Trading energy options to many might appear to be a risky venture, especially in the volatile energy complex. To cash in, you not only need to guess correctly on the strike price, you also need to guess correctly on the time frame of when the strike will be hit. Therefore, even the most saviest of traders prefer to use options as insurance protection for their long or short futures contract positions. Fortunately for energy bulls, because of the European Union willingness to backstop Greecian economic turmoil, a political put is already in place protecting downside risk to long positions.
Similar to the famous Bernanke put for long equity postions in the United States, where traders can rest assured that the Federal Open Market Committee will adjust interest rates to buoy any sinking stock market, the European Union put is firmly in place as long as the EU decides to allow countries to remain in the EU despite not meeting debt to GDP ratio guidelines.
The weeks to come are sure to be filled with violent clashes between the Greek government and its unions. The euro likely to rise and fall just as violently, moving the energy complex up and down as well. Bulls will be waiting with ready cash on the violent dips lower and cashing out on the violent rips higher.
Saturday, April 24, 2010
Saturday, April 17, 2010
Fuel Costs and New Emmission Standards Mean Soon Coming Revival in Truck Purchasing
The recent recession forced most transportation companies to severely cut back spending on new trucks. This has been good news for truck parts outlets, horrible news for truck manufacturers. Now that the economy is improving, transportation companies will begin opening their check books for new trucks. This is indeed good news for truck manufacturers.
One manufacturer that is likely to benefit most is the maker of Peterbilt and Kenworth trucks, Paccar. Although only expected by most analysts to make $00.90 per share in earning this year, the company could easily double those earnings next year. In fact, the probability is favorable that Paccar will reach 2006 record high earnings of $4.00 in just a few years.
Why be so optimistic on the growth of Paccar's earnings? It is simply that demand for new trucks will likely double next year. Truck sales are at a twenty year low. The lack of new supply has increased the sticker price of used trucks, creating greater trade in value on older trucks that need replacing. Also, cargo weights have been steadily rising. An excellent indicator of an improving economy and greater demand for new trucks.
Replacing old trucks with new trucks they shall. With increasing diesel costs and ever stricter emissions regulations, transportation firms will have a much greater need for newer, fuel efficient and regulation approved vehicles. Paccar is ramping up now to meet the need. Smart transportation value stock investors will begin adding to portfolios now and enjoy the ride higher over the next few years.
One manufacturer that is likely to benefit most is the maker of Peterbilt and Kenworth trucks, Paccar. Although only expected by most analysts to make $00.90 per share in earning this year, the company could easily double those earnings next year. In fact, the probability is favorable that Paccar will reach 2006 record high earnings of $4.00 in just a few years.
Why be so optimistic on the growth of Paccar's earnings? It is simply that demand for new trucks will likely double next year. Truck sales are at a twenty year low. The lack of new supply has increased the sticker price of used trucks, creating greater trade in value on older trucks that need replacing. Also, cargo weights have been steadily rising. An excellent indicator of an improving economy and greater demand for new trucks.
Replacing old trucks with new trucks they shall. With increasing diesel costs and ever stricter emissions regulations, transportation firms will have a much greater need for newer, fuel efficient and regulation approved vehicles. Paccar is ramping up now to meet the need. Smart transportation value stock investors will begin adding to portfolios now and enjoy the ride higher over the next few years.
Saturday, April 10, 2010
Will Energy Traders Continue Outsmarting Most Economists?
Energy traders have led the way in having a better understanding of the world's economic recovery and positioning their trades accordingly. Crude has steadily risen to a 70% gain off last year's lows despite most economists, until recently, arguing for no or a very slow worldwide economic recovery. Will crude's up trending ways continue or is energy in the process of correcting an overly bullish market?
Energy bulls, much like equity bulls, have been much maligned by most economists over the past year. Energy bears taking their trading ideas from these economists, have handed over huge losses in the zero sum game of futures and options. Now that crude is staring down the $90 and potentially the $100 level, will the bulls keep charging?
In free markets all commodity pricing eventually obeys the law of supply and demand. Crude and its refined products have seemed to break away from this law the past 10 weeks with crude stocks rising continually with very little pull back in price. Gas and distillate stocks are at multi year highs and storage costs for crude are on the rise as over supply bids for storage. Crude future term spreads which appeared to be heading for backwardation, have recently widened keeping the contango market in place.
Also, affecting petroleum products supply will be more refineries in the United States and worldwide, soon to be coming online. Affecting crude supplies are better and more economical drilling techniques, spurred on by higher crude prices.
So where are crude prices headed? No one knows for sure. That is why most successful energy traders rely on technical analysis with a small dose of fundamental analysis thrown in. We are likely to see bulls make a run at $90 possibly $100, however the current overbought condition will make $90 the higher probability near term high. Bulls will be more than happy to collect their profits at these levels, and traders should be prepared for a slide back to $70 as contracts are exited by bulls ringing the cash register. Of course the bulls will be right back in the market stronger than ever at the $70 level, so when the market looks like it is about to crash, that is when the large houses will be putting even more cash to work.
Energy bulls, much like equity bulls, have been much maligned by most economists over the past year. Energy bears taking their trading ideas from these economists, have handed over huge losses in the zero sum game of futures and options. Now that crude is staring down the $90 and potentially the $100 level, will the bulls keep charging?
In free markets all commodity pricing eventually obeys the law of supply and demand. Crude and its refined products have seemed to break away from this law the past 10 weeks with crude stocks rising continually with very little pull back in price. Gas and distillate stocks are at multi year highs and storage costs for crude are on the rise as over supply bids for storage. Crude future term spreads which appeared to be heading for backwardation, have recently widened keeping the contango market in place.
Also, affecting petroleum products supply will be more refineries in the United States and worldwide, soon to be coming online. Affecting crude supplies are better and more economical drilling techniques, spurred on by higher crude prices.
So where are crude prices headed? No one knows for sure. That is why most successful energy traders rely on technical analysis with a small dose of fundamental analysis thrown in. We are likely to see bulls make a run at $90 possibly $100, however the current overbought condition will make $90 the higher probability near term high. Bulls will be more than happy to collect their profits at these levels, and traders should be prepared for a slide back to $70 as contracts are exited by bulls ringing the cash register. Of course the bulls will be right back in the market stronger than ever at the $70 level, so when the market looks like it is about to crash, that is when the large houses will be putting even more cash to work.
Saturday, April 3, 2010
High Liquidity Levels Continue to Drive the Energy Complex
When money is available at inexpensive cost levels, investors are willing to take on greater risk because they are able to leverage the lower cost structure for potentially higher returns. This has been clearly demonstrated over the past 12 months with the government's lower interest rate initiatives causing liquidity to flow into securities markets.
This flood of liquidity has helped stabilize an economy that was sinking in quicksand as early as last March 2009. Equity and energy markets have been a major benefactor of this tidal wave of cash allowing the S&P 500 to rise an astonishing 400 points and crude oil $50 in only one year.
When will the party end?
The bond market has always been the adult at the party keeping equity and energy from getting too wild. High liquidity eventually brings the fear of inflation. Bond buyers on the long end of the curve are beginning to demand higher interest rates to compensate an increased risk of inflation. The 10 year and 30 year bond yields are pushing upper range resistance levels, which if broken eventually raises borrowing cost for investors.
The ultimate result of higher interest rates are a slow down in economic development. This eventually leads to the equity and energy markets finding more sellers than buyers as investor's costs rise with the higher interest rates.
Energy traders will be monitoring closely the 10 year treasury yield which closed Friday at 3.86. This is just slightly below its one year resistance level of 4.01. Should resistance be broken on a weekly close, energy and equity traders will begin being hit with higher costs, resulting in less liquidity flowing to the markets. And once again the bond market is likely to efficiently tame the crude and equity party animals.
This flood of liquidity has helped stabilize an economy that was sinking in quicksand as early as last March 2009. Equity and energy markets have been a major benefactor of this tidal wave of cash allowing the S&P 500 to rise an astonishing 400 points and crude oil $50 in only one year.
When will the party end?
The bond market has always been the adult at the party keeping equity and energy from getting too wild. High liquidity eventually brings the fear of inflation. Bond buyers on the long end of the curve are beginning to demand higher interest rates to compensate an increased risk of inflation. The 10 year and 30 year bond yields are pushing upper range resistance levels, which if broken eventually raises borrowing cost for investors.
The ultimate result of higher interest rates are a slow down in economic development. This eventually leads to the equity and energy markets finding more sellers than buyers as investor's costs rise with the higher interest rates.
Energy traders will be monitoring closely the 10 year treasury yield which closed Friday at 3.86. This is just slightly below its one year resistance level of 4.01. Should resistance be broken on a weekly close, energy and equity traders will begin being hit with higher costs, resulting in less liquidity flowing to the markets. And once again the bond market is likely to efficiently tame the crude and equity party animals.
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