09
Jan

Wrap – Week Ended 1/7/11

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Holdings Watch: Closed trades last week:

  • GMXR – Sold the GMXR Feb $6 calls for $0.55 with the stock just over $6, up 51%. I continue to own a small position in the common in the ZLT. 
  • HAL – Sold the $40 strike calls taken yesterday, for $0.60, up 61%, with the stock at $39.  

Positions in the ZIM and ZLT will be updated by the time of the release of the Monday post. 

Weekend Mailbag:

Why is this not the same point in time as July 2008? Before the financial collapse, there was a severe rotation out of the energy sector. Fighting that trend was very costly.why is this not the same scenario? ~ Ram

 

My response:

  • The broad market peaked in October 2007. 
  • The XOI peaked in May 2008, with the gassier XNG peaking in June 2008
  • All energy commodities had been running up hard YTD at mid year. 
    • Oil was $145.29 on July 3, 2008 and was up 56% YTD then
    • NG was $13.58 and was up 72% year to date
  • Energy stocks, unlike most other sectors, were still working for investors at the mid year point, especially the gassy ones, and while the S&P was already down 14% on the year by 7/3/08, the XNG was up a whopping 25%. 
  • So the broad market had already been in decline for 9 months when the uncertain conditions in the financials (when credit defaults swaps, sub prime mortgages, and large financial institution stability) came to the fore.  
  • Job losses were accelerating. 
  • In Energy Land,
    • mid 2008 forward valuations did not appear stretched due to the high forward strip.
    • contrasted to now where they are somewhat fullish (between the mid point and the upper end of the range)
    • Commodity prices then, again, were very high.
    • There was no thought to limiting flush production from the shales nor to cutting rig counts. Both are happening now. 
    • Prices now for:
      • natural gas are near the 10 year low;
      • oil is elevated from the lows but not that high when you consider mounting per capita demand in the 2nd and 3rd world and recovering demand in the U.S. 

 

  • Nutshell: The level uncertainty that existed then was much higher than the current environment. Not just about the economy but about the ability of the financial markets to function. I'm not saying things won't be bumpy along the way but I do not see the kind of rapid drop in commodities or the commodity tied equities that we saw back in the back half of 2008 and early 2009. Correction overdue? Probably but the medium and long term fundamentals for both natural gas and oil prices point to stability with charts generally moving up and to the right over time. Oil has been moving up over the last several months and is ahead of itself in the near term relative to inventories and demand and as I've often stated, anything over $90, at this point is more dangerous than beneficial to the equities. I do expect a move on $100 in the first half before pulling back and then gradually heading back towards that level by year end.  For my oilier names this is much less important that simply keeping prices above $75 and growing production.  Natural gas should play a bit of "catch up" over the next two years as the switch to liquids-rich drilling in the States, a deceleration of shale focused gas drilling as leases enter HBP status by the mid point of this year, a recovery in the domestic industrial economy, and continued and accelerating international LNG demand all come together to boost prices.  

 

3 Responses to “Wrap – Week Ended 1/7/11”

  1. 1
    zman Says:

    Snowing nicely now, interns in the office tomorrow. 

  2. 2
    zman Says:

    Crude up a buck fifty as transalaska pipeline remains shut for full day after north slope leak. Normally transports 630 to 650,000 bopd.

  3. 3
    ram Says:

    Thank you Zman. I hope the large fund investors are as smart as you are and will support energy equities.

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