The Three Legs Of Commodity Pricing

We were forwarded a respectable news letter from the Gold folks at Monex. In it they gave various opinions on the direction of the shiny stuff. They make money whether you buy or sell so they do not tend to be too bias, but they usually have a bullish outlook.

In their latest alert (Thank You Dana), they discuss another commodity OIL. They explain the recent spike of 4% on inflation. Our reaction was to suggest the recent spike has more to do with speculation as a result of the fears about the situation in the Straits of Hormuz. In doing a bit of research, there are three factors that keep arising when we look at the prices of any commodity.

We have never seen them captured in one place but here is what we came up with.

Currency valuation. Inflation and uncertainty about a country's currency impacts the ability of that country to buy as much commodity with their dollar, yen or drachma (Will we see the return of the Drachma?). Most petro deals are done in Dollars so when the dollar gets devalued, the price of oil usually rises and vice versa.

Supply and Demand. Self explanatory, but if more people are demanding an item the resulting scarcity cause prices to go up. The one exception to the laws of supply and demand is the Giffen Good. That is usually a staple commodity related to similar commodities and when the price of the Giffen Good goes up people substitute the Giffen good because they have less overall monies to buy all goods there by violating the laws of supply and demand. Think of potatoes and rice. If the price of potatoes go up there is less money available for meat and veggies so people substitute more potatoes in their diet. (Sorry that took me back to sophomore year economics, when I challenged our teacher when he said there were no exceptions to the laws of supply and demand. After countless hours in the library, I found Giffen Good. The teacher treated me miserably from that point forward. Won the battle but lost the war. But I remembered Giffen Good.) Wow, that was a digression on steroids.

Speculation. Fear and greed drive every market because of the speculative nature of humans. In the case of oil, we have seen a run up over the last few weeks, not solely attributable to supply and demand or currency devaluations. It is because of the fear of Iran getting aggressive in one of the more important petro shipping lanes, the Straits of Hormuz. It is estimated that there is a 10-17% fear speculation built into the current price of Brent Crude.

There are the three legs of commodity pricing currency valuations, supply and demand, and speculation.

We were at the controls of the star ship Salve Lucrum this morning at 6:05. It gave us plenty of time to sllok at futures and pre hour stock prices, read the eIBD, figure out the possible market direction and check the IBD rating on our core holdings. Here are few trades we made at the opening.

Bought another VXX 2013 $20.00call as the price erodes further.

Added more MSFT as the IBD rating continues to climb and we are heard good things from the CES show in Vegas. (Keep in mind we have already done our fundamental and technical homework on these stocks. WE ARE NOT buying off headlines.)

Added more UNFI as their IBD rating improves and their techncials look like it might be breaking out of that 39.00 price range.

Added more MGRC as the IBD rating improved.

We are shifting our thought about GLD and bought some June 2012 140.00 call options for 22.35 each. Our stops are in at 17.90 but we look for a 40% up swing by April. We calculated that by identifying a nice buy point of 156.05 and looked at an 8% stop level of 143.56 and chose a 140 call we liked.

We also bought some February 10.00 Puts against AA Alcoa as they typically drop 11% after missing analysts figures. We are three for three with this type of play. Let see if we can make it a fourth time. We have a 20% stop and look for a 30% gain in about a week or two. The last three times the market was in a correction or an uptrend under pressure. If we don't make money this time, we will blame the market in an uptrend. REMEMBER in stocks, the trend is your friend, in options the trend is your lover.

Market Update

With no bad news coming out of Europe (actually good news regarding bond floats and French Industrial production), and the miss by Alcoa being absorbed well, and China doing a bit of easing along with good news, had number in positive territory, but most of all, it was on moderate volume. They must have heard my plea to turn up the volume.

On mornings like today, when we have the time, we like to go panning for gold. Here is what we do if you want to play along. Using some of the criteria from the CAN SLIM IBD system we set up a screen in FINVIZ. If you want to play along, I'll wait a second for you to get to FINVIZ.COM. Mmmm, mm, mmmmm, mmmmm, mmmm. That was me humming "Until It's Time For You To Go", great Elvis song.

Anyway if you are there now click on the tab that says screener. On the descriptive tab, choose price and set the price for above $30.00 a share. It is a good basic screen that gets a lot of scum out of the way. Then selct the fundamental tab and choose the following, return on equity over 25%, sales growth for 5 years over 10%, EPS growth this year over 25%, EPS growth qtr over qtr over 25%, and EPS growth last 5 years over 25% (That separates the wheat from the chaff) If you do it tonight or early tomorrow, you should have a screen of 18 stocks. The list will change a little each day. These 18 are a great place to start doing your homework for stocks like AAPL and BIDU and NFLX (sorry Jerene). But you will also find some up and comers to put on a watch list like, GPOR with an IBD rating of 96, a great set of fundamentals, a nice story, and a pretty chart that is coming out of a cup and handle pattern and has a decent buy point of $36.80. Now you might say, it is at 32.07 why is the buy point $36.80? we want to watch it finish its break out. The buy point is from Nov 4. It finished its handle at the end of the year and has not worked its way up to the entry point and there is not volume commitment. We want to see both, but we would not buy until we do.

See this stuff is fun and tomorrow is another day.

Salve Lucrum