Big Winners During Fiasco Week

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Some very unusual suspects.

It was a week to remember for stocks. The Dow and S&P 500 dropped about 6% and the Nasdaq 7.3%. It came after a Santa Rally that had turned into a figment of Wall-Street hype. The week was even worse in China and in some markets in Europe. It was a week that many people around the world wish never happened.

To make money being long in equities, you’d have to be in something like infrared-camera maker FLIR Systems, which jumped 7.9% for the week, almost all of it on Tuesday after Goldman Sachs upgraded the company from neutral to buy.

Bonds did what they’re supposed to do when stocks swoon, though they’ve failed to live up their reputation many times recently, having gone down in lockstep with stocks. But not this time: 10-year Treasuries rose as did high-grade corporates. Even junk bonds hung in there. Clearly, the drama queens were in equities.

And there were some BIG winners in unusual places.

In the commodities sector, all kinds of things went down the tubes – but not everything. Crude oil plunged, with WTI down 11.3% for the week. Wednesday evening it traded with a $32-handle, the lowest price since December 23, 2008, when it briefly kissed $30.28 a barrel before jumping to $36 a barrel after Christmas. This time, it didn’t jump. It ended the week at $32.88.

You’d think, given this whiff of mayhem, that US natural gas would have experienced a similar fate. But no.

In electronic trading on the NYMEX, natural gas jumped 6% during the week to $2.48 per million Btu, capping a strong three-week rally off the ludicrously low $1.77 per million Btu on December 17, a price not seen since the 1990s. A three-week bounce of 40%!

I’ve been bullish about natural gas and bearish about natural-gas drillers (hang on, I’ll explain that seeming contradiction in a moment) since early 2012. With, let’s say, mixed results. At the time, natural gas was trading below $2 per MM Btu, hammered down since 2008 by the fracking boom and the glut it engendered.

My theory at the time? Our over-indebted, junk-rated natural-gas drillers were bleeding cash from their natural gas activities. They needed to borrow all the time just to keep going and service their existing debts. Given the ruinously low price of natural gas, they would soon face investors and banks unwilling to extend more credit.

Defaults and bankruptcies would hit the industry by 2013. They’d be forced to curtail drilling because they’d run out of money, and eventually production would decline. Meanwhile, cheap natural gas would increasingly replace coal for power generation. It would attract industrial and chemical companies. Transportation uses would increase. Demand would rise.

Tightening supplies and growing demand would eat up the glut. But the industry, now shriveled down and starved for money, could not ramp up quickly enough. The media would be full of stories about the soaring price of natural gas. There’d be articles on importing expensive LNG to meet winter demand. And we’d be in the middle of one of those infamous natural gas spikes.

I was right about every part except the most important one: the money. Thanks to QE3, ZIRP, and Wall Street hype, money kept flowing into the industry which drilled it into the ground, and production kept rising despite the low price.

So what I thought would happen in 2013 has started to happen in 2015: defaults and bankruptcies among natural gas drillers. Yet the glut persists. Production has been leveling off but barely. The winter has been relatively warm. Now the industry is sitting on record inventories for this time of the year. And there is likely to be a lot more pain.

Natural gas has taught me a lesson about how long pricing absurdities can persist and how much capital destruction they can cause when the cost of money is nearly zero. But over the last three weeks, with a 40% gain, natural gas has been THE big winner.

Other commodities weren’t so lucky. Copper dropped 5.2% for the week. Palladium plunged 12%.

But wait…Gold gained 4.1% for the week, and silver 1.4%.

Silver was my first money-losing investment in the early 1980s. I’d done all the right things: I’d waited till it had plunged a whole bunch before buying, and I’d bought physical. Two years later, I sold at a 50% loss. After that, it kept dropping for years, interrupted by vicious sucker rallies. And today, at $13.93, silver is about back were I’d bought it over 30 years ago!

Silver and gold are trades that exist on a time scale that exceeds my patience. Though there are numerous reasons to hang on to physical gold and silver, I no longer bet on the direction of their prices. But they did have a good week.

And there’s another “investment” – that’s what most people use it for – that did well during this brutal week: Bitcoin. It rose 5% for the week to $452.70. Oh wait…. it has doubled since October! It may be useless as a currency, given this sort of crazy volatility, but it sure can be a lot of fun to play with.

But how bad really was the swoon in stocks? In the overall scheme of things, it was just a dip, and there’s a lot of air underneath Friday’s close. Read… How Could Stock Markets Croak Like This First Thing in 2016?

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  16 comments for “Big Winners During Fiasco Week

  1. Sgt Milstar
    January 10, 2016 at 11:19 am

    Could it be related to this –

    Historic First: North Atlantic EMPTY of Cargo Ships in-transit – ALL anchored along coasts; none moving


    • OutLookingIn
      January 10, 2016 at 1:22 pm

      Sgt – great link, thank you.

      Rail car loadings have fallen on their face.
      Big rig truck freight has hit the ditch.
      Available crude oil storage has almost reached saturation point.
      The VLCC’s (very large crude carriers) lease rates are way up, because producers/speculators are using them as floating storage.
      The BDI (Baltic Dry) has fallen 96% in the past 74 months.

      World trade has come to almost a standstill. Recovery??? Not much!

      • Sgt Milstar
        January 11, 2016 at 4:27 pm

        My son-in-law is a truck driver for a small independent outfit. Loads are getting smaller and shipping volume has dropped. He is lucky to get three loads a week. He used to have 4 to 5 loads a week.

    • d
      January 11, 2016 at 1:21 am

      Interesting graphic.

      The number of other “Hysterical’ articles on that article page, lead me to question accuracy and balance as I am still seeing shipping movements in our Backwater/low volume, shipping region.

      In conflict with the graphic.

      The article screams about the fish pond that is the north Atlantic, but makes no mention of the North/south pacific which shows the same.

      Further it shows no shipping in Kagoshima bay, which is totally incorrect. As that’s one of the places where a lot of vessels idle.

    • Curious Cat
      January 12, 2016 at 5:11 pm

      I had wondered a little about that information because the site was a little suspect to say the least. Turns out that one of Wolf’s “Favorite Reads” has debunked that claim. See here.

  2. Petunia
    January 10, 2016 at 12:42 pm

    In the early 90’s I thought the mortgage derivative bomb would go off within 5 years. It lasted another 15. It taught me the same lesson you learned, craziness is forever.

    The people in power will keep the schemes going until they can’t. There will be no fixes to the system, only recoveries from one disaster to the next.

  3. Bobster
    January 10, 2016 at 2:41 pm

    Prechter noted that natural gas has the most volatile pricing of any commodity.

  4. NY Geezer
    January 10, 2016 at 4:05 pm

    I agree re US natural gas.

    The commodity price of US natural gas bottomed at $1.68 in late 2015 and should enjoy a multi-year price increase. It was indeed darkest before the dawn for this commodity.

  5. robt
    January 10, 2016 at 11:47 pm

    Nat Gas has to be the trade to drive you crazy. Play the bull via HNU.TO leveraged ETF for the last 7 years and 30,000 dollars has become 16 dollars. Play the bear with inverse ETF HND.TO and 2 dollars has become 15. Not an inverse result as you may expect, and with major drama in between. Nat Gas, the widowmaker. I used to be a moderately high roller on NG, but no matter how much you study it, or follow it minute by minute, or a longer time frame, nothing ever seems to make sense. Even some of the big kids in the heart of the action have been wiped out.
    Play the seasonals on NG for the last 6 months? Exactly opposite to ‘expected’ seasonal patterns and no, the weather doesn’t matter. Actually it seems like the only time the seasonals don’t work is when you play them. If you don’t play them, they work.
    After 4 years on the hate list, and with possible large amounts of smart exit-the-market money (the nice name is distribution-completion) heading into a relatively tiny miner’s market, gold and silver and especially their shares just may be due for a shot. When miners are down up to 95% there is a lot of upside possibility.

    • Jason
      January 11, 2016 at 11:40 am

      I would have to believe the power plants here in Cali may dictate ng prices also. If that’s true, then summertime would also play in.
      I’ve seen how much ng gets sucked up by the turbines they use…

  6. night-train
    January 11, 2016 at 4:48 am

    Another opinion on natural gas from one who saw the lows of late 80s – early 90s “gas bubble” as we called it then. As I have stated before, high gas prices encourage exploration and development, as one would expect. The good news, or bad news, based on one’s perspective, is that there is a lot of gas to be found. Geologically, it is found in conventional, shale, and coalbed methane plays. In short, price increases at the wellhead spurs exploration, which in turn increases supply. And increased supply, well, here we go again.

  7. B Tilles
    January 11, 2016 at 8:25 am

    Regarding natural gas prices, the expected spate of somewhat cold, seasonal weather in the Northeast is also a factor in its recent price rise. If the weather here,in NYC, turns warm again look for a retest of the lows.

  8. Yoshua
    January 11, 2016 at 9:36 am

    What’s wrong with you investors ? All this analyzing. Just roll the dice !

  9. SRV
    January 11, 2016 at 1:57 pm

    Sorry Wolf, Gold (and Silver to a lesser extent) are not commodities… but has been “financialized” on the COMEX to effect price management policy.

    In fact, gold is traded in USDs in Forex markets… but it’s apparently something not discussed in polite circles lest we upset Mr Global and Friends.

    • January 11, 2016 at 4:00 pm

      Agree. And I didn’t call them commodities. But I definitely see how you can connect the two paragraphs and read it as such. Sloppy writing :-]

  10. chris Hauser
    January 11, 2016 at 5:57 pm

    once gas starts flowing, it tends to flow upward, being gaseous. the price is a function of how much can be used or stored. if it can’t be used or stored, you just turn the valve.

    it took this long for someone to figure out the dollar strength has something to do with the price of oil?

    not that i had any idea. bravo morgan stanley.

    my dollar can buy 40% more of canada than two years ago. yow.

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