Energy, Commodities,, Euro, and Gold

Interesting piece from Michael Krieger at Sanford Bernstein. Along the line of this recent post of mine.


Energy, Commodities and
Energy stocks ran hard to the upside into EPS and then when SLB missed earnings but gave positive commentary on a North American recovery in 2H08 energy stocks rallied once again. At that point it seems as if nothing could derail the momentum train from its tracks. Energy wasn’t the only sector to run on incredible momentum into earnings, as the (POT, MOS, now there is new issue IPI, None Covered) stocks defied gravity and kept increasing due to extraordinarily favorable pricing power. Amazingly, POT and MOS each had market capitalizations well north of $60 billion each as of a few days ago. For a little perspective, DE and CAT , two great companies very leveraged to the agriculture boom have market caps of $38 billion and $51 billion. Potash companies worth half as much as INTC? Come on…

It seems that the large money managers did their homework into EPS and decided that energy/mining/commodity stocks had the best chance of beating or exceeding consensus forecasts. So far it seems this has been a smart bet. While that led to the run in these stocks into EPS, the reaction to good numbers has become decisively negative. FCX (Not Covered) yesterday may have been a key tell (see chart) as the stock initially rallied up $5 per share to above the resistance at $120 and then completely failed, reversed and closed down $2 per share. POT today reported excellent numbers and raised the midpoint of guidance to 13% above consensus. The stock is down 3% today after falling 5% yesterday.

The Euro and Gold
Today’s move in the dollar/euro exchange rate is big. There is no other way to describe it. Now does this mean the euro/dollar has peaked? Of course no one knows, but I think there is a very strong chance we just saw the top. While there was a similarly huge move back in late March in the dollar/euro and the euro still went on to hit new highs there is something very interesting and important about that late March move in the euro. It marked the top in gold (at least for now). This is very important considering that more and more investors and market participants are looking to gold as an indicator for the dollar, oil and commodities in general. It does indeed seem that gold is the leader of the whole space. Its fall from grace may have marked a signal that the reversal of all the crowded momentum trades was imminent, ie that the euro, oil and commodity bubbles we close to popping.

It is still unclear whether this is the case, but as I have said previously, the bursting of the commodity and euro bubble when it happens will lead a historic rotation of capital and U.S. equities (non commodity names) will be the biggest beneficiaries. While the S&P 500 is down a little since the peak in 2000, in euro terms it is down huge. Where do you think Europeans will put their equity capital if they think the dollar has bottomed??

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