Market Buzz

Posted by Ryan Irvine: Keystocks

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Surging Crude a Worry for Broader Economy, Boon for Service Stocks in Our Coverage Universe

For the most part, stocks have proven bears wrong so far in 2012 – for now. Strength has been more pronounced in the U.S. where a five-month rally has been built on a string of improving economic data that suggests U.S. corporate profit growth will remain intact near term at least.

The Standard & Poor’s 500 is up for eight of the last nine weeks. This week, the Dow closed above the 13,000 mark for the first time since May 2008 and the S&P 500 twice closed above 1,370, up 9% in 2012 alone. The NASDAQ, at one point, crossed the 3,000 level this week and is trading at its highest since 2000.

While Toronto’s main index closed lower on the day, driven down by slumping resource issues as oil prices fell 2.3% a day after hitting a 10-month high above US$110 on supply concerns in the Middle East. Lower gold prices also affected the resource weighted index, but year to date, the S&P/TSX Composite index is up 5.76%.

Look close enough and you can find both strident bears and bulls at present with relatively reasoned arguments on each side. In the near term, the markets may be due for a pull-back – this can be a natural conclusion. But in the end, we tend to care little about the near-term noise.

The fact is, there are some really expensive stocks out there and some really cheap ones when we look 1-3 years out. It is our job to find them.

OIL RAISES A RED FLAG AND AN OPPORTUNITY – One we have been positioned for over a year to take advantage of.

Investors are focusing more on economic data lately, with a bailout package for Greece in the works and U.S. earnings news winding down. But rising oil prices create some anxiety for the broader economy as crude is often considered a tax on doing business. As it rises, growth can slow. Concern about supply disruptions from Middle Eastern oil producers has kept crude oil above US$120 a barrel.

While the strength in crude could become a drag on the rather tepid recovery, it has already been a boon for oil service stocks as both energy producers and explorers continue to drill and utilize their strong current cash flow to expand. Year-end and quarterly numbers from the oil service stocks in our coverage universe started to come in at the end of this week and the growth has been very strong (as expected).

Forecasts for Q1 continue to be strong and we expect a relatively solid 2012. We will be updating these oil service stocks over the coming weeks for our clients with fully updated BUY/SELL/HOLD ratings.

Our first report will be on Strad Energy (SDY:TSX) which reported recorded record numbers and instituted a dividend policy late today. We are happy to report the stock reacted very favourably this week.

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