Thursday, August 14, 2008

Markets Zig and Zag, They Don't Zig and Zig (part 223)

No dramatic market move lasts forever. Up, down, sideways, if the move is a steep one, the market will invariable overshoot, and when the change happens, it usually fakes you out of your shoes.

I hate to trade Nat Gas. I call it the "career ruiner". Nat Gas has taken more guys off the field in stretchers than any other commodity. It ain't even close.

Nat Gas is good stuff. Composed primarily of methane which contains olny 1 carbon atom per molecule, Nat Gas is much easier on the environment when compared to coal in BTU's.

Nat Gas ("NG") has gotten KILLED. Now I am one of those guys who thinks the market is always right, no matter how wrong you might think it is. I have been wanting to go long NG for weeks now, and had lost money long NG earlier in the year. But once bitten, twice shy as they say. And thankfully so, I would have lost money - again.

Inventories of NG are 15% below last year's inventory levels, even though the EIA reports that production is up 8% in 2008 over 2007. Now something is wrong with this picture. Not sure what it is, and if anybody out there has something intelligent to add, please email me directly. But when market's get this far into the Zig, the Zag is usually somewhere in the near future.

This is how I feel abuot Silver and Gold. I don't trade palladium or platinum, as the auto business is their big industrial market and you know how I feel about the future of automobile manufacturing. I have been bullish on the Metals for many years now. I have been getting email from folks asking me if the bull market in Silver and Gold is over. I guess with the recent correction (in the case of Silver collapse might be a better word) people think this is it.

I don't think so. The sell off in the CRB index has been brutal, with fund liquidation weighing heavily on the market.

So, if I am so smart, why didn't I see this coming?

Because it is not possible. If anybody saw this coming, then the market would have corrected earlier, when the folks that sold in July moved their sales up to June. Markets go down from selling pressure, not from talk. The sell off in precious metals was probably 1 standard deviation away from the mean price for the year. Pretty normal, unless you are long. Will there never again be a 1 standard deviation to upside away from the mean? Of course not. The question becomes, what will the mean be?

With the exception of Oil the other day, I have never called a bottom or a top on anything in this forum, and I am not willing to call one now in Gold and Silver. But we are close. Not the least of which is that Oil will put the bottom in for Gold and Silver.

So why would I own them now? Because the U.S. Oil import crisis is in full swing, and some of the smartest guys I know have a RELIGIOUS belief that "somehow" it will get fixed. Over the next 18 to 24 months, those guys are going to come to their senses, in my humble opinion, and rush to the other side of the boat. IF you want to be able to sell something to these guys as they pile into it, you gotta own it before that time. Before the masses see it. Before Wall Street's brokers see it.

Some of these guys argue that the trade is over for energy and the precious metals. These are the same guys that MISSED the trade over the past 5 years in Oil, Gold, Silver, Corn, etc... in the first place. Why would you listen to them now? Maybe you think it is their turn. If that is true, you should be buying the Financials, Fannie & Freddie, the Airlines, the Travel & Leisure sector, Homebuilders, etc... and shorting Oil and Gold. I think that would be suicide.

Individual investors are not very good at investing. Individual investors don't like to buy low and sell high. The like to buy high and sell never, buy high and sell low, buy low and ride it high but ride it all the way back down again in the proverbial round trip. Still, they expect their timing to be perfect, and when it isn't they punish themselves by refusing to look at the data, refusing to do their homework, their research. When they hear 2 opposing sides, they figure its a hung jury, or that both sides are idiots. This is a critical moment in the history of investing. This is the moment in time when you must really do the homework you never did, and REALLY understand if this Oil thing I speak of is true - or not. Because, if it is true, half meassures won't work.

For over 5 years folks in my camp have been saying that the U.S. faces a serious Oil import crisis, and in fact, the U.S. imports of Oil has declined 7.5% for the first 220 days of 2008 vs the same period in 2007. Folks in the media have a new mantra "demand destruction", and they got it exactly backwards. It is the supply that has gotten destroyed, and demand can NEVER exceed the supply. For now, this media mantra has had an effect on market particiapnts. However, I am convinced that the decline in Oil imports will continue next year and the year after and the year after, etc... from NOW ON. When the market comes to this conclusion, the effect will move heaven and earth. That does not mean we won't have sell offs and corrections - but the "trend is your friend". Disregard that old saying at your peril.

Especially in light of a 7.5% decline in U.S. Oil imports. (Just scroll down to the first page of Table 1 and look for "Total Net Imports.) Because, in my HUMBLE opinion, nothing else matters.

Mentatt (at) yahoo (d0t) com


Anonymous said...

(From the non-regulating, self-proclaimed oil expert bureaucrat):

I'm still not on board with this "you can't have demand exceed supply" thing. You CAN tap reserves (for a while), which allows demand to exceed supply, temporarily. And, be honest now, we really aren't 100% sure (maybe 95%) that there isn't another Prudhoe Bay out there somewhere. It's highly unlikely, yes, and it would also be more likely than not to be under the control of a national oil company (not an Exxon), but are we REAAAAALLY sure there isn't a field like that out there somewhere? If there is, the only holdup is the number of years to tap it and get the oil to market. If the pessimistic side of me had avoided the S&P 500 in 1989 (very bad year/S&L crisis) when I started work (and I stuck with the S&P 500 100%), I wouldn't have $300,000+ in my retirement accounts (now in U.S. bonds -- not much choice). Sometimes the sun does indeed rise.

Anonymous said...

(continued ...)

You also don't mention: the wild success of demand destruction (a 3% drop in U.S. miles traveled cutting oil prices by 20%!! Now that's a lever!). I myself am squeezing out so many wasted vehicle trips, and having fun trying to find ways to drop my thermostat. And, don't forget the inevitable transitioning to electrical transportation (true it is reliant on coal, N gas and nuclear since electricity is not an energy source, but an energy carrier), but it could work. The rich Mr. Jeffers needs some sunshine!! :)

Anonymous said...

Although I have been a sad and chastened investor recently with my round trip investment strategy I haven't lost the faith yet. The fundamentals are there for a much higher oil price. The markets do indeed gyrate but eventually they catch on to reality. When they do we should do all right. As far as the export bureaucrat's comment I don't share your optimism. Another Prudoe Bay would do NOTHING to affect the global supply/demand balance except at a margin. The mathematics of depletion are just so relentless that an additional 5-10 billion barrels stretched out over 10 years would not make a bit of difference.

Chuck H.

Greg T. Jeffers said...

There IS another Prudhoe Bay out there. And we will find it. So what. We consume 8 billion barrels per year, and the world nearly 31 billion barrels. We will find the equivalent of 1 prudhoe bay per year - 8 billion barrels. Just do the X and Y on that one.

Greg T. Jeffers said...
This comment has been removed by the author.
Greg T. Jeffers said...


I round tripped Corn, so I am not perfect. I am in shock over the price of Silver, but I am not ready to call a bottom for the precious metals. Once markets start going parabolic, up or down, they can really get over done.

You can't trade well as a "believer". If you are on a losing trade, you gotta get off.

Anonymous said...

(How about the North Sea? That one pumped 49 billion barrels compared to Prudhoe Bay, that pumped 13 billion barrels, and they opened about the same time. Make any difference?)

Anonymous said...

Regarding Silver... have you tried to buy any silver lately? There is none available. The last time silver dipped, most of the big silver outlets 'ran out'. This time the same thing happened. The dealer cut on the few silver coins available is more than 20% ($3+ per oz.) There is no limit to 'digital' silver, but in the real world it is scarce.

Is it possible that silver is the victim of naked short selling?

Greg T. Jeffers said...

Silver, in my opinion, is in a selling climax as we speak. We sold almost all of our silver, bought just two contracts yesterday, and took the loss on those to this afternoon.

I have NO EXPLANATION as to the behavior of Silver prices, which i really, really thought would break $22 by year end.

Historically, you buy metals ONLY when they are getting raped. This would qualify as one of those moments for Silver. Don't look for any quick comebacks in US$ terms, though. That just is not how things work.

There are a lot of things going on here, but don't believe that conspiracy bullshit. Commodities do this every so often. They kill and eat everybody around them.

The US$ rally IS not sustainable. That does not mean it can't beat your brains out before it ends. iF you own fully paid bullion, I would do nothing. If yo have cash, and you don't buy here, when would you?

If there is no oil import crisis, Silver could go under $10 pretty easily. The Silver bet is a bet on declines in Oil imports to the U.S. (if you are a US$ investor).

Good luck

Viv said...

I just don't understand it, why are silver and gold getting slaughtered when inflation is at a 17 year high (even with all the dodgy govt. accounting trying to keep a lid on it!) did some mega hedge fund go bust and liquidate all its silver positions or something???

what about the possibility of deflation, mish at global economic analysis is pretty adamant that the rest of the world is in a worse position than the US??

Anonymous said...

We seem to be inflating in some things (food, energy, health care) and deflating in others. I think Mish has a point.

Anonymous said...

"So, if I am so smart, why didn't I see this coming?"....ummmmm..could that be because you are not???????

Greg T. Jeffers said...

Nope, Not smart enough to see every move in the market's short term, but smart enough to admit when I am wrong so that I can cut my losses and make a living in the markets.

Oh, well.