Category Archives: Market Status

I give a weekly status update based on the market.

Market: Busy, UNG, Intel, AMD, Ugh

I haven’t been blogging because I am doing some “expert witness type” consulting for a legal firm, which of course, I can’t discuss.  So currently writing a report that will keep me swamped for the next several weeks.  So, this is just a quick entry on multiple topics, and presumes you’ve read some of my previous posts.

Ugh.  One of Abraham Lincoln’s most favorite quotes: “You can fool some of the people all the time, and all of the people some of the time, but you cannot fool all of the people all the time.”  Obviously, he wasn’t familiar with modern day political marketing, which operates on the philosophy, “you can fool enough of the people most of the time.”  The Faux Noise channel provides a running example of this.  Kudlow on CNBC is another.

UNG.  Spot Natural gas prices dropped to a $1.88/MMBtu on Friday.  It had been speculated that if it got below $2, some operators would turn off the supply.  I guess they did, because the spot price soared to $2.55 yesterday.  The October futures contract, which is what UNG owns, is at $2.82.    In the next few weeks, these 2 will get close in price.  As of the close on Monday, UNG is selling at a 19% premium over NAV. From September 12th through the 15th, UNG will sell all its October futures contracts, and buy the November ones.  The November futures contract is currently at $3.86.  UNG investors should read page 16 of the UNG prospectus on the dangers of investing in UNG when there is significant contango in the futures market, and then do the math.  The best short play, in my opinion, is to sell slightly in-the-money calls using the October and January contracts.  This is what I have done, and added to my position yesterday.

Intel. Intel announced its Lynnfield version of its Nehalem microprocessor.  For a thorough review check out http://www.anandtech.com/cpuchipsets/showdoc.aspx?i=3634.  But this announcement was expected.  The net result is a new low price for a Nehalem – about an $80 price drop.  Also, with the new platform architecture of Lynnfield, motherboard prices will also come down $50.  So more pricing pressure on  AMD.  As the price difference between DDR3 and DD2 memory drops, expect a little more price pressure on AMD.  Mobile Lynnfield processors are supposed to be announced later this month (according to various reports at the tech websites).  Intel’s IDF is also this month.  I am long Intel.

AMD. I have previously recommended a buy on this a couple of weeks ago.  2 events caused the stock to be up a lot yesterday: (1) the weekend news of Abu Dhabi buying Chartered Semi; and, (2) Barclays coming out with an overweight recommendation on AMD yesterday.  According to various web stories, AMD is supposed to have 2 key product launches this month: (1) 40nm DX11 graphics chips; and, (2) a new mobile processor and platform. As mentioned previously, I bought AMD on Aug. 17th.  I added a little to my position yesterday, at $4.58.  I do not recommend AMD at its current price.  Also, I view my long position as a short-term trade, at this point.  By February, if not sooner, I will be out of my position.  And, if it gets too high, I might turn into a short in December or January (way too many great Intel products launching in January timeframe (32nm Nehalems, Nehalem-EX, Moorestown) that will make life difficult for AMD in 2010).  As also previously mentioned, I am long AMD’s 2012 convertible, which I expect to hold until it matures.

nVidia.  As I have written previously, I am short.  And, this has been a losing position.  But I still like it as a hedge to my Intel and AMD longs.  The rationale for my short has been previously explained.  But like I said then, I could be way too early on this short.

Lowry. Lowry’s intermediate indicator has been at a Buy since August 4th.  The short-term one has been at a Sell since August 31st.  I remain cautious.

Market: UNG, Update on NAV, Futures, Premium, and Spot Prices

This is just an update on the Natural Gas ETF (UNG), and assumes that you understand the basics which I described last week, see Market: UNG, What you need to know.

Over the last week (8/21 to 8/28), the spot price of Natural Gas (Henry Hub) dropped from $2.80/MMBtu to  $2.50, the October futures contract dropped from $3.22 to $3.03, UNG’s stock price dropped from $11.35 to $11.13, and UNG’s NAV dropped from $9.94 to $9.35.

So UNG is now selling at a 19% premium over its NAV [(11.13-9.35)/9.35)], vs. 14% a week ago.

Over the next 3 weeks, the price of the October futures contract (which is what UNG holds) will get within a few cents of the spot price – on August 21st, the September contract was just $0.02 above the spot price.  I’ll assume 3 cents for mid-September.  So, if the spot price moves from $2.50 to $3.00 (i.e. over the next 3 weeks), the October futures price remains unchanged, and UNG’s NAV also will remain unchanged.  On the other hand, if the October futures contract drops to 3 cents above the current spot price (i.e. to $2.53), UNG’s NAV will drop from $9.35 to $7.81.  If UNG gets out of its regulatory box with the CFTC (possible, but unlikely to happen over the next 3 weeks), UNG’s market price will align with its NAV.

Over the long-term, a natural gas price of $2.50 is not sustainable.  However, over the short term, next 2 months, it is a different story.  In the DOE’s weekly storage report (Thursday, 10:30AM), the amount of Natural Gas in storage (3,258 Bcf) is way above the 5-year historical range for this time of year.   The record amount in storage was on Nov. 2, 2007, at 3,545 Bcf.  Friday’s Bloomberg article (Natural Gas to Fall as Weak Demand Bolsters Supply): “Supplies may reach 3.9 trillion cubic feet, which would be near U.S. storage capacity, according to Energy Department data.” Because it is cooler in September and October, these are months when significant amounts of gas are put in storage.

Also, here are a few quotes from DOE’s Natural Gas Weekly Update. “At 3,258 Bcf, working gas stocks are about 7 weeks ahead of the normal fill rate, exceeding the 5-year average (2004-2008) level of 3,242 Bcf for October 9.”  “Warmer-than-normal temperatures in most of the Census Divisions in the lower 48 States during the week ended August 20, 2009, likely contributed to the below-normal level of injections into storage. Based on the National Weather Service’s degree-day data, temperatures in the lower 48 States during the week were, on average, more than 2 degrees warmer than normal and 3 degrees warmer than last year’s levels.”

So, given the supply/demand and storage situation, it is difficult to make a bullish case for the Natural Gas spot price over the next 2 months.  Perhaps, the only thing that could change the equation would be a major hurricane in the Gulf, and we are just now entering prime hurricane season.  Currently, there are no near term threats (National Hurricane Center).  A more likely situation is a piling into UNG stock to reach an ungodly premium to NAV (i.e. similar to what happened to AIG, FNM, and FRE over the last week).

Disclosure:  I am short straddles on UNG (September and October).  But I am short ~4X more calls than Puts.  In other words, I am hoping that UNG stays below ~$12/shr, and below $11/shr would be somewhat better.  But below $8, not good.

Market: Spinnin’ Wheel

Lyrics from the song: “What goes up must come down, Spinnin’ wheel got to go ’round“.  This week, reverse it.

What a bizarre week in the market.  After being down more than 2% on Monday, the next 4 days were up, and the market closed up 2+% for the week.

Lowry was equally bizarre.  After Monday (which  was a 90% down day), Lowry’s conventional short-term signal went to a Sell.  And, then after Friday (a 90% up day), it went to a Buy.  But note that the intermediate term indicator (which investors should pay the most attention to) still remains at a Buy.  So, Lowry’s short-term sell on Monday was bogus.  So, is Lowry’s short-term Buy after Friday’s close also bogus?  We will see.

On Monday, the down day, I was buying – mostly in the names that I have previously mentioned.

One new one for me this week was AMD.  But I view this as more of a short-term investment.  I think that if you look at all quarters in 2009 and 2010, 4Q2009 has the potential of being AMD’s best quarter.  I expect that GAAP EPS will still be a loss, but come in better than analysts are currently expecting.  Currently, 2/3 of my AMD stock long is hedged by being short the Jan4 calls.  Warning: I may be early and wrong in this strategy.  Both Intel and AMD will be making significant announcements in September, and Intel’s are the stronger ones.  And, AMD has taken on considerable risk with multiple different die on a still ramping 45nm process technology (Shanghai, Istanbul, Athlon II X2, and Propus) – forecasting the right mix for Q4 is challenging (given mfg throughput times, ~3 months).  So, this is a very speculative short-term investment.  However, if AMD screws up in Q4, Intel and its stock would benefit.  Since I have a long position in Intel and my position in Intel is much larger than in AMD, that’s OK.  Again, a long investment in AMD at this time is highly speculative.  (Note: as previously mentioned, I have been long AMD’s August 2012 convertible since June.  And, I have previously discussed the bullish case for owning Intel.)

On Friday, the market was up a lot – a new recovery high.  I am still nervous, and worry about a short-term correction of 5+%.  Also, historically, September is the worst performing month of the year.  So, on Friday, I took out some insurance.  I bought a Put spread on SPY (S&P500 ETF) using the Sep100 and Sep95 for ~$1/shr.  I am hoping that this is a total loss (i.e. market goes up between now and mid-Sep).  But if the market does go down, I will have some protection.

Market: UNG, What you need to know

Natural Gas on Friday (August 21, 2009) closed at ~$2.80/MMBtu – a 7-year low.  If we assume that the price will rise to $5 my mid-November of this year, is UNG (the Natural Gas Fund ETF) a good way to play this increase?  Here are the key things to consider:

  1. What does the UNG fund contain?  Does it own Natural Gas?  No.  Instead it invests in future contracts and swaps on the NYMEX and ICE exchanges.  On August 11th, it owned the September contracts.  The September contracts terminate on August 26th.  As specified in UNG’s prospectus, it rolls its contracts 2 weeks before termination, over a 4-day period.  This means that for the 4-days starting August 12th, it sold its September contracts and bought October contracts.  Currently, NatGas future contracts are under severe contango, i.e. the farther out in time you go, the higher the price.  The October price for NatGas is $0.42/MMBtu higher than the September price (which is just $0.02 above the spot price, of $2.78). So, the current spot price needs to rise about ~14% to equal the current price of the October NatGas contract, which closed on Friday at $3.22/MMBtu.  In a month from now, UNG will have to sell its October contracts and buy November ones.  At that time the spot price will be about the same as the October contract price.  If we assume that the spot price moves up to $3.22, NatGas is up $0.42, but UNG has not benefited from this, since the October Futures contract has not moved, by our assumption.   Is this an isolated occurrence?  Will this happen every month over the next 3 months?  Look at the future prices: http://www.nymex.com/ng_fut_cso.aspx.  Today (Aug 22, 2009), the December price is ~$5.02/MMBtu.
  2. UNG is in a regulatory box.  Before July, as the demand for UNG shares increased, UNG’s managers created more UNG shares, and to back them up, they bought more natural gas future contracts and swaps.  They did this to keep the price of the shares reflective of the underlying value of the natural gas investments (futures and swaps).  If UNG shares traded below the underlying value of the investments, the managers would go into the market and buy back UNG shares (and thereby reduce the outstanding share count), and at the same time sell some of their contracts and swaps.  But in early July, UNG hit their maximum share count, 347.4M.  They filed to expand this by 1 billion shares, and got permission by the SEC to do so a couple of weeks ago.  However, since the CFTC is thinking about imposing restrictions on funds like UNG (because they are neither a consumer nor producer of NatGas), UNG is not creating new shares.  In fact, the CFTC may impose restrictions that could force UNG to either resort to offshore trading vehicles or to liquidate the fund.
  3. There is a difference between UNG’s market price and its underlying value (NAV, or net asset value).  Because of the low price of NatGas, many stock investors have been buying UNG.  But because the UNG mgt is not creating more shares, the market price of UNG ($11.35) now differs from the value of its current investments, i.e. its NAV, which is $9.94.  Every day UNG management posts its NAV (http://www.unitedstatesnaturalgasfund.com/ung_holdings.asp).  So UNG is currently selling at a 14% premium over NAV.  Should the CFTC allow UNG to continue its strategy (or if UNG can switch to an offshore less regulated exchange, or if UNG management decides to liquidate the fund), then the NAV and market price will align.  In this case, UNG longs will suffer a ~12% loss, as the market price drops to NAV.
  4. There is a huge supply of NatGas.  This could be a long and complex discourse, and quite frankly I don’t fully understand the complete picture.  But I do get the Storage situation.  For this, simply look at the gov’t/DOE data:  http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html.  Pay particular attention to the chart.   Or more simply, there is far more NatGas in storage than in any August in the last 5 years.  For a simplistic commentary on this: http://www.nytimes.com/2009/08/21/business/energy-environment/21gas.html.

Bottom line.  I am bullish on the Natural Gas Prices over the long-term, but bearish on UNG.

Disclosure:  I am short straddles on UNG (September and October).  But I am short ~3X more calls than puts.  In other words, I am hoping that UNG stays below ~$13/shr, but above ~$9/shr.  I would prefer to simply short the stock, but cannot get the shares from Fidelity (even though the short-interest isn’t high – just ~12M shares vs. 347M outstanding).

Market: The Pause That Refreshes?

The stock market had a small correction – down about 0.6%.  Lowry is still bullish on the intermediate term: “current signs of weakness appear largely short-term in nature, while longer term, the rally appears to be showing signs of renewed strength.”

I am still a bit cautious, but did cover some shorts and did some selective buying, eg including the names that I mentioned last week.

Two ideas this week.  One deals with an ETF that I mentioned last week, TBT, which moves in the same direction as the yield on long-term US Treasury bonds, and uses about 2-1 leverage.  If you think as I do that yields will move up over the next few years, it makes an interesting long-term investment.  The yields have moved down over the last week -  4.6% to 4.4% for the 30-year.  And TBT went from 53.7 to 50.29.  RYJUX is a way to invest in the same way, without leverage.  But TBT has options, and RYJUX does not.  So this opens up a way to invest in TBT with short-term strategies.  A simple way is to sell Puts.  For example, the current price of the TBT Dec51 Puts are 4.50/shr.  The strike price is 51 and the exercise date is December 19th.  If the stock closes on December 18th (a Friday) below $51/shr, your Put will be exercised and you will be buying TBT for $51/shr.  However, when you sold the Put, you got $4.50/shr, so your actual cost is $46.50/shr.  If TBT closes above $51, the Put is worthless, and you have made $4.50/shr.  But unlike buying the shares outright, your upside is limited to $4.50/shr.  Of course, there is a lot of varieties to this strategy, e.g. other months (August, September, January, March), and many other strike prices.  Also, once you have sold the Put, you can always buy it back at any time before expiration.  Disclosure: I’ve mainly been selling straddles in TBT (which is a lot more complex to explain).

Second idea this week is NLY (Annaly Capital Management).  NLY is a Mortgage REIT.  “REIT” (real-estate investment trust) implies it pays out 90% of its earnings as dividends, and that the dividends are not eligible for the 15% special dividend tax – they are taxed as regular income.  So, if possible buy NLY in an IRA.

NLY invests in Mortgage-Backed-Securities (MBSes), and uses ~6-to-1 leverage, eg for each $1 cash, it borrows $5 (short-term) and buys $6 worth of MBSes (long-term).

These are the important parts of their last quarterly report (key parts in bold):

At June 30, 2009, the weighted average yield on assets was 4.67% and the weighted average cost of funds, including the effect of interest rate swaps, was 2.54%, which resulted in an interest rate spread of 2.13%. Leverage at June 30, 2009, was 5.9:1 compared to 7.1:1 at June 30, 2008, and 6.0:1 at March 31, 2009.

Fixed-rate securities comprised 69% of the Company’s portfolio at June 30, 2009. The balance of the portfolio was comprised of 25% adjustable-rate mortgages and 6% LIBOR floating-rate collateralized mortgage obligations. At June 30, 2009, the Company had entered into interest rate swaps with a notional amount of $19.8 billion, or 31% of the portfolio. The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company’s cost of funds. Since the Company receives a floating rate on the notional amount of the swaps, the effect of the swaps is to lock in a spread relative to the cost of financing. As of June 30, 2009, all of the Company’s Investment Securities were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an actual or implied “AAA” rating.

. . .Our swap book, which provides the bulk of the floating rate exposure in our portfolio, continues to roll into lower rates and thereby lower our cost of funds. After taking into account the effect of interest rate swaps, at June 30, 2009, our portfolio of Investment Securities was comprised of 37% floating-rate, 25% adjustable-rate and 38% fixed-rate assets.”

So, they have “safe” MBSes – excellent.  38% of their portfolio is exposed to a rise in short-term interest rates.  When this happens in a significant way, earnings will decrease, and with that dividends.  How much, I don’t know.  However, even if the dividend rate were to drop by 33% (which has <25% probability, in my view), say 2 years from now, that would still be OK.

Mark-to-Market accounting could make their earnings look strange (as mortgage interest rates rise, the value of their fixed-rate MBSes will go down).  But this should not effect the dividend.

As a very long-term investment (more than 2 years), you have to be cautious with NLY.  It is possible that the US could enter a period of very high interest rates (comparable to the late 1970’s), and this would be bad for NLY.  So this bears monitoring.  But for the next 2 years this stock, with its dividend should do well.  Disclosure: I am long NLY.  Initial position was about 1 year ago, and I added to it this past week.

In some sense, an investment in TBT or RYJUX hedges an investment in NLY.  As all interest rates rise, the NLY dividend (and possibly, its stock price) could go down, but TBT and RYJUX would rise.

Market: Natural Gas, Investment, Manipulation, or Both? Part 2

On July 12th, I posted this entry, Market: Natural Gas, Investment, Manipulation, or Both? This post assumes that you have read that one, or are already knowledgeable about UNG, the Natural Gas ETF.

UNG now has permission (from the SEC) to issue more shares (up to 1 Billion).  However, they are concerned that the CFTC will not allow the fund to invest in the futures and swaps that make up the fund’s holdings (see Bloomberg story: Gas Fund Stops New Offerings on Regulatory Concern).  Normally, the fund would buy or sell shares (and the futures/swaps underlying the shares) so that the market value of UNG stock accurately reflects its NAV (net asset value of the future and swap contracts that it is holding).

However, since the fund is not issuing more shares and the demand for UNG has been increasing, the market value is no longer tracking NAV.  On Friday, UNG closed at $12.49/share, and its NAV is $11.22/shr (see http://www.unitedstatesnaturalgasfund.com/ung_holdings.asp).  So it is selling at a 11% premium.

So perhaps the smart guys are shorting UNG, and buying the underlying future/swap contracts.  But the smarter guys could be doing the opposite to force this discrepancy even higher and create a short squeeze.  But the smartest guys could be doing,  . . . .  No idea.  But it will be interesting to watch.

But there is more to this story.

It’s that time of the month again.  The September Nat Gas contracts terminate on August 26, which means on August 12th, the UNG fund started its 4-day process of selling its September contracts and buying October ones.  Last month I wondered whether this process would create distortions in the natural gas market because of the huge amount of contracts UNG holds.  But it went smoothly last month, and the 1st 2 days are going smoothly this month.

The spot price of NatGas is currently $3.24/MMBtu, which is also equal to the September Nat Gas futures contract.  But the October contract is  $3.64 – a 12% premium.  So, if NatGas spot prices stay the same over the next month, the NAV of UNG will actually decline 12%.  And, if UNG gets permission to sell more shares so that the market price gets in line with NAV, tack on an additional 10% decline.

On July 12th, NatGas spot prices were $3.37, and UNG’s NAV was $12.13/shr (and a market price of $12.30).  So since then, NatGas prices have declined 3.85%.  UNG’s NAV has declined 7.5%.

And, there is one other tidbit to consider: Options expiration on Friday, August 21st.  The open interest in UNG options is fairly high.  Specifically there are about ~32,000 in the money calls (strikes 9-12) and ~121,000 in the money puts (strikes 13-18).  To get this in share counts, multiply by 100.  The open interest in just out of the money contracts is also interesting:  91,000 in the Aug12 puts and 66,000 in the Aug13 calls.  On Friday, option volume in the August contract was ~28,000 in calls and ~11,000 in puts.  So will these option positions and volume affect UNG this week?  Possibly.  Which way?  No idea.

Disclosure: I do not have a position in UNG.  But I am short various straddles.  The position is complex to describe, but I’ll give you a rough estimate of the effect of UNG on my August position.  I make the most money if UNG closes between 12 and 13 (it is currently 12.49) on Friday.  The trade will still be profitable if UNG closes between ~11 and ~14.  Outside of that range, I lose.

Market: An august August?

If you prefer some lighter reading, check out my 2 previous blog posts today (labeled OTOH, which stands for “On the other hand”).

This week the market took a bit of a breather – up ~1% (S&P500), after its 11% surge in the preceding 10 trading days.  Normally, I would view this action as bullish – a more significant correction after such a surge is more typical; thus, a sideways move often suggests a further move to the upside.  However, since this was also the last week, in an up month, it is also normal to expect end-of-the-month buying (aka window-dressing) by investment funds.  So, we shouldn’t read too much into last week’s action.

The bullish case.  The increasing consensus is that the recession is over, i.e. GDP will be positive for both Q3 and Q4.  Since the March lows, the percentage of cash in mutual funds has actually increased.  Also, the percentage of assets in money-market funds (relative to stock market value) is still  higher than it was at the 2002 bottom.  So there is plenty of fuel to support the bullish case.

The bearish case.  Even if this is a new bull market, we have come too far, too fast.  A correction is due.  Also, even if are out of recession, attention is likely to turn to the nature of recovery.  We have excess capacity, and unemployment is continuing to increase and not expected to peak (at 10-11%) until 1 year from now.  Although the previous recession ended in Nov-2001, both the stock market and employment did not hit their lows until a year later.  Our financial system is still in a precarious state: (1) the worst of the commercial real-estate loan losses and credit card losses are still in our future; and, (2) the European banks are in far worse shape than the ours (i.e. they are more levered, and have not come to terms with their emerging market loans).   We also have long-term systemic problems (current account and fiscal deficits, unfunded federal, state, and local pension/healthcare liabilities, etc) that seem insurmountable.  A good discussion on some the intermediate-term and long-term issues and outlook is in this week’s Mauldin.  There is a guest column this week, by Tony Boeckh and Rob Boeckh, The Great Reflation Experiment (click it to get the PDF).

I am neither a bull nor bear on the stock market.  I have a mixture of longs and shorts, plus a high-percentage of bonds, and more in cash than is typcial.

There was no change this week in the Lowry indicators.  The short-term indicators are at Buys.  The intermediate-term indicator is at a Sell, and it moved a little farther away than last week from switching to a buy.  Selling pressure is now 7 points away from generating a Buy (vs. 2 points a week ago).  Various other technical indicators that Lowry follows are also more positive now.  So the Lowry commentary is more positive than previously.