The first was an unprecedented $41 billion liquefied natural gas (LNG) deal with Australia, which was announced last week. The deal calls for PetroChina Co. Ltd. (NYSE: PTR) – Asia’s largest oil and gas company – to buy 2.25 million tons per year of liquefied natural gas (LNG) from the Gorgon field in Western Australia over a period of 20 years.

It is the largest deal ever brokered between the two nations.

The Gorgon field has yet to be developed but is considered to be a key global resource and an economic boon for Australia.

“The Gorgon Project is globally and nationally significant with a resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years from the time of start-up,” said Chevron Australia Managing Director, Roy Krzywosinski.

“Furthermore, the Gorgon Project is Australia’s largest single resource project and is set to deliver significant economic benefits and create around 10,000 indirect and direct jobs during peak construction.”

Chevron Corp. (NYSE: CVX) owns and operates 50% of the field.

Yet this is just one of the mega-deals signed between China and Australia. China was Australia’s second largest merchandise trade partner in 2008 with two-way trade of $56.3 billion (A$67.74 billion). Australian exports to China grew 37% in 2008 from the previous year to $27 billion (A$32.48 billion) and comprised chiefly of raw and lightly processed farm, mineral and energy products.

“China needs us, we need China,” said Australian Trade Minister Simon Crean.

Of course, China’s demand for natural gas and other resources is growing so fast that it needs more than Australia.  That’s why the Red Dragon recently signed a $5.6 billion deal with a consortium of energy companies operating off the coast of Myanmar.

The consortium, led by South Korea’s Daewoo International Corp., will supply China National United Oil Corp. (CNUOC) with 500 million cubic feet of natural gas a year from 2013 to 2043. The supply, which will come from Myanmar’s A-1 and A-3 offshore blocks, amounts to about 7% of China’s current gas consumption, Reuters reported.

The consortium – which also includes India’s Oil and Natural Gas Corp., Myanmar Oil & Gas Enterprise, India’s GAIL Ltd., and Korea Gas Corp. – will invest a total of $5.6 billion in the project and be responsible for production and offshore pipeline transportation.

Land transportation will be jointly managed with CNUOC. The two parties also plan to build oil and gas pipelines through Myanmar and into China’s southwestern Yunnan province, Reuters reported.

Few Western countries, or Western companies do business with Myanmar, which has been heavily criticized for its human rights violations. The military junta that controls the country is considered one of the most repressive and brutal regimes in the world today. Forced labor, child labor, human trafficking, and instances of sexual abuse are widespread.

However, China, which has itself been a target among human rights watchdogs, chooses to overlook these discretions, preferring instead to focus on Myanmar’s resources. And in its defense, China is rightly concerned about securing enough raw materials to support its booming economy and a population of about 1.3 billion people.

Natural gas, for instance, accounts for just 3% of China’s total energy needs, but its use is expected to grow rapidly as energy demand increases. China currently consumes about 7.3 billion cubic feet per day, but that is expected to grow at a 10% compound annual rate to 18 billion cubic feet per day by 2020, according to Bernstein Research.

And China is doing the right thing by securing long-term supplies of natural gas now, while prices are low and supplies are high. It’s taken similar action with other commodities over the past year, stocking up on large amounts oil, copper, and iron ore as prices swooned.

China Gases Up While Prices Are Low

Natural gas prices yesterday (Thursday) fell to levels not seen since 2002 after the U.S. Energy Department said the amount of gas in storage hit a record high for this time of year.

Natural gas stockpiles rose by 52 billion cubic feet to about 3.2 trillion cubic feet in the week ended Aug. 21 –21% above year ago levels. Levels are now so high that some experts believe the United States will run out of storage capacity before winter begins.

“We have never been here before in terms of what to expect when storage gets this high,” Aubrey K. McClendon, Chief Executive Officer of Chesapeake Energy Corp. (NYSE: CHK), told the New York Times. “It’s like a balloon; there comes a point where you can’t blow any more air into it.”

Natural gas prices tumbled more than 6% to $2.725 per 1,000 cubic feet of gas on the New York Mercantile Exchange (NYMEX), a price not seen since Aug. 7 2002, The Associated Press reported.

However, now that gas prices have tumbled roughly 80% from last year’s high above $13, some investors believe the market is bottoming out – or at the very least, significantly below its fair value.

Chesapeake Energy stock has risen nearly 8% in the past month, despite plunging prices and mounting inventories. Devon Energy Corp. (NYSE: DVN) is up about a 5.5%.

“The perception is that gas has finally gotten to its lowest point, so people are buying exploration and production stocks,” Marshall Adkins, energy analyst at Raymond James Financial Inc. (NYSE: RJF), told Reuters.

However, Adkins does not expect a rebound to come any time soon. His firm expects natural gas prices to fall below $2.50 per thousand cubic feet in the months ahead as an inventory overhang overshadows gas’ attractive price.

Still, there’s good reason to believe gas prices will have a strong rally in early 2010. To begin with, gas companies are slashing production exploration in dramatic fashion.

Newfield Exploration Company, for instance, has announced the plans to voluntarily curtail about 2.5 billion of cubic feet equivalent of gas of its third quarter of 2009 production in response to the recent lull in prices.

U.S. producers have cut the number of rigs drilling for new gas by more than half since Sept. 2008. Oil-services company Baker Hughes Inc. (NYSE: BHI) recently reported that 688 gas rigs were active in the United States, down about 56% from one year ago.

“We think the decline curve for production will be fairly steep because of the big drop in drilling,” Rich Howard, manager of the Prospector Capital Appreciation fund, told CNNMoney.

Source: China Landing Natural Gas Deals as Prices Plummet

The gap between the crude and natural gas markets continues to expand. The world is concerned with having too little of the former and too much of the latter.

As I write, front-month natural gas futures are selling at a level we have not seen since August of 2002 (when the equities market was claiming a low of its own), just $2.93 per million BTUs.

The contract price has fallen by more than 6% during today’s session.

It is certainly not good news for domestic companies that worked overtime to expand their drilling range during the bullish run we saw over the past several years.

Pennsylvania, West Virginia, Ohio and New York all saw companies like Chesapeake Energy (NYSE:CHK) and Andarko (NYSE:APC) knocking on the door of property owners, willing to sign big checks to get their hands on mineral rights.

But now that the nation’s economy has ground to a halt and gas prices have fallen off a cliff, producers are wondering what in the world they were thinking. All they can do is shut down the drills and close the valves.

The further natural gas futures fall, the more output will be stricken from the market. It is a race to see which side of the equation can reach equilibrium first.

The tide is turning

If you have been following this site throughout the summer, you know I have remained bullish on natural gas. And if you are a TFN Strategic Trader subscriber, you know I have made several recommendations in kind.

Judging by today’s headlines, I am not alone.

According to the Financial Times, an unnamed hedge fund has spent millions to gobble up extremely bullish natural gas options with expirations later this winter. Specifically, the fund bought contracts with $10 strike prices that expire in January and February.

That means the fund is showing its confidence that natural gas prices will more than triple in the coming months. If it happens, or comes anywhere close to happening, the mysterious hedge fund stands to rake in tens of millions of dollars.

If it doesn’t happen, of course, and the situation gets even worse, the mysterious fund could lose everything.

So why would anybody make such a move?

Several reasons. First, even if natural gas prices do not hit the $10 strike price, the options could surge above last week’s trading price of $0.056 with even a slight short-term spike in prices or bullish speculation.

A four-percent turnaround in gas prices in the near future could lead to a triple-digit gain for the fund. That’s the beauty of options.

Beside an all-out speculative play, the firm could be hedging its book with the move. After already making a slew of cash playing the downside, this could be its plan to help ensure it keeps those gains even if prices make a quick turnaround.

The bullish argument for gas prices is an easy one to make. As natural gas prices and demand have plummeted over the last year, producers have cut their production. They have cancelled plans for new exploration and have slowed their development of new wells.

Eventually, the current market oversupply will turn into a shortage. When it happens, which very well could be this winter, prices will surge until equilibrium is met in the opposite direction.

Whenever the market’s pendulum swings this far, its momentum will carry it to the extremes of both sides.

Now is the time to enter natural gas plays, when nobody else wants to do it. The easiest way to make the move is to check out TFN Strategic Trader’s portfolio. There is more than enough in there to get you drooling.

Source: Taking a Big Bet on Natural Gas

It must feel good to be part of OPEC these days. Now that the threat of $30 per oil is clearly in the past, the oil cartel is regaining some of the power it so quickly lost last fall.

The group of oil producers continues to claim $75 per barrel is its target price for crude, calling it “fair” for everybody involved. Who is to debate what is arguably the most powerful group of countries on the planet?

What OPEC wants, it gets. What are the alternatives? Wind, solar, tides? Doubt it.

As an oil-burning American with a propensity to drop a few Franklins into the gas tank on a weekend adventure, the thought of oil climbing to the cartel’s target range is frightening.

But as an investor, I welcome it with arms wide open. Bring on the profits.

One oil-industry company worth taking a look at is Devon Energy (NYSE:DVN), a $28 billion producer that is up by close to 5% today. The action is merely a continuation of a 50% surge over the last 90 days.

Profit while nobody is looking

In case you have not peered into the energy sector today, oil prices are surging on word that American supply inventories took a stronger-than-expected dip over the last week, with crude levels plunging by 5.4 million barrels. Most analysts were expecting a reading of just a 700,000-barrel decline.

Today’s report is proof the nation’s crude consumption is far more extensive than the doom-and-gloom predictions we saw in March. The news gives OPEC all the reasons it needs to sit on its hands and wait for the revenues to come rolling it.

The cartel’s decision to keep production quotas at current levels was not enough to hold prices down. As I write, a barrel is trading for just over $65.

The pricing action will remain bullish as the global economy recovers and starts slurping oil at a record pace once again. Even better for the bulls, the further the dollar drops, the higher the greenback-denominated commodity will soar.

Companies like Devon Energy, Marathon Oil (NYSE:MRO) and Chesapeake Energy (NYSE:CHK) will be strong benefactors as the markets fix their recent oil-industry miscalculations.

As long as crude prices stay below the demand-zapping level of $80 per barrel, I am extremely bullish on the industry. Look for some of the year’s strongest profits to come from companies like those mentioned above.

Of course, Hot Stock Confidential readers are well aware of my favorite energy-industry pick. Its shares have tacked on just about another 5% so far today.

With moves like these, it is hard to tell there is a “green” revolution trying to take place.

Source: Oil at $65: A Glimpse of What’s to Come

That is, the price of oil was high enough that people were beginning to change their usage habits, but the price wasn’t bad enough to break the banks (so to speak). The worldwide pace of well drilling was strong, but not unsustainable with the existing fleets of onshore and offshore rigs. Meanwhile, across the world, the oil patches were booming.

What a difference a year makes. By about March last year, the price of oil began to spike upward. Eventually, in July 2008, it reached $147 per barrel. And then the price broke. Oil prices slid down into the $100s by Labor Day. Between late September and late December, prices dropped as low as $33 per barrel. Now in January 2009, oil is hovering around the low $40s per barrel, $100 less than back in July, only six months ago.

We had a wild ride in 2008. And I believe 2009 will give us some new shocks. First, we are seeing significant companies in the domestic gas drilling business, like Chesapeake Energy (NYSE:CHK), scaling back their drilling programs. And we’re seeing eye-popping fourth-quarter losses from key industry players like Conoco-Phillips (NYSE:COP) (lost $31.2 billion in the last quarter) and Shell (lost $2.8 billion in the last quarter). We will see more reports like that, of operating losses, diminishing reserves, reduced earnings, write-downs and even some shotgun weddings (if not bankruptcies). Remember how Congress spent much of last year licking its collective chops over how it was going to tax those horrible so-called “windfall profits” of the oil firms? Well, not anymore, eh?

Also, watch how fast the drilling and oil service industry decelerates. Oil companies that lose money also scale back their capital expenditures. Conoco-Phillips and Occidental are cutting back. We’re seeing layoffs in key parts of the oil service sector. Companies like Schlumberger, Halliburton and Baker Hughes have announced personnel cutbacks just in the past week. And Rowan, a large offshore driller, is canceling new rigs. Across the oil patch, the hiring boom of the past couple of years has halted, while the average age of the current work force just gets older by the day.

With less drilling going on, we will soon start to see tighter output for both oil and natural gas. In Russia, oil output decreased by a seemingly small — but telling — 1% toward the end of 2008. You can expect a larger drop from Russia for 2009. Mexican oil output dropped by about 10% in 2008, and is on track to drop even more in 2009. According to figures recently published by the International Energy Agency, about 58% of world oil output comes from just 800 oil fields. And most of those oil fields are in the “mature” category. They were discovered in the 1950s-70s and are past their respective output peaks. So the macro view is grim, out beyond two years or so.

Markets work, right? Yes, basically. That’s the idea, anyhow. Unless, of course, they don’t work very well. And if something doesn’t work very well, does it still work? A stopped clock tells the correct time twice a day, right? But what if the clock just stops and starts whenever it gets banged around? To use another cliche, is that any way to run a railroad?

Let’s try to figure this out. What’s the difference between oil at $100 in January 2008, $147 that July, $100 in September and $33 in December? Has global demand been changing all that much? (Hint: Worldwide demand was not rising all that much in the first half of 2008. And demand is down over the past six months, but not by large factors.) Is the current oil price — in mid-January 2009 — in the low-$40s per barrel the “right” price? Can we believe the market?

One key thing that has changed in recent months is the oil market’s perception of the future. The marketplace is predicting lower oil usage as the world recession unfolds. So oil prices tend to fall with the release of bad economic news. But that perception is just plain myopic. Look at both the amount and the composition of the oil for sale. We’re seeing falling oil prices in the face of flat (at best) world output. And total world oil output includes increasing volumes of natural gas liquids (NGLs) and tar sands from Canada.

Let me translate that for you. NGLs are evidence that the oil industry is blowing down the world’s gas caps. And tar sand “oil” is the capital-intensive stuff with low energy return on investment. Tar sands use a lot of water and energy and come out at great capital cost and environmental cost to the North American landscape.

Ask yourself a couple more questions. In the near term, will worldwide economic contraction lower the use of oil? Yes, probably. And in the medium-to-long term, will depletion lower the worldwide output of oil? Yes, as well.

For now, lower oil demand is trumping stagnant supply. Oil prices are down. Near-term issues are beating out the medium-and-long term issues. But the longer oil prices stay low, the more damage will be inflicted on the world oil and drilling industry. More rigs will not be built. More wells will not be drilled. More prospects and fields will not be developed. More personnel will not enter into an aging industry work force. More of the current infrastructure and human capital will just run down.

In short, we are setting ourselves up for a period of severe volatility in oil prices. When demand starts to recover, supply falls below some not-yet-defined volume or perceptions change about the future of oil availability… prices will take off.

Source: What’s the Right Price for Oil?

This from Investment U:

President-elect Obama takes office in less than a week’s time. While many will be watching closely to see how he handles the ongoing financial crisis, I’ll be equally interested to see how he handles a far more ominous one: our ongoing energy and infrastructure crisis.

Regular readers know I believe energy and infrastructure are inextricably combined. We need cheap energy to fuel sustained economic growth. And we need infrastructure in place to move and dispense the energy from its source to its destination. Today I’m going to give you a perfect example of how the two are intertwined, and how one can play off the other to create a positive benefit for all.

In the face of gas prices that are less than half of what they were only a few months ago, it’s easy to think the “oil crisis” has passed. We can all return to “business and life as usual” – revert to our old driving habits – and just pay the lower price at the pump, right?

That would be a huge mistake. The real price we’ll pay will be our continued dependence on foreign oil. Last year, U.S. consumers and businesses spent over $475 billion hard-earned dollars for it.

Higher Gas Prices Are Around The Corner

With today’s lower prices forcing the cancellation or postponement of exploration projects around the world – and OPEC threatening more cuts – higher gas prices are just around the corner.

Just imagine for a minute, if – year after year – we took that nearly half a trillion dollars and reinvested it here. We’d have a stronger dollar, less susceptibility to economic downturns and recessions, and perhaps even a trade surplus as opposed to a trade deficit.

Well there’s one state that’s doing just that, setting an example the rest of the country should follow. As a result of their efforts, a growing percentage of money spent on auto fuel stays here. And car sales there are on fire. You see, these cars don’t burn gasoline. They run on a much cleaner fuel, one that’s found in abundance right here in the United States: natural gas.

We’re behind the natural gas as a fuel for cars curve, however. Worldwide, there are about eight million vehicles operating on natural gas. Here in the United States we only have 116,000. But Utah, with its estimated 6,000 vehicles, is breaking new ground. Even Utah’s Governor Jon Huntsman Jr. converted his state SUV to run on the clean burning fuel.

One word: cost.

Gas Prices In Utah – 85 Cents-A-Gallon

Natural gas prices at the pump in Utah are controlled, and are the cheapest in the nation, at the equivalent of roughly 85 cents-a-gallon. The other big advantage Utah has is the infrastructure to fill the cars. It’s fairly scarce in most other areas of the country.

And while natural gas is widely used in Europe at the consumer level, here its use is relegated to a few fleet vehicles. At the consumer level, it’s the classic Catch-22 situation. Carmakers – with Honda as the only notable exception – aren’t willing to make natural gas powered cars with so few filling stations available.

On the other side, filling stations don’t want to fork over the money to install expensive equipment to compress the gas, something that’s required in order to fill the tank on the car.

As is often the case, government intervention in the form of tax incentives or financing will go a long way towards breaking the logjam. California is leading the way, with legislation that offers a minimum $2,000 rebate to buyers of natural gas fueled cars.

Congress has legislation it will be considering this year that offers tax credits to consumers and producers alike, and mandates to install pumps at service stations across the country. The goal? Have the nation’s consumer fleet 10% powered by natural gas within 10 years.

Energy and Infrastructure Plays With a Natural Gas Bent

U.S. natural gas production remained stagnant for nearly nine years, and then in 2007, abruptly increased 9%. Improved drilling technology accounts for a large portion of the increase. Horizontal drilling and fracturing is fast becoming the preferred method of producing gas from difficult geological formations like shale.

And there’s plenty of it: Big shale deposits include the Marcellus, Bakken, Haynesville, Barnett and Woodford. Navigant Consulting, an industry consultant, estimates natural gas production can be ramped at least 50% to 30 trillion cubic feet per year between now and 2020, if necessary.

A simple way to play the gas game is to bet on one of the big producers, like:

• Chesapeake Energy (NYSE: CHK)
• Anadarko Petroleum (NYSE: APC)
• Or BP, PLC (NYSE: BP)

Once the gas is brought to the surface, it has to be distributed through our nation’s pipeline network. And that’s currently being expanded at a rapid rate to meet growing gas demand, primarily from utility customers. Take a look at three of the largest natural gas pipeline infrastructure companies in the United States:

• Kinder Morgan (NYSE: KMP)
• El Paso (NYSE: EP)
• Williams (NYSE: WMZ)

In summary, natural gas-burning vehicles represent a clean alternative to fossil fuels, and a good bridging solution until improved batteries enable meaningful numbers of plug-in electric hybrids. All the companies mentioned stand to score big if a serious natural gas auto mandate gets underway. And we’ll all be the better off for it.

Source: The Gas Prices Rollercoaster: Why Energy & Infrastructure Are Inextricably Combined

• Reeling from the housing and credit crisis, luxury-home builder Toll Brothers Inc. (TOL), reported a 41% dive in its fiscal fourth-quarter revenue, Bloomberg reported. “Unfortunately, the preliminary signs of stability we had discussed in early September were upended by the past month’s financial crisis,” Chief Executive Officer Robert Toll said in a statement.

• Despite first-half profit falling 35% and a reduced sales forecast, Vodaphone Group Plc (VOD) investors cheered the company’s plan to focus on cash generation and tightened capital, MarketWatch reported. The world’s largest mobile phone provider also raised its interim dividend by 3.2%.

• Tyco International Ltd. (TYC) more than doubled net income in its fiscal fourth quarter, The Wall Street Journal reported. But the electronics and security system provider projected that fiscal 2009 results would fall below analysts’ estimates.

• Cash-flush StatoilHydro ASA (STO) said it will buy an inital 32.5% stake in the Chesapeake Energy Corp.’s (CHK) 1.8 million-acre Marcellus shale gas reserve. StatoilHydro doled out nearly $3.4 billion for the unconventional energy source, filling a huge hole at Chesapeake, which has a heavy debt burden, Reuters reported.

• The price of oil hit a 20-month low yesterday falling $3.08 to settle at $59.33 a barrel on the New York Mercantile Exchange – the lowest closing price since March 2007.

• Sirius XM Radio Inc. (SIRI) said yesterday (Tuesday) that its third-quarter losses totaled $4.88 billion, or $1.93 a share. Revenue more than doubled to $488.4 million, from $241.8 million, however. On an adjusted basis, revenue soared 16% from $529.2 million last year, to $612.8 million.

Source:Global Investing Roundups Wednesday, November 12th, 2008

In honor of this historic day – not to mention the risks of an unchecked majority in the senate – we’ll start things off with a little humor.

The inspiring message above is brought to you by despair.com, a tongue in cheek purveyor of de-motivational goods. If you’re getting ready to draw up your Christmas list, one of despair.com’s “government” plaques might be just the thing for the cranky libertarian in your life. (Nothing wrong with being cranky I might add.) Or if you work in a “progressive” office environment, one of these babies on your desk could be quite the conversation starter. (Hee hee.)

Mailbag!

There were some excellent comments (as usual) on Friday’s “Signs of a Tradable Bottom” piece. As usual you sent in way too many emails to highlight even a fraction – but I’m grateful for them all.

So now let’s dig into a few…

Excellent article! I agree the market is very tradeable now (excepting my beaten down 401K mutuals). With the money I’ve made on your WOW puts, I bought a lot of shares of Ford and RBS. Prior to that I bought AMD & NVDIA, although they continued down afterwards. I believe good buys now will bear fruit next year if not in the near future. Who was it that said, “Why are stocks the only thing in the world that no one wants to buy on sale?”

Do you know of any other severely beaten down good companies with stock price below $10?

~ TD Reader Kevin C.

Thanks Kevin. Glad to hear that WaveStrength Options Weekly (WOW) is keeping you in clover. I knew we kept that crusty old bear around for a reason. (Just kidding Adam.)

Seriously though, WOW has been a lifesaver in the environment we’ve just lived through. I’ve heard comments on similar lines from many other grateful readers: WOW subscribers who have used big profits from outsized options gains to fund attractive buying opportunities.

Make 146% in 12 Weeks Without Touching a Single Stock.

Here’s a safe, simple way to turn the market crash into a 146% gain in 12 weeks or less.
Read on now for detailed trading instructions…

In a trader’s market – and a market like this one especially – it’s good to have access to long and short opportunities. WOW has been a veritable cash machine in that regard.

And while the shorts cleaned up the longs got killed, of course… but things change. The market moves in cycles. Trends breathe in and out. As Robert Bacon, author of the 50-year-old tome Secrets of Professional Turf Betting, says, “The form always moves away from the public.” Just when the majority of folks feel they have the market pegged, things shift. Thus it has been, and thus it shall always be.

The Aggressive Value Portfolio

Regarding the question about stocks below $10: Funny you should ask. I’m actually working on a new special report of sorts for Safe Haven Investor readers. Here is an excerpt from what I wrote to them last week:

It’s fascinating wading through all the beaten-down hard asset stocks out there. Many of the miners in particular have loads of cash, low share prices, and little to no long-term debt… making them ideal candidates for snapping up shares.

I’m thinking of creating a special “Aggressive Value” portfolio for names like these – low-priced shares rich in assets and light on debt that we can just scoop up and hang onto.

The challenge is a lot of these “cash boxes” are too speculative on the business side of things. Multiple times now, I’ve come across a candidate whose balance sheet looked top notch… only to find that their cash pile came entirely from an equity funding round, and the actual mining properties aren’t producing yet.

So I’ll keep digging there. We want cash boxes that have money coming in the door too – not just a pile of equity proceeds with no firm sense of how the company will make money.

The most promising candidate I’ve found so far will be hosting an earnings call next week. I’d rather listen in on that earnings call – getting the “lay of the land” you might say – before jumping in. I’ll report back to you soon.

If you’d like to see what I come up with in the “stocks below ten bucks” department, sign up for Safe Haven Investor and you’ll get the goods – probably at least two picks by the end of this week, with more likely to come. As you might have guessed, I’m excited about the compelling values out there now.

Stocks Revisit the Disco Era

I won’t try to kid you: As far as long only portfolios go, there were no true ports in a storm during the months of September and October. The panic selling hit everything. In order for value to provide a haven, markets have to function. Normally the assigned market value of a strong company is like a rubber band attached to a peg. The rubber band can be stretched high and low, but the peg (intrinsic value) acts as a stabilizer.

In October the rubber band snapped. The peg was abandoned completely.

But that’s why the markets are littered with eye-popping values now, and why stocks are trading below 1970s valuations by some estimates. “Blacktober” wiped off $9.5 TRILLION in market value according to Barron’s. Total carnage so far has been estimated at something like $16 trillion. That’s more than a quarter of the world’s wealth!

The government bungling and mass bloodletting brought a hidden silver lining, though: Due to the white-knuckled nature of credit market cardiac arrest, it took mere weeks and months for stocks to fall to levels that it might have taken years to reach under less harrowing conditions. We have compressed the brutality of past grizzly-bear markets into a much shorter timeframe.

C-notes on the Sidewalk

I was telling a friend, too, how different this environment feels with so many hedgies (hedge fund managers) having been blown up or carried out.

As J. Carlo Cannell observes, at one point there were more hedge funds than Taco Bells in the United States. If a ten-dollar bill landed on the sidewalk, a dozen hedgies would simultaneously swoop down to try and snatch it up.

Now the sidewalks have twenties, fifties, and even hundred dollar bills scattered around with abandon. The pool of opportunistic survivors with cash to deploy has shrunk dramatically. (Good news for survivors.)

Let’s hear another optimistic vote, and then we’ll turn to some skeptics.

Since I’ve discovered that I’m a better trader than investor, I love the volatility here at the bottom. I’ve been gradually building large positions in good companies that have had the stuffing kicked out of them and making money on the swings at the same time. My advice is to buy strongly when the market is at its weakest and sell lightly as it climbs. This leaves me with plenty of capital when I see a stock selling at what I like to call an “are you on crack?” price. I’m up 7% in the past 2 weeks alone. It is beginning to look very much like all the bad news is already priced in however. I may regret not jumping in with both feet here, but since I seldom spend more than an hour a day playing the market I’m pretty happy with the returns thus far. The imminent drop of the USD will only increase my profits.

~ TD reader George

Sounds like a good plan George. I like the mental visual of the “are you on crack?” price. When I was in high school the operative term was smoking plastic, as in “Dude, are you smoking plastic or what?”

A lot of CEOs seemed to be smoking plastic as they dumped tens of millions or even hundreds of millions worth of shares in October. A few poor souls, like Aubrey McClendon of Chesapeake Energy (CHK:NYSE), may well have lost billions. But that, too, was a function of the market panic. Margin calls forced these executives to sell at valuations that probably made them cry. (And I mean literally cry.) More good news for survivors with cash to deploy.

George makes an interesting point, too, about discovering he is a better trader than investor. One thing that I have heard confirmed over and over again in markets, from a wide a variety of sources over the years, is that market success ultimately depends on having a style and a methodology that works for you personally. As traders and investors we always want to be working on our weaknesses, but we need to remember to play to our strengths, too. We address weaknesses to keep from being held back, but the strengths carry us home.

“Dumb First Class?”

Buffett or no Buffett, not everyone is excited about opportunity levels here…

I personally believe the market continues to trade in a “lunatic ” fashion . Buying stocks at this time may be Economics 101, but to me it’s “dumb first class.” The economy is tanking with consumers pulling back from their spending-without-money ways. Since the economy is 70% consumer driven and the housing market not even close to fixed and companies reporting poor earnings and laying off workers, to me it’s idiotic to be buying stocks thinking that everything will be great in 6 months.

~ TD reader Robert T.

Robert, I agree it would be “idiotic” to think that “everything will be great in 6 months.” But who is saying that exactly?

When you buy a stock, you’re basically buying a stream of future cash flows. If the stock pays a dividend, that means you get some of that cash flow back in the short term. If the stock doesn’t pay a dividend, it means the cash flows are being re-invested for growth in the longer term. It’s still all about cash flows either way.

The point is, stocks are priced based on long-term cash flows – that is to say, cash flows over a period of time much longer than six months. This is why the stock market can turn upward while the economy is still in the dumps. The stock market (when functioning properly) acts as a cash flow forecast extending years and years into the future.

Remember, too, that outlook varies widely from industry to industry. There are some industries you wouldn’t want to touch with a ten foot pole… other industries that have come down so far and fast there’s almost no compression left in the coiled spring… and still other industries and companies that could benefit handsomely from what’s ahead.

Expect the Unexpected

What’s more, don’t forget that the market is often driven by factors that investors don’t anticipate.

In the period before World War I, for example – 1890 to 1914 – there was a doubling of the world’s gold stock. The gold mines were going at full steam ahead back then, and there were enough huge new finds in the Americas to expand the supply of gold dramatically. This outpouring of gold had a massive inflationary impact on all kinds of prices, including share prices. In effect it was like Mother Nature imitating the Fed, flooding the system with new money. Starting with a street-level view of the economy, who could have predicted such a thing?

Point being, markets can move (and can stocks can rally) for reasons wholly off the radar screen of most investors. Some of this has to do with basic “plumbing” principles – money moving through markets like water and steam moving through pipes. Between the U.S. dollar, the paper currency outlook and a few other high level “macro” factors, there is more than enough potential for things to get weird.

Macro factors and money flows are too big a topic to wade into here, but just remember too that multi-month rallies in times when few expect them – like in the middle of dark bear markets – are far from unprecedented. It would be more accurate to say they are common place, given the right set of prevailing conditions.

If you’re a trader who can do a little shucking and jiving, this is great news. If you’re an investor with an eye for carefully selected bargains in the right industries – not the toxic ones – you can do alright too.

The Heavy Hand of Uncle Sam

The market will not be the ultimate money-maker, as it was in years past, because of government intrusion. It will ultimately lead to permanent over-regulation, which is never good for the free market. Also we have environmental realities, eg. diminishing fresh water supplies, global warming [etc.] that will prompt more and more conscientious citizens to demand government(s) get involved – meaning even more government demands on the evil-doer companies that supply our creature-comforts. Thanks for the articles…

~ TD reader Julia L.

Thanks for that perspective Julia. (I like your initials by the way.)

Interesting thoughts… Government intrusion is a funny thing. Going back through history, it’s useful to note how perspectives have changed.

Take Federal Deposit insurance for example. FDIC insurance is an unalloyed good, right? Would anyone disagree it’s comforting to know you can deposit funds at your local bank without worrying (too much) about getting that money back? And yet, when blanket deposit insurance was floated a century or so ago, the idea was denounced as an awful socialist sop. There was widespread fear that laxity on the part of depositors would punish good banks and reward bad ones. Funny how attitudes can change…

Also re “years past,” want to hear something really crazy? When JFK took office in 1963, the top tax rate was an incredible 91 percent! JFK shaped himself as a tax-cutting hero by lowering taxes his first two years in office – down to a mere 70 percent!

Talk about socialism… in the late 50’s and early 60’s, a supposed golden time for America, tax policy really was socialist, even as the McCarthy era kicked into gear. And yet we came back from it, and tax levels fell to the “merely confiscatory” levels we’re now accustomed to.

My takeaway is that if top tax rates in the United States can range from 91 percent to zero percent as they have in the last century, over the long run they can go anywhere. (And so can I, courtesy of my trusty passport.)

Surprising huh? History is full of surprises like that… in fact the more I study history, the less convinced I become that anything is permanent, except for the laws of physics and some basic laws of human nature. I agree that regulation trends can expand in frightening directions and stay entrenched for a very long time. But when opportunity is pressed downward in one area, it often pops up in another area – and it’s hard to say what kind of short- to intermediate-term effects all this stuff has.

As far as the problems you listed (fresh water etc.), we’ll have to address those problems. But that’s good news, not bad news, for a capitalist-driven technology sector that focuses on solving pressing problems to earn profits. Not to mention that the heavy hand of Uncle Sam can sometimes lift up entire sectors and industries, sending rivers of cash their way for years. Just look at the past boom years of military defense spending for example. Morality of government aside, there is opportunity to be found in sussing out the winners and losers.

Always enjoy and appreciate your thoughts and commentary. I believe that you gave us some good rule of thumb principles to follow and look for in [Friday’s Taipan Daily piece]. What would be interesting and valuable is to identify the events/data that were the triggers that started the next slide down during the early thirties follow through on the downside from the ‘29 crash. I’ve never read anything specific on what were the events or data that investors realized that the economy and market weren’t out of the woods yet and it was going to be worse. What should we look for to trigger the next leg down or the start of a meaningful sustaining recovery? Any thoughts or insight on this would be much appreciated.

~ TD reader Don S.

You’re right Don – that would be an interesting and valuable area to explore. I will roll up my sleeves on just the topics you propose!

Tomorrow, in fact, I’ll write to you about some surprising market parallels from years past… not in regard to how the roaring twenties ended, but how they began.

Source: Opportunity Extraordinaire or “Dumb First Class?” Responses from the Mailbag

At Friday’s closing price of $48.40, Chesapeake Energy shares are down 35% from their 12-month high of $74. But the cause is clear.

When crude oil shot up from about $100 per barrel to $135 per barrel a few months ago – and natural gas skyrocketed from $10 per billion cubic feet (bcf) to $13.50 per billion cubic feet at the same time, prompting all sorts of investigations into speculative activities by the Commodity Futures Trading Commission, and in turn prompting calls for Congress to make it harder for financial investors to buy energy futures – it’s no surprise to see that almost every energy producer that prudently hedges part of its production against price drops had losses in the quarter.

Most analysts – myself included – are asking: “If we would have started drilling in the Continental Shelf and other such places a while ago, would this have ever happened? Probably not.” But it did. When the market supply-demand equation gets tight for any critical resource, prices have a way of getting totally out of hand. And lack of flexibility in supply is always to be blamed. In this case, it seems as if Chesapeake Energy was caught badly on the “wrong” side of the trade. Or was it?

As Chesapeake was selling natural gas futures, and as those futures were climbing exponentially, the company was taking what looked to be huge mark-to-market losses. But natural gas prices peaked shortly after June 30 and have collapsed with the demand destruction that has prompted a quick reversal in investor positions from “long” to “short.”

This brought prices down to their strong support levels of around $8 per bcf. These much lower levels were pretty stable for all of 2006 and 2007. So it turns out that Chesapeake was actually prudent in its strategy of taking advantage of high natural gas prices while it had the chance to do so. And its chief executive officer was confident enough that he was willing to take the heat over lackluster quarterly earnings for this huge temporary mark-to market hit and was not squeezed into closing these “losing positions” and realizing the loss. He took the bad mark-to-market hit at the quarter’s end and all the heat that this implied.

But do not let this quarterly loss fool you. In fact, the staggering $1.6 billion loss had, by July 25, reversed and moved up the value of Chesapeake hedges by a gorgeous $4.7 billion. CEO Aubrey K. McClendon and his team had seen what was coming and masterfully called the market’s bluff.

With Chesapeake’s staggering reported loss for the quarter and with natural gas prices now down to pre-bubble levels, the “fluff” in the stock has been removed.

Are the shares now worth a shot? You bet.

Not only is natural gas a key part of the energy solution for this energy-starved country, but Chesapeake’s long-term strategy is to tap into a very clean form of energy that is abundant in the U.S. market and to lead production in North America.

Natural gas and oil sales almost doubled from a year earlier to about $2.2 billion, showing an operating gain of $479 million, which beat Wall Street estimates by a penny. What’s more, at these prices, you are already seeing strong incentives to switch some energy generation away from coal, whose prices have remained stronger, to natural gas-fired plants.

And Chesapeake is growing its reserves at about a 20% to 21% annual clip thanks to its expanding production in The Barnet, Haynesville Fayetteville and Marcellus Shale areas. This is the key to future share price growth. The shale production revolution, enabled by newer and cheaper drilling technologies and current prices of natural gas, is changing the industry, allowing for sustained reserve growth. And that will help satisfy the ever-expanding demand.

So you are buying Chesapeake at levels that now reflect the much lower prices we are seeing today in natural gas – but at a time when we are heading into the heating season, and we are counting on continued reserve growth from their shale strategy to keep growing the bottom line. What about the volatility in earnings due to hedges? It is just loud market “noise” that proved that the company really knows the market and that has provided you with this great buying opportunity.

ACTION TO TAKE: BUY shares Chesapeake Energy Corp. (NYSE: CHK).

Source: Buy, Sell or Hold: Chesapeake Energy Corp.

U.S. gas production is up 9% this year – a rate of increase not seen since 1984 – with most of that gain coming from natural-gas shale, particularly the Barnett Shale, a deposit that now produces 7% of the country’s gas supply. Indeed, there could be as much as 842 trillion cubic feet of retrievable gas in shale deposits throughout the United States alone, according to Navigant Consulting. That would support the current level of U.S. consumption for about 40 years.

“It’s almost divine intervention,” Aubrey K. McClendon, chairman and chief executive of the Chesapeake Energy Corporation (CHK), told The New York Times. “Right at the time oil prices are skyrocketing, we’re struggling with the economy, we’re concerned about global warming, and national security threats remain intense, we wake up and we’ve got this abundance of natural gas around us.”

Shale beds are a major part of the story. The Barnett – with reserves of 2.5 trillion cubic feet of natural gas, and as much as 30 trillion cubic feet of natural gas resources – was the first shale field to undergo major development, and has seen output increase tenfold since 2001. It’s just one of at least 24 shale beds in North America. The Haynesville in Louisiana and the Marcellus in Appalachia may be even bigger, but will require further development and won’t come online for another two to five years.

The vast potential of fields like these has only been unlocked recently with advances in the technology of horizontal drilling hydraulic fracturing. Horizontal drilling, or slant drilling, allows producers to drill laterally beneath cities and neighborhoods, and hydraulic fracturing is simply a method by which water is pumped into the rock to break the sediment and release the gas.

Some analysts are urging speculators and prospectors not to get too carried away, however, as there is still a great deal of uncertainty concerning how much natural gas the deposits actually hold. The U.S. Energy Department estimates shale-gas reserves at 125 trillion cubic feet, or roughly one-seventh the Navigant estimate. Of course, the government estimate is based on 2006 data and could increase.

Regardless of what remains to be discovered, Deutsche Bank AG (DB) analyst Shannon Nome said in a recent report that production from the eight largest shale fields could hit 6.6 billion cubic feet a day this year – or 11.8% of national gas production – and then rise to 14.5 billion cubic feet a day, or 23% of U.S. production, in the next three years.

A Bright Future for Natural Gas

A large domestic supply of natural gas would lower utility costs nationwide, reduce U.S. dependence on foreign oil, and help combat global climate change.

More than half of U.S. homes use natural gas for heating purposes, and with the cost of oil still substantially higher than it was a year ago, heating costs are expected to be 20% higher this year than they were in 2007. According to the Energy Information Agency, U.S. consumers will pay an average of $1,182 to heat their homes this year.

In recent months, however, increased natural gas production – spurred by the addition of shale sources – has actually caused gas prices to decouple from oil. Natural gas prices have plummeted 40% since early July, while the price of crude is down slightly more than 18%.

Additional natural gas resources would also ease U.S. dependence on foreign imports. The United States imported a record-high 4.6 trillion cubic feet of natural gas in 2007, at an estimated cost of $32 billion. And the government expects 2009’s figures to top that.

Natural gas is also the world’s cleanest fossil fuel, emitting 45% less carbon dioxide than coal and 30% less carbon dioxide than oil. That makes it an important transition fuel that could give solar, hydro, and wind-power technologies time to become more productive and efficient resources.

It can also be used in cars. General Motors Corp. (GM) already makes 18 models of cars and trucks that use compressed natural gas (CNG), and more could follow. One congressional bill, introduced last month, aims to make 10% of Detroit’s output CNG-compatible by 2018. It also offers a $90,000 tax credit to get 20,000 gas station owners to add CNG pumps.

Chesapeake Energy’s McClendon says the United States could convert 10% of its vehicles to CNG within eight years, and only increase overall natural gas consumption by 1%.

“Imagine if tomorrow you could announce a new energy plan that would in one stroke cut your constituent’s gasoline bill in half, reduce oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emission and create tens of thousands of new jobs in the U.S.,” said McClendon.

Europe’s Shale Game

With so much at stake, and shale gas recovery booming in the United States, the movement is gaining significant traction in Europe.

“There’s a possibility that under our feet are the same kind of shale-gas deposits that you have in the United States,” Brian Horsfield, a professor of organic geochemistry at the GFZ German Research Center for Geosciences in Potsdam, Germany, told the International Herald Tribune. “There are many of the same types of shale formations in Europe.”

Next year, GFZ scientists will begin mapping possible shale-gas sites in Europe, and investigate the possibility of commercial recovery, with the Barnett as a standard. They aren’t alone, however, as OMV Aktiengesellschaft (OTC ADR: OMVKY), an Austrian energy company, has already been conducting tests of gas shale in the Vienna Basin. Royal Dutch Shell PLC (RDS.A, RDS.B) has also obtained exploration contracts for to sites in southern Sweden and Lane Energy Poland is exploring that country, IHT reports.

“The Europeans have to hope that these shales will do for them what eastern shales have done for the U.S. gas supply, which is to boost the main supply that is coming from the Gulf of Mexico,” said Don Hertzmark, an oil and gas consultant in Washington. “That would reduce the prices the Russians were able to charge the final consumers in Europe.”

Russia and its state-owned gas monopoly, OAO Gazprom, control more than 25% of Europe’s total gas supply. Even before its recent intrusion into Georgia, Russia was anything but a reliable supplier.

Last year, Gazprom threatened to cut off gas shipments to Belarus, and the energy giant followed through with similar threats against the Ukraine as recently as March.

Gazprom reduced natural gas deliveries to Ukraine by a full one-quarter in March after accusing the country of failing to pay $600 million in gas bills for the year. After Ukrainian officials failed to turn up for planned talks aimed at ending the supply dispute, Gazprom threatened to cut supplies by another 25%, reducing the total amount of natural gas to the Ukraine by half.

It was the second time in as many years Gazprom cut gas shipments to the Ukraine, which in 2006 installed a pro-Western government in Kiev.

Most recently, Gazprom offered to buy all of Libya’s oil and gas exports just as the former terrorist state was beginning to look like a viable alternative for Europe to diversify away from Gazprom’s dominance.

Virtually all of Europe would breathe a sigh of relief if major shale discoveries, like those found in the United States, were located somewhere on the continent.

“Shale is the most significant domestic natural gas find in 50 years,” Chris Ruppel, an analyst at the institutional brokerage firm Execution, told The NY Times. Ultimately, this could mean “the United States will become gas independent, and more industrially competitive versus Europe for gas-intensive industries such as chemicals, fertilizer, smelting iron and aluminum.”

Source: New Natural Gas Discoveries are a Boon for the U.S. Energy Sector