The Shadow Stock Trader
Friday, August 15, 2008
By Horacio Marquez
Email – #12
** We Love Financials and the Commodities Correction is Close to Bottoming
Let me tell you a secret: $109.95 per barrel oil is the 50% Fibonacci retracement ratio in my one-year West Texas Intermediate oil chart. In other words, that level signifies that we have given up 50% of the gains in the price of crude. This is hugely significant.
Not only are we likely to get a bounce, we’re also very likely to hold these levels. Congress has not yet approved the expansion of drilling in the US Continental Shelf, there are geopolitical worries in Georgia, and as the Olympics come to an end and the ban on cars and factories in Beijing and Shanghai is lifted, oil demand will be coming back. Also, the winter heating season, believe it or not, will be starting in a few months and traders will anticipate this.
The negative momentum in energy is slowly being exhausted, and so we were happy to add Energy Select Sector SPDR (AMEX: XLE) to our portfolio last week. Now’s the time to invest in the secular global growth story, despite what the pundits would lead you to believe. We’ll be adding more names soon.
Steel Margins are Increasing: Demand is Very Strong and Will be Accelerating Soon
Steel companies have been passing along only a portion of the drops in their input prices (nickel and energy mainly) to customers in the form of price reductions.
Speaking of prices, Goldman and JP Morgan changed their long-term outlook against the US Dollar. This points to a reacceleration of the US economy. You heard me. The early cyclicals, like retail, have rallied dramatically from the bottom. Weren’t we supposed to be experiencing the death of the US consumer? Not a chance.
The interest rate reset peak is behind us, and the credit crunch will be abating as we move forward from here. Next month, we might see headline deflation (not inflation) with the massive drop in energy and food prices. All of this is restoring the consumer’s lost purchasing power. And this in turn means that the banks’ loan portfolios will have fewer losses, and retail sales and real income will outperform.
Financials on the Move
The US’s renewed strength, the stronger US Dollar and the economy’s reacceleration will lead to further easing of the credit crunch. So pay no mind to the analysts-they’re scrambling to increase their GDP estimates as they once more missed by a mile. We shouldn’t be worried by Wall Street’s downgrade of Citi and Lehman, either. Curiously, Wall Street misses more in their estimates of their own industry than they do in any other. And financials tend to bottom one month before or as soon as Wall Street downgrades them.
Keep the faith in financials. George Soros added “only” 10 million shares of Lehman to his portfolio. His brilliant peer investors Warren Buffett and Wilbur Ross like to buy a dollar for fifty cents, and we are in the same camp. Feel free to add to Vanguard Financials ETF (NYSE: VFH) at will. It has tons of room to run up short-term, and multiples of its current value longer-term.
Enjoy and profit,
Horacio Marquez
All Shadow StockTrader recommendations will be posted on the Monument Street Publishing website. Simply go to http://www.monumentstreetpublishing.com and click on “Money Shadow Stock Trader.”
Stock
Current Price
Comments
Energy Select Sector SPDR (XLE)
$71.04
Buy
Market Vectors Steel ETF (SLX)
$77.20
Buy
iShares MSCI Emerging Markets Index (EEM)
$40.45
Buy
Vanguard Financials ETF (VFH)
$40.57
Buy
iShares MSCI Australia Index (EWA)
$23.08
Buy
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