Energy and Commodity prices are taking it on the chin, and there are several reasons for this decline. Not withstanding the commentary on TV, we can point to a few other reasons for the decline;
1) Whatever goes up dramatically in a bull market, normally corrects, and sometimes corrects very sharply. After a normal correction, prices consolidate then gradually move higher.
2) Hedge funds that were over exposed to energy and commodities are unwinding their positions to avoid a Amaranth type situation.
3) Interest rates are falling. Normally interest rates fall when the economy is in trouble. Lower interest rates are used to bail out a faltering economy, but everyone is telling you the economy is fine. So, if the economy is fine, why are interest rates falling. If the economy is not fine, then why are stocks rallying?
4) No hurricanes in the Gulf, and a few "Magical" moves just before the election in November.
If you don't believe in "Magic", the why did Fred Barnes quote President Bush in The Weekly Standard as saying the following;
"In the midterm election on November 7, Bush predicted Democrats won't win either the House or the Senate. "I believe these elections will come down to two things: one, firm belief that in order to win the war on terror there must be a comprehensive strategy that recognizes this war is being fought on more than one front, and, two, the economy." Bush said the price of gasoline, which has been falling rapidly, is one of the "interesting indicators" that the press should watch carefully. "Just giving you a heads up," he added."
Now what did (if the quote is accurate) President Bush mean by the comment "Just giving you a heads up". Did he know in advance that oil prices were going to drop going into the election?
I realize most have a political agenda (Barnes included), but if this quote is even close to being accurate, then my "magic" theory (sad to say) has been validated.
This being said, how can we profit from the recent decline in energy and commodities?
As the panic selling unwinds, eventually prices of stocks will become severely oversold in the same fashion as they were severely overbought. While hedge funds and momentum players are throwing in the towel, they also tend to throw the baby out with the bath water.
I am interested in seeing how these stocks act the first 15 days of October, here are a few to watch;
Iron Ore not Steel: I tend to favor Iron Ore companies over steel companies because the action is in the commodities, not the steel makers.
The Iron Ore companies I am watching are: Rio Tinto (RTP)- Iron Ore, Energy, Industrial Minerals, Aluminum, Copper, Diamonds, Exploration and Technology , BHP Billiton (BHP)- Has several commodity businesses, including aluminum, energy coal and metallurgical coal, manganese, uranium, silver and titanium minerals, and has interests in oil, gas, liquefied natural gas and diamonds., and Cleveland Cliffs (CLF)- Producer of iron ore pellets in North America and sell the majority of its pellets to integrated steel companies in the United States and Canada..
Energy: Marathon Oil (MRO)- Refining, Oil and Gas, Chesapeake Energy (CHK)-Producer of natural gas with proved oil and natural gas reserves, Valero (VLO)- Marketer of refined oil products, Sunoco (SUN) Petroleum refiner and marketer-.
Coal: Arch Coal (ACI)-Mines, processes and markets low-sulfur coal , Peabody Energy (BTU) has majority interests in 34 coal operations located throughout all major U.S. coal producing regions and in Australia.-.
Agriculture: Monsanto (MON)- A global provider of agricultural products for farmers.
What I am looking for is a way to potentially make 20-40% gains on a stock. The stocks listed above have the potential to make those kinds of gains. Will it happen overnight? No. Can they return those kind of results in 2007-2008? Sure.
Since I do not believe China's growth has peaked, these companies should continue to be decent investments.
