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To: ms.smartest.person who wrote (1537)	10/6/2006 3:38:37 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 3198

Building the bear case for commodities TAVIA GRANT AND ROMA LUCIW Globe and Mail Update Commodity prices are due for a “protracted bear market” after speculators drove prices artificially high in recent months, Merrill Lynch & Co.'s chief investment strategist said Wednesday. “We commented early last month that the level of speculation in commodities was at an all-time high,” said Richard Bernstein in a report. “Despite September's pullback in overall commodity prices, the level of speculation has actually risen!” Merrill was not the only brokerage betting that the commodity space is getting riskier. An RBC Dominion Securities analyst turned bearish on the Canadian oil field services sector Wednesday, urging investors to view companies working in the field with caution, given the sharp drop in natural gas prices. ”In light of further risks to gas prices, exploration and production spending, and pressures on service pricing and margins created by potentially lower activity levels and more capacity, defensiveness and caution should continue to be the main theme over the next 6-9 months,” RBC's Angela Guo wrote in a note. Merrill's Mr. Bernstein measured the level of speculation in the market by comparing spot prices of commodities that trade exchange-listed futures with spot prices of commodities that do not. He believes that speculation is more likely to occur in the futures markets than in the physical markets. “By our reckoning, commodities' prices are now about 60 per cent above what could be explained by fundamental supply and demand,” the Merrill report said. Its research suggests that September's drop in commodity prices might “only be the beginning” of a long-term drop in prices. “We find it amusing that a consensus has now formed that housing is speculative and overdue for an extended pullback, yet many commodities have appreciated much more than housing has, and have done so in a shorter period of time,” Mr. Bernstein said. “Housing is speculative, but commodities are purely a fundamental story? We disagree.” The report comes a day after Merrill's U.S. sector strategist Brian Belski downgraded the U.S. energy sector to “underweight.” He predicted the energy sector will underperform the stock market over the coming months. RBC took a closer look at investing in the companies that provide products and services for the major oil and natural gas companies. The sector has provided another way for investors to profit from the boom in the resource sector. But the price of natural gas — the most common U.S. home heating fuel — has dropped nearly 25 per cent since August 1 to its lowest level in nearly two years as North American inventories swelled on the extended warm weather. The drop in natural gas has forced some companies such as Canadian Natural Resources Ltd. to slash their natural-gas drilling plans. RBC's Ms. Guo said a new look at the risk-reward profile of companies in the oil-field services sector triggered wide-spread downgrades in the sector. Akita Drilling Ltd., Trinidad Energy Trust, Mullen Group Income Fund, Pason Systems Inc., CHC Helicopter Corp., and Flint Energy Services Ltd. were all downgraded to ‘underperform.' Ensign Energy Services Inc., Precision Drilling Trust, Calfrac Well Services Ltd., Trican Well Service Ltd., Cathedral Energy Services Income Trust, and Total Energy Services were all cut to ‘sector perform.' Although the sector looks cheap now, there is no compelling reason to pick up the stocks, Ms. Guo said, nothing that a lack of near-term positive catalysts and continued uncertainty on earnings estimates will likely keep the sector depressed. "As a dramatic measure of maximum risks — should the oil price fall significantly due to macro economic reasons, while the gas price dips further due to a warm winter, applying the historical trough trailing multiples to the stocks would imply an average downside of 24 per cent for the sector from current levels." Ms. Guo left her ‘outperform' recommendations on Savanna Energy Services Corp., Enerflex Systems Ltd., CCS Income Trust and ShawCor Ltd., saying the stocks were already either oversold or more defensive in nature. The last four companies have a more ”favourable” relative risk-reward profiles when compared with the rest of their peer group and could be purchased by ”value-oriented investors seeking exposures to the sector," she said. theglobeandmail.com