12-05-2013, 06:53 AM
from a MS strategy piece entitled 2014 in 2014. Explains how some might be looking at the group.
Materials: The sector is only 3.5% of the S&P 500 and is weighted about 2/3rd toward chemicals, so unlike
other regions in the world, going overweight materials is not necessarily a bullish call on China infrastructure.
We are increasing our exposure from 4% to 6%. Our bets in materials are only in chemicals. We are
increasing our long-standing position in LYB from 1% to 2%, and establishing a 1% position in EMN, and
retaining our 2% position in MON.
Energy: We are downgrading energy from equal weight to underweight and reducing our exposure from 9%
to 7% vs. the benchmark weight of 10.4%. The short explanation is that we think Brent oil will go lower.
Adam Longson, our commodities strategist, has articulated that excess supply is likely to weigh on the price
near-to-medium term. What have we learned over the past few years? When Brent gets to around $125
there is clear demand destruction. So, if the oil price goes higher, investors will think it is more supply-fear
than demand and that will weigh on the sector's performance. If oil goes lower, we don't want to own energy
stocks. So, we are in a band here where we think it could be “heads you lose, tails you lose” for energy
sector exposure. Ole Slorer thinks it's premature to bet on a sustained rally in oil services. The integrated
names are not growing and would need a dramatic reduction in capital spending to spur huge free cash flow,
and the faster growing oily mid-cap names (EOG, PXD) now seem crowded and have displayed a negative
convexity recently (they go down more when oil goes down than they go up when oil goes up). We are
removing our 3% position in CVX and now are naked integrated oil in the portfolio. It screens poorly in our 3
month model. We are removing KMI, which Steve Maresca downgraded. We are adding a 2% position to NE,
which screens well in our models, is recommended by Ole Slorer, and seems toward the bottom of its tight
recent trading range.
Materials: The sector is only 3.5% of the S&P 500 and is weighted about 2/3rd toward chemicals, so unlike
other regions in the world, going overweight materials is not necessarily a bullish call on China infrastructure.
We are increasing our exposure from 4% to 6%. Our bets in materials are only in chemicals. We are
increasing our long-standing position in LYB from 1% to 2%, and establishing a 1% position in EMN, and
retaining our 2% position in MON.
Energy: We are downgrading energy from equal weight to underweight and reducing our exposure from 9%
to 7% vs. the benchmark weight of 10.4%. The short explanation is that we think Brent oil will go lower.
Adam Longson, our commodities strategist, has articulated that excess supply is likely to weigh on the price
near-to-medium term. What have we learned over the past few years? When Brent gets to around $125
there is clear demand destruction. So, if the oil price goes higher, investors will think it is more supply-fear
than demand and that will weigh on the sector's performance. If oil goes lower, we don't want to own energy
stocks. So, we are in a band here where we think it could be “heads you lose, tails you lose” for energy
sector exposure. Ole Slorer thinks it's premature to bet on a sustained rally in oil services. The integrated
names are not growing and would need a dramatic reduction in capital spending to spur huge free cash flow,
and the faster growing oily mid-cap names (EOG, PXD) now seem crowded and have displayed a negative
convexity recently (they go down more when oil goes down than they go up when oil goes up). We are
removing our 3% position in CVX and now are naked integrated oil in the portfolio. It screens poorly in our 3
month model. We are removing KMI, which Steve Maresca downgraded. We are adding a 2% position to NE,
which screens well in our models, is recommended by Ole Slorer, and seems toward the bottom of its tight
recent trading range.