Joseph Dancy's Contributions

A brief Powerpoint presentation showing the short supply of high quality crude, burgeoning China demand, declining production capacity, and projections.

Several very positive developments have occurred in the energy sector in the last several week, many of which should be bullish for companies in the sector.

Bloomberg reported yesterday that Standard & Poor’s 500 Index companies will earn 18 percent more this year than in 2010 according to the average estimate of more than 9,000 analysts. Even assuming the companies posted no growth, the price-earnings ratios would be lower than 96% of the time during the last two decades. The point was that from a valuation standpoint stocks remain attractive.

Even with the decline in crude oil prices from recent highs we remain bullish on the energy sector. We think investors are grossly underestimating the impact the shut-in Libyan sweet crude oil production will have on energy markets this summer and fall.

Last month German politicians in a stunning policy reversal revealed that they will shut down all 17 of their nuclear reactors over the next decade. Germany is the largest national economy in Europe and the fourth-largest in the world. Nuclear power accounts for a staggering 23% of the power used in the country – a larger percentage than is used in the U.S. and U.K. (see charts courtesy Financial Times and The Economist).

Last weekend it was announced that China has suspended exports of diesel fuel indefinitely to help meet domestic energy demand ahead of the peak summer season. The measure could create energy shortages and spread higher prices – and possibly panic about the availability of energy supplies - across Asia.

As we approach Warren Buffett’s the Berkshire Hathaway (BRKA) annual shareholder’s meeting next weekend (April 30th) in Omaha – attended by thousands of investors who are seated in a sports arena with the overflow seated in other venues - several interesting academic issues arise regarding the company and Mr. Buffett. Ranking as one of the wealthiest individuals in the world Mr. Buffett is widely regarded as one of the most successful investors ever. He is commonly referred to as the "Oracle” or "Sage” of Omaha or as the “Legendary Investor” or “The Master” due to his investment expertise.

Saudi Arabia claimed last weekend that the global crude oil markets were oversupplied even with Libyan production essentially shut down – an incredible claim. The Saudi’s said they were cutting back on production – even in the face of high and sharply rising oil prices! Estimates by both OPEC and the IEA are for crude oil demand to increase by 1.4 million barrels per day in 2011.

U.S. retail gasoline demand fell last week following sharp increases in prices at the pump, MasterCard Advisors' SpendingPulse report noted earlier this week. Average gasoline demand dropped 1.8 percent week-over-week and 3.0 percent year-on-year according to MasterCard, declining for the sixth straight week. Pricing levels, according to the report, is having an impact on US gasoline demand.

With all the volatility in the stock market and global correlation of markets during periods of crisis investors should ask why they should invest in the stock market. More than a quarter of U.S. employees (27%) said they were ‘not at all confident’ about their ability to afford a comfortable retirement with their 401(k) plans and retirement savings, the highest percentage in two decades, according to an Employee Benefit Research Institute report issued this week.

After focusing on the energy sector the last few months we return to another long term bullish story – agriculture.

Global food prices reached record levels last month as the weather around the globe adversely impacted crops. High food prices have already sparked protests across the Middle East and North Africa.

For 2010, the year just ended, the IEA estimates that global crude oil and natural gas liquids demand was around 87.8 million barrels a day — an incredible 2.8 million barrel per day increase from year earlier levels, one of the largest increases in consumption in several decades! China alone added almost one million barrels per day to its daily petroleum demand. The increase was almost double what the IEA originally forecast.

Factors that should contribute to this outperformance include (1) an accommodative monetary and fiscal policy, (2) investors returning to the equity market (see note below on the ‘torrent’ of funds returning to the equities market), (3) reasonable valuations of stocks in the sector, (4) a positive and improving business outlook, (5) price momentum/persistence/relative strength in the equity markets, and (6) merger, acquisition and deal making activity.

In 2011 we think a number of very positive themes will play out for investors. We see the following developments in 2011, all of which create interesting investment opportunities.

Platts last week that China's crude oil demand reached record levels in December, rising 18% year over year to a record 9.6 million barrels per day (b/d) average. Oil demand in December was up 7% from November's the previous record high – so it appears demand continues to ramp upward in a significant manner. The continued increase in demand has been labeled as ‘astounding’ by industry analysts.

To measure the degree of social development Morris examined four factors: (1) energy use per capita, (2) urbanization, (3) military capacity, and (4) information technology. Investors in the energy sector have long been aware of the first factor and its influence on economic activity and social development - the capture of energy is a necessary condition for existence.

Return persistence or price momentum - the tendency for stock prices to trend in the same direction – was the topic of an article in a recent edition of the Economist magazine.

In a development that is very positive for active portfolio managers—in fact one of the most bullish developments in the last couple of years in our opinion—the strong correlations between individual stocks and the bond market or major market indexes since the 2008 financial crisis are ’decoupling’.

Illustrating how tight the global grain markets are becoming, and the concern of governments over higher grain prices, yesterday Russian Prime Minister Vladimir Putin said he had signed two governmental resolutions to start supplying grain from the state intervention fund to Russian regions affected by this year's abnormal heat and drought.