May 11, 2009

Global Market Comments
May 11, 2009

Featured Trades: (DVN), (CHK), (NATGAS), (GOLD), (SILVER)
Special Natural Gas Issue

1) I know what keeps Obama awake at night. Let's say we spend our $2 trillion and get a couple of quarters of weak 2% type growth. Then once the effects of the stimulus wear off, we slip back into recession, setting up a classic 'W' type recession. Unemployment never does stop climbing. This happened to Roosevelt in the thirties. So congress passes another $2 trillion reflationary budget. Everybody get's wonderful new mass transit and alternative energy infrastructure. But with $4 trillion in spending packed into two years inflation really takes off. The bond market collapses, the dollar tanks big time, gold goes ballistic to $3,000, and silver to $50. Ben Bernanke's replacement has no choice but to engineer an interest rate spike, taking the Fed funds rate up to a Volkeresque 20%. Housing, having never recovered, drops by half again. This all happens in the 2012 election year. Obama is burned in effigy, a Mormon is elected president, and the Republicans, reinvigorated by new leadership, retake both houses of congress. We invade Iran. Crude hits $200. This is not exactly a low probability scenario. Remember Jimmy Carter? This is why junk bond yields are still stubbornly high at 14.5%, and credit default swaps are at lofty levels. The risk of Armageddon is still out there. Just thought you'd like to know. Pass the Ambien.


2) I am reprinting below in all humility my April 14 recommendation to buy natural gas at $3.60, the strongest, most aggressive, table pounding advice I have given this year ( ), with appropriate apologies to red headed people. Only years of driving around hot, sweaty, dusty roads, wildcatting for good old CH4 in Texas and Colorado, could enable me to make such a call. After one last puke out round of stop loss selling that took it down to an unbelievable $3.22, it soared 36% to $4.38. Chesapeake Energy (CHK) rocketed by 85%, and Devon Energy (DVN) roared by 71%. No doubt that it has been dragged up by crude's move to $58, kicking and screaming all the way. Although this is not as impressive as crude's 80% lift off its $32 bottom, it is still one of the most rapid and impressive moves of any commodity this year. You can also bet that every electric power utility in the country was scampering to acquire advance supplies of the clean burning fuel, taking advantage of a rare opportunity to buy at below the cost of production. While the juice may be out of this for a day or weekly trade, natural gas is still a steal at these levels for the long term.

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3) (Dated April 14, 2009) 'OK, enough is enough! Right here, at $3.60, is where you buy Natural Gas ($NATGAS)! After peaking at $13.50/btu last year, it has become the red headed step child of the energy complex, plunging a gut churning 74% to a low of $3.50. To see demand this weak coming out of a cold winter, is nothing less than stunning. The credit crisis has forced US companies like Chesapeake Energy (CHK) and Devon Energy (DVN) to scale back exploration, so the US rig count has dropped by half. The price collapse is welcome news for consumers, as NG is an essential raw material for making naphtha, fertilizer, and plastics and accounts for 20% of US electric power generation. It also is a favored fuel of the green crowd, as the only byproducts of its combustion are carbon dioxide and water. The industry was making the leap from a domestic industry to a global one, just as the global recession punched it right between the eyes. The completion of six liquefaction plants in Qatar, Russia, Indonesia, and Yemen, costing $48 billion, is expected to boost global production by 25% this year, and more big plants are coming on stream in the near future. Below $3.50/btu the big producers start shutting in supply, which will cause the glut to disappear rapidly. If I'm right, and those really are crocuses out there and not some florid hallucination, then it's time to load the boat with NG.'

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4) One of the great asset management blunders of all time has to be the EC's decision to sell its gold reserves in the wake of the launch of the Euro in 1998. The decision led to the fairly rapid sale of 3,800 tons of the yellow metal at an average price of $280/ounce, reaping about $56 billion, according to the Financial Times. Today with gold at $920/ounce, the stash would be $52 billion more. On top of this, the Swiss National Bank is poorer by $19 billion, after offloading 1,550 tons of the barbaric relic. The large scale, indiscriminate selling depressed gold prices in the early part of this decade. It is a classic example of what happens when bureaucrats take over the money management business, ditching the best performing investment on the eve of a long term bull market. The funds raised were largely placed in poorly performing national Eurobonds. At least they didn't buy stocks - or invest with Bernie Madhoff. The good news for gold bugs is that these reserves are largely drawn down now, and future selling will trail off in the years ahead.  The shrinking supply can only be positive for prices.

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'The rate of profit is always highest in the countries that are going fastest to ruin,' said Adam Smith, in The Wealth of Nations, on the dangers of 'overtrading.'

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