Friday saw commodities rally significantly after European central bankers once again came out and stated that they were going to finally stand up and face this economic situation head on. The belief in the market is that the Europeans will finally begin their own quantitative easing and take on the bond vigilantes, thus lowering their rates and at the same times lowering the value of the Euro, which should also raise the prices for commodities while also providing some much needed growth.
This morning we would stick to names which we have been buying with the market heading lower, while also adding some positions which will benefit from a quantitative easing taking place in Europe. Remember that Europe is China's biggest export market, so good economic news for the EU is good news for China - and by extension those providing the commodities that the Chinese need to import in order to build the infrastructure to continue to grow.
Oil & Natural Gas
ATP Oil and Gas (ATPG) is one where we told investors to sell into the rally, and in hindsight that was obviously the correct call. Shares came under pressure during Friday's trading session with shares falling $0.55 (28.21%) to close at $1.40/share with volume rising to 7.8 million shares. The shares came under pressure due to reports surfacing that bondholders are preparing for a potential bankruptcy filing. Since May shares are down almost 90%, and although the company has had some decent exploration results they have also been plagued by operational issues and that is where the problems are. This is one oil and gas stock we would continue to shy away from, even at these prices.
We saw a rally in the coal shares Friday after investors cheered the Arch Coal (ACI) numbers. The numbers were not that great in our opinion, but the fact that they were not that bad is what caused the rally. Shares closed up $1.54 (29.28%) to close at $6.80/share as 42.9 million shares were traded. The low may very well have been put in now, but to buy now would not be prudent as this was more of a short squeeze than fundamental rally. If you want to argue that point or simply doubt that, take a look at the reaction the larger names had to the same news on Friday and you will see. These will come back a bit after the bears are run off and then we will better be able to see where we stand.
We speak in the plural tone because we are including Alpha Natural Resources (ANR) in this conversation. It saw shares rise $1.17 (20.12%) to close at $7.01/share on volume of 26 million shares. This was the trade we initiated at the close of Wednesday via the weekly options we purchased (the $6 Calls @ $0.17). It was a trade and not an investment and now we will go back to being on the sidelines until the bulls finish chasing the bulls off. The company still has to report their own results, but investors have thrown them into the same basket as Arch over the past few months and this is now the trading vehicle for those wanting coal exposure along with Arch to an extent.
This morning we find ourselves a bit more bullish of things as we digest the news out of Europe at the end of last week. We have long been bearish of the metals used to build the infrastructure of great economies and this morning we feel the tides may be turning. If the Europeans are now going to unleash an offensive on the bond vigilantes, we say good. This shall inject hope in financial markets across the globe and enable growth to creep back into the global economy. We may also see a large commodity rally as this should have an impact upon China's economic profile.
Due to all of this we want to be bullish of both Vale (VALE) and Freeport-McMoRan (FCX) now. Certainly not with 100% exposure at this point, but we want to have at least initial positions in order to lock in what we think are low prices should the economic atmosphere be changing to a more pro-growth one. The Europeans printing money would also light fire under the price of gold which would add another dimension to Freeport's bullish case moving forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.