The Gift of QE3: Refined and Wrapped in Gold
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Federal Reserve Chairman, Ben Bernanke announced QE3 and whether you agree or disagree, accept it and figure out where you need to go from here (another reason why I don’t short stocks). I had several posts that had to be scrapped because of this grand announcement, and a few that were no longer relevant (in the short term), so it’s time to grow up, be an adult, and act accordingly. So where, exactly do we go from here?
The previous round of quantitative easing (QE2), was the catalyst for an illustrious three-day “rally”, followed by a month of market malaise which had more than a few people scratching their heads in search of answers. What the result from the recent QE-infinity declaration is anyone’s best guess, just ask them, believe me, they will tell you.
So the market bears and the short-sellers were forced to reevaluate their sentiment, their positions, hedges, and whatever else it is they do. Conversely, the market bulls enjoyed the mini market Mardi gras, patting each other on the backs, finger-pointing and shouting “I told you so!” at the top of their lungs. If you are like me (my most sincere apologies), which is a much easier group to be a part of, as most wolves do, you take some profits and eat, crouching all the while in search of your next prey.
Heavy Metal Soars
Immediately following the QE3 declaration, judging from the move in SPDR Gold Shares (NYSEMKT: GLD), the once almighty US dollar is going to take a sound beating in the future. In just over one-hour’s time after the announcement, the trust spiked up over $5, declaring victory over currency, proving on this day, that rock beats paper (I never understood “paper covers rock”). With the surge in metals, which had experienced a relatively decent run leading up to the Fed’s decision (GLD up 13% from summer lows in June), it would not surprise me to see new 52-week highs (GLD high $177), sooner rather than later. The price has leveled off since the projectile vomit move up, and any future word of the printing presses churning more and more green should see steady upward momentum.
The mining stocks moved stride-for-stride with the metals post-announcement, but the general consensus among many analysts is to be invested in the metals, not the miners. But by investing in the largest silver ETF, iShares Silver Trust (NYSEMKT: SLV), as fellow Fool writer, Dan Caplinger points out, holding those shares can end up costing any future returns. The move in SLV off June lows is up over 22%, and I wonder if there is more room to run much higher. As we ease our way into a federally mandated, Peter Pan economy, where nobody grows up as long as we continually sprinkle QE fairy dust over everything so the stock market can fly, our esteemed Chairman will have to work on his juggling skills with inflation, stagflation, recession, and the almighty, “slow growth”. Throw in Europe, China’s hard, soft, or over-easy landing, along with the unemployment situation and fiscal cliff, and we’re left with a mess that is more confusing than the Occupy Wall Street movement. Where do we go from here?
Issue A Downgrade, Raise The Target Price; Makes Perfect Sense
While the analysts bang the “metals” drums, I question why the stocks aren’t continuing the upward momentum. Surely they are putting more money in as they recommend them to loyal subscribers, viewership and readers. But another school of thought is that with the endless easing, everything we buy will be much more expensive, cereal, soda pop, ice cream, even gas. Now hold on for just a minute, in my neck of the woods, the cost of a gallon of gas has gone down since the announcement. And so has the share price of Phillips 66 (NYSE: PSX), although it’s up as I type this. To add to the confusion of trying to live in our QE universe, analysts recently downgraded a slew of refiners, from “Buy” to “Neutral”, while at the same time raising some price targets. I guess we all get to have it both ways. “Hold it, don’t buy it, but it’s going to go higher.” Excuse me?
Vote For Buffett
This is definitely going to be an interesting development, especially taking into account we are days away from a Presidential election which should rake in returns of nearly half the voting population, half of whom probably don’t know the contents of their 401k’s. But when we get the overwhelming abundance of information clogging our personal bandwidth, there are moments when you have to simply trust your own research based on the amount of time you dedicate to each of your holdings, as well as those on your watch lists. Phillips 66 has had a glorious run since the spin off from ConocoPhillips (NYSE: COP), and had you listened to yours truly, depending on your Conoco cost basis, we’re looking at 30-40% returns, courtesy of Phillips (“My Second Crush of 2012”). The stock closed at highs the days following the gift of QE3, and has dipped a little, but appears to be leveling somewhat, despite the “downgrade”. The company’s net income per barrel is almost twice from last year; producing 2.2 billion barrels per day from its 15 refining operations. Second quarter net income grew almost 14% and the stock received a “Buffett boost”, this summer after it was announced that both Berkshire portfolios acquired substantial stakes in the refinery side of the spin-off (since that July announcement the stock is up around $12 per share).
As we slowly grind toward the election, Phillips 66 may experience some consolidation, offering nice spots to enter a long position. The common trader mantra, “trade what you see”, doesn’t necessarily apply to investors, and I prefer to “buy when there’s opportunity”. I think there will be opportunities with Phillips 66 (and other refiners), and with prices close to 52-week highs ($29-$48), it could see a bit of profit taking (probably the reasoning behind the analyst downgrade). The stock pays us for our patience with a 1.8% dividend yield, giving shareholders 20-cents per share each quarter, which may increase next year. So after we all perform our civic duty and vote, make sure to focus on the company’s earnings call November 6th. With the upcoming challenges facing the global economy, coupled with the Federal Reserve’s penchant for infinite easing, scaling into positions when the opportunities present themselves are much easier than trying to time a bottom with GLD or Phillips.
kmet312 owns shares of ConocoPhillips. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.