A recession in Europe is all but assured. But instead of dragging down global economies, China saw bank lending increase in December 2011. New loans were $640.5B yuan, up from $562.2B yuan in November. A looser monetary policy in China may encourage growth in 2012, since inflation is under control in the country. The country's inflation rate for 2011 is expected to be 4.0% in December, down from 4.2% in November.
Investors eager to take a bullish position in China's strength would look at the resource sector. There is upside in energy stocks, but downside remains for metals due to a glut in inventory.
Freeport-McMoRan Copper & Gold (FCX) - Avoid
Analysts are more bearish on Freeport. The average EPS estimate declined to $0.68 as of December 20 2011, down 4.20%. Copper prices began a recovery at the start of 2012, only to reverse more than 3% last Wednesday January 4 to close at $7,540 a ton.
Copper will see ongoing pressure from Europe. Strength of the U.S. dollar versus the Euro will hurt Freeport's share price.
Alcoa (AA) - Avoid
Alcoa reports 4th quarter results on Monday, January 9, after the market close, to kick off another start to the earnings season. In the 3rd quarter, the company reported earnings per share of $0.16. As of December 20, the average earnings per share estimate for Alcoa was $0.06. Earnings were revised downward from $0.07 or 14.28%. Shares are down 50.07% from a high reached on April, 2011.
Alcoa announced a production cut in Texas on January 5, along with plant closures in Tennessee. This will reduce earnings by $165M ($0.16 per share).
In 2008, there was an over-supply in aluminum. By 2009, prices dropped to the $1,300/ton range. China's stimulus along with quantitative easing in the U.S. led to a $2,400/ton price for this metal. 2011 looked as though growth would continue, but by April it was clear that the positive momentum for the metal was waning. The world economy was slowing, and there was an over-supply in many commodities including aluminum. Of all the commodities, only oil appears to provide the most attractive risk/reward. Recent figures suggest that the U.S. is seeing a pick-up in demand, despite ongoing weaknesses in Europe.
Aluminum prices have yet to recover. The price on the London Metal Exchange for the metal was $2,039/ton on January 6 on Friday.
Cliffs Natural Resources (CLF) - Buy
Iron ore prices were as much as $200 per ton in 2011 on the back of strong steel output in China. Steel rebar futures traded recently in Shanghai at $660 per ton, down 16% from its peak. Similarly, iron ore is holding steady at $130 per ton, due to small mills holding up demand. Price direction for iron ore will be more clear after the Chinese New Year.
Cliffs Natural Resources is a major iron ore producer and a significant producer of high- and low-volatile metallurgical coal. Its major interests are in Australia (45% in a coking and thermal coal) and Canada.
Analysts reduced the earnings per share estimates by just $0.01 as of December 30, 2011. The EPS estimate for the 4th quarter is now $2.67, down 0.4%.
The energy sector saw strength at the start of 2012. West Texas Intermediate light sweet crude oil reached $102.27. Events in the middle east will impact the price of oil in the short-term, but growth in China will sustain the share price for various energy firms. A way to play the strong energy sector is:
British Petroleum (BP) - Buy
BP closed recently at $44.08, just 7.58% from its 52-week high. Shares continued to trade well above lows, despite a sell-off in European share issues. More than $21B has already been paid for the damage associated with the oil spill. BP is trying to have Halliburton pay for all of the costs. BP pays a dividend of $1.68, a yield of 3.81%. Legendary investor Seth Klarman also has a 5.5M share holding in BP.
Breitburn Energy Partners (BBEP) - Buy
Breitburn Energy bottomed at $17 in the last quarter of 2011 and is now trading at $19.15. The stock pays $1.74, a yield of 9.09%. Bearishness increased for Breitburn by November 30 2011. Short interest increased 41.1% between November 15 to 30 to 392,865 shares. Short interest increased again in December by another 32.1%. The short shares was 518,913 on December 15.
Unfortunately, the bearish bet is not paying off. Shares are up 12.65% in that time. Investors looking to earn a high yield and to gain upside exposure to rising energy prices.
Potash Corporation of Saskatchewan (POT) - Avoid
A build-up in fertilizer inventory in China will not be enough to offset growing demand for food grain in 2012. Shares closed recently at $41.77 and pay a dividend of $0.28 to yield just 0.67%.Still, Potash may be a takeover target. China's Sinochem and BHP Billiton (BHP) were cited as companies interested in buying Potash. Regulatory hurdles would impede a deal from taking place.
Disclosure: I am long BBEP.
