Wednesday, February 23, 2011

The Crude Risk Premium

The recent pop in the price of Crude is the risk premium the market tacks on due to the uncertain outlook for the larger crude producing Arab states. The problem for investors is this “risk premium” could persist for several months – so we may need to reposition our portfolio holdings

The “risk premium” beneficiaries would be the senior and junior crude produces and the oilfield service companies – names like Suncor Energy Inc, Canadian Natural Resources Limited, Cenovus Energy Inc, Precision Drilling Corporation and the BMO Junior Oil Index ETF (ZJO) Other beneficiaries in the consumer space, Dollarama Inc., Dorel Industries Inc and Tim Hortons Inc, .

The industries to avoid for now would be the airlines, transport companies, non-essential retail stores to include electronics and in and outdoor furniture, travel to include fast food, hotels, theme parks and gaming. Also anything auto manufacturing related. I would also avoid industrial metals like copper, nickel, aluminum and steel to exclude the precious metals. The most dangerous sector is the bases metals sector – the best strategy is to cut back and look for a buying opportunity in any of the above over the next several weeks

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