Crude oil prices erode under Saudi onslaught, creating some short to long term opportunities in at least two investment sectors. Insurance stocks also likely to catch a bid.
WASHINGTON, Dec. 8, 2015 – Today, Tuesday, we are going to split our Market Maven column into two, moving our background market discussions to our other column, The Prudent Man while keeping our specific market recommendations right here.
We’re doing this partially to keep column sizes down to an Internet-acceptable minimum—Internet readers seem to really hate anything much over 750 words. But we’re also doing it to make sure traders are more specifically tuned into our thoughts, right or wrong, while leaving them the option of tuning into our in-depth material should they want to peruse it.
We’ll provide a cross-link between related (or past) columns just to help.
Today’s trading tips
Facts on the ground? The Saudis and OPEC continue to kill the crude oil market, at least in the short term, by running flat out, overproducing to drive U.S. shale oil producers right out of business. Today, crude is trying a feeble recovery, but that influential commodity still has more likely downside to go.
In our opinion, this ongoing oil price drop—or at least its current act—is getting way overdone. That doesn’t mean it’s necessarily over. But the downward pressure is getting a bit exaggerated and we’re likely nearing a positive bounce.
If we’re right, that means at least a brief bounce in oil and oil-related stocks as well, which in turn means we can consider a quick trade, or use the bounce to exit from oil patch positions we currently hold that we’d like to exit so we can sleep at night.
Here, we continue to hold small, slightly losing positions in oil refiners Marathon Petroleum (symbol: MPC), Valero (VLO) and refiner/MLP Calumet (CLMT). We’re not likely to add to these positions right now.
That said, we’d observe that refiners are getting unfairly battered, as they process oil starting with whatever prices they pay for the raw material. The lower the price, the lower they can sell the end product, presumably for roughly the same profit margin. But they’re also likely to sell as much as they can refine since all of us might be more inclined to top off our tanks more often in coming months.
The short-term negative here is the usual spate of traditional autumn and winter “refinery outages,” meaning that select refinery complexes are temporarily shut down to allow personnel to perform needed maintenance.
When a refinery is shut down, of course, that lowers output and profits temporarily before they resume for the traditionally heavy spring and summer driving seasons. This is no different from the really bad post-Christmas first quarters that retailers experience, except that right now, everyone who invests in stocks is freaking out on energy, exaggerating the downside. So caution remains the watchword in this sector, at least for Q1 2016 or its accounting equivalent.
On the other hand, we are now actively looking for one or two petro-chemical companies to invest in, including possibly overbought Dow (DOW) and another chemical giant, Celanese (CE). Oil and gas—both under price pressure—are a main raw material for such companies, and you can follow the logic: lower raw material prices equal lower costs and higher profit margins for these chemical companies. We need to do a bit more research, though, before we figure out which one we like best.
Adding to select banks and insurance stocks, we may be looking to add Ace (ACE) to the portfolio. With interest rates almost certain to increase, most insurers will experience a lift in their stocks since they most frequently use bond and real estate investments to provide stable, conservative yields in their own giant investment portfolios. With interest rates likely to start gliding up, this should help profitability considerably, although it will take one to five years to see the results. So insurance stocks are still only for the patient.
Meanwhile, the market in general is getting extremely oversold. So we could be on the verge of a late week dead cat bounce that could look like the resumption of the thus-far aborted 2015 Santa Claus Rally.
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