Weekend Edition
The Best of The S&A Digest
January 9, 2010
 What are the big trades for 2010? We have two ideas...
First, we think natural gas bottomed last year and will continue a new bull market this year. Relative to oil, we think natural gas is still cheap (though not as cheap as last year, when we called the bottom).
And while vast new quantities of natural gas are coming on line, power companies are switching a large number of coal-fired power plants to natural gas. As demand for electricity rebounds this year, demand for natural gas will grow faster than expected – fast enough to push prices back to more than $10 per thousand cubic feet (mcf). Powering demand for electricity will be a surprising rebound in global economic growth.
This leads to our second main prediction for 2010: much higher interest rates. We are bullish on the economy for 2010. And we are bearish on government debt of nearly every stripe, but particularly on the fixed-rate, long-dated debt of the world's largest debtor – the United States of America.
The global economy is going to boom this year, powered by soaring money supply and robust public sector deficit spending. Over the next few years, the world is going to relearn a very painful lesson about paper money and public finance.
In short, paper money is inherently unstable because paper systems don't restrain lending or spending with savings. When reserves can be printed, why bother with the pain of saving money? Untethered by any market discipline, sooner or later every paper system collapses under the weight of its accumulated debts and the resulting inflation.
Likewise, when a political system (like ours) promises voters more in benefits than it collects in taxes... trouble is only a matter of time. Combining the two systems – a democracy with a heavily progressive income tax and a paper money monetary system – is a recipe for a massive financial collapse. And make no mistake, that's exactly where we are heading.
The French know a thing or two about real money. It was the French who first demanded gold from the U.S. Treasury rather than paper, forcing Nixon to close the gold window – temporarily, he said at the time.
So in the face of all of the monetary uncertainty, it's interesting to see the big French oil company, Total, buying up a huge amount of U.S. natural gas. Total announced a $2.25 billion deal with Oklahoma's Chesapeake Energy. Both Total and Chesapeake shares gained on the news. Total will pay $800 million in cash for a 25% stake in Chesapeake's Barnett Shale assets. It will pay an additional $1.45 billion to help fund 60% of Chesapeake's drilling and completion expenses in the area.
The Barnett Shale is the most productive gas field in the U.S. It provided 52% of Chesapeake's third-quarter output. The deal will provide Total with additional production of around 175 million cubic feet of natural gas per day – 30,000 barrels of oil equivalent. That number should grow to more than 250 million cubic feet per day. Royal Dutch Shell and BP, the two largest European oil companies, have already acquired reserves from two of Chesapeake's other fields.
These Big Oil companies are buying gas for one reason – oil is getting more expensive to find and develop. It's more cost effective to buy cheap natural gas reserves. Gas still trades for less than $6 per mcf, down about 70% from its 2008 highs. And the oil-to-natural gas ratio is currently around 14, down from a 2009 high of around 25 (when natural gas was trading for less than $3 per mcf).
From a reader: "It's easy for you to say 'we called it' on natural gas when you have so many writers on your staff and one or two happen to discuss the subject, but I don't believe any of your writers were crazy bullish..."
Well, I said it several times this fall in The Digest... but my most complete "buy natty gas now" analysis was published on September 11, 2009, in my newsletter, PSIA:
Right now, nobody wants natural gas. The current record-low valuation of natural gas as compared to oil tells you market participants have come to believe natural gas will never be valued at par with oil again. That's impossible, of course, because as the price of a commodity falls – especially one as useful as natural gas – consumption rises.... And using a gold ratio chart, we can also see natural gas has probably never been cheaper.
These factors lead me to believe we are approaching a once-in-a-decade opportunity in natural gas. It's worth watching closely. And I know every great investor in the world is doing the same thing. I know because I've spoken to a handful of them about natural gas. I know because legendary investors have been buying lots of natural gas-related stocks.
Finally, I've been in the markets long enough to know, when you see an anomaly like this, it's going to attract a lot of capital... At some point in the next year or two, lots of people are going to make a killing in natural gas. I want you to be one of them... From a valuation perspective, there's no doubt in my mind it is time to buy natural gas.
I went on to recommend buying a small natural gas drilling firm that was trading for about 20% of book value. We doubled our money right out of the gate and ended up stopping out for about a 50% gain.
In my latest issue, out yesterday, I recommended a play I think will do even better in the coming natural gas boom. It's a super-safe gas stock yielding almost 8%. I expect 100% returns in the next 18 months. To learn more about PSIA, click here.
Regards,
S&A Research
Stansberry & Associates produces the daily S&A Digest, which comes free with a subscription to one of our premium products. To learn more about a risk-free trial subscription click here. |
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S&P 500 |
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Zions Bancorporation |
ZION |
+30.01% |
Marshall & Ilsley |
MI |
+24.22% |
Lennar |
LEN |
+21.06% |
Countries |
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Russia |
RSX |
+6.44% |
Indonesia |
IF |
+6.00% |
Israel |
ISL |
+5.94% |
Sectors |
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Homebuilding |
ITB |
+7.99% |
Oil Services |
PXJ |
+7.19% |
Gambling |
BJK |
+7.08% |
Commodities |
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Silver |
- |
+8.90% |
Lead |
- |
+6.83% |
Coffee |
- |
+4.38% |
S&P 500 |
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GameStop |
GME |
-6.75% |
Abercrombie & Fitch |
ANF |
-6.26% |
Expedia |
EXPE |
-4.90% |
Countries |
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Switzerland |
SWZ |
-0.26% |
Germany |
EWG |
+1.47% |
Thailand |
TTF |
+1.79% |
Sectors |
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Utilities |
XLU |
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Food |
PBJ |
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Internet |
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Commodities |
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Cotton |
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Source: Bloomberg, Yahoo, StockCharts, XLQ 12/31–1/7.
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