Energy, Steel, and Most Commodities Have Bottomed and the US Markets Are on Their Way to a Strong Recovery

August 29, 2008

The Shadow Stock Trader
Friday, August 29, 2008
By Horacio Marquez

Email – #14

** Energy, Steel, and Most Commodities Have Bottomed and the US Markets Are on Their Way to a Strong Recovery

We called the bottom on energy, we went into Energy Select Sector SPDR
(XLE) and it held and rallied. Hurricane Gustav is helping us a bit; but then
again, hurricanes aren’t the basis of our investment thesis…

The entire commodity complex has been oversold on the false premise of a
global slowdown. Reality is, most of the selling is based on profit-taking from
long-term positions that are taking advantage of low capital gains this year, just
in case they’re increased next year.

I believe that these positions are already starting to be put on again. The
tightness of the presidential race might lessen the risk of higher tax rates next
year, which is clearly benefiting the markets. Also, the fact that second quarter
GDP came in at a brisk 3.3% sprint, surprising most analysts (but not us), is
only adding fuel to the fire.

All year I’ve been saying that investors can make huge money by buying into
the dips, even though it seems painful. I’ve witnessed the same phenomena in
countless distressed economies around the world over the last twenty years. To
put it simply, open market, democratic and flexible economies come roaring
back after devaluations and restructuring. Then these markets make new highs.

The US ranks at the top in all those measures. So we have been taking
advantage in financials and steels here. We will be adding more fuel shortly.

After all, George Soros bought 10 million shares of Lehman Brothers recently
and somebody sold 30,000 puts in Lehman this week. There are rumors that
Fannie and Freddie maybe be salvaged in some benign way by the US Treasury
over the long weekend as well. And funds have had a tough time closing their
shorts.

The bears are running out of ammo. 70% of the pain in housing is behind us.
Structured paper is massively under-valued (to market) in the books of banks,
and the Case-Schiller home price index is showing consistently declining rates
of price drops nationwide for months now.

America has been doing its homework, and it is showing in the shrinking trade
deficit, higher savings rates, hard restructuring and foreign capital flocking in
droves to take advantage of this situation. Just look at the US Dollar. As is the
case with most sell-offs around the world, the locals are usually the last to see
how cheap they really are to the rest of the world, as they sit mesmerized by
their recent failure.

What about the rest of the world?

iShares MSCI Emerging Markets Index (EEM) is clearly bottoming. The so-
called “global slowdown” is seriously in question with the US’s brisk 3.3% rate
of Gross Domestic Product expansion in the second quarter. And with inflation
in check around the world, most of the emerging markets are in position to start
lowering rates again. Commodities, which are oversold, will make an orderly
comeback, sustaining prices at slightly higher levels.

In this sense, I’ve continued turning stones on the steel industry globally, and
I’ve found some good news. In Europe, which supposedly is slowing down,
Salzgitter AG, a major German producer, is reining in its prices again for the
fourth quarter. And in India, China and the Far East, recent price drops have
been selective by-products-more linked to seasonality and the recent China
big-city pollution clean-up effort, which closed factories and electric utilities
during the Olympics. Posco in South Korea said that they will not be lowering
their prices. Russian steel prices are very firm. But in Brazil prices are going up,
because of a demand-supply imbalance in steel slab that will take some five
years to correct.

Even in the US, where some have talked of a fourth quarter slowdown, steel
prices have barely come off, while the inputs in their production process have
seen much larger prices drops, therefore expanding, rather than contracting
profit margins. The legendary Leon Cooperman, head of the very successful
Omega Advisors was on CNBC yesterday talking precisely about his holdings
in Nucor (NYSE NUE), which he saw as oversold, as well as many other
commodity-based stocks, including some energy and agro names. We fully
agree with him and have been acting accordingly prior to his comments.

This whole scenario should help iShares MSCI Australia Index (EWA),
which will soon be lowering rates, and Brazil, where the US’s “slowdown” can
only be traced to newspaper articles.

Next week, we have the OPEC meeting, which should be interesting to say the
least, and car sales, which should disappoint. The Fed’s Beige Book should be
balanced with emphasis on the need to keep supporting the economy with low
rates as inflation, a trailing phenomenon, dips in the months ahead. Be ready to
buy on the probable dip.

Our next opportunity to profit will be from the coming major rally in the US and
global markets ahead of next Friday’s employment number. This should
“surprise” to the upside.

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)

$74.46

Buy

Market Vectors Steel ETF (SLX)

$80.72

Buy

iShares MSCI Emerging Markets Index (EEM)

$40.15

Buy

Vanguard Financials ETF (VFH)

$40.79

Buy

iShares MSCI Australia Index (EWA)

$23.84

Buy

All Money Shadow Stock Trader recommendations are posted on The Monument Street Publishing website – www.MonumentStreetpublishing.com Just click on ‘The Money Shadow Stock Trader’

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