We had excellent news yesterday from Europe and this has really lit a fire under the commodities arena with oil, precious metals and a whole host of sectors moving higher on the news. America is well ahead of the rest of the world markets right now in terms of the health of her companies and the general economy, so we want to focus on names with production near there, which can sell domestically and which then use their excess supply to export abroad. This does not work for all the commodities which we follow, but that is the general idea which we are going for today. We are not out of the clear yet as the economic numbers today carry considerable weight, but we took a very big step in the right direction yesterday.
Oil & Natural Gas
Yesterday provided the spark for Kodiak Oil & Gas (KOG) which we had been looking for, and quite honestly that the market had been looking for as well. The resistance at the $9/share level was taken out the previous day, but with Europe appearing for the day at least to be solving their fiscal woes, the shares continued higher unlike in previous attempts to cross that threshold and march higher. Today will be quite telling as to how real and entity specific that rally was, because if we fall back down to the $9/share area, we would be of the opinion that we are in for one of two outcomes: consolidation or retracement back to the mid $8/share level. Traders would also do well to notice that volume yesterday was quite light here, actually coming in below the three-month daily average.
Much is the same story with SandRidge Energy (SD) and its inability to cross $7/share. Of course bulls could not even push it to $7/share in yesterday's trading as it topped out at $6.99/share and then fell all the way back to $6.87, where it closed for the day only up $0.08 (1.18%). It was an underwhelming day to be sure, but we truly believe that shares are due for a revaluation as they continue their ramp up in the Mississippian and Chesapeake is set to announce a JV partner there before the end of the year. The deal may not close by December 31, however, it should be announced in our opinion. As tough as it may be, continue to watch this one.
We have talked in depth about Vale (VALE) and Freeport-McMoRan (FCX) over the months as we have waited for Europe to fix their problems, with the logic being that it would solve one of China's largest hurdles to growth as well. With Europe finally stepping up to the plate, we are inclined to believe that this may very well be the beginning of the end for the bearish China trade and all things China. If you look at Asia, you can see China is by far the best economy with the best growth rate - that is of course as long as you believe their official numbers! Their stock market has been hit the hardest as a risk-off trade has taken hold and with barriers in place foreign money has been unable to step in and prop up valuations. When their stock market comes back so too will real estate as we see the two highly correlated. With their biggest trading partner setting the table to resume growth long-term, look for China to resume growth at a higher rate than today and because of this look for those supplying the raw materials to their economy to move higher long-term. We are bullish copper now, but still ever so moderately bearish on iron ore now.
Also, if China is going to begin to ramp up the growth rate on GDP, then food inflation will pick back up, and all commodity traders know that when food inflation in China picks up it is super bullish for names like Potash Corp of Saskatchewan (POT) and the rest of the fertilizer names. We would begin to look at the sector to place some bets heading into 2013, but keep the buys low and space out the entry points, no need to rush into this trade at this point, however, we like the story at these levels.
Author's Note: Right as we were submitting this, we noticed China will spend $157 billion on infrastructure. Only reaffirms our thinking here.