Me And Merrill Lynch

December 07, 2008

Apparently, I'm not the only one who thinks oil could go to $25/barrel.

Along with a number of readers who wrote in agreeing that $25/barrel oil was a possibility (and quite a few who did not), Francisco Blanch, head of commodities research at Merrill Lynch in London, warned on Friday that "a temporary drop below $25 is possible if the global recession extends to China."

The FT covers the story here.

Blanch expects oil prices to average around $50/barrel next year, which the FT says is one of the lowest estimates on Wall Street. The consensus figure, according to a late-November Reuters poll, is $71.83/barrel.

With the NYMEX January contract for oil falling to $40.81/barrel on Friday, the "consensus" now calls for a 76%+ rally in the price of crude. Impressive bullishness, if you ask me. Imagine if the Wall Street consensus called for a 76% rally in the S&P 500 next year; people would be calling the analysts "nuts."

Meanwhile, it won't take long for the pundits to start slicing and dicing Obama's new public works agenda to see which ETFs will benefit. Here's my short list:

  • Infrastructure and Construction: There are a number of good infrastructure ETFs out there, but most of them are global in scope. The global ones might benefit, but you have to guess that our public tax dollars will flow to U.S. companies. If you want an all-domestic infrastructure play, the closest you can get is the PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB). It has some residential construction exposure, but not much.

    A dark-horse candidate might be something like the Market Vectors Steel ETF (NYSEArca: SLX). SLX has simply been crushed this year, falling 70%. It's trading at 5X cash flows and 2X book value. Everyone thinks the steel industry is dying, so much so that credit insurance on the largest player (ArcelorMittal) is soaring. If Obama's public works push boosts marginal demand for steel, a fund like this could recover.

  • Energy Efficiency: The other big play here is energy efficiency. Obama's plan calls for a massive retrofit of government buildings to make them as energy efficient as possible. That seems like a nice fit for the PowerShares Cleantech Portfolio (NYSEArca: PZD), which holds a global portfolio of stocks that help companies and institutions conserve natural resources (and save money in the process).

Beyond that, a handful of sectors are already anticipating the next bailout shoe to drop, chief among them REIT ETFs, which soared last week on expectations that Congress will finally do something to spur new buying in the real estate market. By the time any official agenda passes, however, expect the benefits to be priced in here already (if they aren't already).


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