Jumpin’ jack-*#^% from the gas, gas, gas …

Jump to Comments

… to paraphrase the hook line from the Rolling Stones’ song “Jumping Jack Flash”.

Gasoline futures are up 10% in the past three days and my investment in refiner Frontier Oil (NYSE: FTO) is up … wait for it … 2.3%!  Yessir, they’re going to have to pay me some big bucks soon for that kind of performance.

 Bending, but not breaking – stirred, not shaken - is how I’d categorize the portfolio’s performance at this point.  (See Portfolio at 17 May (-5.72%) under “My Portfolio” in the right hand column).  Down 5.7% is not all that terrible considering the short ETF’s have been leaning into the headwind of a runaway market.  (Called that one dead-wrong.)

All of the energy investments are now positive, with Encana (NYSE & TSE: ECA) up almost 12%.  However, as in all things in life, there is no free lunch.  Because energy prices have started to move again, the currency traders, in a fit of deep analysis (i.e commodities = Canada), have all stampeded back into the Canadian dollar, pretty-much wiping out my energy gains.  Wrong when I’m right … How messed up is that?

The weighting of the portfolio is 42.6% energy and gold, 41.1% short ETFs, 15.1% alternative energy, and a smidgeon of petty-cash.  The reason the portfolio is stagnant is that the two scenarios for which it is positioned have yet to unfold – (1) higher energy prices through the summer, and (2) a market pullback at some point.

A small profit-taking breather is almost certain for the market very soon, but a significant correction in the near term? – not necessarily.  I’m astounded at how much stock is being taken out of the market by acquisitions (particularly by ”private equity”) and stock buy-backs.  Most of the beneficiaries of this activity are institutions, who by mandate will have to re-invest the money somewhere.  (I hope to hell it all goes into oil stocks.)

Longer-term, all this private equity stuff is unsettling, on two counts.  First of all, the massive amount of junk debt being created is going to come back to bite someone’s big institutional ass down the road (not to mention the companies themselves).  Secondly, private companies don’t have to adhere to SEC or public scrutiny.  So you now have a whole crop of huge, highly-leveraged companies ripe to be run into the ground by a bunch of guys who can do pretty-much what they want.  Employees take note. (Hint: Enron).  For now, everybody’s partying.

My last post talked about the perils of concept investing.  Well, it looks like part of my “alternative energy” investing is turning into “alternative profitability”.  Investors seem to have pulled the plug on Plug power (NASDAQ:  PLUG), and it is now down 15%.  Luckily I managed to dodge the 50% haircut that Distributed Energy Systems Corp. (NASDAQ: DESC) took the week before last (see previous post).  It’s not all bad though, I have much more of Northland Power Income Fund (TSX: NPI.UN), and that’s up 5.5% and also yielding 8%, distributed monthly.

Oil and gas looks very positive at the moment.  Natural gas and crude prices, although down from last year, have held steady at historically high levels and are pushing higher again.  Gasoline is going nuts.  At these prices the companies are all still making big money.  Credo Petroluem (NASDAQ: CRED) and Precision Drilling (NYSE: PDS) now, and Encana and Frontier Oil fairly recently, were picked up by the MSN Money value screen I use to short-list high-growth, high cash-flow stocks.   (See the post “The stock screen that picked three takeovers”.)  While the Dow is hitting new highs, these things actually look like bargains.

As mentioned, the price of gasoline is soaring.  Supplies are tight, and the price will be volatile both up and down over the summer.  The main culprit is the condition of North American refineries.  They should be running at 95% capacity to meet summer driving demand,  but currently are only at 85%.  The reason is shutdowns due to maintenance problems.  (Buy duct-tape stocks.)  These refineries are aging and are increasingly susceptible to breakdowns; no new ones have been built for quite some time now.  Actually, the thing holding back Frontier Oil may be the upcoming one-month maintenance shutdown it recently announced.  The lost revenue would be a drag on next quarter’s earnings, as Frontier has only two refineries.

Oil may be fickle.  It seems comfortable for now in the $60’s.  What would most likely drive it higher is some geo-political event or a really serious draw-down on gasoline supplies, and the possibility of that is keeping a floor under the price.  If the US, and then global, economy turns down (there are increasing signs of that), then eventually oil prices will come down as well from lower demand.  But that probably won’t happen before the second half of the year at the earliest.

Natural gas is interesting.  If you look at the weekly chart, the price is bumping up against a long, flat ceiling of about $8. If it breaks through that, hang on to your hat for a gallop.  The main drivers for that would be air conditioning use during summer heat waves, and hurricanes that threaten energy infrastructure in the Gulf of Mexico.  My Credo Petroleum and Encana holdings – both predominantly natural gas producers – should do well by that.

That’s the immediate scenario.  Longer-term, the peak-oil and climate change issues will drive energy prices progressively higher and/or create great growth opportunities in the fledgling renewable energy industry (which is ultimately where I would like to get to).

Gold is in a bit of a funk.  It can’t decide whether to go up because higher energy prices are inflationary, or down because a cooling economy would be de-flationary.  So it’s just tagging along with the Euro saying “I’ll follow you.”  My Goldcorp (NYSE: GG) holding is down 15% as a result, although I’m not that worried. Goldcorp’s ridiculously low $150 per-ounce cost of production leaves net- $500 an ounce to play with at current prices, the production is un-hedged, and 70% of revenues come from ”politically safe” NAFTA countries. (If Dick Cheney shoots someone else – all bets are off on the last point.)

Be careful about using gold stocks to hedge against a market decline – gold stocks will go down as well unless inflation is making front-page headlines.  If you think the market is going down, buy short ETFs instead.  Here’s a list.

So then, feel free to buy expensive jewelry, take lots of Sunday drives, turn up the air-conditioning full-blast, and warn everyone who will listen about the impending stock market crash. 

Cheers,
Allocator

1 Comment

Filed under Dow Jones, Stock Market, asset allocation, charts, commodities, currencies, economy, futures, inverse ETF, investing, investments, investor, leveraged ETF, portfolio management, renewable energy, shares, short ETF, stocks