Much as we suspected, the US Fed provided no support for commodities markets yesterday via a rate cut or QE3. It was a good call to be on the opposite side of that call from Goldman. This morning oil prices, and other commodities, are taking their beating now that easy money appears to be off the table. Our opinion is that we missed the rate cut this time, but like we predicted we did see a shift towards a more dovish stance - meaning a QE3 or easy money policy IS in the future and we would bet sooner rather than later. So on any major pullbacks we will look to buy marquee names with great assets at discounted prices. We alluded to this yesterday, and it now appears that the pullbacks will be taking place, so be prepared to deploy your capital in the days and weeks ahead.
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Oil & Natural Gas
As the dark clouds appear to be clearing up around Chesapeake (CHK) we continue to see shares rally. Yesterday shares traded higher by $0.33 (1.76%) to close at $19.04/share on volume of 31.9 million shares. The strength was greater in earlier trading, but the shares were up due to news that the Chinese are looking at their assets to take stakes in. Chesapeake needs to offload assets, and the Chinese are willing to pay a premium for high quality commodity assets.
Kodiak Oil & Gas (KOG) was down $0.29 (3.63%) to close at $7.69/share and the price action simply goes to show just how important the $8/share level truly is. We think that will be a point of resistance moving forward and could provide support once above it, but with the oil market the way it is, we need not look at that issue right this moment. We want to watch volume here and see how high it stays to get a feeling of where we are heading. Volume was 7.3 million yesterday which was a good bit above the three month average. The head of Statoil yesterday did state on CNBC that he thought the Bakken was going to be a better play when all is said and done than the Eagle Ford Shale, which would bode well for Kodiak shareholders.
Rare Earths
Molycorp (MCP) had found support around the $20/share level and yesterday the shares got a boost off of those levels due to the Chinese saying that the US had rare earth reserve numbers wrong. This pushed rare earth stocks up across the board with Molycorp shares rising $1.77 (8.57%) to close at $22.43/share on volume of 10 million shares. The sector has been consolidating but having been one of the first to recommend these names, we will say that we do not see this as the beginning of a new run. The strength here should be sold into and investors should revisit the shares at lower prices. We must call them how we see them, and that is how this will play out.
Coal
James River Coal (JRCC) moved higher yesterday and got stronger as the day moved on. Shares finished at $3.42/share having risen $0.73 (27.14%) on volume of 5.3 million shares. The company's market capitalization is now above the $200 million threshold. We still do not like coal right now, and for more on coal we have an article we submitted to Seeking Alpha this morning which has a more in-depth analysis on this sector. Bottom line is that these rallies should be sold into.
Potash
Potash Corp of Saskatchewan (POT) was down $0.19 (0.46%) to close at $40.80/share on volume of 4 million. It seems that $41/share is a level we will have to revisit at a later time, but we think that we are headed down below $40 now as markets appear to be tiring out after the US Fed did not lower rates or give the markets a heads up regarding a move to start QE3. This is a play on economic growth and quality of life improvements, and right now both are going up slowly. We need to get the situation in Europe fixed and that will help Asia and South America which in turn will help all of the fertilizer producers. Right now after this breakdown in commodity markets we would not be buyers here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
