SET Monthly Issue May 2016

| May 3, 2016


It’s something all of us have had a hunch would happen sooner or later.  Crude oil prices would eventually bottom out and the energy business would rebound.

But it’s the timing that’s been devilish to decipher.  The risks of getting back in too soon have been tough to ignore.

We don’t profess to be market timers.  History gives us constant reminders of the foolishness of this approach.  It also gives us some clues and enduring economic truths to try and put in perspective.

When we look at the energy business right now, we see the signs of resurgence.  Will prices take another dip before they begin a steady climb back up?

Perhaps so, but because trends are forces to be reckoned with, and because the laws of supply and demand can’t be manipulated for long, we’re ready to take a stake in energy.

When we survey all of the opportunities in the global energy business, we see the most attractive combination of upside and safety primarily in the smaller U.S. based companies, not the giant multinationals like Exxon-Mobil $XOM.

It is this scenario that leads us to the PowerShares S&P SmallCap Energy ETF $PSCE.


That’s where countless energy businesses have been floundering for the past few years.

Repercussions have rippled through the economy.  From stock market jitters to bank loans gone bad, plunging oil prices have polluted countless financial shores.

Small to mid-size players in the energy business have been hanging on for dear life.  More than a few have gone bust.

It’s been like watching tornadoes crash across the Oklahoma oilfields and not being able to do anything but run for cover.

This leaves us with well-managed companies holding good assets, but battered balance sheets, ravaged revenues, and stock prices that have suffered a major meltdown.

So when we look at PowerShares S&P SmallCap Energy ETF, we can’t help but wonder, “Is it time to get back in?”

Here’s why we believe it is. 


To simplify our look at the complexities of global energy, we’ll carve the landscape into two pieces… OPEC and Non-OPEC producers.

The OPEC countries want to cut production and hike prices, but so far, they haven’t been able to.  There is no shortage of intrigue, subterfuge, and hidden agendas, but a big reason why is the relationship between Saudi Arabia and Iran.

Saudi Arabia won’t step up to the plate and commit to higher prices until Iran does, and, as you know, Iran marches to its own drummer.

But there’s too much money at stake, so we believe that before long, there will be some kind of an accommodation.  The Iranians and the Saudis don’t want to leave money on the table.

The OPEC meetings held in Doha, Qatar last month, where efforts to hike prices failed, have laid the groundwork for some kind of a deal to be cut.  Our position is that despite all the mutual distrust, profits will prevail, and the Saudis and the Iranians will cut a deal.  The Iranians will agree to production cuts, price increases, or both, and this will unleash years of increased energy prices.

What about the Non-OPEC producers like Canada, the US, Russia, Brazil, and China?

These countries will play follow the leader.  In fact, the Non-OPEC producers may well be more aggressive with pricing and production limits.

We are already seeing this.  According to U.S. Energy Information Administration, US crude oil production has hit the lowest level since October 2014.

This leads us back to the heart of the matter.  Have oil prices really hit bottom?

Here’s where they’ve been for the past two years…


But rear-view mirrors are of limited use.  Our search for the bottom needs to be guided not just by the past, but by the future.  And this is why our belief that the Saudis and the Iranians will negotiate an agreement sooner rather than later means this is a good time to invest in the PowerShares S&P SmallCap Energy ETF.


The SmallCap Energy ETF is designed to track the performance of the S&P SmallCap 600® Capped Energy Index.

These companies are on the front line of the oil patch.  They are oil and gas explorers, producers, distributors, and refiners.  They are also involved in services, and operating pipelines.

The top five holdings and percentage weight for PSCE:

Company Name Ticker % Weight
PDC Energy Inc PDCE 15.35%
Carrizo Oil & Gas Inc CRZO 10.38%
US Silica Holdings Inc SLCA 8.72%
Synergy Resources Corp SYRG 5.31%
SEACOR Holdings Inc CKH 4.91%

A Closer Look At The Top 5 Holdings

PDC Energy is an independent exploration and production company.  It produces, develops, acquires, and explores for crude oil and natural gas in Colorado and Ohio.

Carrizo Oil & Gas is in the business of oil and gas exploration, development, and production.

US Silica Holdings is a domestic producer of commercial silica, a specialized mineral used for products ranging from bricks to windshields.

Synergy Resources is in the oil and natural gas exploration and production business.  Its operations are focused on northeast Colorado.

SEACOR Holdings operates & markets equipment in the offshore oil and gas, shipping, and logistics sectors. 


The Vitol Group, based in the Netherlands, is the world’s largest independent oil trader.

One of Vitol’s senior executives is Christopher Bake.  Late last month, Bake said, “Especially over the last few weeks, there’s definitely a sentiment in the market that we’ve bottomed.” 

If crude oil prices start to slip once again, the companies tracked by this ETF will not do well.  We are recommending the PowerShares S&P SmallCap Energy Portfolio $PSCE because of the opportunity for significant upside.

A more cautious investment would be an ETF like the Energy Select Sector SPDR $XLE which has exposure to the large cap, global firms.

But even without a dramatic spike, and even if we see a slow firming of prices that leads to a growing consensus that the worst is over, PSCE can do extremely well.

We are assigning a fairly tight stop loss price to our recommendation, in order to minimize loses should the crude oil price pendulum take a severe swing.  Recovery from another reversal could take quite a bit of time.   


Trade Alert

Buy: PowerShares S&P SmallCap Energy ETF (PSCE) up to $17.50

Recent Price:  $15.66

Price Target: $27.00

Stop Loss:  $13.75



We left the tech party a few months ago when we sold our positions in two tech-driven.

Good thing…because with what’s been happening with industry bellwethers such as IBM, Intel, and Apple, the tech sector is not a prosperous neighborhood for ETF investors right now.

Apple reported its first year-over-year slump since 2003. Quarterly revenue fell to $50.6 billion from $58 billion during the same period last year.

The problem is evident.  Skidding iPhone sales.  And it’s virtually impossible to find anyone who’s convinced this is about to change.

IBM’s problem is identifying a workable business strategy, and Intel has been humbled by the decline of the desktop.

We’ll keep an eye out for opportunities in the tech sector.  For now, we’ll take a breather.



. . . .  First Trust NASDAQ Community Bank Index Fund $QABA – HOLD         

The price target is $46.00.  Continue holding.

. . . . Aberdeen Chile Fund $CH – HOLD

The price target is $11.00.  Hold

. . . . SPDR S&P Homebuilders $XHB – HOLD

The price target is $50.00.  Continue holding.

. . . . Market Vectors Retail ETF $RTH – BUY

The price has dipped below our buy up to price of $77.50. The price target is $90.00.

. . . . iShares Medical Devices ETF $IHI – HOLD

$IHI is continuing to climb.

The price target is $140.00. Continue holding.

Portfolio Changes

  • This month we’re buying PowerShares S&P SmallCap Energy ETF (PSCE) up to $17.50
  • Move Market Vectors Retail ETF (RTH) from Hold to Buy… the price has dipped below our buy up to price of $77.50.


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