1) The Potential Gas Committee of the American Gas Association published a report that US reserves have jumped by 35% to 1,836 trillion cubic feet, thanks to the huge discoveries of new shale fields since 2006. Also contributing are the new fracturing technologies, which I had a hand in pioneering myself ten years ago. That means our natural gas reserves can now meet 100 years of current consumption, and are roughly equivalent to Saudi Arabia?s crude reserves on a BTU basis. Natural gas futures dove 26 cents to $4.23, and the ETF (UNG) gave back 4%. A buddy of mine close to the committee warned me that something like this was headed down the pike, which is why I sent readers a warning two weeks ago to cash out at $4.30. When you only see chart driven traders buying a commodity and the industry insiders selling the Hell out of it, you want to stay away. Bewildered technicians were last seen feverishly searching for Hainesville on Google. It was their models that sucked $3 billion into UNG over the last three months. This is great news for the big consumers of NG, like the utility industry and the petrochemical industry. It will also give a shot in the arm to Boone Pickens? plan to shift our transportation system to NG (see my March 30, 2009 Newsletter). Even the ratio, pairs, and mean reversion traders have been burned by NG this year. As cheap as NG is, a Saudi Arabia?s worth of supply hitting the market could easily knock the price down by half from here. As extreme as the move in the oil/gas ratio is at 18:1, we could be breaking new ground.

2) While searching for beneficiaries of lower natural gas prices, I stumbled across an interesting little company in Connecticut called FuelCell Energy (FCEL). It sells onsite power plants which are basically giant lithium ion batteries that run of NG as well as biomass, wastewater, propane, and landfills. Think of a cell phone battery that pumps out 50 megawatts of electricity, enough to power a small city. Since the NG is soundlessly electrochemically reacted and not burned, there are no greenhouse gases produced. I have been following this technology for 35 years, and you used to only find things like these at remote industrial sites well outside the power grid, like on Pacific islands or in Northern Canada, where the only alternative was a diesel generator expensively shipped in. While the technology created warm and fuzzy feelings with environmentalists, a cost of four times the market was usually buried in a footnote on page 247. Not true anymore. Their net cost is 16 cents a kilowatt hour, which looks good in high cost states like Hawaii and California. But if you throw in the abundance of state and Federal subsidies now available for alternative energy, that cost drops to 12 cents. Imagine what a halving of NG prices would do? The Golden State accounted for 40% of FCEL?s orders last year, you can find them at several Marriot Hotels in San Francisco, but a South Korean utility has become a large customer, boosting the stock by nearly triple from the March lows.? This is a classic example of why old fossils like myself have to more frequently clear out the cobwebs from our brains in order to root out the new trading opportunities.

3) A lot of people like to follow Warren Buffet?s Berkshire Hathaway (BRK/A) as a leading indicator for the market. What better guide than a portfolio of the best of the best, run by the world?s great investor? Recently the news has not been good. If you wonder what a stock looks like when it is rolling over on diminishing volume, this is it. The only question is how big, how fast. As much as I worship the avuncular, chocolate milkshake loving, Sees Candy eating Oracle of Omaha, memorizing his annual letter to investors?? and hanging on his every spoken word, he hasn?t been doing that well lately. Since March, his main investing vehicle has only managed a 35% gain, compared to a 40% pop for the S&P 500; despite heavy weightings in such best of breed financials like Goldman Sachs (GS). Better keep his ticker on your desk top, because what BRK/A does, the world will follow.

4) I have really been avoiding financials for the last few months after they had their dead cat bounces. However, I had to listen to Midsouth Bank CEO Rusty Cloutier when he spoke on CNBC. His 24 branch bank, with a market cap of only $103 million, is based in Lafayette, LA, one of my old stomping grounds and home of the world?s greatest ??touff??e and shrimp gumbo. He says that ?Unless we break up the big banks and get back to sound banking principles we are going to relive this over and over again??.Free enterprise has to have the right to fail??.Allan Greenspan and his administration have some problems they have to ??fess up to.? With the current system of megabanks ?they get the gain and we get the pain??.I?m regulated now by 13 agencies of the US government and I don?t know that I need a 14th.? There?s no one who can read you a riot act like a Southern regional banker.

QUOTE OF THE DAY

?We?re trying to fix everything in four months that took place over 100 years, said Jack Welch, retired CEO of General Electric (GE).

1)There?s nothing like getting up in the morning, taking off your shirt, and splitting a quarter cord of wood to get the blood flowing. One of life?s little pleasures is also calling up investors and telling them their position went limit up yesterday. That is what happened with lumber, and I seem to be the only one out there who likes the knotty, aromatic commodity. The knee jerk explanation was that the numbers for housing starts for May were up a blistering 17%, much better than expected. Starts have been bouncing along at an annual rate of 500,000, compared to the peak of 2.2 million in 2005. But the big lumber stocks like Weyerhaeuser (WY) didn?t go up, nor did the besieged homebuilders. The real reason is that we are crawling off of a five year bottom; we have miles to go before we approach a decade high of $4.60, and that lumber is still inherently cheap. What will happen when the Chinese start buying? They?ve bought everything else. One of the tip offs that you?ve got a great position is that all of the accidents and surprises tend to happen on the upside.

2)First of all, let?s get some facts straight. No one is buying oil here at $72 because they plan to burn it, use it to drive more miles, make asphalt or plastics, or rub it all over their bodies. They are buying Texas tea because they hate the dollar and there is no other surrogate reserve currency. Some of the biggest buyers of crude now are the oil producers, desperate for any appreciating asset they can park their revenues in size. This is why you can now walk across the Caribbean and not get your feet wet, jumping from one storage tanker to the next. The world is choking on surplus crude. Does anyone see anything wrong with this picture? Even perma bull Boone Pickens has a target of only $75. I hope he remembers to sell this time (sorry for the cheap shot Boone). The problem is that when you have so many hedge funds, financial players, and non consumers bunching up in a trade, the turns can be particularly vicious. All it would take is a little more evidence of a double dip economy, or even just an innocently strong dollar. Watch those green shoots with a magnifying glass.

3) I couldn?t help but laugh when I saw my old colleague from Morgan Stanley, Stephen Roach, on CNBC today. The current chairman of Morgan Stanley Asia (MS) is bearish on the economy and sees no chance of a ?V? shaped recovery, just a very weak one at best. The ?green shoots? are still underground. ?The consumer is toast,? he averred, and he expects consumer spending to plummet from a record 72% of GDP to 67% in five years. Since a massive external deficit has to be funded by foreigners, the outlook for the dollar is ?down, down, down.? There won?t be a crash, just a gradual descent, as we have seen for the last 38 years. China isn?t going to bail us out. The US has only 4.5% of the global population, but accounts for $10 trillion of consumer spending. China and India together have 40% of the population, but only spend $2 trillion. This disparity is 50:1.?? Steve was an early BRIC fan, like me, and since China is so overbought short term, India is his first pick. You want to buy countries that have to build infrastructure and a middle class, and China has already done that. India?s recent election of a more pro business government is the trigger. I aggressively pushed India at the beginning of the year, and it has doubled since then. The humorous thing about all of this is that Steve has been spouting the same bearish line for the US for 15 years. The in-house joke at MS was that he was sent to China because his negative sentiments were scaring the firm?s conservative US institutional investors. Given the performance of the BRIC?s since then, it is Steve having the last laugh.

4) Sadly, once again, my once beloved but now spurned home state of California is threatening to commit suicide. The formerly Golden State officially runs out of cash in 50 days, and our body building governator, Arnold Schwarzenegger, refuses to borrow any more until the legislature delivers $24 billion in spending cuts. Standard & Poor?s has placed it on Credit Watch, and premiums for credit default swaps on the state?s debt have already spiked back up to 300 bp. I got a letter today from Robert Birgeneau, Chancellor of the University of California at Berkeley, where my son goes to school, telling me that his budget shortfall has just leapt from $67 million to $145 million, and that tuition is going up 9.3%, while staff wages will be cut by 8%, and financial aid will be chopped to the bone. Yikes! And this is the place we are counting on to deliver the scientists, engineers, and professionals who are supposed to keep us globally competitive.?? Pleas to Obama for a bailout have already been brushed aside, like a pesky fly. He rightly sees us as an alcoholic friend asking to buy him just one last drink. A default would be no joke, as California accounts for 15% of US GDP, and ranks as the world?s eighth largest economy. Few realize that the state is home to the country?s second highest per capita payers of tax revenue into Treasury coffers, after New York (Sarah Palin?s Alaska is the lowest). Hardly a day goes by without banner headlines about closing state parks, cancelling local sports programs, or freezing payments to mothers with dependent children. In fact, most state residents now prefer the Sacramento government to go bust in order to bring a speedier resolution. There is only one possible solution. A new governor holds a constitutional convention to reduce the vote to pass a budget from two thirds to 50%, or a statewide voter initiative accomplishes the same. Maybe ex Ebay CEO Meg Whitman, who will run for Arnold?s job next year, is up to the task?

QUOTE OF THE DAY

?It?s hard to believe that with more regulatory oversight and less leverage permitted, that return on equity is not going to fall??.my guess is that it is three to four points lowe
r,? said Bob Doll, co-chairman at Black Rock, the world?s largest money manager.

1)It looks like the worm has finally turned. Hedge funds that rushed headlong into piling on new risk positions as recently as last Friday are now unwinding them today just as fast. All last week the smart money was selling to the late comers, newbies, and wanabees. The Viagra is starting to wear off. It?s time to take short term trading profits on crude (USO), commodities (DJP), all stocks (SPX), emerging markets (EEM), short Treasury bonds (TBT), all currencies (FXE), and junk bonds (JNK, HYG). I love all these things long term, but suffer from a short term tolerance for pain. When the best case scenario is sideways, I?m outa there. Look for decent bounces in risk reducing positions like the dollar ($USD), short dated Treasury securities (CSJ), and defensive sectors like utilities (IDU). It has been obvious to me that all of the good, long term holds were rolling over on shrinking volumes right at 50 or 200 day moving averages, since last month (see ?Sell in May and Go Away?). All of a sudden burgers on the back yard BBQ, booking campsites at Big Sur, and visiting those long lost, but nearby relatives looks like a better choice. I?m having a ?staycation? this year to save money. Instead of Italy?s Amalfi Coast, you?ll find me dining at my local cheapo Italian restaurant with the nice Roman mural painted on the wall, the red checked tablecloths, and the plastic grapes draped over the doors. Please pass the parmesan cheese!

2) I just thought I?d give you an alert here to put ?wheat? on your watch list, with a view to a buy. The harvest for spring wheat is in full swing and the weather has been great, both here and in India, so prices have dropped $1.00 from the $7.25 top it put in two weeks ago. You usually see peak production in June, so this is traditionally a timely window to put on medium term long positions, as cash strapped farmers hedge known inputs. New plantings are down 25% in Argentina, and 18% in Canada. A multiyear drought continues in Australia, where my younger sister, unable to coax life out of her 7,000 acres near Esperance, has resorted to driving a huge Caterpillar truck at the ore mines up North to make ends meet. It?s just a matter of time before the food riots resume. For the raging long term bull case for wheat see my May 22, 2009 Newsletter. There is maybe $1.00 of downside here if we get perfect weather, but a possible double on the upside, and more if we get lucky. This is the kind of risk/reward ratio I am constantly hunting for. Wheat is one of the few Ag plays that is not overbought right now.

3) If we are just on the verge of entering a long term bull market for nuclear energy, as I mentioned in my piece yesterday (http://madhedgefundradio.com/June_15__2009.html), then you would have to expect the same for nuclear fuel producers. Last year, the US consumed 55 million pounds of ?yellow cake? or uranium oxide, but produced only 4 million pounds. The rest came out of stockpiles or from imports, much if it from the reprocessed Russian nuclear warheads. The new Dept. of Energy under Dr. Stephen Chu has made a big priority of making loan guarantees available to expand nuclear capacity from a lowly 20% of our total grid. The price of uranium is also rising, dragged up by crude, and has bounced 25% from a low this year of $40/pound, to $50. You can take a look at Austin, TX based Uranium Energy Corporation (UEC), which could start production at its Golead mine next year.

4) After my chat with Christine Romer on the health care issue last week, I thought I?d give George Schultz equal time on the other side of the aisle. Economics professor at MIT and the University of Chicago, former Treasury Secretary and Secretary of State, George has certainly covered all the bases. Now 89, he is the senior statesman and eminence gris of San Francisco, as well as a major philanthropist. When I read his bio, I feel like my own life in comparison has been spent watching Archie Bunker on TV in All in the Family. I first ran into George in the seventies as the President of Bechtel, and pursued him while in the White House Press Corp. I have since occupied the box next to his in the San Francisco Opera, and joined him in several Marine Corps charities. George said that America?s health care headache started in WWII, when wages and costs were controlled, but not benefits. So companies competed for labor by offering increasingly generous, tax free benefits programs. And when something is free, you lose a lot of it, driving total costs through the roof. The end result is large misallocations of resources that you don?t see in other businesses. Private American companies have made possible tremendous medical advances for a profit, and this system should be allowed to continue. But we need to incentivize future advances with cost containment. We need a universal, subsidized plan that heads off intergenerational conflict by not allowing healthy young people to escape obligations, nor denying older people with preexisting conditions. Allowing consumers to buy private insurance across state lines, which is now impossible,?? would be a start. Today your average 65 year old lives for 20 years, compared to 13 years in 1965, and two years in 1900. An equitable system would enable those who wish to continue working after 65, without burdening employers with health care costs, adding $1 trillion to GDP that will help us pay for this all. If George represents the conservative response to Obama?s proposals, then I can see enough common ground for something major to get done this year.

QUOTE OF THE DAY

?Freedom of the press is only true if you own a press,? said A.J. Liebling, a famed journalist for the New Yorker.

1) Since energy is going to be the dominant factor in making our investment decisions for the next decade, I thought it would be a good time to sit down with Carl Pope, Executive Director of the Sierra Club. Carl is as sharp as a tack, with the fervor of an evangelist, always a dangerous combination. In the spirit of full disclosure, I have to tell you that I was a member of the Sierra Club back in the sixties when they were mostly interested in identifying mountain wildflowers and bird calls. They changed a little after that. Carl says that the ?Earth has a fever,? with temperatures rising, glaciers melting, forests burning, oceans rising and acidifying, and the overwhelming cause is hydrocarbon burning. The US needs to cut CO2 emissions to 2 tons per person, per year, by 2050, or down 90% from today?s levels. To do this we need to ban the burning of coal by 2030, unless it is sequestered, and stop all petroleum consumption by 2040. We can accomplish this by converting all cars to electric and moving freight via an electrified rail system. Petroleum needs to be classified as toxic waste, and a cleanup superfund needs to be set up, funded by 10% of the earnings of the oil companies for the next ten years. If we eliminate oil consumption, our trade deficit will improve by $100 billion/year, that money can be invested in the US to create 10 million jobs, and we will all be a lot healthier. The biggest and quickest way to cut CO2 emissions is to convert all coal fired power plants to natural gas immediately, and Carl likes the Pickens plan (see my May 15, 2009 Newsletter ). Carl is not shy about using his 40 man Washington DC office to twist the arms of recalcitrant Senators and Congressmen to achieve these ambitious goals. I had to pinch myself. The Sierra Club has backed off from its earlier, more radical positions, and that much of what they are saying makes good economic sense. No more going back to a bicycle based economy. While 40 years is not exactly tomorrow, look how fast the last 40 have gone by. Remember pedal pushers, thin ties, fins on Chevy?s, and the Bay of Pigs? When contemplating your risk positions, you always have to consider all views. Who knew that $147/barrel would turn us all into environmentalists?

2) I am constantly in search of the big macro numbers that explain the world to me, so it is with some fascination that I publish the chart below, courtesy of Mark Perry, which wonderfully quantifies the carnage we have endured since the 2007 peak.?? World stock market capitalization fell $35 trillion, or 54%. It has since bounced by $10 trillion over the last three months. Do you feel $10 trillion richer? I don?t think so. And you may be about to give up $5 trillion of that. If you throw in real estate and commodity losses, and net out gains from US Treasuries with losses in private bonds and derivatives, the net, net, net is that we went from a $100 trillion world to a $50 trillion world in two years. If I?m wrong on these figures, you can always deduct the difference out of my next paycheck.

3) Very, very rarely I find a comment that is so brilliant, that I feel obligated to quote it verbatim, in its entirety. Anything less would dilute its meaning. This is what Defense Secretary Robert Gates said in a recent issue of Foreign Affairs. ?Repeatedly over the last century, Americans averted their eyes in the belief that events in remote places around the world need not engage the United States. How could the assassination of an Austrian archduke in the unknown Bosnia and Herzegovina affect Americans, or the annexation of a little patch of ground called Sudetenland, or of a French defeat in a place called Dien Bien Phu, or the return of an obscure cleric to Tehran, or the radicalization of a Saudi construction tycoon?s son?? There is wisdom here for hedge fund managers and the rest of us too.

4) I have to tell you that my old friend, Dr. Copper, the only commodity that has a PhD in economics, has decisively broken resistance at $2.25 and hit a new high for the year at $2.40, up 78% from the year?s low. If you recall, I was feverishly pounding on the table trying to get people to buy the red metal at $1.35 in January. I also was pushing the world?s largest copper producer, Freeport McMoran (FCX) at $30. Is this the definitive breakout that will lead us into the next leg of the global equity bull market? I don?t know, but there is one thing that makes me feel queasy. Our illustrious state?s public employee pension fund, CALPERS, has announced that it is again making asset allocations to the commodities area. When they did this a year ago, it all ended in tears, putting in the spike tops in every commodity across the board, followed by the mother of all crashes. California teachers saw their pension payments cut. You would think that once burned is twice forewarned. Is history about to repeat itself? CALPERS, with $170 billion in assets, down a third from the peak, it?s just too big to play in this space. This is the playground of end commodity producers and professional traders. It?s like sharing a very small cage with a very large, 800 pound gorilla, who, oops, is horny. All they can do is damage. Better for them to go back to being a closet global index fund. But keep an eye on Dr. Copper anyway.

QUOTE OF THE DAY

?I?d rather lose an opportunity than lose capital,? said Doug Kass, President of Seabreeze Partners.