Yesterday was looking like it was going to be a decent day, especially as many of our commodity stocks were green following the week's large rally. Alas, it was not to be as the Fed came out and indicated that they may back off of their quantitative easing programs by the end of the year now that the fiscal cliff has been avoided. Yes the market disliked this revelation yesterday but we think that the Fed would not walk away from a job unfinished and will see the economic turnaround all the way through. So if they believe that walking away at the end of the year makes sense, then we are that much more bullish of the economy moving forward. Further simply because they end their quantitative easing, we would argue they move to a neutral position before they would begin to scale back (above the natural rate of those securities that they hold on the balance sheet maturing) all the liquidity they have made available. With that said, we think with the economy getting stronger and that liquidity already in the system will help propel commodities and commodity stocks higher in 2013 - even with a less involved Federal Reserve.
Oil & Natural Gas
We have discussed over the last few months the need for investors to gravitate towards the more 'oily' plays within the oil and natural gas plays, especially as it pertains to the shale plays. It is a trend which has been developing over the years and now with all of the focus on NGLs and production rising dramatically there, just as it did with dry natural gas, we think it is ever more important to find the quality oil plays out there in order to diversify the portfolio. With EOG Resources (EOG) hitting a new 52-week high yesterday, we think that our theory is right on as across the board it is the 'oily' names trading at or near 52-week highs whereas many other players are hobbled by their dry natural gas exposure.
Cheniere Energy (LNG) once again hit a new 52-week high yesterday, and this march higher is quite impressive. We have highlighted this stock recently and over the months discussed the business and outlook, but today we simply want to point out one important note. Late in the day the shares failed to retake $20/share and fell off into the close. Now whether that is a near-term top or not is hard to say, but certainly something to watch in the next few trading sessions.
Speaking of tops and upwards resistance, we saw Alpha Natural Resources (ANR) and the rest of the coals rallying yesterday and the share above the $10/share level for most of the day. When we checked in after the market had closed we noticed that the shares had in fact closed above the $10/share level to put the stock at fresh 6 month highs. Based on the price action yesterday we would watch the $10.20/share level moving forward.
The Justice Department reached an agreement with Transocean Ltd. (RIG) to settle the deepwater Horizon Gulf spill. This sent shares higher at around 11:15 yesterday as the cost of the settlement was announced to be $1.4 billion in total ($1 billion in civil penalties and $400 million in criminal penalties). The company had already booked a $1.5 billion contingency on its books, so from that standpoint it was a win and the settlement allows investors to better value the entire company now that one of the larger question marks has been removed. There is still other litigation that the company is working through in regards to the spill, but this was potentially the biggest issue as it was with the Federal government.
As readers know, we are not the biggest fans of solar energy. Actually, it would be fair to say we are not fans at all. We were asked what we thought the best name in solar was yesterday and the answer to that is First Solar (FSLR) which in our opinion has the best technology and prospects. Just because we like the name in a bad sector does not mean we are bullish on it, because it is after all in the solar energy sector and we believe that this newfound strength will be sold into. We will be watching to see if there is an uptick in calls sold or increased put buying in the near future because the options market is usually a pretty good forward indicator when it comes to situations such as these.