Where’s the BOTTOM?


It’s been pretty ugly over the last few months and it’s not just the usual summer malaise. The “Sell in May” mantra looks like the best call by any Broker across the globe. Problem is, not many brokers called it.

There are plenty of reasons to remain sidelined and keep your cash safe. And where commodities are concerned – it’s been like watching ‘sink holes’ appear across the sector. Minnows and mid caps swallowed up as the carnage continues to take on casualties.

M&A is perhaps the only catalyst near term that can add back some sense of value to what has become a disconnected casino market.

One thing is sure though, where there are losers, there are winners to follow. Those cash rich companies with an eye for acquisitions are going to be like kids in sweet shops. The key is to try and guess which sweeties they are likely to go after first. One view is that low hanging fruit with reduced risk is the first port of call. Followed by companies with assets in regionally safe or stable parts of the world.

5 picks that could be the first to be acquired or benefit from M&A fever when it arrives are as follows:

1. Enquest (currently 25.5p)
2. Ithaca Energy (currently 28p)
3. Premier Oil (currently 91p)
4. Amer Resources (currently 22.75p)
5. Tullow Oil (currently 181p)

Many of the above have heavy debt – this kind of debt suits the bigger fish. They can manage it , reneg it or pay it down – whichever suits them best post acquisition.

It’s too early to call bottom within the markets in general as the major indices still look frothy on QE and have been long overdue a pull back.

But commodities have been on a downward curve now for over 5 years. Historically M&A tends to kick off the recovery and with prices now cheaper than ever before or since last decade, i think the bottom could be insight. When the summer months end and traders return to their desks in early Sept (next week) you could see the beginnings of a market recovery for the beaten up commodity sector.

OPEC and other oversupply issues are still to be managed but the slow down in China should be priced in. The trouble is… China is a big unknown. It’s time for the chinese to do their part and kick off some significant QE. Europe and the US have done their part. If China wants to avoid the carnage then they’ll need to do more than play the currency war.

So…don’t rush in. Be smart. Do your research and watch for signs of M&A whispers followed by the real deals. Seek advice if you are unsure as volatility brings with it increased risk. It’s not a market for beginners nor even the experienced. There are many hedge funds and brokers on the wrong end of this recent market correction. If the experts get it wrong, then you know your chances as a PI are tougher than tough.

It’s a fool’s game calling ‘bottom’ but at present I think September could see a recovery which would make those following the “sell in May” mantra very happy indeed. Dare I say it… (more fool me) but I think the Commodities Bottom could be a few days or a week or two away. But that doesn’t mean an instant turn-around. It’s likely to take 6 months+ before POO begins to show signs of a stable balanced price and that’s assuming currency wars are put to bed.

For the larger indices – the DOW looks fairly priced at around early to mid 14000 based on little assistance from QE. That’s still some 1000pts away. If I’m right, then it could see the 14000’s sooner than many think.

Updates on the hotlists will follow but I can tell you now… none of the lists are looking pretty.

3 thoughts on “Where’s the BOTTOM?”

  1. Looking forward to your postings and invitations for the 2016 hotlist hub. Please dont leave it until last minute
    Happy Christmas to you and your family .
    Tony Dean

  2. Dear Hub.
    i enjoy your updates and research. Please keep it flowing. I would love to see some articles and research on mining stocks. I have my entry for next years hot list.
    Take care

    Tony Dean

    1. Hi Tony,

      I took a deliberate step back from posting on commodities as the sector and climate was and is woeful. It’s virtually impossible to make sense of the market valuations being used when you see 1p reserves priced at just $50cents per barrel (example – XEL).

      I think the market will be forced to return to some common sense valuations once M&A kicks off again. How many of the Premier Oil’s, Tullow’s, Ophir’s, Faroe’s, Ithaca’s etc will be left? Many will merge, or sell assets or be bought up in my opinion. I think the market expects this to start in early 2016. Hence – I will return to normal posting again soon as think the sector will be bouncing next year – not for all stocks but for many of the attractive reserve heavy / debt heavy types which have been oversold. There will be a hotlist for 2016 but as with 2015, the heavy RISK caveat will be applied.

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