Back to archive
The Money Map Advantage
Thursday, February 16, 2006
By Horacio Marquez
#29
** Energy Is On Sale Right Now: Go for it!
Our portfolio is rallying very nicely today, driven mainly by energy and Brazil. The story about the “end of the commodity boom” is quickly coming to an abrupt end. Let me tell you why…
Tomorrow is options expiration day, ahead of a three-day weekend. Expect a lot of volatility, but this is the precise spot to make a strategic move. As I wrote before, energy players and Wall Street used the already-resolved large triple uncertainties of the Federal Reserve February meeting, the quarterly refunding and the Bernanke testimony to take some profits in their preferred sectors: energy and commodities. And the momentum players went along for the ride with options, which, as always, exaggerated the movement… creating a great buying opportunity.
Wall Street had to make room in their books for the multibillion-dollar refunding risk. And, like many times in the past, they preferred to focus on the coincident stronger economic data that is coming out now – rather than looking longer term, which is where the market is really going, and where we are going to make the real profits.
After Katrina and Rita, Wall Street had called for the Fed to stop or pause, and now they call for the Fed to keep going. They were wrong then and they are wrong now. Prior to the refunding, many Wall Street houses increased their economic forecasts and highlighted the inflationary risks, calling for much further tightening.
All of this is natural. After Katrina and Rita they were long global equities, and now they had the quarterly refunding ahead. If you are going to have to bid for billions of volatile 30-year bonds that have not been issued since 2001, you want to make sure that the auction goes well; that you are not stuck with billions of these bonds after the auction; and that investors do not sell them back to you after the auction is over.
So, even in stable markets, bond prices typically start dropping a couple of weeks before the auction, and tend to rise afterward in what is known as the selling concession . But we are in a tightening cycle, with some minimal inflation having crept into core prices. So it is also natural to focus even more on the risks of such a large investment – inflation – and emphasize these risks over alternative benign scenarios.
And it worked: While the three-year auction was on the weak side, the 30-year auction was a resounding success and Wall Street can now refocus on their favorite plays.
But the Fed is not in the business of jumping to the whims of Wall Street traders, since they are focused on ensuring consistent long-term price stability and sustainable economic growth. And they have been doing this remarkably well. So, they saw through the Katrina and Rita temporary slowdown of the fourth quarter, and they will see through the rebuilding that is going to temporarily accelerate GDP in the first quarter.
What did we learn from transparent-candid Bernanke in his Congressional testimony? We reaffirmed what we already knew:
That the U.S. economy is on solid footing, and Bernanke expects above 3% GDP growth for 2006, but…
That some inflation risks remain;
That the U.S. housing market is already showing unequivocal signs of slowdown;
That core inflation is well-behaved, and long-term inflation expectations are well-contained; and
That future monetary policy will be data-dependant.
What this all means is that the U.S. economy is growing nicely, and that the Fed will very probably stop raising rates in the next meeting, as I expected. If I am wrong, I will miss it by only one additional 0.25% at most. Why?
While the first quarter will definitely be ahead of the 3.25% to 4% Fed GDP estimate for the year, helped by an unusually warm January and the New Orleans rebuilding, the economy will slow down to a soft landing later in the year, abating inflationary pressures:
Monetary policy does work and is already having its effect on frothy sectors like housing;
The New Orleans rebuilding will tail off; and
The current temporary drop by 50% in natural gas prices will reduce inflationary pressures.
What about global growth? This morning alone, the Fed adjusted up its U.S. economic forecast for 2006 by 0.25%, and we learned that India’s GDP for the fourth quarter of last year will be probably around 8% – much hotter than expectations.
China is likewise accelerating, as are many of the southeastern economies, Japan, Brazil and much of Europe, while Russia and the rest of emerging economies are growing steadily at above-trend rates. All of this growth requires energy to power it.
And energy is on sale right now: Just witness the two-year chart for the CBOE energy index below.
We are in an excellent position to buy more right now. Not only did I recognize it, but the Lehman Brothers energy team has, as well. Yesterday, they came out with an extensive (100-plus pages), very bullish report on coal, which specifically showcases Peabody Energy as one of their two top picks in coal.
I strongly recommend reading the report. They mention the “tremendous amount of energy value on the ground that continues to be underappreciated,” “high barriers to entry,” “increasingly restrained supply” and “rising realized coal prices.” I cannot concur more with them.
Peabody Energy and others are the main beneficiaries of the coming resumption in the energy rally, since they are the cream of the crop of energy companies that have been unduly penalized by this confluence of temporary factors – including the unusually warm January. While with hindsight 20/20 vision I would have preferred to buy Peabody Energy (BTU) today, and not last week, I feel very confident that patience will reward us greatly, as in all our other positions.
The market is in a massively oversold position, with huge profits having been achieved on the short side. Shorts are being closed and longs have to be put to work. And the February options are expiring tomorrow. So, if you have room, feel free to double your BTU position today and tomorrow, and for very aggressive investors, buy out-of-the-money March calls on Peabody Energy.
ACTION TO TAKE:
Double your Peabody Energy (NYSE: BTU) position at market price on dips today and tomorrow. Speculators can buy the $90 March 2006 calls on Peabody Energy (BTU CR). Do not pay more than $4.10.
If you have any questions, feel free to call one of our VIP Trading Services representatives at 888.570.9830 (toll-free) or e-mail: viptrader@oxfordclub.com , or contact Pillar One Advisor Greg Galloway at 800.438.3040 or 407.667.4729.
Stock
Current Price
Comments
Peabody Energy (NYSE: BTU)
$88.47
Buy. Sell stop is $70.
IShares Brazil Fund (Amex: EWZ)
$41.71
Buy. Sell stop is $33.79.
BHP Billiton (NYSE: BHP)
$36.41
Buy. Sell stop is $32.70.
Banco Bradesco (NYSE: BBD)
$41.48
Buy. Sell stop is $29.45.
Petrobras (NYSE: PBR)
$88.70
Buy. Sell stop is $75.47.
Mitsubishi UFJ Finan. (NYSE: MTU)
$13.99
Buy. Sell stop is $12.93.
iShares Japan Fund (AMEX: EWJ)
$13.50
Buy. Sell stop is $12.83.
Tenaris (NYSE: TS)
$150.54
Buy. Sell stop is $117.27.
MSCI Austria Fund (AMEX: EWO)
$29.96
Buy. Sell stop is $26.51.
Copyright – 2006 Monument Street Publishing. Monument Street Publishing does not act as an investment advisor or advocate the purchase or sale of any security or investment. Monument Street Publishing expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Monument Street Publishing provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Monument Street Publishing has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Monument Street Publishing, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
Market Watch
NASDAQ
1528.95
0.00
SP 500
813.88
0.00
DJIA
7749.81
+89.84
As Of 6:12AM 3/26/2009
Attention Money Map Subscribers!
Money Map Report,
New China Trader
& Money Moves Alert
are now found at www.moneymappress.com
