It appears to us that Europe is no longer a contagion zone, but rather a containgeon - something between a containment zone and a dungeon-zone. It is apparent that Germany, France and their healthy neighbors will be the jail keepers, but for the others it will be a long, hard road to recovery. These are true facts.
We were surprised with the strength coming out of the gates yesterday, and it reaffirms our belief that the world economy will continue to expand even with the issues in Europe. At least that is what the tape is telling us. Commodities across the board rallied higher, although there were some weak spots, especially in those areas where actual gluts exist. We continue to look around and see green shoots, healthy company balance sheets and a willingness of capital sitting on the sidelines to rotate to a more active role. Although the Dow Jones could not hold 13,000 we are inclined to believe it will get there once again and pass through.
Looking ahead politically, as that will indeed play a part in our investments, it is probably safe to say that investors can start assuming a second term for President Obama if Romney loses the Michigan Primary. This primary season might get a bit rockier as some of the moderates in the Senate on the Republican side are being challenged by extremely conservative opponents for US Senate seats in Utah and Indiana (see story here). Not trying to get political, however, in the next few months the election season will kick in and take over the news cycle. For investors betting on a Republican party seizing the Senate, reflection upon this news would be warranted.
Gold & Silver
Gold and silver rallied strongly with general markets on the Greek bailout news. Gold was impressive rising from 1740 to a high of just over 1760 in trading yesterday. In early morning trading, gold is marginally lower, expected after the 2% rise yesterday. With the euro seemingly broken, we still think owning gold in euro terms is an intriguing play, however, we simply own it via physical means. We still like silver more than gold, and although the one year chart looks quite awful we think that if silver can hold $34/ounce it could certainly build momentum going forward.
Freeport-McMoRan (FCX) is an interesting play we think here. With gold once again a play on inflation the company becomes a proxy on the economy. With significant exposure to both copper and gold, it benefits from economic activity on the building front and the inflationary pressures which come with that growth, especially in a low rate atmosphere which the Federal Reserve has guaranteed for the foreseeable future. We would buy on any pullbacks, and turn even more bullish on the stock if it is able to break through the $50/share level.
Many are getting worried about oil prices, and they may be correct to worry. We are not invested in the futures, but rather companies increasing reserves and de-risking their properties via the drill bit so we are far less concerned. We also have a bit of a hedge as the oil from these parts sells at a discount to current market prices due to lack of infrastructure or costs a small fortune to truck and train out. So even lower prices by 20% coupled with new infrastructure allowing for regular market prices allows some of the Bakken plays to actually do better.
This scenario would entail oil falling to $80/barrel and their prices rising from the current $70-$75/barrel we have heard from those in the industry. We will continue to ride Gulfport Energy and Kodiak Oil & Gas (KOG). Kodiak broke through and held $10/share yesterday rising just over 2% in order to do so. Gulfport continues to impress and took out $37/share yesterday and we still think it has the potential to take out $50/share in the near-future pending results from the Utica.
Still bearish on natural gas, and our only exposure at this time is via EV Energy Partners, LP (EVEP). It is in the portfolio for the Utica, and we view the natural gas holdings as a bit of a lottery ticket. The distribution we believe is safe, even in this environment of falling natural gas prices.
We saw some uranium issues doing quite well yesterday. Uranium One (OTC:SXRZF) which we mentioned has been strong yesterday was up another 7%. Uranerz (URZ) was strong, but will face headwinds at $3/share. Unless a company is producing at this point, we believe it to be only worthy of a trade. With the recent M&A activity in the industry, we are tempted to spread some money among the juniors with proven deposits that are trading for pennies on the dollar. Cameco (CCJ), which we have talked about numerous times in other articles, has risen sharply from its lows. Yesterday it rose through the $25/share level which we think may provide some resistance, however the chart looks bullish in our eyes as it broke out from a lower high and lower low pattern.
Rare Earth Elements
Definitely lagging the market, however we have seen bullish activity in Stans Energy which we initiated a trade on last week. When the economy really takes off and risk-on money is flowing, rare earths will rise sharply. At this point, for investors looking to set up for that trade we would recommend Rare Element Resources (REE) for their light rare earth element project (LREEs) and Quest Rare Minerals (QRM) for their heavy rare element project and extremely cheap valuation. We continue to be bullish Stans though.
Estimates from analysts are rising for fertilizer prices and it looks like supplies might be tightening. Potash Corp (POT) had a strong day yesterday and as we have said previously Mosaic (MOS) is another good pure-play on fertilizer prices. China and India will bargain hard, probably even Brazil, but the bottom line is that both the buyers and sellers know that prices are rising, the only question for investors is by how much and how quickly. The stockpiles in China and India are usually a good indicators as to where prices will go, and we will look into the numbers over the next few days.