June 2, 2009
Featured Trades: (SILVER), (NATURAL GAS), (GM)
1) The big thing for me yesterday was the long awaited (well, maybe not so long) upside breakout in silver to a new six months high of $16.00, up 95% from the October lows. Please see my warning of the impending move at. The metal is at the low end of its historic valuation relative to gold, which has ranged between 12:1 (Remember the Hunt Brothers?) and 70:1 and is currently 62:1. Geologically, silver is 17 times more common than the yellow metal. All of the gold ever mined is still around, from King Solomon's mine, to Nazi gold bars in Swiss bank vaults, and would fill two Olympic sized swimming pools. But most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps. Silver did take a multiyear hit during the nineties when the world shifted from silver based films to digital photography. Now, rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference, as in Latin America. That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $50/ounce in the next economic cycle. Since silver can trade with double the volatility of gold, this forecast could prove conservative.
2) Every evening, after the cleaning staff has swept up the discarded trade tickets from the floor, the networks have swapped relentlessly opinionated commentators for game shows, and all but the most ambitious traders have decamped for the bars across the street, I sit down and go over my portfolio, asking myself a few key questions. Have I gone completely insane? What have I missed? Are these the positions of someone who has gone completely barking Mad (oops)? Just as I was going through this exercise last night, a long time friend from the energy industry, who used to put me up in his Dallas mansion when I was wildcatting for natural gas in the Barnet Shale a decade ago, called me up and told me I was out of my tree putting people into NG at $3.60.Â Huge discoveries, such as the Hainesville shale in Alabama, have made available enough NG to last the US another 50 years. The new generation of fracting technology, while great for taping into marginal, low grade fields, is much more difficult to turn off when prices are low without causing permanent damage. And then there is the looming threat of large scale LNG imports from abroad. The big gas companies will be forced to dump whatever they have on the market at any price, possibly taking prices this summer down to $2, or even $1. This, after all is the mother of all overshoot contracts. Of course, one could argue that these risks are what already took it down to $3.20, and that industry demand will happily soak up the excess supply. Did I mention that the hurricane season started yesterday? Only Mr. Market knows for sure, and he ain't talking. In the past month, my calls have enabled traders to catch a 50% move in NG, followed by a 20% move (http://www.madhedgefundtrader.com/April_14__2009.html ). No one will think less of you if you want to cash out here at $4.30 and stay on the sidelines until a more definitive bottom is put in. As they love to tell you in flight school, there are old pilots, and there are bold pilots, but there are no old, bold pilots.
3) The fat lady finally sang. General Motors (GM) is gone at last. Don't look at the share price, which now trades in pennies, down from $90. Look at the labor force, which has shrunk from 360,000 to 39,000 on its way to 18,000. I sat at Ralph Nader's knee (because there were no chairs) 40 years ago, who wore his unfashionable trademark white shirt and pencil thin tie. He was fresh from the runaway success of his book Unsafe at Any Speed, which castigated GM for its Corvair, which had the unfortunate tendency to explode when hit from behind. Even then he was predicting the demise of GM. Companies that recklessly kill off their customers and produce inferior products at high prices can't last, he said. Fuel efficiency and the environment came later. Many people considered him a communist then, for bashing GM was considered unpatriotic by most and treasonable by some. No doubt J. Edgar Hoover's FBI was following his every move. I think that Obama should now make Nader a director of GM, along with that other GM hater, Michael Moore.
4) I have made a lifetime hobby of analyzing scams out there, partly to warn my investors, but also driven by my fascination with the creativity and determination of crooks intent on extracting cash from the unwary (for the last one, see how to raise money for your hedge fund at http://www.madhedgefundtrader.com/March_27__2009.html). In the San Francisco Bay Area, the new con is to rent out a house you don't own. The unscrupulous are targeting any of the thousands of abandoned or empty homes in the high rent region, changing the locks, and then renting them out below market on Craigslist. The victims sign a lease, pay first and last month's rent, plus a two month security deposit, and move in. They don't realize they've been had until the lender, the sheriff, or the true owner shows up to evict them. No wonder that credit check went so easily! To protect yourself, go to www.foreclosureradar.com, which will tell you if that property you are lusting after is delinquent, in foreclosure, or scheduled for auction, before you lay out any cash.
QUOTE OF THE DAY
'I think I timed this move perfectly. I'm at a last place network, I'm moving to a state that's bankrupt, and tonight the show is sponsored by General Motors,' Said Conan Obrien on his opening monologue of the Tonight Show.