Bernanke speaks today, and with the most recent economic news, which was disappointing, still fresh on investors' minds we should hear something about QE3 not being off the table. We never thought that it was, thinking that Europe would force the Fed to acknowledge that QE3 was still a weapon at their disposal but it now appears that our very own economic news may require this.
We are now approaching levels on some of these companies which border on ridiculousness. It also is making some of these companies acquisition targets for the larger integrated oil majors. The big boys need somewhere to deploy their cash reserves to and the explorers at this point are in serious need of capital to drill out their inventory of shale lands. Chesapeake Energy (CHK) is the latest to have acquisition rumors swirl around it, and yes the talk makes sense. SandRidge (SD) also makes sense, as both companies face what Wall Street believes to be insurmountable cash flow shortfalls thus forcing them to stop their aggressive drilling plans. We have been believers in the two entities, thinking we would rather be invested in companies with property and needing to find capital rather than companies rich in capital looking to find land to drill. One usually has more 'outs' when they have the goods, and we could see an acquisition where either of these two gets taken out for 35-50% premiums.
We are always amazed at how bad news can be good news at times and that is exactly what is happening in the precious metals markets. Bad economic numbers increase the probability that QE3 happens, which increases the money supply and thus should increase inflation and the price of gold, silver, etc. With that said, we see gold trading above $1640/ounce and having traded between $1640 and $1645/ounce since Asian markets opened.
Silver, being an industrial metal too, has had a bit rougher go of it this morning having been up marginally, and now trading lower. It is expected that this would be the case with the economic news, but if QE3 begins to gain traction and sound bites from the talking heads, look to see silver behave as we stated in the paragraph on gold above.
Molycorp (MCP) should have a decent day, and could be green today as China announced over the weekend that they were speeding up the consolidation in their rare earths industry. It is an association and it will further add to the production capabilities of their largest players in the industry while at the same time pushing the smaller players out of the business altogether to better protect the environment and allow the most efficient producers the opportunity to maximize production. This has been playing out now for some time, and it appears that China is now rushing to complete this transition before the West gives them any more problems over their plans for rare earths.
As we have previously stated, Rare Element Resources (REE) is a nice trading vehicle to use when rare earths begin to move. It is currently trading in an area which we see as a nice entry point, a point where we have in the past initiated trading positions, and could see nice gains if day traders move in today. The only question is if this news is enough to excite the risk-on trade in this market for this sector.
Coal was covered in this week's Barrons and they pointed out just how bad it has been for the industry. The stocks are down and the underlying commodity is down and to top it all off they government is very much so down on the future outlook for the commodity and its role in our country's future. Administrations change, demand changes, and supply changes - and we think that this is one of the areas where once China's economy starts moving again so will these companies' stock prices. Alpha Natural Resources (ANR) will be a play investors run back to based on this logic, and at this time it is one of the issues we will look to gain exposure to as capital becomes available