Refiners Finally Moving

This is a very tough environment... the main things moving are the most beaten down sectors, so to partake you either (a) have to make wholesale leadership changes and believe financials, homebuilders, retailers are going to lead us to the next bull market or (b) be a very short term trader - buy these for what they are, trades, and then exit shortly.

In a mutual fund environment there is not much to do, other than to sit and watch as these parts of the market race and most areas with hopes outside of short covering bounces lag and do very little. This has been the case for most of the past week and a half in fact. Another of those long lost beaten down groups, the refiners, are finally making a huge move today based off the Valero Energy (VLO) move. As I wrote Sunday:

Valero (VLO) - the largest independent refiner; a group that has been demolished... still this group is usually worth a trade or two every year as its very cyclical - but the past 4-5 months have just been a big money loser trying to play these from the long side

Owning these names in this sector has just been a money losing expedition for much of the past 6 months. [Nov 7 - More Refining News] I know, because I've tried before cutting losses (at much higher levels). [Dec 17 - Closing Tesoro] [Dec 28 - Closing Frontier Oil] However, unlike the retail, financial, home builder complex I actually like this group for more than a week and a half trade; I just have ben waiting for "the trade" that comes 2-3x a year to come back. Each time I've tried of late it has not worked out. Is this finally the move? I don't know. What is interesting is in these beaten down groups all it takes is "we are not going out of business" and the stocks are putting on huge rallies. Meanwhile a stock like Microsoft (MSFT) posts incredible earnings/guidance and the market sells it off. Once again, a very difficult market. Only very short term trades buying "worst of" is working right now. This is even happening withing sectors - clear leadership stock Nokia (NOK) is struggling, whereas dog of all dogs Sprint (S) is making a huge move. These moves show to me just how over confidant and over exposed the shorts (bears) were. They are now being forced to cover. But the lack of movement up in previous leadership stocks show me this is not real buying (at this point). We have a combination of massive short covering driving up the "dogs" combined with some very short term traders partaking in the "trade" (the type of people who could care less about fundamentals - they only latch onto whatever is working for the moment). So it remains a market hard to really get behind.

Again, if you are in the camp of "this is the bottom", "the Fed and the government can make all the problems go away", then you want to be buying financials, retailers, home builders hand over fist as the leadership mantle returns to them. I still remain skeptical and it will take a multi month move in these sectors to sway me. You can see it in today's Countrywide (CFC) numbers - they promised this quarter they would return to profitability (kool aid alert!) - instead they post a large loss. Thankfully they have an arranged shotgun marriage with Bank of America (BAC) or the path to $0 would be paved for CFC.

More on Valero - Earnings tumble, but beat Wall St.

• U.S. refiner Valero Energy Corp (VLO.N: Quote, Profile, Research) on Tuesday said fourth-quarter earnings fell sharply on lower profits from gasoline production. Net income in the quarter dropped to $567 million, or $1.02 a share, from $1.11 billion, or $1.80 a share, last year.
• Profit margins from refining were relatively weak in the quarter as gasoline prices failed to keep pace with oil prices, which soared to record levels.
• Margins for many of its secondary products like asphalt, fuel oils and petrochemical feedstocks were also weak.
• Valero said it believes supply constraints coupled with seasonal demand growth will result in stronger gasoline margins this spring and summer.

That last point would indicate this group might finally be coming into favor. I keep an eye on crack spreads, as always.

No positions