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Seeking Alpha

Monday, October 29, 2007

Morning Report: Commodity Plays Played Out


(Stocks in this article: NYSE: VZ, NYSE: MER, NYSE: F, NYSE: HUM, NYSE: RSH, NYSE: UBS, NYSE: GPS)

The tone of trading today is likely to be driven more by expectations and anticipation than on actual news. This week's Federal Open Market Committee Policy Statement is as anticipated on Wall Street as this year's Halloween candy harvest is to every child waking up this morning. Wall Streeters are also as anxious as your kid is about the potential success or failure of the effort.

Since the last Fed cut in September, the big 50 point move, stocks have run up into this report on expectations of a history that repeats itself. In the past, big Fed easings have been followed by trend of continued rate cut, but things threaten to be different this time around. Up until last week, many on the street, myself included, thought Fed inaction was at least as possible as a 25 point cut.

Last week's unraveling at Merrill Lynch (NYSE: MER) and existing home sales weakness were viewed by the market as catalysts for cut. However, your daily columnist here points out that this was just the reporting of old news, and news the Fed was well aware of in August when it held its emergency meeting.

Thus, today, we advise that a Fed 25 point cut might not be enough to sustain some of the recent rise of certain asset classes (read gold and oil). We expect the Fed will follow its action with wording warning of dollar dangers, and a forward view based on the continued following of data. It's entirely possible that the Fed could communicate a neutral bias moving forward and point toward the solid Q3 GDP report expected that same day. GDP of course is benefiting from an improved trade deficit, which in turn benefits from a weaker dollar and thrifty American consumer (ironic). Therefore, GDP strength is built on a false foundation.

In light of this view, we would advise taking profits in your commodity based stocks in gold and oil for the near term. Shares of Barrick Gold (NYSE: ABX) are up 43% since their August 16 close. We think it's time to take profits in ABX and other gold shares. Oil giant Exxon Mobil (NYSE: XOM) is up some 14% over that same time span, and we would take some profits there as well. PetroChina (NYSE: PTR) looks like an even wiser sell at this point, up some 96% during that span. If the Fed indicates further easing is suspect, the dollar should find some footing and these commodity plays become played out.

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