Featured Trades: (NATURAL GAS), (UNG), (DVN), (CHK)
2) Something is Bubbling in Natural Gas. Today's surprise release of figures showing a shocking draw down in natural gas supplies throws a great spotlight on what has undoubtedly been the red headed step child of the energy space for the last three years. While oil prices have been soaring to near all-time highs, gas prices have plummeted from a high of $18 per million BTU's to as low as $2. Gas is now selling for one fifth of the cost of crude on an adjusted BTU basis.
You would think that people would be in love with natural gas already. This simple molecule, CH4, produces only half the greenhouse gas emissions of oil, and is easily available in large quantities in the US though a web of interstate pipelines. The byproducts of its combustion are only water and carbon dioxide, not the noxious sulfur and nitrous oxides that diesel fuel spews off. Half the electric power plants in California already burned the stuff. I was part of a team in college that built a car that ran on natural gas, and it was so cleaning burning that it didn't need a tune up for its first 100,000 miles.
The problem is one of simple supply and demand. Thanks to the new 'fracking' process, large swaths of the country once thought tapped out of oil and bearing coal of a grade considered too poor to mine have been found to be sitting on Saudi Arabia sized natural gas supplies. New horizontal drilling technologies have also been a big help. As a result, the US is now sitting on top of a giant 100 year supply of untapped natural gas, and there is probably a second century's worth there if people bothered to look. Areas of the world with similar geology, like Europe and China, can expect to find the same. These staggering discoveries have led to the greatest reassessment in global energy supplies in since the massive Saudi discoveries of the 1930's.
The problem is one of basic supply and demand. So much gas has been discovered so fast that the price collapse has decimated the existing industry. Storage facilities around the country are filled to capacity. Unlike crude, the excess can't be exported because there is no global market and very expensive liquefaction and re-liquifaction plants and specialized tankers are unavailable. Not only did industry leaders like Chesapeake Energy (CHK) have to fight off bankruptcy, a few major hedge funds, like Amaranth, blew up as well. While gas looks great on paper, it will require a $1 trillion investment and a decade of deregulation to create the infrastructure such enormous new supplies demand.
All of this may be about to change. After a Herculean three year, $100 million lobbying effort, legendary oil man T. Boone Pickens, an old friend of mine, is close to gaining passage in the House of HR 1830, which promises to greatly speed up the natural gas conversion process with a whole raft of government subsidies. At the top of the list are incentives to build a nationwide network of natural gas stations to fuel the nation's 18,000 heavy long distance trucks. Weaning these off oil with cut America's oil imports by 2 million barrels a day, the amount we currently bring in from the Middle East. That would save us the cost of the now three wars we are fighting there.
I smell a trade here, and not a scalp but a ten bagger, even though natural gas is odorless and colorless. For a start, to bring gas prices in line with oil at $110/barrel for Cushing, gas has to rise 500% to around $20/MBTU. There are large scale liquifaction plants now under construction or on the drawing board to deliver large scale gas exports to ever energy hungry China.
This is all happening when Japan's 40 year contracts to buy LNG from Asia, which are tied to high oil prices, are expiring, and the country's nuclear industry has been unexpectedly pushed into the back seat. This could enable the US to become a net energy exporter within a decade. Higher oil prices also make all alternatives, including gas, much more attractive.
The great question the entire energy industry is now grappling with is when supply and demand will come back into balance. No one knows. It could be as early as this summer or a few years off. The only certainty is that it is coming. When it does, every trader in the country will flip from selling rallies in gas to buying dips, for a long time.
When the sea changes does come, whatever you do, don't rush out and buy the natural gas ETF (UNG), which thanks to a contango in the futures markets, has the worst tracking error in the industry. Instead, buy industry leaders like (CHK) and Devon Energy (DVN) and the pipeline companies. I'll keep you informed of more interesting gas plays as I come across them.
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Natural Gas: The Worst May Be Over
Featured Trades: (PARIS STRATEGY LUNCHEON REVIEW), (FXE)
2) Paris Strategy Luncheon Review. The full force of soaring oil prices really hit home when I took a taxi to the Paris airport yesterday. As we passed a gas station, I mentioned to the driver that I didn't know that they sold gas by the gallon in France. He answered that they didn't. France depended on Libya for much of its oil supplies, he explained, and those were the prices in liters I was seeing. He then voiced concerns about the future of his taxi business as fuel prices ratcheted up from $10 to $15 a gallon! It makes our own bleating that our prices may edge up from $4 to $5 a gallon appear somewhat feeble.
The first Paris strategy luncheon, held at the Cercle National des Armees, or the French Army Officers Club, was one of the best yet. You know, the place where Napoleon used to hang out at. I gave my talk under the watchful eyes of Charles de Gaulle, President Nicolas Sarkozi, and the French Foreign Legion. Renditions of the battle of Waterloo were nowhere to be seen.
The event turned in to something of a reunion for me, with my former institutional clients from the 1980's dropping by, as well as some of my French staff from the London office of Morgan Stanley. Claude won the prize for the greatest distance traveled, some 5,680 miles from San Diego, CA. Spend your Zimbabwe dollars wisely, Claude. Maybe you can offload your holding to Muammar Khadafi.
The big question at all of my recent lunches is what will happen when QE2 ends? I offered the simplest of all possible explanations. Asset classes that prospered from the $600 billion infusion from the Federal Reserve, like stocks, commodities, precious metals, and oil, will suffer the most from its demise. Asset classes that suffered from the rapid expansion of the monetary base this encouraged, like the US dollar, should see a rebound. The political balance in Washington makes a QE3 impossible, unless the stock market crashes first, vaporizing Ben Bernanke's wealth effect.
Everyone present complained that the Euro was insanely overvalued at $1.42, but conceded that momentum could take it as high as $1.46 before it sees a reversal. An overvalued currency was acting as a drag on the European recovery, especially in export sensitive Germany. I brought an extra suitcase to Paris, hoping to fill it with goodies for those on the home front at the department store Gallarie Lafayette. Mon Dieu! Thanks to the collapse of the greenback, prices were so high that I only purchased a few postcards, knowing I could buy the same products at home on line for half the cost, with free shipping.
I spent the weekend playing tourist and visiting my old favorites, such as the Louvre, the Musee d'Orsay, Sacre Coeure, Montmarte, the Eiffel Tower, and a fine dinner floating down the Seine on the Bateaux Parisienne. The food is so good that even the local corner brasserie produced a meal to remember. A stylish people make it impossible to be overdressed, no matter where you go. In Paris, even the homeless have taste. A search for my front teeth on the Left Bank, which I lost in a riot there in 1968 when a flying cobblestone hit me in the mouth, yielded no results.
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Featured Trades: (WHERE'S THE BEEF?), (SPX), (SPY)
3) Where's the Beef? With the Q1 earnings season now underway, investors seeking a repeat of Q4's blistering results are about to be sorely disappointed. While calendar 2010 delivered a white hot 41% improvement in reported earnings, the growth rate for the most recent quarter could deliver gains as low as a paltry 13.6%. Still, a gain is still a gain.
However, we are about to see divergences between sectors not seen in the past arising from the huge increases in commodities prices. Rising costs against frozen selling prices is not a great business model. The distinction is very simple to predict. Industries that produce energy, commodities, and food, and those that service and transport them, will surprise to the upside. Industries that consume these things will disappoint. Since consuming industries substantially outnumber producing ones, the overall results will be muted at best.
Perhaps this is what the stock market is trying to tell us with its recent subdued performance. Take a look at the chart of the S&P 500 below and tell me if you see a double top lurking in there somewhere. My experience is that if it looks like a duck and quacks like a duck, it is definitely not a bull. This is why I have been studiously avoiding longs since the first peak in February. It is also why I am stretching my muscles and cracking my knuckles, getting ready to lay on some serious shorts into the next rally.
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Looks More Like a Bear to Me
Featured Trades: (WHAT ARE TECHNOLOGY STOCKS TRYING TO TELL US?),
(XLK), (AAPL)
4) What Are Technology Stocks Trying to Tell Us? If you are a perma bull or a believer in the return of the 'old normal', please email me the hidden meaning of the two charts below. Technology stocks have been the preeminent sector leader since the bull market began two years ago, running with the bit between its teeth on every substantial rally. Many of the top stocks have quadrupled or more.
Since the main market peaked on February 20, the Technology Select Sector SPDR ETF (XLK) has clearly been rolling over, while the lead stock Apple (AAPL) has entered a downtrend. If Steve Jobs' vaunted wonder machine breaks $320, a mere $10 lower than here, the high will almost certainly be in for the year, and it will all be over but the crying.
This abysmal two month share price performance has been happening in the face of absolutely stellar earnings reported by the industry, and Apple's case in particular. After all, these are among the few American companies that still make stuff people want to buy. Note to beginners and newbies: when your best players are striking out, it's time to take your ball and bat and go play another game.
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Why Are Technology Stocks Striking Out?
Featured Trades: (WHAT RELATIVE SECTOR PERFORMANCE IS TRYING TO TELL US),
(XLF), (XLK), (XLV), (XLP), (AAPL), (SWY), (KFT)
3) What Relative Sector Performance is Trying to Tell Us. Get ready to reach for that barf bag in the seat pocket in front of you. The relative performance of industrial sectors in the S&P 500 is shouting 'Mayday, Mayday, Mayday!'
During times of market strength, financials (XLF) and technology stocks (XLK) outperform on the upside. This is because during healthy stock markets, investors are happy to increase their trading volumes and use the profits to buy new IPods, Mac Books, and Xbox 360's. During weak markets, investors flee to the imagined safety of consumer staples (XLP) and health care stocks (XLV). After all, regardless of market conditions, people still get sick and need to eat and take a bath.
Take a look at the revealing charts below provided by my friends at www.StockCharts.com. Defensive sectors started a definite upturn from the beginning of April, while leading sectors have moved into the dog house. You can clearly see this in the individual stock charts for Kraft (KFT), Safeway (SWY), and Apple (AAPL).
These charts suggest that the love fest we have been partaking in for the past seven months are about to end, and that troubled times are at hand. Did I hear someone say 'Sell in May and Go Away?'
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You Are About to Experience Some Moderate Turbulence
Featured Trades: (SPECIAL DEMOGRAPHIC ISSUE), (VNM)
1) If Demographics is Destiny, Then America's Future Sucks. Desperate homeowners counting on a "V" shaped recovery in residential real estate prices to bail them out better first take a close look at global demographic data, which tells us there will be no recovery at all.
I have been using the US Census Bureau's population pyramids as long leading indicator of housing, economic, and financial market trends for the last four decades. They are easy to read, free, and available online at http://www.census.gov/ . It turns out that population pyramids are something you can trade, buying the good ones and shorting the bad ones. For example, these graphical tools told me in 1980 that I had to sell any real estate I owned in the US by 2005, or face disaster. No doubt hedge fund master John Paulson was looking at the same data when he took out a massive short in subprime securities, earning himself a handy $4 billion bonus in 2007.
To see what I am talking about, look at the population pyramid for Vietnam. This shows a high birth rate producing ever rising numbers of consumers to buy more products, generating a rising tide of corporate earnings, leading to outsized economic growth without the social service burden of an aged population. This is where you want to own the stocks and currencies.
Featured Trades:? (VNM)
Market Vectors Vietnam ETF
4) Vietnam is a Paradise for Demographic Investors. Now that we have figured out that Vietnam is a great place to invest, take a look at the Van Eck Groups Vietnam Index Fund (VNM). The venture will invest in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its offshoring.
Vietnam was one of the top performing stock markets in 2009. It was a real basket case in 2008, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help.
I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on a long vacation. If you are looking for a laggard emerging market that has not participated in this year's meteoric move up, this one fits the bill nicely. Their green shoots are real. But watch out for the old land mines.
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Pass Me a 'BUY' Ticket Please
Featured Trades: (THE BEAR MARKET IN BONDS IS STILL SLEEPING), (TLT)
3) The Bear Market in Bonds is Still Sleeping. I just wanted to give you this updated technical chart of the long dated bond ETF (TLT), showing that the bear market in bonds is indeed on 'PAUSE'. This will be music to the ears of my Macro Millionaire followers, who are raking in the coins running a short in the (TLT) June $86 puts. Although we have already taken in half the profit on this position, running it seems to be in order. While yields could climb from here, and prices fall, I doubt they will reach the 5.2% the 30 year would need to reach to get the (TLT) to break below our strike of $86.
Keep in mind that this is a short term counter trend trade in the midst of a long term bear market in bonds. We will certainly break below $86 in the (TLT), but not until our options expire. In a market that isn't giving you much to work with these days, this one seems to be a winner.
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Wake Me Up in June
Featured Trades: (PALLADIUM), (PLATINUM), (PALL), (PPLT)
4) Check Out the Dip in Palladium. If you want to see the one precious metal that has been beaten senseless by the disaster in Japan, take a look at Palladium (PALL). Thanks to its close ties to the auto industry, the white metal has plummeted by 22% since its February peak. Similarly used platinum (PPLT) has been pared back by 9%.? If you believe in the 'V' economic scenario that I described for the world economy above, and the auto industry specifically, these should be the first metals that you pile back into.
Palladium was one of my star performers last year, soaring by 112% since my initial recommendation in January, 2010 (click here for the piece).? Double dippers beware! Moves like this by industrial commodities do not occur in the face of a collapsing economy.
It's looking like the car manufacturers, which consume huge amounts of the palladium and platinum, could turn out as many as 13 million cars this year. This could rise to 15 million by 2015. The 2008 nadir was a paltry 8.5 million vehicles. You can forget seeing the drug induced haze of 20 million annual units free money brought us, returning in our lifetime. Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by another 1 million units a year.
Some 80% of the world's palladium production comes from Russia and South Africa, dubious sources on the best of days. This means that a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries.
Also known as the 'poor man's platinum,' demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF (PALL) last year. The fund is thought to be bumping up against of its position limit of 1.29 million ounces, which amounts to a breathtaking 18% of global production in 2009.
If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical. You can buy 100 ounce bars at $50 over spot or Royal Canadian Mint one ounce .9995% fine palladium Maple Leaf coins at $50 over spot. And yes, you can even buy them on Amazon by clicking here.
Think I Should Buy Palladium on the Dip?
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Featured Trades: (NEW YORK STRATEGY LUNCHEON)
Last Chance to Buy a Ticket for the Thursday, March 31 New York Strategy Luncheon. The Mad Hedge Fund Trader's Global Strategy Update will be held at 12:00 noon on Thursday, March 31, 2011.
The event will be held at an exclusive private club on Central Park South.?? A three course lunch will be followed by a 30 minute PowerPoint presentation and a 45 minute question and answer period. I'll be giving you my up-to-date view on stocks, bonds, currencies commodities, precious metals, and real estate. Enough charts, tables, graphs, and statistics will be tossed at you to keep your ears ringing for a week.
I'll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets. To buy a ticket for $279, please visit my store. I look forward to meeting you, and thank you for supporting my research.
