Tuesday, September 26, 2006

Jim Rogers: Time to buy natural gas.

Here's an interesting trade.

Jim Rogers, former hedge fund manager, on Cavuto on Business this weekend:

"Two hedge funds have collapsed recently, have driven down the price of natural gas. Two things:

It's gonna be cheaper to heat your house if you use natural gas; if you don't use natural gas, switch to natural gas.

But secondly, buy natural gas, you'll make a fortune."

[Note: The transcript on Foxnews.com contains only the first comment about using natural gas in your house. The quote above is more accurate.]


One of the funds he's referring to is Amaranth which hasn't collapsed and is trying to stay open, though that seems a little unlikely given the circumstances, so ultimately he'll probably be right. Using borrowed money to gain serious leverage, they played natural gas futures for early 2007, in the process basically cornering the market for themselves. When they ran out of money to keep buying, it turned out everybody else had taken their toys and gone home (quite possibly on purpose), and the market plunged, leaving Amaranth holding the bag.

The other fund he's likely referring to is MotherRock LP which also incinerated itself with natural gas trades. The notable thing about MotherRock is that one of the managers was a former President of the New York Mercantile Exchange (a major commodities exchange) who probably had a little bit of experience with trading commodities before trying his hand at running a hedge fund portfolio.

So, justifiably, natural gas is considered the most volatile commodity of all, and it has certainly proved it recently, burning even those with experience. After spiking last year to $15, it's now down to under $5.

Jim Rogers is probably counting on three things to support this trade: First, that the blowup of these two hedge funds has created a temporary dislocation in the price of natural gas to the downside, and secondly that natural gas is now trading at the low end of it's range in it's normal relation to oil. This idea is also supported by energy analyst Kurt Wulff, who recently wrote "Natural gas may not have positive price momentum, but it has value at near the lowest ratio to crude oil in the 00's decade." Finally, we are just ahead of winter and natural gas has a tendency to spike sharply if you get a period of very cold weather during the winter.

A couple of things to keep in mind: This is a trade he is recommending, so you need to keep a watchful eye on your position to sell into a spike. Predictions for this winter suggest it will be warmer than normal.

If you don't trade the commodity, you could take a look at stocks that generally trade along with natural gas, some of the ones I found correlated are EGN, PXP and WMB. The larger producers of natural gas include COP, ECA, EOG, APC, XTO, CHK.

Saturday, September 23, 2006

Pickens: It's the fundamentals.

I dunno, maybe he's a Star Wars fan too.

Dallas Business Journal: Pickens: 'Fundamentals' driving oil price.


Dallas oilman T. Boone Pickens says "fundamentals" are the reason the spot-market price of oil has fallen recently to $61 per barrel from nearly $79.


"What's happened is you have enough oil now to satisfy everyone's needs," he said. "The demand is dropping off; the economy is slowing down. You don't need as much oil as you needed 30 days ago or 60 days ago, so the price came down. And that's it in a nutshell."


All kidding aside, the 50/50 case for recession is tilting here heavily. In the recession of 2001, oil prices dropped from roughly $40 (inflation adjusted) to around $23, or 42%. In 1990, they dropped from roughly $56 to around $33, or 41%.

So, let's see... $78 - (78 * .41) = $46.

OPEC wanted a floor of $60, they're going to have to pull oil off the market to get that one to stick. That will be interesting to watch.

Wednesday, September 20, 2006

What's missing from these charts?

Chart of the Day: Oil, Inflation Adjusted.

The Big Picture: The Car Dealers Doldrums Indicator.

Econbrowser: Watching housing slide.

Grey shaded areas on all of the above charts are recessions.

Oil prices, car dealer sales, building permits, housing starts, and the yield spread - suggesting the possibility of recession.

Unemployment, corporate profits, the market averages - generally not suggesting recession.

Retail sales - ?

Could go either way, just as Liz Ann Sonders said. (Her case was built on oil, housing, and the yield curve, btw.)

How's real estate doin'?

Barbara Corcoran is founder of The Corcoran Group, which is listed on it's web site as the largest residential real estate firm in New York City.

So perhaps she can give us a sense of how exactly real estate is doin'.

Not so good, apparently.

FoxNews Cavuto on Business, Recap of Saturday, September 16:


Barbara: Home prices falling; you ain't seen nothin' yet!

Coincidentally, I happened to be in one of Corcoran's regions this weekend outside of NYC and I was struck by just how many FOR SALE signs I saw. (This was before I saw her comment, btw.)

Monday, September 18, 2006

Another casualty of a rough year.

CNBC via MSN Video: Hedge fund blows $5 billion in one week.

NY Times: A Hedge Fund’s Loss Rattles Nerves.

CNBC via MSN Video: The man who lost $5 billion in one week.

CNBC via MSN Video: Mistakes at Amaranth.

This is the third hedge fund that I can recall that blew up this year due to bad commodity bets, the others being Ospraie Point Fund and MotherRock LP. In this case it was apparently a result of a bad bet on natural gas, which spiked up during the heat wave in the summer then turned around and plunged as the rest of the summer turned mild and no serious hurricanes threatened Gulf production. MotherRock also blew up due to natural gas, I believe they had been leaning bearish when the price shot up. In this case, the trader was playing spreads on natural gas futures, which turned on him. This has shades of the Long Term Capital Management situation, where they were also heavily concentrated, leveraged, and playing spreads between various fixed income instruments based on historical tendencies, which also turned on them.

I haven't recommended buying futures and options here for the simple reason that the volatility can be very intense, even for traders with years of experience, and when things go wrong money can disappear very, very quickly. Amaranth, according to the reports, had been up 22% for the year in August, and is now down something like 35%, which is a 57% turnaround in one month, with the worst damage suffered last week.

P.S. Brian Hunter - no relation.

Friday, September 15, 2006

What's missing from this chart?

Chart of the Day: Oil, Inflation Adjusted.

The greyed areas on this chart are recessions. Notice that when we had a large rise in oil prices in a short time (circa 1974, 1979, 1991, 2000), we generally encountered a recession shortly thereafter.

Will it be different this time? The rise this time came over 3 years, rather than in a short period, but this is also the second largest rise on the chart.

Also, one other thing to note: Most of these rises were followed by sharp breaks in oil prices as demand faltered.

Stay tuned..

Thursday, September 14, 2006

The real estate wildcard.

Why delve into real estate and mortgages on a blog about energy? Because the situation developing in real estate is a wildcard that can't be ignored in trying to figure out what could happen to the economy in the future.

The real estate boom of the past few years was really one for the ages. By various measures, real estate values got significantly above long term trend lines, particularly in hot areas like Florida, California, parts of the Northeast and Washington D.C. areas, and Las Vegas. Additionally, ostensibly to help people afford homes at these valuations, various forms of exotic adjustable and interest only mortgages were peddled and came into much wider use. Which makes you wonder: since fixed rates were so low during most of this period courtesy of the US Fed, why bother using these mortgage timebombs that ensure higher future payments? They were used because they made payments look affordable to people as they mostly focused on the early payments, not the potential for upward adjustments in the future. Now that people are seeing these adjustments upwards, often fairly significantly upwards, many of these mortgages are now causing people much grief, and in some cases pushing people into foreclosure as they find themselves unable to keep up with the payments.

As the articles below indicate, this is a growing issue, and will likely contribute to the cool off in housing. And an accident in housing will likely affect consumer psychology negatively.

Keep an eye on this story.

BusinessWeek: Nightmare Mortgages.

CNNMoney.com: Foreclosures spiked in August.

Courtesy of Calculated Risk, a blog I read for housing info:

USA Today: More fall behind on mortgages.

Wednesday, September 13, 2006

A plug for Google Reader.

Totally off topic, for those of you who read a lot of blogs, I highly recommend using Google Reader.

Clean, elegant, simple; I love it.

Sunday, September 10, 2006

Liz Ann Sonders explains her 50/50 odds of recession call.

As a follow up to this earlier post, here is an interview from Friday where Charles Schwab Chief Investment Strategist Liz Ann Sonders explains her call for 50/50 odds of recession.

I think this is a pretty logical call.

CNBC via MSN Video: Charles Schwab Liz Ann Sonders.

Saturday, September 02, 2006

ECRI: Premature to call a recession.

The Economic Cycle Research Institute, or ECRI, was one of the first outfits to identify the economic trouble brewing after the Internet bubble. They look at a variety of economic data, some of which is explained in the Bloomberg video below. Right now their indicators have broadly softened, but are not at a level suggesting a recession. [...yet. But we can keep an eye out and try to spot which way things are tilting.]

New York Times: A Forecast for a Fork in the Road.


At the Economic Cycle Research Institute, the forecasters have noticed that the last six months bear a striking resemblance to two different kinds of periods: the run-up to a gentle slowdown, like those of the mid-1980’s and mid-90’s, and the run-up to recession. In both situations, consumer expectations fall while interest rates and inventories rise, which has already begun to happen. But the two paths — slowdown and recession — historically diverge sometime after the six-month mark. Starting Friday, with the August employment report, we will begin to get a sense of which road we’re going to take.

Globe & Mail: Housing Reports a Bad Omen?


In a further sign of trouble, an index that foreshadows turning points in the U.S. economy suggests things will get worse before they get better. The Economic Cycle Research Institute's weekly leading index annualized growth rate fell to a 179-week low yesterday, its worst level in more than three years.

"The growth rate has been falling steadily since January," said Anirvan Banerji, director of research at the independent forecasting group, based in New York. "That suggests that as far as the eye can see, the U.S. economy will keep slowing, at least through early 2007."

Mr. Banerji said it is too early to tell if the index is pointing to an actual recession, but would not rule out that possibility. "We are certainly not seeing any indication of a revival in economic growth."

Bloomberg: Achuthan of Economic Cycle Calls Recession Fears `Premature'.