Egypt Crisis Points Investors Toward U.S. Energy Producers and Crude Oil

By: Money_Morning

By Jon D. Markman writes: Stocks lifted generously over the past week as investors celebrated the start of February with a bang amid cooling tempers in Egypt, guarded optimism in the halls of the U.S. Federal Reserve, stronger results among U.S. retailers and semiconductor makers, a merger in the gold mining industry and a devil-may-care attitude about the worsening of unemployment.

Raw materials, energy, technology and retail rose the most, which was nice since those were my strongest recommendations this year. It's nice to see a plan come together. As far as financial news anchors were concerned, gold miners' shares took off because a big merger announcement: Newmont Mining Corp. (NYSE: NEM) snatching Fronteer Gold Inc. (AMEX: FRG). But as you can see in the weekly chart of physical gold below, something was bound to happen to cause a bounce of that well-established trendline.

The rebound of gold this week was emblematic of the market in the past two years: A strong group that pulled back to a trendline and then was bought with two hands just when bears thought they were finally getting the upper hand. It's incumbent upon us as private investors to have the guts to take advantage of corrections in leadership groups when they occur. I am sure you have heard in the media, as I have, that the move in gold was finished after it triple-topped in October, November and December. Yeah, sure, whatever you say.

I am not a gold bug by any means, but I know a demand-supply imbalance when I see one, and I believe strongly that the more successful emerging markets' central bankers want to add gold to their reserves now that they have a few bucks to spare.So whether you think gold is really a store of value or not, just recognize that a rebound is likely here -- offering a trading opportunity.
And remember from our experience last year that if you think the value of physical gold is going to rise, then the larger gold mining companies' shares will rise roughly twice as much, and the smaller gold miners' shares will roughly double that. It's because of the operating leverage that unhedged operators have.

Thursday provided a perfect example: Physical gold rose 1.3%, the Market Vectors Gold Miners ETF (NYSE: GDX) rose 2.7% and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) rose 5.8%. QED! (That's "quoderat demonstrandum," for you English majors, not a new stock symbol.)

Energy Politics
Key points of news mid-week were an outbreak of violence in the streets of Cairo as Egyptian police clashed with demonstrators. It's so easy to get caught up in the moment about Egypt -- the flames on television, the melee that roughed up CNN reporters, the fiery rhetoric on both sides -- that the big picture can be obscured.

The main takeaway about Egypt's political situation for us as investors is that a 40-year period of stability is coming to an end. Sure it's hard to use the word "stability" for a part of the world in which there have been horrible battles fought in the those four decades, such as the Six Day War, the Persian Gulf War, the Iraq War, the Iranian revolution, the Beirut civil war, the Russia-Afghanistan war, the U.S.-Taliban war, and the Iran-Iraq War which alone killed a million people.

But by stable, I mean that for the most part the countries that sit astride the largest reservoirs of the world's most important resource, crude oil, have been run by dynastic monarchies that have reached some sort of uneasy entente with the United States and Europe. For all they complain about us and Israel, they need us -- we are their customers. They recognize that if they don't keep the price of crude oil within limits, they will kill the golden goose that pays for all their palaces and fleets of warplanes and luxury 767s.

But now it looks like change in the style of the falling of the Berlin Wall is on the verge of sweeping across the Middle East. And we do not have a clue -- no idea, no one really does -- about what will come next, and how a new form of stability will be achieved, and at what price. I agree with Dr. Henry Kissinger when he told a television interviewer that we have been acting mostly correctly in the recent dust-up, but we "are playing catch-up." And so is everyone else. There is no putting the genie back in the bottle, so to speak. And we don't get three wishes.

This is why investments in U.S. energy producers and crude oil make the most sense now. Oil and gas, for better or worse, continue to be the fuel and feedstock for almost everything that makes modern life happen, from air travel to train transportation to your commute to the plastic in your toothbrush. And to the extent that there is new uncertainty about the longevity of Persian Gulf governments it makes sense that there will remain a bid under the prices of these assets.

I still expect Egyptian strongman President Hosni Mubarak to step down by summer and be replaced by a general who will reform the government enough to meet the street's approval. But these are just tactics. The long-term strategic arc here is an unruly, messy, uncomfortable, uncontrollable change in the Persian Gulf, and that is going to keep prices of energy assets firm.

Take a good long look at the 11-year chart of West Texas Intermediate Crude Oil ($WTIC) vs. gold and the Standard & Poor's 500 Index, above. Except for the parabolic bump higher and lower in 2008, that's a chart you want to be involved with. The two clips at the bottom show two of our favorite positions, Enterprise Products Partners LP(NYSE: EPD) and National-Oilwell Varco Inc. (NYSE: NOV). They have performed well in excess of the price of crude, and I think you are going to want them in your portfolios for a long time even after this month is over. Like the mobile Internet, this is one of the main trades of our era.

Retail Therapy
Helping with the recovery story was news that initial unemployment claims fell 42,000 to 415,000 and productivity jumped as well. And the ISM non-manufacturing index rose to 59.4 in January from 57.1 in December, which was the highest level since 2005. Impressive.

One of the best tells for employment is a steady trend down in layoffs. Adjusted for the size of the labor force, according to Goldman Sachs Group Inc. (NYSE: GS) figures,new claims have fallen to mid-1990s levels, the onset of a period of very strong employment growth.

Moreover news out of the shopping malls was equally positive. Same-store sales data helped showed a +4.2% comp in January vs. 2.7% consensus and the +3.3% printed last January. Also the ratio between beats and misses among individual stores rose to 60/40 from 56/44 in December. Stock results were quite dispersed, and it was hard to see the trend.

Many discounters such as Dollar Tree Inc.(Nasdaq: DLTR) have slipped badly, but some of our favorite discounters, such as Ross Stores Inc.(Nasdaq: ROST) and Costco Wholesale Corp.(Nasdaq: COST), jumped to new highs Thursday. Also the high-end retailers appeared to have an edge, as Tiffany & Co.(NYSE: TIF) and Nordstrom Inc.(NYSE: JWN), to name a couple, showed great comps and saw their stocks rebound out of downturns. Also shoe retailers, for whatever reason, tend to lead the market, so it was a big positive to see Genesco Inc.(NYSE: GCO) and Steve MaddenLtd. (Nasdaq: SHOO) pull out of recent downtrends as well.

As you can see above in the two-year weekly chart of the SPDR S&P RetailETF (NYSE: XRT) fund, the retailers are due for a bounce off their 20-week average, which is a key reason that I recommended it. But I am still leery of retail due to employment and tax trends, and am not planning to make this a long-term hold for now.

Full House
One of the new-high leaders that piqued my interest this week was Full House Resorts Inc. (AMEX: FLL) because it rose to the top of my model in late January, but I had to remove it as a recommendation due to low trading volume.

Full House is one of those really scary casino micro-caps that we used to see a lot during the 2003-2007 bull market. The $85-million company's directly owned or managed assets include a lot of seemingly second-rate properties such as the Harrington horse-racing track and casino in Delaware; the FireKeepers Casino in Battle Creek, Michigan; and the Stockman's Casino in Fallon, Nevada.

I don't mean to knock FLL, since it may be a very well managed outfit that will rock the world one day. And it did pass my system's minimum filters for quality. But when you see stocks like this hit the jackpot, the "market message" is that there is a lot of liquidity and it is finding its ways down from the most deserving companies, such as Exxon Mobil Corp. (NYSE: XOM), to the potentially least deserving, which is something like Full House.

Lender Bender
Income and consumption trends recently have provided great news, but now add this: The Fed's latest survey of senior loan officers suggested that a significant turnaround in business lending is likely in store this year, which would boost investment and employment. Demand for residential mortgages has weakened at the same time, but we know the housing market is in the dumps and unlikely to improve materially until later this year at the earliest.

Mind you, the willingness of banks to supply loans didn't change much in the latest survey, but a Capital Economics analyst noted that more banks are relaxing standards on commercial and industrial loans and most types of consumer loans. This has caused demand for business loans to jump to a five-year high, while the demand for residential mortgages fell sharply, CapEcon said.

The analysts said that historical trends suggest the demand for business loans should translate into a healthy increase in actual lending this year. And since more banks are loosening standards, the supply of money shouldn't be a problem. Most of this new lending is expected to be used to fund investment projects. Business spending on equipment and software rose rapidly last year and results and guidance from companies like Applied Materials Inc. (Nasdaq: AMAT) and Novellus Systems Inc. (Nasdaq: NVLS) is showing that it will be another strong year in 2011, particularly with the 100% depreciation tax allowance included in the latest fiscal stimulus.

Bottom line: Geopolitical risk in the Middle East appears to be ebbing a bit at a time when fiscal policy and bank decision-making is making more money available for consumers to spend and businesses to invest. This reinforces our positive outlook -- not that there can't be some smashes in the mouth from time to time to keep everyone dutifully on edge.

The Week Ahead
Monday: Consumer credit; Earnings: Boardwalk Pipeline Partners LP (NYSE: BWP); Cognizant Technology Solutions Corp. (Nasdaq: CTSH); Randgold Resources Ltd. (Nasdaq ADR: GOLD); Hasbro Inc. (Nasdaq: HAS); Harmony Gold Mining Co. (NYSE ADR: HMY); Humana Inc. (NYSE: HUM); Lorillard Inc. (NYSE: LO); SYSCO Corp. (NYSE: SYY); TransDigm Group Inc. (NYSE: TDG); Becton, Dickinson and Co. (NYSE: BDX); Badger Meter Inc. (NYSE: BMI); Brown & Brown Inc. (NYSE: BRO); Cousins Properties Inc. (NYSE: CUZ); FMC Corp. (NYSE: FMC); Gartner Inc. (NYSE: IT); Lincare Holdings Inc. (Nasdaq: LNCR); Principal Financial Group Inc. (NYSE: PFG); Veeco Instruments Inc. (Nasdaq: VECO).

Tuesday: NFIB Small Business Index, ICSC-Goldman Chain Store; Redbook Chain Store; API Crude Inventories; ABC Consumer Comfort. Earnings: AGCO Corp (NYSE: AGCO); Avon Products Inc. (NYSE: AVP); Beazer Homes USA Inc. (NYSE: BZH); Coventry Health Care Inc. (NYSE: CVH); Earthlink Inc. (Nasdaq: ELNK); Martin Marietta Materials Inc. (NYSE: MLM); The Macerich Co. (NYSE: MAC); Omnicon Group Inc. (NYSE: OMC); Potlatch Corp. (Nasdaq: PCH); Pike Electric Corp. (NYSE: PIKE); Sara Lee Corp. (NYSE: SLE); Teva Pharmaceutical Industries Ltd. (Nasdaq ADR: TEVA); UBS AG (NYSE: UBS); Warner Music Group Corp. (NYSE: WMG); The Walt Disney Co. (NYSE: DIS); Stifel Financial Corp. (NYSE: SF).

Wednesday: MBA Mortgage Purchase Applications, USDA Crop Report, DOE Crude Inventories. Earnings: Acco Brands Corp. (NYSE: ABD); AGL Resources Inc. (NYSE: AGL); DTE Energy Co. (NYSE: DTE); IntercontinentalExchange Inc. (NYSE: ICE); Ingersoll-Rand Plc (NYSE: IR); The Coca-Cola Co. (NYSE: KO); Polo Ralph Lauren Corp. (NYSE: RL); Sigma-Aldrich Corp. (Nasdaq: SIAL); Sonoco Products Co. (NYSE: SON); Dentsply International Inc. (Nasdaq: XRAY); The Allstate Corp. (NYSE: ALL); Akamai Technologies Inc. (Nasdaq: AKAM); Activision Blizzard Inc. (Nasdaq: ATVI); Cisco Systems Inc. (Nasdaq: CSCO); Equifax Inc. (NYSE: EFX); FLIR Systems Inc. (Nasdaq: FLIR); Gamco Investors Inc. (NYSE: GBL); Kimco Realty Corp. (NYSE: KIM); MetLife Inc. (NYSE: MET); Prudential Financial Inc. (NYSE: PRU); TriQuint Semiconductor (Nasdaq: TQNT); Whole Foods Market Inc. (Nasdaq: WFMI).

Thursday: Initial Jobless Claims; Continuing Claims; Wholesale Inventories; EIA Natural Gas Inventories; Treasury Budget. Earnings: Alexion Pharmaceuticals Inc. (Nasdaq: ALXN); Bunge Ltd. (NYSE: BG); BorgWarner Inc. (NYSE: BWA); The Goodyear Tire & Rubber Co. (NYSE: GT); Louisiana-Pacific Corp. (NYSE: LPX); Noble Energy Inc. (NYSE: NBL); Lufkin Industries Inc. (Nasdaq: LUFK); Rio Tinto Plc (NYSE ADR: RIO); Sprint Nextel Corp. (NYSE: S); Smith & Nephew Plc (NYSE ADR: SNN); Cephalon Inc. (Nasdaq: CEPH); DaVita Inc. (NYSE: DVA); Expedia Inc. (Nasdaq: EXPE); Graham Packaging Co. Inc. (NYSE: GRM); Kraft Foods Inc. (NYSE: KFT); TC Pipelines LP (Nasdaq: TCLP); Wright Medical Group Inc. (Nasdaq: WMGI).

Friday: Trade Balance; Univ of Michigan Consumer Sentiment. Earnings: Allegheny Energy Inc. (NYSE: AYE); Coca-Cola Enterprises Inc. (NYSE: CCE); Discovery Communications Inc. (Nasdaq: DISCA); SCANA Corp. (NYSE: SCU); WABCO Holdings Inc. (NYSE: WBC); Ladish Co. Inc. (Nasdaq: LDSH).

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