Earnings jump 91% = Sell Off?
Research for Online Investors

by John Dalt

7/30/10

Our favorite company reported earnings Thursday morning.  Exxon’s (XOM) second quarter earnings jumped 91%.  XOM is the world’s largest oil company not under state control.  They reported $7.65 billion in profits, or $1.60 per share, almost double last year’s second quarter $0.81 per share.  Revenue was up 24% to $92.48 billion.

In the earnings conference call, David Rosenthal, XOM’s Vice-President of Investor Relations said oil equivalent production was up 8% to four million barrels per day.  The U.S. government should pay attention to the next statement concerning the drilling moratorium in the Gulf of Mexico.  Rosenthal said there is a “slight delay in the Gulf of Mexico, but we are progressing full speed ahead in the rest of the world.”  While our government wrings their regulatory hands, the rest of the world is producing energy to sell to us at higher prices because we refuse to produce our own.

After writing all this glowing information about XOM, full disclosure requires us to tell you our Long-Term subscribers were “stopped out” of Exxon during the sell off earlier this month.  Even our favorite company must be sold if it violates our rules.  We have our target price for re-entry when the time is right.  Perhaps you would like to join us for the great run we expect that is waiting on patient investors.  Oh, just so you know without having to check, XOM has sold off since their earnings announcement!

According to the Energy Information Agency (EIA), U.S. crude oil imports rose 7.7% in May to 9.622 million barrels per day. This is the second highest import total since January 2009. 33.7% of all our imports came from Canada and Mexico. Canada has been our top supplier since March 2006. Canada’s May crude oil sales to the U.S. were up 6.1% over the month earlier totals. Canada’s sales were the highest on record for the month of May. Imports from Saudi Arabia dropped 12.2% from April levels. While Presidentie’ Hugo Chavez spewed venom at the U.S., Venezuela sold us the highest amount of crude oil since September 2009.

Here is an interesting chart that shows how many barrels of oil it takes to buy one ounce of gold.

It presently takes 14.91 barrels of West Texas Intermediate Crude to buy one ounce of gold.  Is there a pair trade here?  You can read our Investor Resources article on pair trades to refresh your memory.  We think gold is overpriced with the Fed happy talking about deflation.  What about oil?  We don’t doubt that crude oil could take a dip if the equities market does, but the world economy runs on oil.  We are only one quarter of significant growth away from every talking head on TV talking about shortages.

We think this relationship could easily move back to ten barrels of crude oil equals one ounce of gold. A trade for your consideration is; short gold and go long oil. We opened one leg of this in play today in the SwingTrader.  If gold moves lower and oil higher, that brings us closer to clearing the trade and then go long gold. The fear of deflation won’t last long with rising energy prices because that means the world economy is improving. Good luck.

To the Mailbag:
Hi John, thank you for the great article on BP. The media, in general, is so biased except for FOX.   Living in Florida, I have been genuinely concerned about the oil spill. You have put it in perspective for me. I keep hearing that residents affected by the spill are not receiving payments "from BP" as they were promised. What is Obama doing with all the dough he expunged from the company? BP should have replied with an explosive, "NO"...I trust the British company more than I trust our government.---subscriber G.C.

John’s reply: I agree. Boy, I caught heck on our MarketToday Article titled White House Shakedown.  Quite honestly Ken Feinberg did an excellent job on the 911 Trust Fund, and I believe he will do his best.  But, I think people are going to be disappointed no matter how hard they try.  The bigger concern is the White House demanding money from a private company, and getting it.  Finding fault and the appropriate remedy is what the judicial system is for.

I am teaching class (mathematics) today but elected to dump my 2500 shares of GE with about $4,000 gain - most long term.  I have been waiting to make this move.....you pushed, I jumped.  Thanks for the nudge. ---subscriber D. M.

John’s reply:  GE is on our list of short candidates in the SwingTrader.  I would like to ride ‘em in August, before the ex-dividend date.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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