Wednesday, August 22, 2007

Bail out for the refiners?

CFC gets $2 billion from Bank of America and it helps the refiners? Yup. Sorry, you may not like the logic, but it's Wall Street's logic, and if you want to make money, you need to play by Wall Street's rules. Here's why it works.

The borrowing at the discount window shows that the financials are no longer toast, and cannot be rumored downed by the shills on the street. The Fed, bailed out CFC, with Bank of America's help. So why does this help the refiners?

Did you watch the steel and material stocks the last few days? US Steel (X 92.73) tacked on 18 points from it's low last week, and FCX (85.59) also added 18 points from it's low. This indicates that the economy is on the mend. And now the refiners, which have been accumulated the last week, can now be bought aggressively as they are now ready to move.


Because when the financials were shorted and rumored, the play was to buy crude and short the financials. The cost of the goods for the refiners is the cost of oil. This trade is being unwound. The financials will have a tsunami of buying, as they reverse their positions. A pullback in the price of crude, will help the margins of the refiners.

What happens if crude doesn't pull back? Who cares. The pyschology on the trade is broken. Gasoline inventories were drawn down a ton, and if the material and steel stocks are rallying, which indicates strength in the economy, then the price of gasoline is done going down, right here, and the refiners go up. You also have the analysts in the wings getting ready to upgrade the group, after they've been already downgraded. Don't believe that? Well, wasn't it Merrill Lynch that just downgraded CFC last week? How smart does that look now? The analysts will learn from that, and now, if they upgrade they'll get to use the closing prices of today as their price, and with the futures up, I'll take that bet. I just wanted it into print, before it happens.

Now the best plays, that I see are Western Refining (WNR 49.50) and Tesoro (TSO 49.04), as both stocks were off 18 points intra day from their all time highs just a short while ago. Tack on 9 points apiece and you get 18.


No comments: