Long term Methodology: October 24th, 2008
October 24, 2008 – 11:21 pmFor this article, I will be writing about long term investing. I will be reiterating everything I say in this weeks podcast. I apologize to our listeners that I did not make a podcast this past week but I was very, very busy. Please take some time to thoroughly read this article because I just spent two hours writing it.
This is a pretty general statement right? Well….I hope this will be the article that convinces my fellow chasers to start thinking long term. For those of you who have been consistent enough to follow me, you know that my target is 6000 dow and I firmly believe next week is the turning point for the U.S market. I think that the market will digest all the negative earnings news we have seen this week over the weekend and we will see a precipitous fall this coming week. Either way, I will begin to scale into long term holds starting next week. You may ask yourself why I am doing this and the answer is quite simple: the strength of the U.S dollar and book value of companies.
First,take a look at the Euro/USD chart show. The Euro to USD exchange rate closed at .7916, meaning if you went to europe right now, every dollar would give you .7916 euro. The lowest point the dollar has hit in the last God knows how long time was this past july when the exchange rate hit .6280 (keep in mind folks that forex trades 6 decimal places past the zero, so I just cut off two places for the hell of it). SO what exactly does this mean? It means in four months the U.S dollar has increased in value by about .1636 euro. Basically put, the US dollar has been on fire and has strengthened. Why is this negative? It is negative because when overseas currency is weak, it cost others more to import goods from in our case, the United States. This essentially kills our GDP because we are not exporting as much. So in our case, if the euro is now worth .7916 of a US dollar, it now cost countries using the Euro .1636 more than it did in July to buy one dollar worth of U.S goods. With this in mind, the dollar has to drop sometime soon as it has been on absolute fire since July. I am no expert is foreign currencies (so maybe some of our fellow chasers can help me out here) but the U.S dollar has to drop sometime soon. We are in sort of a pickle here because there is forced liquidation of assets, a stronger dollar and interest rates are being cut? Wow wee!
You may ask yourself how this factors into long term investing? Because companies make more as the US dollar drops, plain and simple. (remember my article I wrote yesterday about energy, commodities/basic materials and financials being the trading opportunities of a lifetime? Keep that thought in the back of your mind….)
Second, is the book value of many of these companies. Why do I bring this up? Because the three trading opportunities of a lifetime that I pointed out yesterday will all benefit from a weaker dollar, which has to turn around sometime. I am no aficianado of currency trading but as I said maybe some of our fellow chasers can help me out in that.
Now, you may ask yourself what book value means. Essentially, book value is:
[Total Shareholder equity ($)-Preferred shares ($)]/total shares outstanding
You almost never, I mean NEVER have companies trading below book value and this is a very strong indicator of a buy situation. Now think about that. Commodities, energy and financials all are linked to a weaker dollar, have been the most oversold and most are trading below or near book value. Get the picture? With some of these companies trading below book value and offering huge dividend rates due to sell offs, how can you go wrong? Here are a few that I have hand picked:
Commodities
Freeport Mcmoran (FCX): Book value $41.80 compared to a share value $24.86, trading at 4.78x forward earnings, 8.05% dividend rate.
Companhia Vale do Rio Doce (RIO): Book Value $7.61 compared to a share value of $10.50, trading at 3.09x forward earnings, 1.72% dividend rate.
AK Steel (AKS): Book Value $12.81 compared to share value of $11.61, 2.6x forward earnings, 1.72% dividend rate.
ArcelorMittal (MT): Book Value of $45.37 compared to share value of $21.96, 1.7x forward earnings, 6.83% dividend rate.
Energy
Conoco Phillips (COP): Book Value of $60.78 compared to share value of $48.45, 4.17x forward earnings, 3.88% dividend rate.
Marathon Oil (MRO) Book Value of $24.32 compared to a share value of $23.56, 3.5x forward earnings, 4.07% dividend rate.
Petrobras (PBR): Book value of $33.18 compared to a share value of $21.05, 4.27x forward earnings, negligible dividend.
Chesapeake Energy (CHK): Book value of $18.86 compared to a share value of $20.40, 5.41x forward earnings, 1.47% dividend rate.
Valero (VLO): Book value of $35.58 compared to share price of $15.96, 4.02x forward earnings, 3.76% dividend rate.
Nabors (NBR): Book value of 17.85 compared to a share price of $12.84, 4.17x forward earnings, no dividend
Financials
Many….with FAT dividends to boot.
All in all, be careful out there my fellow chasers. Thanks for reading.
-Justin Moon, Senior writer for Marketchasers.com
3 Responses to “Long term Methodology: October 24th, 2008”
thanks for the write up
By Joe on Oct 27, 2008
as far as the usd/euro chart its hard to follow right now there was support level at 1.40 a bounce another support at 1.30 but it broke that level now close to 1.25 i think we will see a small bounce on the euro at the 1.30 level again but after that its hard to tell where it will go next
By john on Oct 27, 2008
what a move on the euro like i said watch the 1.30 level ive been spot on
By john on Oct 29, 2008