Monday, September 17, 2012

Crude oil ought to be $150 per barrel: Iran

Crude oil should be at least $150 per barrel, Iran's oil minister was quoted as saying on Sunday, and the sanctions-hit country's OPEC governor said current oil prices were not high enough to threaten the world economy.

Benchmark Brent crude prices rose to nearly $118 a barrel on Friday, stoking fears that surging energy costs could harm fragile economic growth. Days earlier, Saudi Oil Minister Ali al-Naimi said he was worried by high prices and the kingdom would take steps to moderate them.

Iranian oil officials say oil prices are still fairly low and deny there is any danger of current prices hampering growth.

Iranian oil minister Rostam Qasemi said on Sunday crude oil ought to be at least $150 per barrel, the Iranian Students' News Agency (ISNA) reported.

"During the winter, oil prices always climb," Qasemi said. "So it's natural that this year as well we will have a rise in oil prices in the winter."

Mohammad Ali Khatibi, who represents Iran on the board of governors of the Organization of the Petroleum Exporting Countries (OPEC) told the oil ministry news website Shana that even price-sensitive consumers saw $100 a barrel as fair. (more)

Afraid of QE3? Buy Real Assets

by Seth J. Masters, AllianceBernstein


In the past few weeks, central banks have reaffirmed their intent to do “whatever it takes,” in European Central Bank (ECB) President Mario Draghi’s words, to address the various ailments afflicting the global economy. While central bank actions may or may not have their desired effects on the real economy, they do create short-term opportunities and medium-term risks for investors, as my colleague Jon Ruff explains below.

Today, the Federal Reserve reiterated that it will “increase policy accommodation” because they are concerned that “without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.”

These comments follow Fed Chairman Ben Bernanke’s speech two weeks ago in Jackson Hole, Wyoming, in which he reiterated that quantitative easing (QE) works primarily by reducing the “supplies of various assets available to private investors” and therefore “affect(ing) the prices and yields of those assets.” In other words, the primary objective of QE is to inflate asset prices. The Fed buys US Treasury bonds from investor A, who turns and buys US high-yield bonds from investor B, who turns and buys US equities from investor C.

US yields go down. US asset prices go up. Everybody is happy—except for two things.

First, these liquidity flows invariably end up in areas of the market least able to handle them. Investor C gets taken out of the highest return opportunities in the US, leaving emerging-market-related assets as the only place left with yield and growth opportunities. Subsequently, money flows to commodities, higher-yielding currencies and emerging-market real estate. Unfortunately, these markets are not as liquid as US stock and bond markets, so the liquidity flows have a disproportional impact on prices. While that’s good for owners of these “real assets” in the near term, it is not good for emerging-market economies that have to deal with food inflation, strengthening currencies and domestic real estate bubbles.

Second, the Fed buys bonds with new money that is tinder for a potential inflationary fire. Currently, banks don’t want to lend and the private sector doesn’t want to borrow, so the new money sits idle as bank reserves. But if (when?) a spark ignites the supply and demand for credit, watch out: the Fed will have to properly identify, time and execute an exit strategy or face an inflationary outbreak that will make the 1970s look tame. Such an outbreak would likely prove to be good for owners of real assets, at least relative to traditional stocks and bonds, but it would not be good for the US economy.

We expect to see continued asset-buying announcements from central banks around the world: the ECB last month, the Fed today, the Bank of Japan imminently. The impact of these announcements, and ensuing implementations on the real economy, are likely to be ambiguous at best. However, our research suggests that “real assets” such as real estate and commodities will profit from asset purchases in the near term and protect from related inflationary risks in the medium term.

Capture a 10% Dividend in a Low-Yield Market

In its third round of quantitative easing, the Federal Reserve will be buying at least $40 billion worth of mortgage-backed securities a month with no end in sight for those purchases. Their action decreases the risk of mortgage securities since we know there will be constant demand from the Fed.

This buying is coming at a time when distressed mortgages are looking a little less distressed. Home prices may have finally found a bottom, according to some experts, and that is helping homeowners. Traders can benefit from these trends by buying a company that is active in this distressed mortgage market.

Distressed mortgages include loans that are being paid late or are underwater, meaning the homeowner owes more on the mortgage than the home is worth. These borrowers might default or try to work with their lender to sell the house at market value and have the lender write off the debt. A home with a mortgage like this will often sell at a discount to its neighbors because lenders want a quick sale and homeowners generally just want to move on. Buyers of these homes have been able to profit and there are even some hedge funds looking at how to get into this market.

Recent news reports estimate that the number of underwater mortgages is declining, but there are still about 10.8 million American households facing this problem. That represents about 22.3% of all outstanding mortgages. Despite negative equity, most homeowners (about 85%) in this situation are still paying their mortgages on time. These mortgages are profitable to the lender, and a continuing real estate recovery could increase profits in the mortgage market.

There is one publicly traded company that offers traders a way to profit in this segment and pays a dividend of almost 10%, allowing traders to consider this as much an income trade as it is an equity trade.

PennyMac Mortgage Investment Trust (NYSE: PMT) invests in mortgage loans, "a substantial portion of which may be distressed and acquired at discounts to their unpaid principal balances," according to the company. The company will use loan modification programs and other initiatives to try to keep borrowers in their homes and paying on the loans. An improving economy should help their efforts. (more)

Next Trade Setup For Monday & Tuesday

Fastenal Company (NASDAQ: FAST)

Fastenal Company, together with its subsidiaries, operates as a wholesaler and retailer of industrial and construction supplies in the United States and internationally. It offers fastener product line under two categories, which include threaded fasteners, such as bolts, nuts, screws, studs, and related washers that are used in manufactured products and building projects, as well as in the maintenance and repair of machines and structures; and miscellaneous supplies and hardware comprising various pins and machinery keys, concrete anchors, metal framing systems, wire ropes, strut products, rivets, and related accessories. The company serves the construction market, which consists of general, electrical, plumbing, sheet metal, and road contractors; and manufacturing market, including original equipment manufacturers, and maintenance and repair operations, as well as other users, such as farmers, truckers, railroads, mining companies, federal, state and local governmental entities, schools, and retail trades.

To review Fastenal's stock, please take a look at the 1-year chart of FAST (Fastenal Company) below with my added notations:

1-year chart of FAST (Fastenal Company)

After trending lower since April, FAST has settled into a small Rectangle pattern over the last couple of months. A Rectangle pattern forms when a stock gets stuck bouncing between a horizontal support and resistance. For FAST, the Rectangle pattern has formed a $45 resistance (red) and a $42 support (blue). The $45 resistance also extends back into May.

Chart of the Day - Amazon.Com (AMZN)

The "Chart of the Day" is Amazon.Com (AMZN), which showed up on Thursday's Barchart "All-Time High" list. Amazon on Thursday posted a new all-time high of $262.00 and closed +1.80%. TrendSpotter has been long since July 19 at $226.17. In recent news on the stock, Digitimes on Sep reported that Amazon is unable to keep up with shipments for Kindle due to strong demand. Barclays on Sep 11 reiterated its Equal Weight rating on Amazon but raised its target to $245 from $220. BofA/Merrill on Sep 7 reiterated its Buy rating on Amazon and raised its target to $281 from $264., with a market cap of $115 billion, is the world's largest online retailer of a side variety of products.


US Weekly Economic Calendar

time (et) report period Actual forecast previous
8:30 am Empire state index Sept. 0.0 -5.9
8:30 am Current account 2Q -- -$137 bln
10 am Home builders' index Sept. 38 37
8:30 am Housing starts Aug. 775,000 746,000
10 am Existing home sales Aug. 4.60 mln 4.47 mln
8:30 am Weekly jobless claims 9-15 375,000 382,000
8:58 am Markit PMI flash Sept. -- 51.5
10 am Leading indicators Aug. -0.1% 0.4%
10 am Philly Fed index Sept. -4.0 -7.1
12 noon Household debt 2Q -- -0.4%
None scheduled