The Money Map Advantage
Friday, September 15, 2006
By Horacio Marquez
Email – #57
** Quadruple Witching Day – And A Long-Awaited Play In Uranium
Today we have a quadruple witching date, which means that all September equity and index options expire. We also had the all-important CPI this morning and if this were not enough for major events, next Wednesday we have the Fed meeting.
I have been waiting for a confluence of factors for several months on Cameco (NYSE: CCJ), whose Money Map metrics have been almost perfect for quite some time, but for the factors that came in line today.
In fact, you might have seen a report some months ago on this, my preferred uranium pick, highlighting how it could bring explosive profits to your portfolio. And patience, the mother of all virtues, is what I needed in order to see the Money Map metrics aligned properly before pulling the trigger.
We first needed to get the Fed out of the way, to see significant oil profit-taking to get a good entry point in the stock and upside in the sector, and to have technical factors in line for a nice pop in the stock.
Why Cameco? Because Cameco, with 20% of the global uranium production, is the world’s largest uranium producer and has a very low cost of production. And uranium is undergoing a secular bull run that will last for at least a decade. There is a huge demand-supply imbalance, in the order of 11% in the world today, which will persist for years to come.
On the demand side, global consumption of uranium is running at roughly twice the amount of global annual production, and consumption has been – and will continue -increasing consistently over the next decades:
- China is building some 27 nuclear plants up to 2020 (a minimum of two a year),
- India has announced some 17 new nuclear plants up to 2012
- The U.S., which gets some 17% of its electricity from nuclear sources, will double nuclear power plants
- Russia will be building some 25 nuclear power plants
On the supply side we see that the structural supply-demand imbalance has been bringing stockpiles of uranium down, and this imbalance had been filled by the decommissioning of Russian nuclear weapons. However, Russia has halted uranium exports as it will now use its uranium for its own new nuclear plants.
The global demand-supply imbalance, uranium stockpile reduction and the Russian export halt have resulted in very strong price gains as per the graph below. And these price gains should continue for years to come, since it takes anywhere between four to eight years to bring a new uranium mine online. Today the price of uranium is at U$52 per pound. You can track the daily uranium spot price at Cameco’s website.
Cameco is ready for another strong bull run…
As you can see, the company has been in this up trading channel for years, following in a step-like manner the more linear rise in uranium prices. Cameco is sitting right now right over the lower end of the bull channel, ready for takeoff.
And we have seen very significant profit-taking action in oil and gas, which has brought the sector down. The drop in energy was due to:
- Seasonal lower demand for energy with the end of the driving season in the U.S. and in Europe, refinery maintenance and the fact that winter heating has not yet begun
- The efforts by Aramco and the U.S. oil industry to defuse the move toward alternative energy, using this low-demand period to keep markets awash with oil
- The reduction in oil risk premia from progress in the Israel-Lebanon and Iran situations
Of the three factors, the first two are clearly short term. Winter will come for sure, driving energy demand way up and reducing the inventories that the oil companies so strenuously are trying to flood the markets with now. The third factor is anybody’s guess, but risk premia is very low right now and could very easily increase fast.
But rest assured, the most important factor, global growth, will continue to be bullish. Just yesterday the IMF brought global growth estimates up by 0.2% to 5.1% for 2006 and to 4.9% in 2007 and expecting China to continue with its rapid growth. Also this week, I heard similar expressions of confidence in global and in U.S. growth from the very well respected C. Fred Bergsten, former director of the Institute for International Economics, probably the most influential think tank on the planet, and from William Harrison, Chairman of JPMorgan Chase.
And global growth is synonymous with energy demand. Indeed, the IMF’s expectations for the price of oil next year highlight the risk of these prices spiking up and slowing the global economy.
The oil complex is way oversold and ready to rally.
Right now, we find that the market has discounted an overly pessimistic global growth scenario. Witness the OIX index, which represents the stocks of 15 integrated oil companies, and how it has consolidated to the lower end of the long-term bullish channel.
The time for buying the oil complex, as it bottoms out near 560, has come up for the market. This rebound will be the catalyst that will drive Cameco, which is waiting for the next strong leg up. And we need to position ourselves before the Fed’s next meeting and before first drops in temperature increase heating-oil demand in Canada and the North of the U.S.
Recommendation: Buy Cameco (NYSE: CCJ) at market. Aggressive investors should buy the December $40 calls CCJ LH at no more than $2.80
Enjoy and profit,
Horacio Márquez
P.S. You have seen me be very quiet since the sell off in May, strongly recommending to add to the entire portfolio one week after the June bottom, a strategy which paid some 25%-30% in a couple of months. In fact, I am traveling with a group of investors on the next Argentina tour, where I expect us to visit with the top management of our very profitable pick Tenaris (NYSE: TS), in addition to visiting Buenos Aires and some of the best places of Argentina and Uruguay. Tenaris’ acquisition targets, the American company Maverick Tube and the French company Vallourec, both reported stellar earnings recently. Feel free to join us. For more information on this spectacular tour, click this link.
Stock & Symbol
Current Price
Comments
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NEW
Buy
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Petrobras (NYSE: PBR)
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Mitsubishi UFJ Finan. (NYSE: MTU)
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iShares Japan Fund (AMEX: EWJ)
$13.40
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Tenaris (NYSE: TS)
$35.29
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MSCI Austria Fund (AMEX: EWO)
$30.46
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Market Watch
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As Of 6:12AM 3/26/2009
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