Gas Takes Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Natural gas, the commodity, is having one of the most spectacular rallies of all times. It was up 11% yesterday alone. The near term contract hit a low of $2.40 and seems to be heading toward $4.00 (a low estimate of production costs). Even after the spectacular rally of the last few days, Natural gas futures are still in extreme contango. The October contract closed at 3.297 yesterday, while the February contract closed at 5.324. Actions of the commodities regulatory body, the CFTC, and its attempts to limit trading in the natural gas and oil markets have been responsible for natural gas's economically impossible behavior.

The CFTC drove oil ETF DXO out of business and is essentially trying to do the same with natural gas ETF UNG. UNG's price was artificially suppressed by actions of the CFTC and it has ceased to function according to any normal trading rules since this has taken place. An announcement from UNG that it would begin to issue shares on a restricted bases starting September 28th helped stoke yesterday's rally. By the beginning of the summer UNG owned 20% of futures contracts in the natural gas market and the big market players wanted the CFTC to crack down on it. Driving natural gas prices way down is also beneficial to the economy, so the government had a double motivation for interfering in the market.

An alternative ETF, GAZ, has been left alone by the CFTC and more closely reflects price action in the natural gas market. It's price movements are by no means ideal however. GAZ was up 4.5% yesterday, while UNG was up only 2.5%. Neither was up anywhere near 11%. The best performing Natural gas ETF was HZBBF (special thanks to New York Investing meetup member Kim L. for finding this obscure stock). It was up 19% yesterday. HZBBF seems to be the same as Canadian ETF HNU which represents two times natural gas (just as DXO did for oil), but it trades in the U.S. markets.

Natural gas is more subject to manipulation than other commodities because it is sold in regional markets. Unlike oil, it is hard to ship. Historically prices for natural gas are twice as much in Europe and Asia as in the U.S. Government attempts to control prices - and this is what the CFTC action represents - ALWAYS lead to shortages in the future. Natural gas will be no exception. Years from now we will look back and be amazed that natural gas was trading at $2.40 in 2009.

NEXT: Precious Metals Becoming More Precious

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Natural Gas Deconstructed

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

If you think logically, what is happening in the natural gas market will be difficult for you to understand. Markets actually always act rationally however, if you have all the facts available. When they don't seem to be doing so, it is because there is additional information that needs to be considered in order to fully understand what is taking place. In these circumstances you need to think about what could be taking place behind the scenes that could explain what is going on.

The natural gas storage report was released yesterday and it was bullish. Storage went up 52 BCFs and expectations were they would go up 55 BCFs. Natural gas has been declining for the last 11 days and is a heavily shorted market. So did it go up on bullish news? No, it sold off! The near term futures contract closed at $2.95. This in and of itself makes absolutely no sense and defies all rules in how markets operate. Even more surprising is that the cost of production for natural gas in the U.S. is somewhere around $4 to $5 depending on the source. It was already noted two months ago that 50% of U.S. gas wells had already been shut down because of low prices. Production should be close to collapse at this point.

The natural gas futures market is also in extreme contango (distant future prices much higher than the current futures contract), certainly the most extreme of any market in recent history. And the contango is getting even worse. The average price for natural gas futures between November and March is $5.32. Moreover, the oil/natural gas price ratio went over 24 yesterday. It peaked around 22 in 1990. This is also an historical extreme. When something gets way above (or below) its long term average, it invariably reverts back to the mean over time.

So who's making money off of this? This statement, which I found in an article for futures traders explains it all: "Traders on the future market are able to lock in the difference of over $2 per MMBTUs and cover their risk exposure by storing supplies until next winter." This is a particular boon to the large users of natural gas and these are the people profiting handsomely from the seemingly irrational behavior in the market. Furthermore, all of this has been made possible because of the CFTC (Commodity Futures Trading Commission), the government regulatory body which is supposed to be keeping the markets honest (and is doing as good a job as the proverbial fox guarding the hen house).

The CFTC announced in June they were planning on reigning in speculation in the market and have been holding hearings this summer. They specifically targeted the UNG ETF as a major source of speculation, even though it is a passive investment vehicle that only buys more natural gas futures in response to investor demand. UNG is also an investment vehicle used by small investors. Along with the SEC, which prevented UNG from issuing news shares for awhile and functioning as an ETF should, the CFTC has tried to cripple UNG's operations. This has allowed the big users of the commodity to drive near term natural gas prices to theoretically impossible levels - and make a killing. Like the SEC and its handling of $65 billion Ponzi Schemer Bernie Madoff (who was investigated several times over a many year period, but no dishonest behavior was ever found), the CFTC hears no evil and sees no evil when it comes to the big players.

As mentioned in yesterday's blog, there is an alternative to UNG. The ETN GAZ also represents the price of natural gas. While UNG lost 50 cents yesterday, GAZ was up 81 cents at one point, although it closed up only 16 cents. The trading volume on GAZ yesterday was enormous reaching almost 17 times the 200-day average. It looked like investors were dumping UNG to buy GAZ, which as an ETN is not affected by the CFTC's investigations. In theory, an ETF and ETN investing in the same commodity should move not only with the commodity, but by the same percentage amount. GAZ actually went up (and by a lot at one point) when natural gas futures were selling off and UNG was down. Just another indication that all rules of reality have temporarily been suspended in the natural gas market.

NEXT: U.S. Dollar, Stocks, Bernanke and Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Oil Up; Retail, Economy and Deficit Down

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Oil had a huge rally yesterday, going up more than 4% on a bullish storage report. It is still over $72 this morning. The oil/natural gas ratio is over 20 and is at the same high that it was in 1990 when it last peaked. There is about a 20 year cycle to this ratio and it should be falling for the next 10 years or so. We shall see. In the shorter term the natural gas storage report is out at 10:30 this morning (New York time). Natural gas can be bought either with the ETF UNG (which is being harassed by the regulatory authorities) or with the ETN GAZ. Natural gas futures are in extreme contango.

The stock market is trying to maintain its rally, which is supposedly dependent on the coming economic recovery. Sears Holdings, which released its Q2 earnings this morning, is going to be a drag on the rally today. The company lost 17 cents last quarter. Analysts expected a gain of 35 cents. Revenue fell 10.3% and was also below expectations. The company's credit rating, which was already in junk territory, was lowered further today by Moody's. Although the financial picture of this major retailer is nothing short of disastrous, the stock has risen 80% this year as of yesterday. At least it is down this morning. This company typifies the market rally - a huge rise in the midst of really bad fundamentals. Who would buy under such circumstances and why?

Weekly job claims also rose this morning to 576,000. This is still deep in recession territory. The rule of thumb for years has been weekly claims at or above 400,000 indicates the U.S. economy is in recession. A healthy economy has weekly claims around 300,000. The market had a good rally a couple of weeks ago when claims fell to 550,000. The "better numbers" were heralded in the press and claimed to be an indication of the waning recession. The press should have waited until claims fall and stay below 400,000 before publishing that story (but that would be responsible reporting, so of course that didn't happen). The press also never mentions that a large percentage of the U.S. workforce isn't eligible to collect unemployment, so when these people become unemployed they don't show up in the weekly claims figures.

The "good news" out this morning is that the Obama administration is predicting the federal budget deficit will be only $1.58 trillion this year. This is still almost 4 times bigger than the previous record budget deficit. Some contingency bailout funds for the big banks won't have to be spent (at least by September 30th of this year). Before you trust any numbers from the White House, consider that their argument for the current stimulus package was it would keep the unemployment rate at 8% or lower. Without it they claimed that unemployment could rise as high as 9%! So the stimulus package was passed early this year and so far unemployment has gotten as high as 9.5% - and that is with a lot of manipulation of the numbers to make them look better. You should assume that all the other numbers coming from the administration are just as reliable.

NEXT: Natural Gas Deconstructed

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Oil Gases Up; Bear Bites Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Week after week after week this spring the media reported a glut in U.S. oil supply. This blog and the New York Investing meetup had to debunk this view of the state of the energy markets more than once. The supply report today once again confirms that the only glut that existed was in the imagination of reporters working for the big media outlets. Storage was way below expectations across the board for oil, gasoline and distillates. This has yet to happen in natural gas, but the market is in super contango just as the oil was in January and early February of this year. Indirectly bullish for oil and natural gas going forward was Russia's announcement today that it is reducing its U.S. Treasury holdings.

Expectations for the EIA's storage report was for a drop of 500,000 barrels of oil and an increase of 750,000 barrels of gasoline and 1.5 million barrels of distillates. Instead, oil in storage fell by 4.4 million barrels, gasoline fell by 1.6 million barrels and distillates fell by 300,000 barrels. This is the third oil report in the last four weeks that indicated a large drop in storage. The oil markets barely moved on this incredibly bullish report, although light sweet crude has been trading today around 71, above the key resistance point of 70.80.

Unlike oil, which has been rallying since mid-February, natural gas has been in the doldrums and is the worst performing commodity this year. This may be changing soon. Natural gas futures are in super contango - the distance future contract are priced well above the near term contract. The July contract is currently priced around $3.80, but the December contract is priced above $6 or more than 60% higher. Oil had the same behavior just before it bottomed and then went up for four straight months. Pay attention to this.

Although it is not getting much play so far, the most important news to come out this morning is that Russia plans to reduce its U.S. Treasury holdings. Along with China, Japan, and the Gulf Oil States, Russia is one the 4 biggest foreign holders of U.S debt. Russia says that it is not selling its U.S. bonds, but will just not replace them when they mature (you should read this as: Russia refuses to buy any more worthless U.S. debt and help us fund our deficit, so we are going to have to print even more money than we were planning). While this may sound like a minor change, it could devastating for the U.S. Dollar. Once one of the major debt holders starts bailing, there could be a stampede for the exits. Did the dollar nosedive on the news? Of course not, it actually went up afterwards. We will have to see just how long central bank intervention can forestall the market's gravitational effects.

Our Video Related to this Blog:

NEXT: Disaster Stalks the Dollar

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.