19 Mar 2015

KOBE 9 Nonetheless

Global stock markets have come a long way from the dark days of early March. And certain sectors natural resources, for example have seen better known names double and more.

This post crash rally has already undergone several gut checks. One occurred in early summer. Questioning whether the economy was stabilizing or relapsing, many investors started cashing out of positions, and the result was a short lived but nonetheless sizeable selloff.

Starting in July, the market began erasing those losses. In fact, the surge continued into late August, leaving the averages and indeed many stocks at post crash highs. But now those concerns are emerging again that the markets have moved too far, too fast and are due for at best a severe pullback, at worst another down leg in the bear market that began in mid 2007.

All bear markets have eventually ended. The Great Depression of the 1930s, however, is well known as a time when massive busts were followed by jagged recoveries, which in turn gave way to renewed routs with the result that stocks were at even lower levels than before.

The chief fear I hearing from many investors is we again in such a time. Basically, the theory is we going to be stuck in an economic debacle for a long time, possibly many years, and therefore KOBE 9 we can Air Jordan Fusion 4 expect the same market action as during the other words, after six months of rally, it time for the shoe to drop on this market, and look out below.

Over the past 25 years or so I established whatever credibility I have by focusing on individual companies, mainly the health of their underlying businesses. The idea is that the stock market is a popularity contest in the short term, where the best stories get the most attention and therefore near term gains.

In the long haul, however, it a weighing machine. And businesses that become more valuable by growing and/or continuing to build a base of valuable assets always gain value, building wealth for shareholders.

This is hardly a novel view of the market and it has plenty of proponents who are better known than I am, from Warren Buffett to energy infrastructure king Dan Duncan.

This outlook does, however, often put me at odds with market sentiment, particularly in volatile and uncertain times like these.

As long as I perceive an underlying business is getting stronger over time, I willing to let a position ride, almost no matter what the overall market is doing.

My goal isn to beat the averages month by month, quarter by quarter or even year by year. Rather, it to build wealth over a period of years.

And that means being willing to hold positions I comfortable with though tough times.

When the Macro Is ImportantNo company or sector is an island. And even the least cyclical businesses are affected by the ups and downs of the economy.

Regulated electric utilities, for example, provide an essential service. In fact, as the economy has become increasingly electrified year after year, consumers and businesses are increasingly less likely Air Jordan 14s to cut their usage, let alone walk away without paying their bills.

Power companies resilience has been particularly apparent during the bear market/recession that began in mid 2007. Despite the worst economy in decades, most posted second quarter results on par with those of a year ago and well within previous management guidance. All but the weakest covered dividends comfortably with earnings and balance sheets have rarely been stronger.

The only real points of weakness have been in the unregulated areas of the business, particularly energy marketing. Players like Constellation Energy Group (NYSE:CEG), which didn exit the business in the past few years like the majority of their peers, have been forced to retreat under heavy fire, as business has declined and lenders have become progressively stingier with providing collateral to do trades.

Nonetheless, even the power sector has felt the bite of this recession. Only a handful of companies like FPL Group (FPL OLD) which rode the growth of its portfolio of unregulated wind and solar power plants managed to post significant earnings growth.

And most utilities saw sales slide, in large part due to mild summer weather compared to a year ago but also because of the sharpest slide in industrial demand since the and an equally dramatic halt in customer growth.

Heavy industry isn nearly as important to power utility earnings as it was in prior downturns. For one thing, there are far fewer major factories in the US now than there were in the or even in the relatively mild recession of 2001 02.

In addition, heavy industry in many states has either been purchasing energy on unregulated markets or generating its own electricity through a cogeneration process.

The result is losing industrial load has had a progressively lesser impact on utility company earnings over the years. In fact, this time around the majority of companies have been able to offset it with cost cutting and rate increases to pay for system improvements as well as to meet renewable energy mandates that are now Air Jordan DMP the law in 33 states and the District of Columbia.

As for customer growth, utilities in states such as Florida have grown accustomed to being able to add business year in. year out with new connections, as Americans moved into their service territories. Some areas, such as southern Nevada, are Air Jordan 16s still seeing growth. But even there additions have slowed dramatically. And the result is less profit growth for utilities.

If even utilities have felt the bite of this recession, other types of businesses have been hit harder still. And the results have shown up in earnings, particularly the second quarter, following which many, if not most, industries showed decidedly unfavorable comparisons with year earlier totals.

Comparisons in industries like natural resources are particularly unfavorable, as producers in particular have had to deal with the impact of a 50 percent drop in oil prices over the last 12 months and an 80 percent plus nosedive in natural gas.

Given the decline in headline numbers, one might ask how anyone could infer any of these businesses are still building wealth. And this is where the the business strategy gets tricky.

Put another way, it pretty easy to tell if a business is getting more valuable and building wealth in good times when everyone earnings are rising.

It another matter entirely to be able to reach that conclusion when the headline profits per share number may not look so good.

There are plenty of companies that have continued to grow earnings in the bad times. In my universe of companies, reverse osmosis water provider Consolidated Water (NASDAQ:CWCO) turned in blockbuster second quarter numbers, as it completed new plants put them in operation selling water in its Caribbean islands service territory.

For the rest, however, underlying signs of wealth are considerably more subtle. They involve delving below the headlines to ascertain whether or not a company is putting the pieces in place for growth when better times return, how well its business is standing up to economic pressures and how well its financial strategy is preserving cash flow and balance sheet strength.

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