Tuesday, June 20, 2006


As usual the conventional wisdom on Wall Street is wrong again. Smart investors learn to "fade" the initial reaction to news; the first reaction by Wall Street Analyst is wrong more often than not. The announcement by China that it plans to stock a Strategic Petroleum Reserve sent oil prices higher today. The market does not appreciate the message that China is sending to Iran. The stated deadline for Iran to accept international incentives is only 9 days away. China, while not willing to publicly come out in support of sanctions on Iran, just sent another message that Iran cannot count on China to stand in the way of sanctions. As nations around the world build SPR's, the power is taken away from those who are willing to use oil as a political weapon. There has already been a huge build up of reserves around the globe. There is more oil in storage right now than ever before in the history of the world (there is more in tankers floating around on the ocean than ever before). No, we do not want to sanction Iran, but Iran's economy will collapse if sanctions are used. The world will find other ways to replace Iranian oil. Saudi Arabia reports that it has reduced production because supply is greater than demand. Production is growing from the Chevron pool found just last year in the Gulf of Mexico.

Morgan Stanley re-instituted coverage of CAL, AMR and JBLU this morning. Just as you would expect, from a sell side broker, the stock is being covered after it has run from $5 to $28 in four years. Individual investment brokers at major sell side houses such as Merrill Lynch cannot recommend a stock unless a company analyst has at least a neutral rating on the stock. No coverage means your broker at these firms cannot bring the stock to your attention. Last September, when CAL traded for $9, Morgan Stanley offered no coverage, now at $27 the company has put a neutral rating on the stock with a price target of $32. The company recommends that the stock only be purchased on "dips" of 10 to 15%. I can tell you with confidence that sometime in the next three years, Morgan Stanley will upgrade the stock to a buy. The problem is that this will happen after the company has had one or several strong quarters of high earnings growth.

The key to making money in all stocks is to buy before periods of high earnings growth show on the company books. It does not take a rocket scientist to realize that a company like CALthat is increasing revenues at the rate of 20% per year and one that is selling all the product it has the capacity to supply at higher and higher prices is going to see an increase in earnings. You should beat Wall Street to the punch and put serious money in CAL. Do it before a deal is made with Iran. The pressure on Iran has been building for almost 5 years. It should be no surprise when the combined forces of Europe, the USA, Russia and China are able to convince Iran that it is in its own best interest to "make a deal".