Seeing Less Faith

As of late, it seems there is less faith in the bull on Bay Street. More and more analysts are switching gears and recommending bank stocks and bonds, as well as getting out of oil and gas stocks.

All of this is happening as the U.S. consumers are spending less and slowing down the economy. As the economies on both sides of the border slow down, interest rates are also likely to go down. In Canada, there is already talk about one percentage point decrease throughout 2007.

Interestingly, the majority of bears reside in the energy sector. While for most of 2005 and 2006 the oil and gas sector was overweight in most portfolios, these days we are seeing institutions slashing their exposure by half, if not more. Most analysts are citing unusually warm winters in North America, which, thanks to global warming, has become a fact of life. I only wonder what they might say if and when another little war pops up somewhere.

Now, this bearishness is an almost 180 degrees turnaround from the early 2006 forecasts. At the time, analysts were expecting record natural gas prices and oil averaging $80.00 a barrel. However, so far, natural gas futures have shaved about two-thirds off their recent highs, while crude oil December futures currently stand below $60.00. This is why the Street is running for cover, buying bank stocks to hedge losses against energy stocks, and bonds to offset weak economics.

As far as what Bay Street likes, it seems with falling interest rates, real estate investment trusts are becoming more appealing. Also, instead of pure energy stocks, power suppliers and pipeline stocks offer some growth potential.

I would just like to add gold and silver to the list. In contrast to sectors that were popular during the summer and are now all out of whack, gold and silver’s fundamentals have not changed all that much, and are actually surprisingly strong and charging ahead.

Supporting the argument, the supply of gold bullion from mines has dropped two percent year-over-year, while cash costs have gone up by about ten percent. This means that while the supply is contracting, it is that much harder to find gold producers with low cash costs.

In addition, in spite of the September selloff and cheap(er) gold made available to buyers for the first time in the past seven years, the European central banks could be short anywhere between 20% and 25% from their typical annual gold quota. Meaning, central banks should again find themselves on the buy side, led by Germans.