The Infrastructure Thesis

Despite Fall, Steel Plays Look Strong

By Bryan Bottarelli
Thursday, December 18, 2008 2:22 PM EST
Thu, 18 Dec 2008 19:22:00 GMT

Dear Bottarelli Research Member,

The conflicting market signals continue. Over the last hours, the Dow has turned lower, lead by a sharp pullback in the steel, oil/energy, and commodity sectors. As you can see from the Dow chart below, the Blue Chips are now nestling up to the support line right at the 50-day moving average. Whether this level holds (or not holds) will be a key determinant of the next major market move.

INDU

In recent days, we’ve seen great strength in momentum sectors, like steel. I attempted to ride this momentum using the US Steel January 45 Calls (X AX), but unfortunately, this position has lost its steam just as quickly as it got it. But going forward, the outlook for the beaten-down steel names continues to be stronger than ever. After all, we all know that Barack Obama recently pledged to “create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s.”

This new plan would come with hundreds of billions of infrastructure projects, including new schools, roads, rails, pipes, and airports. And all of these projects would require the use of steel. In fact, the U.S. Conference of Mayors released an 803-page report with 11,391 various infrastructure projects that need immediate approval. Miami alone has $3.4 billion in potential projects. Sacramento has $2.8 billion, Philadelphia has $2.6 billion, Los Angeles has $2.4 billion, and so on.

X

As you can see, we have a major upside catalyst for steel companies, but for whatever reason, the entire sector is getting whacked on the chin today. While I do like the fact that shares of X remain above their 50-day moving average, we have certainly violated our pre-determined stop limit at $2.10. Therefore, as much as I hate doing it, I must call this position closed. If you haven’t already done so, sell your calls now. But don’t be surprised if I re-recommend January calls if X finds support at its 50-day moving average!

In terms of our other positions, our AEM January 40 Puts (AEM MH), AGU January 35 Calls (AGU AG), DUG January 31 Calls (DZG AE), and AMGN January 60 Calls (YAA AL) are holding their own, so maintain these plays going into tomorrow. And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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