Topic: Daily Advice

How our Inner Circle service can help you create a winning stock market trading strategy

When you join my Inner Circle service, you get to ask me your own personal investment questions, plus you get to see what other Inner Circle members have asked, along with our answers. So you can see how the service works, and get a sense of how it might help your portfolio, I’d like to share just a couple of member questions about stock market trading strategy and stock ideas. I hope you enjoy and profit from them.

Q: Dear Pat: My 79-year-old aunt has inherited $250,000 and has asked me to invest the money on her behalf. She is in good health, has pensions that cover her routine expenses, and two financially independent children who will inherit her estate.

My thoughts are to invest half the money in about 10 high-quality stocks, as per your long-standing investment advice (essentially on behalf of her children), and leave the other half more liquid to cover contingencies, such as the possible need for in-home care.

My two questions are: 1) is this a reasonable stock market trading strategy for the non-liquid portion, and if so 2) what is a good choice for the liquid portion?


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A: Our recommended stock market trading strategy would be for your neighbour to spread the stock portion of her holdings out across most, if not all, of the five economic sectors. Choose from our Buys and Best Buys in The Successful Investor and Wall Street Stock Forecaster.

Holding 50% in liquid assets sounds about right, if these are the only liquid assets she has.

The best way to protect cash is to keep it in cash equivalents, such as T-bills or other short-term government obligations, or in guaranteed investment certificates (GICs). High-yield savings accounts, such as those offered by President’s Choice or ING Direct, are good choices, as well. We now advise against investing in bonds, because interest rates are too low.

Q: What do you think about Petrobras, the Brazilian oil company?

A: If your stock market trading strategy included emerging companies, Petrobras is definitely worth a look.

Petroleo Brasileiro S.A. ADRs, symbol PBR on New York, commonly known as Petrobras, is an integrated petroleum company that operates in Brazil and other parts of South America. It’s now expanding into North America and Europe.

The Brazilian government established Petrobras as a state petroleum monopoly in 1953. Since then, deregulation and privatization have lowered the government’s control of the industry. However, the state still owns 55.7% of Petrobras.

At the end of last year, Petrobras’ average daily production was 2.4 million barrels of oil equivalent. This consisted of 82% oil and 18% natural gas. The company also owns and operates 15 refineries, 998 service stations in Brazil and 990 abroad.

The rising foreign exchange value of Brazil’s currency, the real, has hurt the contribution of Petrobras’ foreign businesses. Brazil’s economy continues to improve, so the real will likely remain strong. The country’s brighter prospects have helped it attract foreign capital for various projects.

For example, the China Development Bank recently granted Petrobras a $10 billion U.S., 10-year loan. The company also received $2 billion U.S. in new financing from the Export-Import Bank of the United States, an agency of the U.S. government.

These funds will help Petrobras develop several promising discoveries in the Santos Basin, off the coast of Rio de Janeiro. The company has a 65% interest in the Tupi field, which it believes could hold between five and eight billion barrels of oil. The other is the Sugar Loaf field, which the company estimates to be five times the size of the Tupi field. Both fields are technologically challenging. The Tupi field, for example, lies beneath 2,140 metres of water, 3,000 metres of sand and rock, and 2,000 metres of salt. However, Petrobras is a recognized leader in ultra-deep offshore-oil extraction.

Petrobras benefits from having a virtual energy monopoly in Brazil’s emerging economy. While the Brazilian government will let foreign oil companies help develop its vast offshore oil fields, Petrobras will still be the lead operator, and will own at least 30% of all new wells. But despite this advantage, Petrobras is still subject to the higher economic, currency and political risk that all Brazilian stocks entail.

The company has ambitious capital-expenditure plans. In the first half of 2009, it spent over 32 billion reals on capital expenditures, up 57% from a year earlier. Most of that went to exploration and production in Brazil.

Petrobras is a buy for aggressive investors.

We plan to update our advice on Petrobras for our Inner Circle members on a regular basis. Meanwhile, if you have investment-related questions like these, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service. Click here to learn more.

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