The Fed indicated yesterday that they are still present and will act like the adults in Washington as the US nurses its economy back to full strength and investors and market participants fret about what a failure to reach a deal on the fiscal cliff will do to liquidity. Right now we believe that it is necessary to re-inflate, and once normal growth returns to the equation we can remove that added variable of easy money by reducing the money supply and higher rates (which retirees and savers will most certainly appreciate). However the current environment is quite conducive to commodity investing so we think we are going to be in a sweet spot in 2013 with growth ticking up and low interest rates.
Oil & Natural Gas
One of our holdings, PDC Energy (PDCE), was downgraded yesterday by Global Hunter Securities. Investors sold shares off on the news, but the analyst did raise his price target for the shares at the same time which was good news. The downgrade was a maneuver done simply because there was not much room to go to meet their price target so they took it down one notch. This had nothing to do with their Utica results, which Global Hunter Securities agreed were good especially when considering factors such as the lateral length and frac stages, but everything to do with the production constraints from the Wattenburg where the company is having drilling success but issues with midstream capacity. Shares finished down $1.28 (3.83%) to close at $32.10, but they did show a lot of strength fighting back to positive territory around the midday point before falling back to the lows of the day by the session close. This is a buy in the $28-31/share range, so on these pullbacks readers want to be paying attention to build up their positions.
The price action in Molycorp (MCP) was not as bad as we had anticipated, nor as bad as the after hours trading indicated that it might have been. This strength can most certainly be attributed to comments that analysts from two firms, Dahlman Rose and JP Morgan, who closely follow the company made yesterday. Both indicated that the departure of the CEO was probably a good thing in the wake of the Securities & Exchange Commission investigation and the missteps that the company has had recently (engineering issues for instance). We think that the individual who has assumed the interim position is well equipped for the job and we would not be surprised if at the end of the day he ended up with the CEO title or at least expanded responsibilities under new leadership.
AuRico (AUQ) finished higher by $0.52 (6.67%) to close at $8.32/share yesterday which puts it above the $8/share level which we believe is of importance. We went bullish the stock after it was blasted following the disclosure that they were having production issues and since then shares have rebounded, rewarding readers who bought in that moment of panic selling. This is a precious metal stock we believe readers should have in their portfolios even at today's prices as we think that the fair value here is somewhere between $10-15/share. The company can get to that valuation by executing on the business plan and having the results increase their value or monetize some assets and/or the entire company. There is a lot of value here, and with resource companies it is our experience that eventually that value is realized, so continue to be patient with this one.
Shares in Vale (VALE) have been steady risers recently with shares rising above the $18/share level and are within reach of taking out the $19/share level. Volume is getting back to normal and yesterday we saw 17.4 million shares traded. We think that the stock can continue its slow melt-up barring any hiccups in the fiscal cliff negotiations or in China's economic growth. Investors interested here should pay attention to the prices of the commodity and steel production. Until the stock begins to move higher, you do get paid to sit around and collect a nice dividend payment which for the most part appears to be pretty safe and will minimize the opportunity risk that you miss a move elsewhere in the commodity space.
We had a reader comment about the coal complex yesterday, and it was as if they had read our mind because we have been watching with amazement recently as Alpha Natural Resources (ANR) moves higher daily it seems. The company has thus far defied Newton's theory of gravity with the latest run, however we were looking at the chart and noticed that shares have rallied so significantly recently that we are now at levels where we could be facing upwards resistance in the next few days. Due to the resistance we are seeing, we remain cautious on this latest run as it might very well be running out of steam. We advised readers to sell out of the trade we called around the $7/share level once shares were higher by 10% and again when they were above $8/share, but for those still involved in the trade we wanted to point out the hurdles to this bull run continuing in the near-term without a pullback for consolidation.
Disclosure: I am long PDCE.