Wednesday, November 17, 2010

Josh Young Finds Value in Oil and Gas E&Ps

The Energy Report: Josh, What makes your hedge fund different from others?

Josh Young: We're focused on oil and gas investments, and we make those investments generally through oil and gas (O&G) equities. We focus on companies that are generally under-followed and find companies which are trading at a big discount to their intrinsic value, with identifiable catalysts that are going to unlock that value.

On the short side, we find companies with some sort of fraudulent reporting or with very high valuations that are in fundamentally challenging situations that they are unlikely to work out.

TER: You're a true value investor.

JY: Yes, I am philosophically a value investor. I focus on the oil and gas space because there's a lot of volatility and there are lots of changes and catalysts. With the right approach to managing the commodity risk, there are regularly opportunities to generate significant returns and invest at the sort of discount to intrinsic value that can't be found in other sectors these days because there's so much investment competition.

TER: You mentioned that you buy companies that are trading at a large discount to their intrinsic value and that have identifiable catalysts for further growth. Do you have much trouble finding those companies in the energy space? And what are some catalysts you like to see? (more)

An Upcoming 30% Price Increase For Cotton Products And Defaulting Chinese Clothing Manufacturers May Soon Test The "Deflation" Thesis

The question of the night is whether Wal-Mart can absorb a 30% price increase in cotton products, because as Bloomberg reports, it will very soon have to. Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs. Reports Bloomberg: "It’s a little terrifying to deal with cotton suppliers now," said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients. This is not an exaggeration - in last week's What I Learned This Week,'s Kiril Sokoloff, a China expert, noted: "We bought cotton back at around $0.99 because we thought the fundamentals were still very powerful. We liquidated the entire position on October 26 at around $1.29 because many Chinese clothing manufacturers were nearing bankruptcy and the Chinese government was cracking down on hoarders, speculators and investigating position sizes." Note the completely unwanton use of the word "bankruptcy" by the otherwise mellow Bulgarian - what has happened in cotton prices is setting off a seismic shift for low-margin retailers, and many traditionally safe and stable companies will soon be forced to attempt to pass on surging costs, or go out of business, especially as the ranks of low-cost vendors goes up in smoke. Bernanke's inflation exporting model is about to backfire with a vengeance. In this most direct consequences of excess liquidity-driven near-hyperinflation, the best possible outcome would merely a total collapse in margins. If you think a very irrelevant Dick Bove hates Bernanke now, wait until you listen to the Walton family's thanksgiving dinner... (more)

Soros: Conditions 'Pretty Perfect' for Gold to Rise

Billionaire investor and philanthropist George Soros may be cutting back on his gold bets, but he says the precious metal still has some kick to it, as long as conditions like low interest rates prevail.

"The conditions for (high) gold are pretty perfect," he said during a speech in Toronto Monday evening to accept the Globalist of the Year award from the Canadian International Council.

"The big negative is that too many people know this and a lot of hedge funds are very exposed ... Gold has a tendency to go parabolic," he said, pointing at its tendency to fall as quickly as it rises.

In fact, gold fell for a third successive day on Tuesday to its lowest level in two weeks as a stronger U.S. dollar kept commodities under pressure, but spot gold was still above $1,300 an ounce.

Soros reduced some of his big bets on gold in the third quarter, trimming positions in miners including Barrick Gold Corp., Great Basin Gold and Newmont Mining. He left large positions in NovaGold Resources and Kinross Gold unchanged. (more)

Tuesday in Commodities: Turn the Heat Up

This title has two meanings; the AC is broken in my office which is brutal in Florida and the 5% swings in commodities only makes thing more interesting. Try to keep a Cool head!

Crude oil has declined $6.50 in the last four sessions as of this post cutting through the 20 day MA like a hot knife through butter. The 50 day MA in the January contract comes in at $82.40 followed by the 100 day MA at $80.65. We will be advising clients to cover all remaining shorts $1.50-$3 lower and looking to reverse getting clients long...stay tuned. Natural gas held its own today but will need to close above the down sloping trend line and 20 day MA for clients to remain friendly. The 20 day MA gave way in the indices as well but it may be too little to late for our clients ES options trades which we’ve been working out of the last few sessions. The 50 day MA in the S&P comes in at 1160 which should act as stiff support. At most we see a move to 1125 which would represent a 50% Fibonacci retracement but clients will be absent as we see better opportunities elsewhere.

We advised clients to exit their bullish plays in live cattle at a slight loss and when the 20 day MA gave way in lean hogs today it likely signals lower ground. Clients have no exposure but those that do expect further selling; dragging prices in February likely 2.5-3.5% lower. (more)

Rhodium Trading Thoughts

RHODIUM TRADING THOUGHTS is about timely and profitable trading of precious metals. We do not believe every turn in the market can be called. Our goal is that our recommendations should be profitable. Profits are the goals, not trades. Do not expect all recommendations to be profitable. No system can achieve that lofty goal. Our goal is simply to state whether conditions for a metal are favorable or not. Buy signals are issued when appropriate. These signals are generally speaking for day they are issued. If price remains below signal price, buying can be done. Do Not Buy signals are given when market is overbought, and buying is unwise. Blue triangles indicate an overbought condition. These would not be good times to buy, so they are labeled Do Not Buy. Software is not showing complete legend, for some reason. (more)

Jay Taylor: Turning Hard Times Into Good times

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Palladium could see deficit in 2011 if Russia halts stock sales: Johnson Matthey

A halt in Russia’s sale of state palladium stocks could see the precious metal’s market fall into deficit in 2011, Johnson Matthey director Mark Bedford told press on Tuesday.

Speaking at the launch of Johnson Matthey’s interim PGM review at the London Stock Exchange, Bedford said that the sale of Russian state palladium stocks was key to the balance of the market.

“If this amount is not sold then palladium could be in a deficit in the market in 2011,” said Bedford. “We may see more Russian stock sales next year, but this is something which is coming to an end now and this will put pressure on the supply side for palladium."

Russia sold 960,000 ounces of palladium from state stocks during 2009, but analysts have warned that the in-flow of the white metal to the market from Russia may be coming to an end. (more)

S&P: Home Prices May Drop Another 10%

S&P has issued a forecast which says home prices could drop another 10% through next year.

The new research says that:

“While U.S. home prices have stabilized considerably since the recession officially ended in mid-2009, recent housing data suggests that the winter season will likely chill recently improving home prices, according to a new report published by Standard & Poor’s Ratings Services In line with this expectation, Standard & Poor’s Ratings Services believes home prices will decline an additional 7%-10% through 2011.”

The news is shattering. The S&P Cash-Shiller Index has shown some improvement, albeit modest, over the last few months. But, foreclosure rates have increased according to RealtyTrac. The number of mortgages underwater still stands at over 11 million, about 21% of all home loans in the US. Fed governor Rifkin recently commented that foreclosure rates would get no better in 2011 and would barely improve in 2012. (more)

11 High Yield Stocks to Buy Now

Approximately once per month I run a high-yield momentum screen using the free service on Finviz and post the results. Last month's list is here. Returns for the last month were 1.75% including dividends versus 2.98% for SPY and -.18% for SDY. The top performing stock from last month's list was Qwest Communications (Q) returning 6.93% while HCP Inc (HCP) was the worst performing at -5.66% (including dividends). The strategy has done well this year despite under-performing SPY last month.

The screen looks for high yielding high momentum stocks. I screen the S&P 500 for stocks yielding greater than 4% and then rank them by 6 month returns. There were 55 results (versus 53 last month) and per a previous article (see below for explanation), the highest momentum, high yield stocks have historically been the best performing so I have listed the top 20% based on 6 month returns, or 11 stocks.

The article in reference was a study done by Charles Schwab in which they studied the 1500 largest stocks by market capitalization from 1990-2009 and divided yielding stocks into 4 quadrants. They ranked the highest yielding stocks by 6 month price momentum, divided them into 5 segments, and found that highest yield stocks with the highest 6 month price momentum outperformed a) all other momentum segments (in other words, those high yield stocks with lower price momentum) and b) the annual return of the other yield quadrants. (more)

Healthy Bull Market Correction – Buying Opportunity?

Everything was down across the board. A great day to spend some time away from the screens. Well, yes and no. We had a huge run-up so days like today are much needed corrections to build bases and pressure for a potential further run-up. Being glued to one’s screens and worrying is not the way to go though. These are days to closely monitor stocks in order to find out more about their personality, how resilient they are and if they display relative strength compared to the stocks in their peer group.

The key question here is if we are witnessing a healthy and normal pullback within a strong bull market with further gains down the road, or if this the beginning of something more serious like the start of a bigger correction or the end of the up trend. Nobody can tell and for now we don’t have the benefit of hindsight. What we can do though is making educated guesses. Right now it looks like lots of people are viewing this pull back as a buying opportunity.

Two things I am monitoring in order two gauge the health of this bull market: (more)

CME Raises Gold Futures Margins By 6%, Hikes Silver Margins For Second Time In Under A Week

If at first you don't succeed at killing the higher beta stock short hedge, try again. The CME has just raised its margin requirement on silver again, bringing maintenance margins up from $6,500 to $7,250, after hiking it less than a week ago for the first time and preventing silver from surpassing $30. Of course, why the CME is raising it more after the spot price of silver is now far lower than where it was at the first raise is a good question, but is most certainly due to the exchange's "risk mitigation" concerns, and has nothing to do at all with the intent to continue killing PM prices. Far more importantly, the CME has finally relented and also raised gold margins, as we had expected. The new maintenance margin is up from $4,251 to $4,500, a minimal increase just to allow the CME to have the option (and making speculators well aware of this) of hiking rates again at any point it so chooses. All in all, all is now fair in fighting excess record liquidity. Look for a second round of imminent margin hikes in cotton, sugar, coffee and wheat, as the exchanges are suddenly very concerned about what retail margin collapses may mean for the non-existent wealth effect.