We see that oil is up this morning, but the futures are down and that is of little surprise as the rest of the world has now had their opportunity to react to the job numbers out of the US on Friday. Interest rates are up in Spain above the 7% level, or in other words right back to the level they were at prior to the last EU Summit. The world economy needs the EU to print money and move towards an easy money policy in real terms rather than just affording it lip service. That move would certainly be bullish for commodities, but we are moving towards investing in those companies which will be considerably increasing production and reserves and/or increasing payouts to shareholders. This is what works in markets such as this, so we will play off of our experience on this one.
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Oil & Natural Gas
Shares in Chesapeake Energy (CHK) continue to show strength as the company was one of the few to finish up in the energy sector on Friday. The shares broke through the $20/share level after rising $0.40 (2.04%) to close at $20.04/share in trading Friday. Volume was once again strong at 23.4 million shares and the strong volume paired with the shares on their continued rise indicates to us that the big market players believe that the company will get their assets sold in time to avoid further angering investors. We can also expect further news regarding their drilling activities in the Utica, especially as more of the oil window wells finish dissipating.
It appears that all of the bad news was not out regarding the coal sector as S&P once again downgraded their outlook on a coal play. We saw strength early on for many of the names in the sector, but by the end of the day we saw lots of red on the screen. Alpha Natural Resources (ANR) finished down $0.60 (6.47%) to close at $8.67/share on volume of 15 million shares. Patriot Coal (PCX), the most volatile stock in the sector, closed down $0.07 (3.10%) to finish at $2.19/share. Patriot had strong volume once again with 30.2 million shares trading hands on Friday but we were surprised by the strength in its shares especially with S&P injecting liquidity concerns into the market once again. We continue to watch the charts of the coal plays, especially the blue chips and still we have not seen a breakout. We monitor this daily, and will report when we see the buy signal.
With fears about the economy resurfacing on Friday we saw shares of Freeport-McMoRan (FCX) fall $0.46 (1.30%) to close at $35.01/share. Volume was quite strong at 26.1 million shares, and one good piece of news to take away is that shares did close above $35, although we seriously doubt that they shall remain above that level after today as world markets are red across the board. If the world economy is looking to back off, we should expect the same from Freeport. Our price target if China and the EU are back in the headlines, as appears the case this morning, would be the $32-33 range. We are currently in no man's land as it pertains to the economy and that puts Freeport in quite a predicament as the economy is not good enough for the copper portion of the business to take off and not bad enough for the gold to carry shares higher. We are stuck in a sweet spot for investors as there is a bottom in the shares, but how they move higher is unclear at this time (unless of course it is the shares rallying on news of settlements over tax rates in Asia and Africa).
We have generally paired both Vale (VALE) and Freeport-McMoRan together in trading along with the economy. Speculators play a much smaller role in the pricing of commodities in both companies' main outputs, and thus the emphasis on the economy when we talk about these two. Oil is very much tied to the economy, however due to the liquidity of the market, size and various ETFs (as well as OPEC) it does trade differently. With that said we have to believe that Vale is headed back down to the $18/share level and would look to buy there, as we have stated before. The rise off of lows due to news out of the EU was nice, but short lived. It will take the US Fed, China solving their own problems or Europe resolving their own for a broad based commodity rally which will take these shares above the $23/share level. Our bullishness is gone this morning as a result of the breakout appearing over shortly after it began. If we move lower, the breakout is over and with the current market action it appears this morning will end the upward movement we have seen lately in the shares. In trading on Friday shares fell $0.62 (3.02%) to close at $19.92/share on volume of 16.6 million shares.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.