israel has movied it to the top of the list of problem areas in the world and being one of the top oil producing nations, any action in that area will drive energy prices even higher.

We now need to look at what commodities offer the biggest near term gains for the companies that produce them and then invest in these companies. Gold, Silver, Copper, Uranium, etc. all are projected to go higher in price over the next year. The one issue is the costs to produce these metals has actually increased more than the metal prices. This is hurting the bottom lines of producers and will require a drastic rise in the commodities prices to make up for the high energy costs. Thus I would hold these companies or sell some of the dogs that you think might not beable to hang in there until their commodities increase in price. I still predict that gold will break $1500 an ounce by next spring and is thus a great investment. Gold Ishares is a direct way to play this but some believe buying the physical metal is safer.

The one commodity that will greatly benefit from rising prices but will not be as hard hit by inflationary pressures is natural gas. It just happens that the summer months are one of the best times to invest in this commodity as there is less demand at that time. I am thus reccomending that you take advantage of the current correction in prices (especially in the companies producing natural gas) and do some bargain shopping. Here is a quick breakdown of the companies at the top of our list. Please do your own research and use this to guide you in selecting the companies that you think have the best investment potential.

Here is a little bit more background from one of our anaylsts:

Energy - A Huge Disconnect

"TSX Energy space off almost 4% today on the back of a 3% pullback in crude. While on the surface this might make sense, it overlooks the huge disconnect between the performance of the energy stocks over the past year vs. the performance of crude. Consider the following chart:
Crude is up 100% over the past year, while the TSX Energy index is up 20%. In our view, one of two things are at play here: 1) There is a huge amount of skepticism in the sustainability of the crude price and we are destined to see prices fall sharply; 2) There is a huge amount of value in energy stocks.

Now, it's easy to say that oil prices are going to come down, but very few people seem willing to explore the alternative - that oil prices are going to go significantly higher. We have thrown everything at oil in the past six months - sharply slowing North American demand, huge subsidy cuts in China, Indonesia and India, sharply slowing economic growth, a stabilization of the US dollar - and yet oil shrugs it all off (kind of like the anti-Shylock - "prick us, do we not bleed", well, actually, no you don't). Our guess is that the doubts about $130+ oil may soon start to ebb and the oil stocks may ride a very big wave for a while.

What if we're wrong? The stocks price in $90 oil now, so being wrong is fairly well insulated. That doesn't mean that the stocks won't go lower if crude pulls back sharply, but we're confident that the slide will be manageable and they'll quickly bounce back. Further, should crude pull back sharply, the rest of the market probably catches a bid, so portfolios probably skate through okay. On the flip side, we're worried we'll be right and this may be the only area of the market that holds us up for a while."

Stocks to Buy

Majors: Encana (ECA), Canadian Natural Resources (CNQ), Suncor (SU) and Canadian OilSands (COS.UN)

Intermediates: Crew (CR) and Celtic (CLT)

Juniors: Delphi (DEE), Iteration (ITX), Cinch (CNH), Tusk (TSK), Glamis (GLM.A), Open Range (ONR), Vero (VRO), Alberta Clipper (ACN), Profound (PFX)

Offshore: Antrim (AEN), Ithaca (IAE), Solana (SOR), Pan Orient (POE), Grand Tierra (GTE)

Service Companies: Cathedral (CET.UN), Calfrac (CFW), Precision Drilling (PD.UN)


Remember to always do your own research and have fun shopping during the Dog Days of Summer. Some of these dogs just might turn out to be darlings...