Our decision to not use puts or sell off portions of our positions should pay off today as markets across the world have either closed up or are sharply higher as we write. Use futures indicate an open nearly 200 points higher, and that is most certainly bullish. Commodities rose healthily on Monday and it would only seem logical that on this news we would see them lead the way higher along with financials. Levered names along with those who are not premier names will probably be the big risers as they have higher betas and tend to have speculators rush in during times like these. We shall hold through the end of the day unless any of our trading positions hit the top of our trading ranges previously determined.
Oil & Natural Gas
Looking at natural gas plays, the action recently has been ugly. We will have an article out soon discussing our predictions for the 2013 investing year which will also have our outlook for natural gas included. Today we want to highlight Quicksilver Resources (KWK) and EXCO Resources (XCO) which both have pretty hideous charts recently. Looking at Quicksilver, the stock hit a new 52-week low on Monday before rallying sharply. When having to set a new 52-week low it is best to end the day higher by roughly 5% so you can at least do it in fashion! All joking aside, it is tough to like companies with such high exposure to dry natural gas when it is obvious that the industry as a whole is moving towards oil due to its global market and the ability to transport it from region to region.
Although we are not fans of EXCO Resources here we do recognize that the company has a wild card up its sleeve with Wilbur Ross on board. Not wanting to get into speculating too much, but if things were to get worse for the dry natural gas players it would not be unthinkable for him to buy the company outright or do a large capital injection and then use it as a vehicle to consolidate the space. There is the Asia card too, so in a bad subsector this is one of the more intriguing plays but more so for the story lines than the investment outlook.
Monday's session saw Freeport-McMoRan (FCX) break higher and close above the $34/share level which had served as an upwards resistance level since the blowout from the announced oil acquisitions. Obviously a lot of value has been destroyed here, but it appears that the dominoes are lining up much like we thought they would and with that the share price should tick upwards. With Europe calming down, the US avoiding the cliff and China appearing like it is beginning to tick higher one has to imagine that copper is going to move higher and if inflation moves up (a good possibility due to the massive money printing) then both oil and gold should have the bulls return in mass.
Another big mover Monday was Cliffs Natural Resources (CLF) which is benefitting from iron ore prices moving higher. Cliffs is a high cost producer which is loaded with debt and pays a high dividend. Simply put it needs high iron ore prices due to production costs and the demands on cash flow, especially in the current coal environment. If we get a rally in the markets over the next few weeks, these levered names will be solid performers - and should the underlying commodities rally too then these names shall outpace their peers as well. We generally like going for quality, but in situations where big market rallies are possible we have ventured into levered, high cost producers before.
We have been following Uranium Energy Corp. (UEC) for years and highlighting it in our daily commentary recently believing that the shares are due for a rally along with the 'other yellow metal'. Some have called this logic into question but even if we were to assume that uranium prices did not increase from here and that the company's production did not increase and simply flat-lined, we would still be bullish. The reason is simple as the company is unhedged and simply selling into the open market (spot) whereas they could be realizing far more were they to lock production into long-term contracts. To date they have avoided this waiting for the inevitable rise in U3O8 prices and it is a strategy we agree with. Bears should be careful here with the way the next two years are set up in the uranium market because even if everything does not go according to plan for producers or the industry as a whole, there are still plenty of options available to the players to make moves to benefit shareholders. This is something which needs to be recognized.