It seems now there is no safe haven for money, if you have any left at this point you can rest assured that you will likely have less the next day if it’s invested in the market. After reporting record earnings, the last bastion of strength in this market is faltering; the commodity stocks such as POT, TRA, MOS, X, GTI, MEE, ACI, and the list goes on and on are getting sold off day after day relentlessly. There seems to be no reason for the sell off when you consider everything the CEO’s of these companies are saying on their conference calls, MT assures us that metal can still increase in cost and car manufactures will only need to raise the price of a vehicle by .9% to recoup costs and pricing power will remain as steel is in short supply. From the CEO of MOS you hear a similar story in regard to the shortages of potash inventories and the record demand for the fertilizers from farmers around the world, so why the sell off?
I think the reason for the sell off is simply the market itself getting weaker over time, in combination with a Fed decision this week where many analysts are unreasonably bullish on the dollar. I would argue they are bullish for no concrete reason other than it has fallen so much and other countries currencies are no safer than our own because they face an economic peril similar to our own. While this is true, and the possibility of the $USD rebounding strongly in short-order may spark a further commodity sell-off, I think ultimately we will get a rebound in commodities within days of the Fed decision.
The reason I think we will get a rebound in commodities (oil, soybeans, corn, ect) is that the CRB index is still in a solid uptrend holding onto about a 100% gain over the last 9 years. Past commodity bull markets have lasted an average of 21 years producing an average gain of 330%, so this would leave quite a bit more of room for upside on the table, and with a substantial pullback to some simple moving averages it would seem reasonable to begin entering bullish positions if you do not have any existing long positions on the following stocks: TRA, ACI, MOS, AGU, X, FLS, ATW, CHK, EXM, and possibly PCU.
My most favorite of the commodity stocks are the ones that deal with fertilizers, my least favorites are gold and natural gas. I did mention in a previous post that we had a glut of natural gas coming online with all of the exploration coming online, of course I could not predict when traders would ultimately react to the reality that with all these new fields being exploited there would ultimately be lower prices for natural gas with the increase in new supplies. Stocks like HK, CRK, and SD, and even less speculative issues such as CHK and XTO shot up to extremes day after day. The uptrend in natural gas finally broke and within a matter of days gains that took months to build up vanished.
If you want to play commodities on the bullish side I would say protect yourself by buying some call options on the SMN while simultaneously buying call options on the leading issues within the realm of commodities, that would mean going long AGU, TRA, MOS, POT, X and take a stab at a shipper like EXM. I am less willing at this point to put money toward coal and natural gas because there is the possibility that natural gas will fall further, unless of course Aubrey McClendon of CHK can get congress to go along with T. Boone Pickens’ plan of moving our transportation over toward natural gas and away from gasoline. I do believe it would be a good idea, it does burn cleaner and it costs about 1/3 as much based on today’s prices, obviously that would change slightly if we were to begin using more natural gas for transportation the price would go up, but then there would finally be a real alternative to gasoline in the intermediate-term while we wait for more viable alternative energy vehicles to be mass produced.
To profit from the possibility of Aubrey’s & T Boone’s attempts to coerce congress I would be interested in FSYS and CLNE. FSYS makes alternative fuel conversion kits and allows vehicles to run on natural gas. CLNE sells CNG and LNG, as well as helps fleets (think of a city’s bus fleet) convert over to CNG & LNG–they also build and maintain CNG & LNG fueling stations. Imagine if even half of the current gasoline stations added a natural gas fueling pump terminal, how much money could CLNE make off of that? Seems like valuations could get pie in the sky quickly if they can convince congress to move on the issue.
So, in summary, short-term there may be a further decline in commodity stocks but I would use the weakness to buy into, offset some risk by buying call options on SMN, to further avoid risk from too much commodity exposure I would short gold on a failure of its 200dma @ 889 on the spot market with a target of 855, then 750 with a break of 840. GL to everyone!