What do "We" think of Penn West" ?

[Guest]

Re: What do "We" think of Penn West" ?

Heebner: Commodities Will Boom for Years


<< "Petrobras could become the biggest stock in the world," Heebner told Fortune. >>

Ken Heebner, the mutual fund guru often compared to Fidelity legend Peter Lynch, is betting big on China, Brazil and — by extension — clearly no let-up in raging demand for raw materials.

Heebner's $7.39 billion CGM Focus fund has racked up five-year annualized returns of 34.91 percent and nearly 11 percent to date in 2008.

The S&P 500 is off 5.63 percent so far this year.

Many are calling for a big push into financials on an eventual U.S. recovery. Heebner is sticking with commodities: CGM Focus is heavily in invested global steel and oil companies like ArcelorMittal, U.S. Steel, Schlumberger, and Brazilian deep-sea oil leader Petrobras.

"Petrobras could become the biggest stock in the world," Heebner told Fortune.

It's a somewhat contrarian bet that growth in China and other big emerging markets won't be slowing down anytime soon. Among his more startling ideas: Oil will exceed $200 a barrel and steel prices will double.

He's also presuming that the U.S. economy is going to head into double-digit inflation inside five years, a scary enough proposition, and one that could cause his foreign-stock strategy to implode — if a U.S. slowdown triggers a round of global malaise.

But you can bet that if a slowdown is a real threat, Heebner won't be anywhere near the pain. His style is to bet big on what's next, then bail out at the first sign of trouble, rather than follow a thesis into a pit.

"I'm not waiting for Morgan Stanley to tell me there's something wrong in China. By then it's too late," he tells Fortune.

Heebner has taken long odds before: He got into copper miners in August 2005. Copper doubled soon enough. He went heavily into homebuilders and made a mint, getting out just a few months before the housing slide began.

He even shorted Countrywide, the mortgage lender, in October 2005. It took a while, but the troubled lender eventually caved and Heebner cleaned up.

As a result, CGM Focus trades — a lot. Fortune calculates that the fund holds 20 to 30 stocks at a time but bought and sold the equivalent of the whole portfolio nearly four times in a year. That trading pushes up costs for investors.

Among Heebner's current top holdings are:

The Mosaic Company (MOS)
Brazilian Petroleum Corporation (PBR)
Vimpel-Communications (VIP)
United States Steel Corporation (X)
Hess Corporation (HES)
Schlumberger, Ltd. (SLB)
Deere & Company (DE)
ArcelorMittal (MT)
Transocean (RIG)
Freeport-McMoRan Copper & Gold (FCX)

[phirang]

Re: What do "We" think of Penn West" ?

I dont get it: these unbounded increases in commodites are going to be financed by whom? China can eat 20%+ yoy inflation?

[Guest]

Re: What do "We" think of Penn West" ?

I dont get it: these unbounded increases in commodites are going to be financed by whom? China can eat 20%+ yoy inflation?

Phirang - I just threw it out there to see what other people think. My sense is he's going to turn out to be right here. I ran out of fingers to count the number of times I've read on these pages arguments purporting to explain why the entire China driven commodities phenomenon "absolutely positively would derail". Lots of perfectly logical reasons have been given for an event which has resolutely failed to materialize. I bet you all the sophisticated and sober predictions we read today why it now must happen will prove incorrect as well.

You could read a lot of posts in this direction around here a year and a half ago. The thesis was, commodities consumption occurring today is a delicate, tenuous event constructed out of fiat currency goosed trade with the OECD nations. Ergo, it would collapse as soon as the heroic US and other OECD consumers caved. I thought these analyses were incomplete (i.e. "wrong") 18 months ago and I still think they're wrong despite our having yet more reasons to expect a US led sharp global recession.

When Europe was reconstructing after WWII, there were a couple of decades in there when almost nothing could have derailed their growth. Their post WWII boom was only partly driven by export markets for their goods. The really big story was what was happening internally within their economies. They were at a point where they were simply "ready" to embark on massive new industrialisation. Instead today we look at China and think their evolution is "at the beck and call of global liquidity". I think there is something persistently incorrect in that viewpoint, despite all the overlays of financial sophistication which the thesis is wrapped up in.

20% YOY inflation is a very different animal in an economy growing 12% than it is in a stagnant economy. And that observation is particularly cogent if the economy in question has been growing at 9% - 14% uninterruptedly for 15 years. Lots of economic dislocations occurred across those 15 years. This level of inflation would flatten the US. In China, it is more like a nasty choke collar, but not a flattener. A recession will mitigate that inflation rate there - but the infrastructure buildout will barely pause. May not even pause at all. This is what Heebner is figuring, and I bet he's going to turn out to be correct.

[phirang]

Re: What do "We" think of Penn West" ?

Right, you may have infrastructure build out, but does it make sense to do so when you've parabolic energy cost increases? If the Chinese took a breather for a few years, they could wait for all the new energy capacity to come online and all the bottlenecks to attenuate.

China produces nothing exceptional: their exports have one appeal, and that's cost. The export deflation using several tools: 1) slave labor 2) no environmental costs, which enable 3) cheapest electricity in the world, sans OPEC.

Now China has managed to build an excellent trade surplus under this policy, but it's a one-trick pony: cheap energy. Eventually, China won't be able to export deflation, and the game is up.

Look at coal prices: $150/ton of thermal, $250/ton met. NG has doubled since august. Oil has doubled. Their refineries are in frankly shit shape, and their energy infrastructure is, from my research, at the brink. I just don't see how their model can persist for another 5 years.

The other danger is if heebner is right, then China's energy-intensive industry and society will induce a postiive feedback loop that'll reduce their economy to industries that have such high energy costs that either 1) the energy infrastructure, unable to pass the costs on to the consumers, collapses, or if it doesn't, induces nasty inflation or 2) they have to appreciate the RMB. RMB appreciation would run contrary to their strategy...

[Guest]

Re: What do "We" think of Penn West" ?

China produces nothing exceptional: their exports have one appeal, and that's cost. ... China has managed to build an excellent trade surplus under this policy, but it's a one-trick pony: cheap energy. ...

Phirang - A one trick pony? ... how many more engineers are coming out of their universities than out of North American ones? If that's 3 to 1, or 4 to 1, they may yet have a few other cards to play. Japan's exports were dismissed as "low tech, discretionary purchase, energy intensive factory floor" in the late 1960's. It took them little more than a decade to vault their manufacturing to levels which had American managers doing pilgrimages to Japan to learn to better emulate - what? They accomplished that transformation in a scant 10-15 years? A 1.3 billion population means China (and it's just one country here, while if you want to discuss commodities demand you need to look around 360 degrees further) have a population 4.33 times larger than the US.

On a straight comparison that already means 4.33 times as many engineers, and skilled design professionals of every stripe, as the US can or will crank out in the next decade. To fall back on their energy intensive past 15 years as a factory floor to the world and extrapolate that into the future may be in some part an error. If we go by the Japanese history, they are due at least to begin to overcome this initial stage fairly soon, particularly when the energy input costs are pressing them so hard to do so. We are crediting America with all sorts of "dynamism" in reinventing itself to overcome an overwhelming energy dependence implicit within our own society's sprawl and infrastructure. Give credit to America for something it has not yet proved, and we are bound to give some credit to China, for at least some innovation potential embodied by this 4 to 1 preponderance of engineers.

You may be entirely right Phirang, I have no huge conviction here to the contrary. I am just putting forward the more obvious qualifiers as to why it's by no means assured that as energy and commodity prices soar into the stratosphere China will buckle under this strain sooner than others. That is a very healthy looking balance sheet they have there, to cover a lot of eventualities for a few years, no? Meanwhile, you look at our balance sheet for a hint of fiscal flexibility while staring at $200 per barrel oil, and it makes you want to crawl under a rock and hide. We seem to have something that looks suspiciously like *zero* flexibility.

[c1ue]

Re: What do "We" think of Penn West" ?

I don't know if the assumption that China can continue their 'economic miracle' is valid given a possible choice between cheaper energy vs. cheaper food.

China's trade surplus had a serious 10% drop in February:

http://news.xinhuanet.com/english/20...nt_7758624.htm

China's monthly trade surplus shrank to 8.56 billion U.S. dollars in February, roughly one third of the level in the same month last year, the General Administration of Customs said on Monday.

This may be a one-off, but note that the US trade deficit widened due to a combination of higher oil, fewer domestic cars being sold, and more foreign cars.

Cheap labor based consumer goods apparently are not benefitting.

[phirang]

Re: What do "We" think of Penn West" ?

Good insights from all...

I think C1ue got it spot on: the food inflaiton is key. Unfortunately, there's a positive feedback between energy costs and food, especially now since China imports quite a bit of it, in addition to dealing with fertilizer costs and the nasty potash cartel...

[Guest]

Re: What do "We" think of Penn West" ?

PennWest ( PWE ) is down something like 15% in the last week. What's the story here?

[GRG55]

Re: What do "We" think of Penn West" ?

PennWest ( PWE ) is down something like 15% in the last week. What's the story here?

It's just tracking most of the rest of the Canadian petroleum sector. Stalwarts like Suncor are also off quite a bit.

[Guest]

Re: What do "We" think of Penn West" ?

It's just tracking most of the rest of the Canadian petroleum sector. Stalwarts like Suncor are also off quite a bit.

Thank you. I am curious though why with oil bouncing off highs and talk of possible military conflict with Iran (who promises to muck up supply for everyone in the region) that it would fall off now as a sector.

[GRG55]

Re: What do "We" think of Penn West" ?

Thank you. I am curious though why with oil bouncing off highs and talk of possible military conflict with Iran (who promises to muck up supply for everyone in the region) that it would fall off now as a sector.

I think that we should expect steadily increasing volatility in both commodities and the commodity producers as the present inflation progresses.

It could be a great market for nimble and skilled traders, but very unnerving at times for investors. The last truly unnerving time for [long] oil investors was 2006, and we may be at the start of another period like that.

[touchring]

Re: What do "We" think of Penn West" ?

Is this a buy now? Any thoughts?

[touchring]

Re: What do "We" think of Penn West" ?

Here's 7 years later...

[Mega]

Re: What do "We" think of Penn West" ?

Can't see what you posted, but i expect them to be doing badly right now............once Russia/Iran have the Middle East sorted i expect $100+ Oil.............
Mike

[touchring]

Re: What do "We" think of Penn West" ?

Can't see what you posted, but i expect them to be doing badly right now............once Russia/Iran have the Middle East sorted i expect $100+ Oil.............
Mike

When the rail companies shipping oil have gone into a price war. No wonder Buffett is hedging his railway bet.

http://www.theglobeandmail.com/repor...ticle26835859/