The Silent Creeping Up

No, I'm not talking about Apple, very loudly creeping up, then down and representing ever more SPX points. The creeping up is oil.Viewing the remainder of this article requires a Subscription

Portugal, and Yields, and Iran . . .

Portugal, and yields, and Iran - oh my! None of these are new stories. Portugal is bigger than Greece - but we knew that. Moreover, we knew Portugal was in dire straits. We knew Germany was already hesitant to provide more assistance and would demand higher guarantees.Viewing the remainder of this article requires a Subscription

The real alternative energy

A long long time ago, there was a lot of talk about alternative energy, and then the government got involved, and the talk subsided, but it was always there, and there were prominent VC's who touted it, and then we all shifted our attention to Europe - and now . . .Viewing the remainder of this article requires a Subscription

Oil and Ag

It's all in the timing. I recently spoke to a client about the recent divergence between oil and the agricultural space. I'm not a chart specialist, but I do like to reference the charts for a quick view of history. In this case, the spread between oil and ag indices looks pretty stretched. .Viewing the remainder of this article requires a Subscription

Oil and energy

As the world's growth is being recognized for what it is, namely anemic if not outright negative, oil and the industrial commodities have come off a good 30+%.Viewing the remainder of this article requires a Subscription

And over in this corner…

While the world looks at the euro dying a surprisingly slow death, I once again have to shift readers' focus.Viewing the remainder of this article requires a Subscription

On the rout in energy

With an economic slowdown starting to get priced in, and deflationary pressures increasing, energy is lower.Viewing the remainder of this article requires a Subscription

Gold and Oil

Approaching new highs in almost every currency. Euro can sustain any bids, and I'm not even sure who's bidding other than the Chinese. Why are the Chinese bidding? No clue; maybe they like losing money. Regardless, gold and even more importantly for me, the gold miners, are rising today.Viewing the remainder of this article requires a Subscription

Black Gold

What does it tell us when oil stays level but oil related companies go up? For starters, it tells us that the implementation vehicle we utilized (XES) was the right choice.Viewing the remainder of this article requires a Subscription

A Contrarian Take On Oil

60 million barrels sure sounds like a lot, so thank you world governments for releasing that into the system and alleviating consumers' burdens.Viewing the remainder of this article requires a Subscription

Energy Revisited

Earlier this week, Dennis Gartman had a note out on the technicalities behind the failed OPEC meeting, where the votes were roughly split between countries willing and unwilling to boost production.Viewing the remainder of this article requires a Subscription

Energy – dare to disagree with Goldman

Goldman came out with a note today encouraging clients to dumb their oil holdings and lo and behold, oil is down 4% – correlation, not necessarily causation, I know, but still. Remember the good ol’ days when oil was at $10? Anyway, let’s put today’s move in context (this is the weekly chart through yesterday):

Still quite a bit higher than the roughly $85 we saw at the beginning of the year, not to mention the beginning of 2009. Simultaneously, we have witnessed the energy sector pretty much single-handedly pull the equity markets up, with a 14+% return vs. the S&P 500′s 6% total return.

I actually don’t have much exposure to oil per se, but I’m definitely overweight energy. So why am I NOT selling my NLR and KOL and FCG like I did SLV yesterday and rotating into utilities or healthcare? For one, when you get in at a good price, you can withstand a lot of market volatility. Secondly, the fundamental reasons why I took a position in energy (political instability, risk of rising protectionism, risk of inflation, increased capital investments, solid balance sheet fundamentals, yield, etc.) are all still in place. It’s that simple.

Some might say that a global slowdown will pressure oil, and they are absolutely right. However, I anticipated a slowdown already BEFORE I took a position and it STILL made financial sense. So either, the expected slowdown will come and I’ll generate solid yields with upside optionality in case of inflationary pressures, or a slowdown will not come and I’ll generate solid returns based on analysts mispricing the top line growth potential. In the meantime, I maintain a hedge against an increase in political turmoil, protectionism (that’s why I concentrated on locally available energy) and inflation. So while Goldman can make predictions about where oil is heading in the next day, week, month or year, I prefer to invest with a longer horizon and by looking at the total investment potential and risk as compared to other alternatives.

Relevant ETFs: XLE, USO, OIL, BNO, NLR, KOL, FCG

Japan – it happens

Japan was hit with another earthquake. It happens. I guess it more likely to happen in certain places than others, but such is life. They’ll rebuild, they’ll have more earthquakes. Is there any new story there? Not for me.

The real story is in energy and food. As I write this, oil is trading at $110! Seriously, are equity investors aware? Are government officials aware? I am not so sure.

Not surprisingly, we see that CORN is also making new highs:

Food and energy are inter-related for a whole host of reasons, not the least of which is that current government policies that encourage taking a need (food) and making it into a want (energy) lead to a constrained supply. I’m actually quite concerned about the next shock to the system. I’m not predicting where it will come from, but historical precedent (and Murphy’s Law) suggests that shocks come at the worst time. Fundamentally, with a slowing world GDP, we would expect oil to go down. However, the monetary policies and geopolitical turmoil are trumping the supply/demand dynamics and we’re maintaining our exposure to ag and energy.

Relevant ETFs: OIL, CROP, MOO, DBA, NLR, KOL, FCG, EWJ, DXJ, FXY

Tsunami’s all around

The Japanese stock market is hitting circuit breakers with a 5% drop as Japanese officials scramble to inject liquidity into the system. I’m sorry to say that BoJ has not proven its ability to influence markets over the past couple of decades, so while the liquidity will help the immediate requirements (maybe), I don’t think it will actually make a big difference for Japanese citizens. They’ll get hammered with a double whammy: higher import prices AND higher energy costs specifically from energy strains on the system. And as the third largest economy in the world, the potential for a chain reaction is not insignificant. As I mentioned before, I’m a big believer that the yen is the most vulnerable developed nation currency in the world. Any bounce from repatriations will be short lived and Japanese export-focused firms are trading at relatively low valuations ANYWAY. That’s a powerful combination and I’ll be looking to add to exposure. Easiest way to play this is through DXJ.

Meanwhile, a political tsunami is raging in the Middle East, which is no longer getting front page status. Bahrain invited Saudi troops to help stanch their uprisings. A curious situation: a sovereign nation inviting the military of another nation to use force against its own citizens. Hmmm. Doesn’t sound like a place I want to move to in the near future. Regardless, with Sunni and Shiite friction increasingly tense, look for Iran to ride in to the defense of their brethren. Not sure how it plays out, but it certainly provides a bid for oil. I’m still wary of going long the region and see more downside than upside risk. That also means that domestic energy producers might benefit.

Relevant ETFs: DXJ, MES, EGPT, FCG, NLR, KOL, YCSm FXY

Heretical or just contrarian?

Energy. Everyone wants it; not everyone has it. Once it’s produced (as electricity, let’s say) it’s tough to store, tough to transmit, and tough to price. For the past few months, turmoil in the Middle East has driven the price of crude oil (WTI), the most commonly cited energy commodity, up around 30%. Remember when $90 oil was a threat to the recovery? Anyway, I have been recommending an overweight to energy, but quite honestly, except for a modest allocation to energy, my focus was on the domestic market through nuclear and coal companies. I can’t complain as they’ve done very well over the past 6 months. It did however, lead me to review my underlying thesis on energy. Will my anticipated slowdown (negative for energy) overpower the continued geopolitical turmoil (positive for energy)? Will China’s slowdown (negative for energy)play a larger role than the possible hoarding behavior by governments afraid of supply disruptions (positive for energy)? And the questions go on.

Here’s the short of it. I still like energy. I think the risk of supply disruptions is high, and while I anticipate China, as the marginal buyer of commodities, to face a significant slowdown, I believe the geopolitical situation is worse than most are pricing in, all coupled with a continued devaluation of most world fiat currencies. That being said, look  at the chart below (from BarChart.com). Do you notice any outlier?

	Name	Last	Change	Percent	1-Month Percent	6-Month Percent	12-Month Percent
	Crude Oil WTI	104.38	-0.64	-0.61%	+15.85%	+30.07%	+22.51%
	Heating Oil	3.0707	+0.0596	+1.98%	+10.83%	+41.88%	+35.32%
	Gasoline RBOB	3.0272s	+0.0805	+2.73%	+13.60%	+42.36%	+32.82%
	Natural Gas	3.930	+0.066	+1.71%	-3.75%	-10.72%	-26.28%
	Crude Oil Brent	115.99	+2.93	+2.59%	+13.36%	+44.79%	+37.72%
	Ethanol Futures	2.543s	-0.018	-0.70%	+3.04%	+36.72%	+49.59%

Of course natural gas is an outlier. There’s plenty of it – no one is discussing peak natural gas – AND, importantly, there a huge domestic supply. It’s underperformed the rest of the complex by 40-60+% over the last 12 months! For a contrarian like me, it definitely looks interesting.

Now, natural gas happens to be a very difficult market to trade. Even professionals get caught up in spreads, roll issues, extreme moves with little liquidity; for example, that’s what brought down Amaranth for those old enough to remember yesteryear. Also, the active contracts are for the front months, which wouldn’t actually provide me with the long-term exposure I might want. So instead, I need to focus on the companies themselves. For those who have the ability to do the due diligence on individual firms, companies like Calpine or Southwest Energy might be interesting (I don’t have positions in either). For those interested in gaining more broad exposure, check out FCG. I’ve mentioned it in the past and it’s held up well, especially given the recent price history of natural gas. Again, I don’t have any exposure to it at the time of writing, but am looking at it for now. One thing I do know, though, is stay away from UNG. Retail investors love this fund for some reason, but it is fundamentally flawed and I wouldn’t be surprised if we see it close at some point soon if natural gas heads any lower. It might pop on some big moves in the underlying, but the direction is clear. This is not a contrarian play.

So there you have it . . . While everyone is selling natural gas, to me it’s beginning to look like a good place to be. No positions yet, but it’s the type of play I like.

Relevant ETFs/stocks: SWN, CPN, FCG, USO, BNO, XLE, CORN, UNG