How to benefit from the depressing natural gas?

This is what I said last week: "Less companies will be willing to produce natural gas. Many of them will simply stop. Production of natural gas requires huge investment with money and equipments. If too many companies stop producing it for too long, it will eventually lead to a supply shortage. And it will take long time to get back the production capacity." Almost like the CEO of Chesapeake Energy (CHK) was taking my advice, they announced a few days ago that they would shut down the gas production by 50%. I'm pretty sure that more and more companies will follow the step, sooner or later. It means the supply of natural gas will be substantially reduced and eventually it will push up its price. Of course this will likely be a very long course. So is there a way to benefit from the depressing natural gas (NG)? Sure you can bet on it!

I talked about Westport (WPRT) on Sep 7, 2011. Westport is the direct beneficiary of the low NG price. It manufactures truck engines which run on NG. When the NG price substantially declines, it becomes more economic and cost-saving for companies to use trucks using NG. At today's NG price below $3, it is estimated that such trucks can save about $2 per gallon compared with using gasoline. This is huge saving for companies such as Walmart etc, which use tons of gasoline per day. So the trend is much clearer that more and more trucks-using companies will convert to use NG. Since I wrote about WPRT about 4 months ago, it has gained over 50%. I think it is a bit pricy at around $40 but if it ever declines to below $30, it will be very attractive for riding the long-term natural gas trend.

How much are you shareing the US debt?

Without any public attention, the US government debt ceiling has been increased by another $1.2 trillion. This not a small number; one trillion has twelve zeros behind one. So the total government debt has jumped to $16 trillion. How much is it? Very difficult to visualize the huge size of this number. It is just too big to think about. Let's make it simple. Suppose each person (7 billion of men, women and children) on the earth equally shares the debt, it mean everyone has the debt of $2300. If we are talking about the US persons only, then every one in the US will share $54000 debt now. Do you get the point? Will anyone with a right mind really think there is any way that the US government can ever pay back the debt? Don't be so stupid to even think about that! So what's the implication? Either the US government declares bankruptcy to wipe out the debt or it has to print the money to inflate away the debt. Almost for sure, the latter is the way to go. Looking around not only in the US but all the countries in the world, which one is not printing money? Even Switzerland is doing so. That's why gold has been appreciating 11 years straight and will 100% continue with the trend. Most important, gold is increasing its value against all the paper currencies. No exception!
Look the chart below for the past 5 years: gold has increased by 153%, compared with 7 major currencies (FXA-Austrialia, FXE-Euro, FXC-Canadian, FXY-Japan, FXF-Swiss, FXB-British, and UUP-US$). The best currency (Jap Yen) is only 1/3 of gold's growth. The US$? The worst performer in the past 5 years!

Expect a market crash

What a short memory for investors out there! Just 2+ months ago, you smelled extreme bearishness and no one wanted to buy stocks. In early Oct 2011, I said it was the time to buy stocks. One of the main reasons was that the volatility (VIX) was extremely high back then over 40. As I said, VIX should drop from that level as it was unsustainable at such a heightened level. For sure, VIX has come down quickly in the past 2 months, so fast that it has dropped below 20 now. I really did not expect this kind of speed. This means investors suddenly change their mood now and feel quite happy. So the volatility becomes lower and lower and the stocks keep going up. If you followed me to buy stocks, especially gold stocks back then, you should be very happy also. But I will be very surprised to see stocks go further higher from here without first experiencing some sort of crash.

Contrary to the extreme pessimism 2+ months ago, everyone has shifted to an extreme bullish sentiment nowadays. The weekly survey from the American Association of Individual Investors (AAII) showed that bullish sentiment increased from 47.2% to 48.4%. Accordingly bearish sentiment plummeted to 18.9% from 23.6%. This low bearishness has not been seen since 2006. What kind of extreme! No question, investors become very complacent again, having forgot all the pain already. Actually there is kind of panic out there that everyone is afraid of being left behind. So there is a high urgency for them to jump into the stock market whenever there is a dip. I think this is usually a contrarian indicator that a crash is coming. I bet it will happen in the next week or two. Of course, I'm not thinking this will be a huge crash but still will be significant. Actually I start to play with VXX again to bet it will jump up soon.

If you are itchy to buy stocks now, I will advise you to wait for a while.

The Fed is terrified!

No question in my mind that the Fed is terrified about the sluggish US economy! The Fed had announced last year that its near zero percent interest rate would be maintained at least till mid 2013. Today it went further by announcing that the extreme low interest rate would be kept at least till late 2014. Why? Because the US economy is really letting them down. Regardless how much money they have printed, they just cannot jump start the economy. They think the inflation is too low and they want to inflate. In other words, more money printing will continue. While it is extremely bad for the economy in the long run, it is great news for the stock markets as well as for precious metals. So you had a great rally today with almost everything. Gold jumped 2% up. This zero interest policy is also great for companies like Annaly (NLY). It will continue to enjoy the greatest interest spread to generate safe but thick dividends for investors.

Natural gas is crashing! Is there an opportunity?

Natty, the nickname for natural gas, is crashing. In the past year, its price was fluctuating around $4 or so, already very low from the historical perspective. But in the past 2 months, natty has droped to below $3, a over 30% decline. What a plunge! What happened? Well, the US was the major importer of natural gas in the past. However, in the past 10 years, due to new techniques being used which has totally changed the way of exploration and production, the US has become the No 1 producer of natty in the world. It is estimated that the current reserve will allow the US to use at least 100 years at the current consuming level. There is just too much natural gas in the US and there is no space at the moment to store natty. The much warmer weather this winter so far has also significantly depressed its demand. Two things will happend with the ever decreasing natty price:
- Less companies will be willing to produce natural gas. Many of them will simply stop. Production of natural gas requires huge investment with money and equipments. If too many companies stop producing it for too long, it will eventually lead to a supply shortage. And it will take long time to get back the production capacity.
- The use of natty will significantly increase. Right now, over 70% of the electricity in the US is produced by using coal. When the price of natural gas is so low, more and more power companies will switch to using natty to produce electricity, a more environment friendly way. In addition, more investment is being made to explore to produce natural gas powered cars and vehicles. Such activities will significantly increase its demand.

I think there is a huge opportunity for investing in companies involved in natural gas. But it is a long-term trend. Pay attention to Chesapeake Energy (CHK), which is the largest natural gas companies in the US. While its share price is plunging right now, it will be a great stock to own at some point to ride the super natural gas bull trend! I think similar to 11 years ago when no one wanted to own gold but it started its huge bull market non-stop, with which no any other assets can compete with, I don't think it will take too long for natty to start its own bull market. When it is started, it will be another gold.

Where will Euro go?

Apparently I'm not immediately correct about Euro and the US$. But I'm not sure I'm really wrong eventually. While Euro continues to be under some extreme pressure and the US$ seems to enjoy daily appreciation, I think people are just too much complacent about the US$ at the moment and inversely too much bearish about Euro. Don't get me wrong and think I'm bullish on Euro. As I said many times, Euro to me is a dead currency and I keep saying that Euro will be dissolved within 5 years. However, I do think in the very near term, there is a high likelihood that Euro will rebound from the current level around $1.27 before it resumes its downswing again. When all the people are dead bearish about Euro and bet for its going down, only a little bit not so bad news will trigger its rebound. I think we are at such an extreme now. I'm still short-term "bullish" about Euro.

By the way, S&P500 briefly touched 1300 today but almost immediately turned back again. I don't feel good about the stock market in the next few weeks. Maybe it will jump again to go beyond 1300, which will ultimately exhaust the bullishness. Then some significant correction will likely follow. Only the time will tell if this is the case.

Vertex, the next target for takeovers?

Today is Saturday, when I have some peace at home. So want to write something I was thinking about last week but not time to do so.
Not sure if you noticed last week about news that Bristol-Myers Squibb paid 163% premium to buy a small biotech company, Inhibitex. The price tag was $2.5B! Unbelievably, isn't? Inhibitex instantly jumped about that much, more than doubling its share price. I wish I had foreseen this and bought Inhibitex. Haha...

Why would BMS like to pay that much for a small company that has no drugs even close to the market? A Hepatitis C drug! Inhibitex's lead product is INX-189, an oral hepatitis C drug in Phase II or mid-stage development. Anyone who knows the drug development understands how much risk this deal is. The failure of phase II drugs is rather higher and regulatory hurdles to overcome are quite daunting, especially when there are already 2 successful drugs on the market for this disease. Actually this is not the only deal for Hepatitis C drug recently. In Nov 2011, Gilead Sciences made a $11 billion acquisition of Pharmasset Inc , which has its own promising hepatitis C therapies in development. The deal was an 89 percent premium.

Such kind of incredibly expensive acquisitions indicate that big pharmas are really interested in this drug market. It is estimated that the total market value for hepatitis C drugs is around $50B and it is just the beginning with only 2 novel drugs marketed thus far. One of them is made by Vertex, a better one of the two.

I talked about Vertex in Aug last year. Back then, Vertex had already dropped by 30% at around $45. I said it could decline further. Yes, it did, not immune to the overall bear market late last year. As it stands now, it is trading in $30s. I think it has plummeted over 50% since its peak after the approval of its Hep C drug. At this level, I think it is really attractive. Not only I think it will be doing well with the Hep C drug, I also think there is a good chance Vertex may be taken over by some big pharma. Think about it. It is a huge market and big pharmas have already paid a super price tag for other biotechs with Hep C drugs that are not even close to be marketed. Vertex has already got a very good drug in the market, which will likely be the standard of care for future new drugs in the regulatory approval process. In other words, any new drug will need to show that it is statistically better in efficacy with a reasonable safety profile. The hurdle is much higher for them. I already saw some reports speculated that J&J or Merck or Abbott could be the interesting takeovers for Vertex. While it is a pure speculation, I won't be surprised to see if this happens.
Here is my game plan. If the overall market indeed corrects as I'm expecting in the next few weeks, I hope Vertex will decline as well with it. If so, I will be seriously considering to add positions for it.