The correction continues in the commodity complex and this was expected after the large run-up before and after the QE3 news. We have received communications from readers worried about their commodity exposure and to quantify this for readers we want to point out that on this pullback we have only increased exposure to commodities by buying companies with growing production numbers and stable underlying commodities as their main offering. We think that long-term this will be the smart play, however painful in the short-term but it is important to remember that we have solid gains in many of those names so we may be a bit more insulated from day-to-day movements in the stocks compared to others who only recently purchased. We remain long-term bulls and believe that looking long-term is the only true way to invest in commodities.
Oil & Natural Gas
We have continued to watch Talisman Energy (TLM) and as of the close yesterday it is now back down to levels from before the large run-up on September 14. This was one of our biggest winners of our career in the oil patch as we were extremely early to the oil trade and one of our companies merged with Talisman and another sold most of their operating assets to the company which allowed us into the company at a cheap cost basis and provided cash to purchase more shares when prices were cheap. So this one is on our screen at all times and we pay attention and still follow it even though we exited the position over a year ago to gain exposure to a few Utica names. Looking at the company it is our opinion that we would have to recommend going negative if shares broke through the $14.10 area short-term. The company has the Eagle Ford exposure but after that they do not have exciting exploration properties with exposure to either wet gas or oil in the shales - they are very dry on the exploration front.
Alpha Natural Resources (ANR) and Arch Coal (ACI) continue to cool off with the rest of the coal sector after some pretty spectacular gains leading up to the QE3 announcement and during the after party. We are holding off on our bullish call until we see where these names as a group settle down to, and right now it is hard to determine price direction as too many factors are pushing shares in various directions. Slowing growth in China is a negative and so too is the story surrounding thermal coal. Based off of what we are hearing from steel companies, that might be another negative moving forward and with yesterday's news from the railroads we have to believe that the conference calls are going to be atrocious this upcoming quarter. This is why we are exercising restraint and patience here, hoping to find a decent short and long-term entry point in case the fiscal cliff comes into play and we are forced to exit positions (we would like to have a built in gain early). This is a sector we investigate each weekend to see if the story has changed, so we will keep readers posted.
Yamana Gold (AUY) turned in another nice day yesterday with shares hitting another new 52-week high as shares moved higher on higher volume. The company traded another 8.3 million shares yesterday and the intraday chart looked great, with shares having risen from the lower left to the upper right and closing near the highs for the day shows true strength when looking at momentum and whether a rally possesses enough energy to continue. The gold trade will cool off at some point in the near future, but we think that the thesis surrounding these shares is valid and that the stocks should continue higher as they follow in gold's wake - and yes we do believe gold will be higher by year-end along with silver.
Although it is not our favorite play in the potash sector, Potash Corp of Saskatchewan (POT) is a good way to gain exposure to the sector and is a popular name when times are good. We like the liquidity it affords investors and for that reason it usually finds its name into our articles. We think that the fertilizer trade may very well be heating up again, and when that happens this stock is a buy for 5-10% upside. We were admittedly early to the potash trade this year, but think that with an improving economy and QE3 pushing money into the economy that food inflation takes place. When that happens we generally see potash stocks follow suit and if China can turn their economy around we could see extra demand from Asia. If you believe that fertilizer prices are on the way up and that the world farmer will do well, then Potash represents one of the best ways to play agriculture.