OSX Buy Recommendation
Tuesday, February 21, 2006 | Teeka TiwariRating:
OK, fight fans, it’s been a rough few rounds that we’ve had to soldier through here on the energy front, but there is light at the end of the tunnel. The OSX has been getting its clock cleaned and is giving us a great buy signal here.
MY RECOMMENDATION IS TO BUY THE OSX SEPTEMBER 200 CALLS RIGHT HERE.
The symbol on the option is OFJIT.
In this article, I'll go into detail as to what’s behind the recent big commodity selloff, and why it could be the single biggest buying opportunity in commodity stocks ... the same way the 1998 mini-crash was for technology stocks.
Okay, let’s talk about the primary culprit, the inverted yield curve. Let's talk about all the damage that it’s doing to global commodity prices, and in turn hurting many of your commodity/energy stocks.
For the uninitiated, an inverted yield curve is when long term interest rates are LOWER than short term interest rates.
Logic would dictate that the longer you lend your money out, the more interest you would receive to compensate you for the greater time risk.
So why would anyone buy a 30-year bond yielding 4.51% when he could buy a 10-year bond yielding 4.54%?
And why buy the 10-year bond for a 4.54% yield when you can buy 2-year bonds and receive 4.65%?
On the surface, it seems nuts, but I assure you it’s not.
When the yield curve inverts, it indicates that bond market participants feel that long-term interest rates are headed DOWN due to an upcoming economic slowdown.
And while a 4.51% return on a 30-year bond may look crazy today, it may not look so crazy a year or two from now if long-term rates are at 3.9%.
Since the 1950’s, a yield curve inversion has preceded a recession seven out of nine times, with the recessions occurring within 12-18 months of the inversion.
It is this deepening inversion of the yield curve that has been hammering commodity stocks.
There is widespread fear of what a US-led slowdown could do to aggregate global commodity demand.
The old adage being that, "When America sneezes, the whole world catches a cold.”
Another big contributor to near-term declining oil and gold prices is the defusing of the Iran nuclear enrichment controversy.
It’s looking like they’ve struck a deal where the Russians will oversee all of their uranium enrichment.
So far it appears to have the backing of both the Europeans and the US.
Anybody who believes that this is the last we’ve heard on this subject, though, is living in a Panglossian
fantasy.
Let me tell you why you should not panic over this inversion.
First, here’s the bad news: We will almost certainly experience a slowdown in U.S. growth over the next 18 months; accept it and let’s profit from it.
Bank stocks, mortgage companies, finance companies, and home builders are going to get gob smacked.
Period.
If you own any of these stocks, sell them.
Now here’s the good news: A U.S. slowdown doesn’t necessarily mean a global slowdown any more.
Japan is the second largest economy in the world, and they are BACK, BABY!!
Remember that Japan has added NOTHING to global growth for fifteen long years.
They’ve got a lot of catching up to do, and I’m confident that they will.
The Japanese are about to embark upon a spending and investing orgy that will unleash trillions of dollars in the Asian region, more than ameliorating any U.S. slowdown.
As long as I’ve worked in and around Wall Street, crowd psychology has never ceased to amaze me.
Especially when I see it infect fellow Wall Street folks with educational backgrounds that far outstrip
my own.
These people’s mind boggling inability to think for themselves is one of the great paradoxes of Wall
Street.
But it’s a paradox that the savvy investor can profit from.
So when the Wall Street pundits tell you that commodity prices are destined to fall because of a looming recession, don’t listen to them.
In the 70’s we had recession and HIGH commodity prices!
How did we manage to pull that one off?
I’ll tell you how.
Regardless of economic activity, the world still needs a certain amount of energy every day just for modern society to function, right?
I mean when a recession hits, we don’t all of a sudden start walking to work, and turn off our heat and lights, do we?
No, of course not.
We conserve, we cut back, but we and big business still consume copious amounts of energy.
Now, if we had a glut of oil and saw an economic slowdown, then yes energy prices would get crushed, but here’s the news flash folks: There’s a global oil shortage.
We don’t have enough oil to meet current demands (do you think if we did that oil would be trading at $60 a barrel??), and we don’t have enough to meet future demand.
Global oil consumption is currently about 82.4 million barrels a day.
Current oil production is only 83.5 million!!!
US Growth may take a hit, but nowhere near enough to make up for the world’s declining supply of oil.
The entire region of Asia, with its 3.6 billion inhabitants, currently uses just 20 million barrels of oil a day.
We here in America with 300mm people use 22 million barrels a day!!
But get this, Asia’s oil demand is expected to DOUBLE over the next decade.
Where is that oil going to come from?
In the 70’s, the decade when the US became a nation in decline and when the UK literally went bankrupt, the price of oil rose by 15 times!
The supplies of oil were so low that prices still rose even though the worlds two greatest powers (the U.K. & U.S.A.) were at a virtual economic stand still.
It didn’t matter what happened to the global economy.
With oil prices, supply/demand imbalances trump everything, even an economy in recession.
Oil capacity is not keeping up with oil use because of two decades of under-investment by the major players in oil exploration, refining and transportation.
Matched with the unexpected boom in demand from Asia, and we have an inescapable upward move in oil prices.
INESCAPABLE!!!
So don’t sweat the yield curve inversion, don’t sweat a US slowdown or recession.
What you should be sweating is missing the biggest commodity run of your life.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
