Weekly Update-February 19, 2012

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Weekly Update-February 19, 2012

Stocks were on the ropes mid week before the usual Greece and Euro-zone rumors lifted the mood into the weekend. For the week, the Dow added .4%, the S&P500 gained 1.4% while the Nasdaq led after tacking on 1.7%.

The front half of the week saw stocks trading to multi-week lows as Greece stumbled with its umpteenth bailout package. But as usual, rumors of a deal started circulating across the Street ahead of the weekend, giving the market every reason it needed to bid stocks higher and push the averages into the green.

And that is just fine. In fact, we’ve seen this trade before. This is exactly how stocks traded last year at the same time, just grinding higher day after day as the market saw every dip as a chance to buy. Take a look at the 2-year Dow chart below for a comparison.

2-Year Dow Chart

That movement is indicative of a liquidity fueled rally. As in, the market is expecting action from the central banks of the world to keep asset prices on the fly.

And in regard to the Euro zone and Greece, it also feels like the market is becoming increasingly numb to the whole thing. There have been a thousand alarms so far, but not once has the entire financial system collapsed. And as sick as it sounds, that has cast a reassuring shadow across the Street.

But on a very macro level, much of this optimism and recent rally has been predicated on a very bold assumption; that the ECB and central banks CAN maintain control of the market. Because make no doubt about it, after everything the financial system and markets have been through over the last few years, those are pretty much the last two lines of defense.

So if one of them fails and the situation spirals out of control, instead of having small, periodic adjustments, the market could be in for a wholesale sell off. And that is essentially the down side risk in this market.

But for the time being it definitely looks like the market wants to keep rallying, making the first 6 weeks of 2012 a great time to own stocks and commodities.

Let’s get into some updates.

Updates:

It’s no secret that the second half of 2012 was a pretty brutal time to own energy stocks, clocking in as one of the worst performing sectors of the S&P500 after 2 years of huge gains. But not, it looks like the conversation in once again beginning to shift, as energy move back into favor with the market on hopes for economic growth and rising crude prices.

We saw that show up in Cimarex Energy Co (XEC) this week, blasting higher with an incredible 24% gain after reporting strong Q4 results that came in well ahead of expectations. That sure did go a long way to ease some of the under performance of this stock over the last 6 months. It’s also a stark reminder of the long-term trend in energy, where limited resources and rising prices have pushed earnings and production higher. So even though energy stocks can be a bit fickle in the short run as hot money flows in and out, the long-term trend is most definitely your friend.

Baker Hughes (BHI) was also on the upswing, adding 5% on the week and closing above $50 as natural gas prices rose in tandem with crude breaking above $104.

We also saw some solid movement from Bunge Ltd (BG), climbing 5% of its own as estimates continue to climb on the company’s recent Q4 results. As a global leader in agricultural goods like corn, beans and wheat, BG is a great way to gain exposure to a growing global population and limited food resources.

With the market regaining its appetite for risk, small cappers have been hot, helping lift EZCorp, Inc. (EZPW) to a 3.5% weekly gain. This is another stock that has been a bit volatile over the last 6 months, but with earnings on the upswing and a compelling valuation, the big picture looks solid.

That’s all for this week, but until next time, here is a follow up piece to our conversation about energy, with Iran announcing over the weekend that it will stop selling crude to the UK and France. If the situation in Iran and the Middle East continues to deteriorate ahead of spring and summer, peak months for energy consumption, crude could easily see a bid back to its all-time high of $147 from the summer of 2008. Enjoy.

Iran Halts Crude Sales to UK and France

Your Investment Partner,

Mike

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