Investors in commodities are a bit worried after the price action in oil near the close yesterday. The drop actually caused other commodities to fall in sympathy. There are a lot of questions of whether that was traders reacting to rumors that the U.S. may release oil from the Strategic Petroleum Reserve -known as the SPR - or some computer trading algorithm running amuck. We were calling for a bit of a correction, however that was a bit more than we had expected over the first day. It is our view that we can pull back to $95/barrel and possibly finish somewhere between $90-95/barrel if the Middle East can calm down a bit from the current state of affairs.
Valero (VLO) shares fell $1.71 (5.07%) to close at $32.04/share after 14.7 million shares were traded yesterday. Volume was higher and volatility as well for the entire industry after an analyst at Citi downgraded three names in the sector to neutral from buy - Valero among them. The analyst thinks that the rally has extended a bit too far with most of the upcoming good news already priced in, by his thinking. He may be right, but we think that this sector has a good future ahead with cheap oil being discovered daily here in the U.S. and production on the upswing. That is the real story here, and so long as we continue to find oil and increase oil production in the U.S. we feel that the refiners shall do just fine.
AK Steel (AKS) saw shares fall another $0.34 (5.79%) to close at $5.53/share as 9.7 million shares were traded. This move was not company specific as recent moves have been, but rather the entire industry getting hit as commodities retreated yesterday. The company's peers were also down, and down by about the same percentage amount. We maintain that the steel companies will be a good way to play an economic rebound, but it is our opinion that the actual materials used will be better plays, which brings us to…
Vale (VALE) and Freeport-McMoRan (FCX) which were both part of our China Trade ahead of that announcement where they announced the stimulus. Vale has moved up to $19.37/share now as investors see hope that demand may rebound and prices for iron-ore may stop their decline. An analyst reiterated their hold recommendation on the shares, so it looks like professional are taking the same approach as us - wait and see.
The move in Freeport-McMoRan yesterday probably stopped some readers out who had been using tight stops as we had been recommending. Shares fell $1.23 (2.88%) to close at $41.41/share on volume of 17.8 million shares. We would not worry about getting stopped out, as money was made on the trade and now it is time to look for another entry point or to place that capital to work elsewhere, and there really are some attractive plays out there even after this large run-up in commodity prices recently.
One such area is uranium, which has been hated since the disaster at Fukushima. Cameco (CCJ) is the play for most investors as it has the largest market-cap and best liquidity for American investors. Once the rally we envision begins to take hold, we shall work our way down the food chain to other names, but to get into that high risk trade again we need confirmation that we are indeed correct in our thinking. We believe that Cameco is a decent speculation here as it has not risen with the rest of the commodity complex to highs and the fact that it pays investors a 1.9% yield to wait for the turnaround in uranium.