While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
Global Market Comments
January 31, 2014
Fiat Lux
Featured Trade:
(TIME TO SELL NATURL GAS),
(UNG), (USO),
(MAD HEDGE FUND TRADER 2014 GLOBAL STRATEGY LUNCHEON SCHEDULE)
United States Natural Gas (UNG)
United States Oil (USO)
Time to Sell Natural Gas
I received a crackly, hard to understand call late last night from one of my old natural gas buddies in the Barnet shale in Texas. Chances are that CH4 peaked in price last night with the expiration of the front month contract. It was time to sell.
I spent five years driving a beat up pick up truck on the tortuous, jarring, washboard roads of this forlorn part of the country, buying up mineral rights from old depleted fields for pennies on the dollar.
The sellers thought I was some moron hippie from California, probably high on some illegal drugs. "You want to redrill these fields and throw dynamite down the holes?" It was a crazy idea. Since I was offering hard cash, they couldn't sign the dotted line fast enough.
During the late nineties nobody had ever heard of fracking. Even in the oil industry only a few specialists were aware of it. My old buddy, Boone Pickens, claims he was doing it in the fifties, but then nothing the wily oilman ever does surprises me.
Only a few reckless independent wildcatters were experimenting with the new process. The oil majors wouldn't touch it with a ten-foot pole. It was unproven, dangerous, and could never deliver sufficient volumes to get them interested. With the deep pockets a trial lawyer could only dream about, they couldn't afford the liability risk of polluting a town's drinking water. So it was left to small fry like me to finance this ground-breaking technology.
I ended up developing a couple of fields, riding gas up from $2 to $5 MMBTU, then selling them off to the gas companies. My partners and I made a fortune.
We have remained in touch over the years. Whenever something indecipherable happens in the international capital markets, they call me for an explanation. When something special sets up in the natural gas market, I get the first call.
On Election Day we all go out and get drunk because their conservative vote cancels out my liberal ones, so why bother? We do this at Billy Bob's in Fort Worth, a favorite of former President George W. Bush, where the 24-ounce chicken fried steaks fall over both sides of your plate.
I didn't reenter the gas market until the Amaranth hedge fund blow up took the price up to $17 in 2006, and then down like a stone. I figured out that the United States Natural Gas Fund (ETF) suffered from a peculiar mathematics that was death for long side investors.
The natural gas futures market often trades in a contango. This is when front month contracts trade at a big premium to far month ones, adjusted for the cost of borrowed money. This premium completely disappears at expiration, when the commercial buyers, like electric power plants and chemical companies, take physical delivery of the gas.
What (UNG) does is buy contracts three months out, run them into expiration, and then roll the money into new contracts another three months out. The premium they pay rapidly falls to zero. Then they repeat the process all over again. It is a perfect wealth destruction machine.
The same dilemma besets futures contracts for oil (USO), corn (CORN), wheat (WEAT), and soybeans (SOYB) to a lesser degree, and a lot of traders make their livings from these anomalies.
What (UNG) does is buy contracts three months out, run them into expiration, and then roll the money into new contracts another three months out. The premium they pay rapidly falls to zero. Then they repeat the process all over again. It is a perfect wealth destruction machine.
I have seen a period when natural gas rose 40%, but the (UNG) dove 40%, thanks to the costly effects of the contango. Needless to say, this makes the (UNG) the world's greatest short vehicle in a falling market. It is a fantastic heads I will, tails you lose security.
There is another crucial factor making natural gas such a great natural short that few outside the industry are aware of. You cannot store natural gas to the degree you can semi liquid oil. Unlike Texas tea, natural gas wells can't be capped without damaging their long-term production. It has to flow and be sold at whatever price you can get. If you don't, it goes away. This means that when the price of natural gas falls, it does so with a turbocharger, also making it an ideal short play.
To make a long story short, I made another fortune riding gas down from $17 to $2. I haven't touched it for 2 years. Other hedge fund manager friends of mine made billions on this trade, and then retired to a sedentary life of philanthropy.
At this point, natural gas is up an unbelievable 56% in three months, thanks to Mother Nature's brutal assault on most of the country, except here in balmy California. Demand is at an all time high, prices a 5-year peak, and speculative long positions in the futures market at an eight-year apex. Storage was taken down to a six month low of 1.2 trillion cubic feet with today's 230 billion cubic foot draw down.
Expiration of the front month contract triggered a super spike in the (United States Natural Gas Fund to an astounding $27, while underling natural gas made it all the way up to $5.50, nearly triple the subterranean $1.90 low set in April, 2012.
This is happening in the face of one of the greatest supply onslaughts in history that will hit the market throughout the rest of this year. They're still hiring and drilling like crazy in North Dakota.
The demand spike came hard and so fast that it caught many suppliers by surprise. That has created a bubble in the pipeline, a temporary shortfall in supplies, and triggered an incredible short squeeze in the natural gas market.
Winter can't last forever. Eventually summer comes, and the shortage of natural gas pipeline will get more than made up by thousands of new fracking wells in the US.
If the UNG returns to the November, 2013 $17 low by July 18, the value of the (UNG) July, 2014 $23 put rises from our $1.68 cost to $4.72, a potential gain of 181%. That's a fabulous risk/reward ratio, and we have six months to see it happen.
Keep in mind that liquidity could be an issue here. Yesterday, 1,549 contracts traded against on open interest of 2,297 contracts. The option market spreads here are also humongously wide and the volatility is of biblical proportions, which is endemic to the natural gas market.
Just to get a second opinion, I called Mad Day Trader Jim Parker, as I hadn't been in this market for a while. He said it was warming up in Chicago, and he was venturing outside for a walk for the first time in three days. Out went the Trade Alert!
Below please find a chart for natural gas generated by Jim?s proprietary trading model. The bottom line here is that there is a high probability that we will drop from the current $5.17 down to $4.70, break that, go down to $4.17, break that, and possibly go as low at the November low of $3.40.
They don?t call this market the ?widow maker? for nothing, so expect a lot of heart wrenching volatility before you see a substantial payoff. So it best to enter a spread of small limit orders and hope for the best.
You can best play the short side through the futures market in natural gas. For those without a futures account, you can buy the 2X ProShares Ultra Short DJ-UBS Natural Gas inverse ETF (KOLD) or the 3x Direxion Daily Natural Gas Related Bear 3X Shares inverse ETF (GASX). The more adventurous can sell short the (UNG) outright, if they can find stock to borrow.
Time to Sell Winter Short
Billy Bob?s in Forth Worth
Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Luncheons, which I will be conducting around the world throughout 2014. Please find the schedule for the next six months below.
To warm you up, I?ll email you a PowerPoint presentation covering the broad range of topics we may cover, which is pretty much everything on the planet.? An excellent meal will be followed by a wide-ranging discussion and a prolonged question and answer period.
I?ll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, and real estate. I also hope to provide some insight into America?s opaque and confusing political system. And to keep you in suspense, I?ll be throwing a few surprises out there too.
The cost is modest. My goal is to meet the readers in person, find ways to improve my products, learn about new trading opportunities, and break even on the cost. If I can gain further insights on the true state of the global economy, that?s a plus too.
I?ll be arriving at 11:00 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. The formal lunches start at 12:00.
The events are held at downtown five star hotels and private clubs that are easily accessible, the details of which will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.
Further Update to: Trade Alert -(UNG)
Buy the United States Natural Gas Fund (UNG) July, 2014 $23 puts at $1.68 or best
Opening Trade
1-30-2014
expiration date: July 18, 2014
Portfolio weighting: 5%, or $5,000
Number of contracts=? 30 contracts
I received a crackly, hard to understand call late last night from one of my old natural gas buddies in the Barnet shale in Texas. Chances are that CH4 peaked in price last night with the expiration of the front month contract. It was time to sell.
I spent five years driving a beat up pick up truck on the tortuous, jarring, washboard roads of this forlorn part of the country, buying up mineral rights from old depleted fields for pennies on the dollar.
The sellers thought I was some moron hippie from California, probably high on some illegal drugs. ?You want to redrill these fields and throw dynamite down the holes?? It was a crazy idea. Since I was offering hard cash, they couldn?t sign the dotted line fast enough.
During the late nineties nobody had ever heard of fracking. Even in the oil industry only a few specialists were aware of it. My old buddy, Boone Pickens, claims he was doing it in the fifties, but then nothing the wily oilman ever does surprises me.
Only a few reckless independent wildcatters were experimenting with the new process. The oil majors wouldn?t touch it with a ten-foot pole. It was unproven, dangerous, and could never deliver sufficient volumes to get them interested. With the deep pockets a trial lawyer could only dream about, they couldn?t afford the liability risk of polluting a town?s drinking water. So it was left to small fry like me to finance this ground-breaking technology.
I ended up developing a couple of fields, riding gas up from $2 to $5 MMBTU, then selling them off to the gas companies. My partners and I made a fortune.
We have remained in touch over the years. Whenever something indecipherable happens in the international capital markets, they call me for an explanation. When something special sets up in the natural gas market, I get the first call.
On Election Day we all go out and get drunk because their conservative vote cancels out my liberal ones, so why bother? We do this at Billy Bob?s in Fort Worth, a favorite of former President George W. Bush, where the 24-ounce chicken fried steaks fall over both sides of your plate.
I didn?t reenter the gas market until the Amaranth hedge fund blow up took the price up to $17 in 2006, and then down like a stone. I figured out that the United States Natural Gas Fund (ETF) suffered from a peculiar mathematics that was death for long side investors.
The natural gas futures market often trades in a contango. This is when front month contracts trade at a big premium to far month ones, adjusted for the cost of borrowed money. This premium completely disappears at expiration, when the commercial buyers, like electric power plants and chemical companies, take physical delivery of the gas.
What (UNG) does is buy contracts three months out, run them into expiration, and then roll the money into new contracts another three months out. The premium they pay rapidly falls to zero. Then they repeat the process all over again. It is a perfect wealth destruction machine.
I have seen a period when natural gas rose 40%, but the (UNG) dove 40%, thanks to the costly effects of the contango. Needless to say, this makes the (UNG) the world?s greatest short vehicle in a falling market. It is a fantastic heads I will, tails you lose security.
There is another crucial factor making natural gas such a great natural short that few outside the industry are aware of. You cannot store natural gas to the degree you can semi liquid oil. Unlike Texas tea, natural gas wells can?t be capped without damaging their long-term production. It has to flow and be sold at whatever price you can get. If you don?t, it goes away. This means that when the price of natural gas falls, it does so with a turbocharger, also making it an ideal short play.
To make a long story short, I made another fortune riding gas down from $17 to $2. I haven?t touched it for 2 years. Other hedge fund manager friends of mine made billions on this trade, and then retired to a sedentary life of philanthropy.
At this point, natural gas is up an unbelievable 56% in three months, thanks to Mother Nature?s brutal assault on most of the country, except here in balmy California. Demand is at an all time high, prices a 5-year peak, and speculative long positions in the futures market at an eight-year apex. Storage was taken down to a six month low of 1.2 trillion cubic feet with today?s 230 billion cubic foot draw down.
Expiration of the front month contract triggered a super spike in the (United States Natural Gas Fund to an astounding $27, while underling natural gas made it all the way up to $5.50, nearly triple the subterranean $1.90 low set in April, 2012.
This is happening in the face of one of the greatest supply onslaughts in history that will hit the market throughout the rest of this year. They?re still hiring and drilling like crazy in North Dakota.
The demand spike came hard and so fast that it caught many suppliers by surprise. That has created a bubble in the pipeline, a temporary shortfall in supplies, and triggered an incredible short squeeze in the natural gas market.
Winter can?t last forever. Eventually summer comes, and the shortage of natural gas pipeline will get more than made up by thousands of new fracking wells in the US.
If the UNG returns to the November, 2013 $17 low by July 18, the value of the (UNG) July, 2014 $23 put rises from our $1.68 cost to $4.72, a potential gain of 181%. That?s a fabulous risk/reward ratio, and we have six months to see it happen.
Keep in mind that liquidity could be an issue here. Yesterday, 1,549 contracts traded against on open interest of 2,297 contracts. The option market spreads here are also humongously wide and the volatility is of biblical proportions, which is endemic to the natural gas market.
Just to get a second opinion, I called Mad Day Trader Jim Parker, as I hadn?t been in this market for a while. He said it was warming up in Chicago, and he was venturing outside for a walk for the first time in three days. Out went the Trade Alert!
Below please find a chart for natural gas generated by Jim?s proprietary trading model. The bottom line here is that there is a high probability that we will drop from the current $5.17 down to $4.70, break that, go down to $4.17, break that, and possibly go as low at the November low of $3.40.
They don?t call this market the ?widow maker? for nothing, so expect a lot of heart wrenching volatility before you see a substantial payoff. So it best to enter a spread of small limit orders and hope for the best.
Here is the specific trade you need to execute this position for a $5,000 holding:
Buy 30 X July, 2014 (UNG) $23 puts at?????$1.68
Time to Sell Winter ShortBilly Bob?s in Forth WorthAs a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
Global Market Comments
January 30, 2014
Fiat Lux
Featured Trade:
(SATURDAY FEBRUARY 22 BRISBANE AUSTRALIA STRATEGY LUNCH)
(PULLING THE RIPCORD ON SOFTBANK), (SFTBY),
(HAPPY BIRTHDAY IRS!),
(THE TECHNOLOGY NIGHTMARE COMING TO YOUR CITY)
SoftBank Corp. (SFTBY)
The day I bought my second lot of shares in the internet giant on December 12 was the exact point where a year of upward momentum in this stock came to a juddering halt.
The shares have since been like an errant teenaged child who you keep giving the benefit of a doubt until he goes out and steals a car. That is show business.
The immediate cause for the selloff was a downgrade of Alibaba by an unnamed Chinese internet analyst, in which Softbank is a major shareholder. The imminent IPO of Alibaba was the whole reason for owning Softbank.
It doesn?t help that the global emerging market rout has sent traders into ?RISK OFF? mode, especially in China. The doubling of Turkish interest rates overnight focused a great giant spotlight on the problem.
When in doubt, sell, especially stocks with funny sounding foreign names. ?Brave new world? technology stocks, like Alibaba, have been put on hold. A full handle move up in the yen against the US dollar to a new high for the year was further fat on the fire.
But what really tipped me over to the sell side was to see the Nikkei Average up a robust 2.70% last night, but Softbank shares drop by -1.30%. If it can?t catch a bid with this tailwind, it?s time to get out of dodge, or in this case, Kabutocho.
You knew this eventually had to happen. Since June, my Trade Alerts have enjoyed an almost unbelievable success rate of 90%. My followers have earned a +41.15% return on their capital, a multiple of what the market did. It was just a matter of time before I got slapped across the face with a fresh piece of sushi. But the entire world had to conspire against me to do it.
If you do have to lose money, this is the way to do it. By owning shares instead of options I was able to limit my loss to 2.86% off the back of a 14.3% fall in the shares. The trade was part of the general deleveraging that I have been implementing with my trading book since the end of 2013. It?s far better to have leveraged gains and unleveraged losses than the reverse.
No doubt, everything I predicted about Alibaba and Softbank will come true, and vast fortunes will be made by shareholders. But for the time being, we will have to restrict ourselves to reading about it in the newspapers from the sidelines.
Ouch!!