The surprise ECB rate cut will be good news for the U.S. dollar and commodities priced in euro terms, such as gold but will have little benefit outside of that in the short-term. Long-term the move should help to shore up the European financial sector and nurse the southern economies back to health, but the only real good news coming out of this is that Europe has a greater chance of seeing growth return faster than it would if rates had remained at 0.50%.
The Bank of England left rates and their buying program unchanged yesterday as well, and that too shall be good news.
With the surprise jobs number here in the U.S., the yields are moving sharply higher on U.S. Treasuries and we could see a new prolonged rally in the U.S. Dollar Index as fixed income investors look to deploy capital in a market where interest rates could be rising. That would open up the FOREX markets to see more demand for U.S. dollars from many of the large currencies, including the euro, yen and Canadian and Australian dollars.
This morning the precious metals are under serious pressure with gold falling below the $1300/ounce level. The trade we recommended for traders being short gold miners and long physical gold should be working today.
Stock of the Day:
Chesapeake Energy (CHK) saw the bears come out of hibernation this week and punish the company for their first misstep in some time. The company reported a pretty strong quarter considering the big changes underway there, but the market did not like the fact that production will take a hit of 9,000 BOEPD due to issues ranging from weather to asset sales. Investors in the E&P crowd are becoming very fickle as they over analyze nearly everything and seem to desire the best of both worlds when you can only have the best of one world. We have shaken our heads as investors have called for companies to sell off their production to fund new exploration and pushed the shares higher when plans are announced to do so only to sell the shares down when it is realized how much that will affect production numbers and the price to be realized. That is the case here with Chesapeake and with capital expenditures being reined in under the new management team one can expect that it will take longer to replace this lost production and the revenues derived from it, especially if it is high value oil production.
We remain bullish the name long-term, but this is the short-term pullback we have been waiting for and writing about in this name. We hit some support already but we think the $25/share level is where it will really kick in.
Chart of the Day:
We are seeing a big move this morning in the U.S. Dollar Index, due to the lowering of rates at the ECB. This has pushed the index back above the 80 level, which will add pressure to commodity prices.
Source: Big Charts
Commodity prices this morning are as follows:
- Gold: $1286.90/ounce, down by $21.60/ounce
- Silver: $21.425/ounce, down by $0.232/ounce
- Oil: $94.60/barrel, up by $0.40/barrel
- RBOB Gas: $2.5137/gallon, up by $0.0106/gallon
- Natural Gas: $3.559/MMbtu, up by $0.04/MMbtu
- Copper: $3.234/pound, down by $0.0145/pound
- Platinum: $1444.00/ounce, down by $12.80/ounce
There is a ton of data being released right now and the good news we gathered regarding the Midland area of the Permian play is that Concho Resources (CXO) is continuing to have success with their horizontal drill program in the area. That bodes well for long-time favorite, and Permian newcomer, Rosetta Resources (ROSE) which reported their quarterly results yesterday (see press release here) and announced the completion of their first operated horizontal well in the play. Based off of the guidance given by Rosetta Resources it appears that vertical wells will dominate drilling activities in the Permian in the near-term, but that horizontal drilling activities will pick up as the company gains more understanding of the geology and techniques for drilling in the area.
We have always been buyers of Rosetta Resources on weakness due to their assets in the Eagle Ford shale. With the added exposure to the Permian we think that the company now has two "company-makers" as far as land positions and believe that this pullback is a great opportunity to buy into a name with a proven management team and great assets.
Source: Yahoo Finance
Looking at the Bakken, where downspacing is becoming a key storyline, Oasis Petroleum (OAS) provided the market with reason to cheer these efforts. Oasis' continued pursuit of downspacing has resulted in more wells being drilled in a smaller area and is resulting in shorter down times for rigs and greater efficiencies. The company's COO also alluded to Oasis looking to deploy downspacing in other parts of the Bakken and getting more aggressive in deploying the tactic across their acreage. With Oasis getting this aggressive in their downspacing program one can expect that Kodiak Oil & Gas (KOG), another aggressive name when it comes to downspacing in the Bakken, to also have positive comments in the coming quarters as we already know that they are continuing efforts to get as much as possible out of their acreage. After the strong quarter posted by Oasis, look for the company to get a bigger profile as investors begin to realize what a big storyline this could be for the company, especially after the purchase of the additional acreage they did in a transaction earlier this year.