Market Commentary Part 2 (or Ball Watching)

I start with an analogy…I used to be a big fan of that TV show, Friends but toward the end of its run, I got really bored with the show and couldn’t have cared less when it came off the air.  And my least favorite character was Joey, so I had absolutely no interest when NBC tried to spin him off into his own show.  But lo and behold, after months of horrible, unfunny Joey commercials flooding the airwaves, I found myself still curious to see the show, almost literally against my will.  Such is the power of propoganda, in this case from Madison Ave.

I bring this up because of the current global financial crisis and the handwringing that has come with it.  It was very easy for me to ignore the financial pollyannas as the markets plunged when commodities & related stocks were riding high and my portfolio was up 18% earlier in the year.   As commodities have corrected and my portfolio comes down to earth, I find myself more receptive and more vulnerable, just like the NBC Joey commercials, to the talking heads who predict the dollar rally will continue or that oil will crash to $60 or that financials have bottomed, etc.  I’m sure many readers can relate.  It’s a very rare person who can stay completely emotionless in times like these with money on the line (and those people usually become professional gamblers or Warren Buffett).

So I’m not going to try to predict the market prices or where oil will bottom or which way the dollar is headed in the near-term.  Even the best get it wrong as I pointed out earlier that Marc Faber predicted the markets would hold July’s bottoms and instead, they fell through the floor.  In the last few months, I’ve been “ball-watching”, a phenomenon you see often in sports like soccer or basketball where players are so enthralled watching the ball that they fail to get into proper position to react to where the ball may go next.  In my case, I’ve allowed stock prices to factor too much into my thinking.  I think it may be a reaction of taking in too much WSJ, Barron’s, CNBC, Bloomberg, etc. and letting that fog penetrate my thinking, much as I resist.

So here is my position.  I don’t know for a fact that commodities and metals are manipulated by market powers.  But for my own safety, I operate as if they were.  After all, if I were the person pulling the strings, you’d better believe that I would be managing these prices as best I could — it’s the smart thing to do.  So oil may drop down to $60.  Who knows.  But fundamentally the big picture remains the same.  Conventional oil supplies are depleting faster than new sources can be discovered.  Unconventional supplies such as oil sands face too many constraints to do much to relieve the supply pressure.  Alternative energy technologies are decades away from even being close to viable and that’s assuming we get there because there’s a good chance we won’t get there.  So if oil drops to $60, I will not question how the market can be so stupid (hey, didn’t somebody buy Fannie, Freddie and Lehman stock?).  I will just silently thank the market gods to get my money in even if my stomach is lurching.

Last week, I added to my CHK position @ $39.55.  Talk about irrational — over 96% of Chesapeake’s 2008 natural gas production has been hedged around $10 per mcfe and over half of 2009 production is similarly hedged.  That means CHK cash flows are locked in and much of those paper hedging losses will reverse in coming quarters at these prices.  The nature of CHK’s shale wells combined with the flexibility afforded by their hedging program means rebalancing gas supply in the face of long-term lower prices is within management’s grasp as high drop-off rates in production of around 35% in the first year of wells makes it easy to restrict supply: just stop drilling new wells and the decline rate at the wells will take care of the rest.

I am also bullish on metals long-term.  Inventory stockpiles are not the same as finding new deposits and eventually, the global economy will resume its march to emerging growth.  But here, I may have to pay more attention to the companies.  For instance, Northgate Minerals (NXG which I, as of now, am long via my put position) looks really cheap on a cash flow basis but they have around $50 - $70M in illiquid ARS  holdings with Lehman Brothers so it’s not clear how that situation will resolve itself.  Even so, there are good companies available at attractive prices — I’ve added more exposure to Yamana Gold (AUY) and I tried to buy Freeport Copper & Gold (FCX) today at $65 and will keep trying, headlines be damned.

As always, YMMV so do your own research, hire a qualified financial advisor (if you can find a good one) & make your own decisions.

3 Responses to “Market Commentary Part 2 (or Ball Watching)”

  1. Jason Says:

    I share your confusion. As US institutions are being bailed out by the Feds, it makes little sense that there should be a rally in the dollar or in oil. The longer term fundamentals remain unchanged, at best. It’s not like China is consuming any *less* oil at lower prices.

    All I can presume is that there’s some kind of coordinated monetary policy among the central banks to temporarily prop up the dollar so as not to cause a broader infection of global markets.

  2. Jason Says:

    Oh, and I also loved Greenblatt’s “stock market genius” book.

  3. The Enlightened American » American Capital Ate Wheaties For Breakfast + Minefinders non-update Says:

    [...] Market Commentary Part 2 (or Ball Watching) [...]

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