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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