You see, the economic recovery in prices started in EVERYTHING last March — but to be clear, the overall market and the profitable commodities market are inextricably tied together.

The S&P 500, my proxy for the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows it provides insight into future moves in other markets.

The CRB Index, Commodity Research Bureau, recently broke above the 267 level making new yearly highs. It’s now on target for a new near-term goal, which represents a 50% rally in commodities since last years dip.

Higher Oil prices are also a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.

Add it all up and it’s easy to see that the CRB, and other commodities in particular, are on target for now.

The Best Opportunity for Commodities Profits…

My recent commodities travels took me to the west coast to revisit acquaintances made during the July National Chicken Marketing convention.

My big takeaway from the exhaustive chicken information was that corn was deemed undervalued by most of the presenters and professionals in attendance. And I trust these guys, after all, it’s their business to know the cost inputs from the egg to the bird on your plate.

The corn crop at that time looked set to make it through the summer months in great condition with no fears in sight to disrupt high yields.

Though my view on trading weighs heavily on technical analysis I learned long ago not to ignore important fundamental information. The upside was greater for corn to rise than drift below $3.00 on perfect growth.

How to Turn Price Charts into Quick Gains…

Corn prices were low (just over $3 a bushel), and that’s exactly when I told readers of Resource Trader Alert to get into a corn play. Over at RTA we use options to directly play commodities themselves – options help limit our risks while giving us a nice risk reward payout.

(I normally don’t give out the specifics of my trades — but I’ll make a special exception for today’s article.)

For our corn option play the maximum risk was a little over $1100 dollars with six full months of fundamental factors to boost prices to $4.00 a bushel. Chicken convention consensus was that our goal should be reached by year’s end – but in fact it was much sooner. The recent high on our RTA option play was around $2,400 – which represents more than doubled our initial investment.

That’s just how quickly the commodity options can move.

The price of corn rallied 25% but our corn options ended up doubling in that same time. By using options we were able to maximize our profit potential and completely limit our risk.

The Charts Know More Than the Farmers…

The reality of fundamental trading on weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. The price charts are one way of seeing what people know — without having to “really” know.

At the July chicken conference the major fundamental support of grain prices was slated to be ethanol demand. But the present grain rally connection to ethanol is difficult to prove at best. In fact, the correlation with crude oil gains has just now only started to kick in as prices rise above $80 a barrel.

With that in mind it’s fairly safe to say that the combination of weather premium and dollar weakness started this grain move instead of the much-anticipated demand from ethanol and biofuel production.

The chicken men were right on price but maybe wrong on the reason. This is a perfect illustration of focusing on “what” the market is going to do, not “why.”

And although huge chicken-related profits aren’t quite hatched they are definitely on the right path to growing healthy, big and strong.

It all comes back to commodities,
Alan Knuckman

November 13, 2009

The Single Best Move for Quick Commodity Profits was originally featured in the Penny Sleuth.

But you’re not out of luck just yet…

Many countries around the world will be able to steer around this extended recession. Some are even in prime position to explode.

And it’s not as difficult to invest abroad as it may seem. Today, it’s as effortless as buying an American Depositary Receipt — same thing as a stock — through your online broker. Figuring out which ones to buy is the hard part.

In Lifetime Income Report, we’ve ramped up our portfolio to reflect our favorites: Asia, Africa and Latin America. Today I’m letting Penny Sleuth readers in on two south-of-the-border plays you can play immediately…

Escape the Second Downturn on Lula’s Coattails

Our favorite international plays come from Brazil. This probably doesn’t come as a surprise. We’ve been bullish on Brazil for over a year now.

The Brazilian economy has never looked better. For starters, the democratic government of President Luiz Lula da Silva is both popular and smart. Instead of leading the Brazilian people down the same road they always seem to end up on — collapsing currency and enormous income disparity — Lula re-cemented the federal and state budgets, brokered trade deals across the globe, and brought the country’s economy into top-ten status.

This success helped him win a landslide reelection in 2006. Even his political opponents can’t discount the success he’s had in making sure Brazil didn’t fall into the same recession that’s now captured the rest of the globe.

Sure, smaller export numbers and commodity prices have put a small hold on Brazil’s growth. But by this time next year, the country’s GDP should be back up to a 3.5-4% growth rate.

Lula has been able to do this by placing a little fiscal responsibility into a system that’s rarely had it. It’s been just 11 years since Brazil suffered from its last currency crash. Thankfully, the country adjusted its currency after that fiasco, completely taking the real off the U.S. dollar peg.

This is probably the most important reason Brazil is now starting to garner some recognition as a safe haven for growth investing.

The federal deficit and spending habits here in the U.S. can only hold for so long. Even China — the country holding more U.S. Treasury Notes than any other — recently remarked that it would like to drop the dollar as the world reserve currency.

Having a currency that’s not pegged to the dollar is a huge benefit in today’s inflationary world.

But besides a superior currency, Brazil investments come with many other perks that interest smart investors.

The Brazilian Advantage

Take tax rates for instance. It’s easy to find foreign plays that pay large dividends. It’s difficult to find ones that don’t have a cut taken off the top just because you’re a foreign investor.

Canada is the most common example. Until very recently, Canada had some of the best royalty plays in the world. The vast resources of our neighbor to the north translated into large income distributions for investors.

That all changed in 2006, when the Canadian Finance Minister Jim Flaherty decided to take advantage of all the rich American investors coming across the border for those large yields. Now, if you are an American, you have to pay his government 15% on all Canadian income trust distributions you receive.

This is a new trend developing throughout the investing world. Fortunately, there are a few safe income havens left. Brazil, Great Britain, Indonesia, Hong Kong, and Mexico are the five zero-tax-withholding countries that we are focused on.

Another perk Brazil has to offer is its rapid acceleration on the world stage. Lula’s popularity and successful reforms have helped put a spotlight on South America’s largest country.

Not only is Lula’s voice highly anticipated in any international gathering, his ability to highlight his country’s tourism-friendly assets helped Brazil lock in the 2014 World Cup and 2016 Summer Olympics.

Of course, just having a great investment location isn’t enough. You need to have the perfect investment to take advantage of it. And we have two of them…

Grab Green Income with the World-Leading Hydro Generator

When most people think of renewable energy, they think of wind farms and solar plants. But one of the most widely used forms of renewable energy is hydroelectric. And no country knows more about hydropower than Brazil.

The Itaipu hydroelectric dam, located on the Panara River between Brazil and Paraguay, is currently the largest in both capacity and annual generation in the world. The site generates nearly 100 billion kilowatthours (Bkwh). That would be enough to power 11.2 million U.S. homes. That might be why the American Society of Civil Engineers picked it as one of the Seven Wonders of the Modern World.

Brazil entered into an agreement with Paraguay in 1973 to build and share the electricity produced from Itaipu. Currently, Paraguay uses it to power more than three quarters of its electricity needs, selling the rest of its share to Brazil.

It was during that 1973 treaty signing that Brazil decided to go headlong into the hydropower business.

The South American leader now generates more than 372 Bkwh per year from hydroelectricity — 85% of total generation.

Brazil is also expanding its capacity at a rapid rate. Over the next 20 years, only China will be generating more electricity from hydropower plants.

Lula’s government has spent plenty to back hydropower expansion. Most of the $221 billion earmarked for infrastructure, transport and energy in Brazil’s stimulus plan is slated for hydro capacity increases.

To take advantage of Lula’s hydropower initiatives, and reap the rewards of Brazil’s fast-growing economy, you should take a serious look at these two hydro giants:

• Companhia Paranaense de Energia (NYSE: ELP) is a major player in the Brazilian hydro market. The company owns 17 different hydro plants, most of which are located on the Panara River. The stock is in position for an easy double from here.

• Enersis (NYSE: ENI) owns and operates 53 power plants — most of which are hydroelectricity plants — that have an installed capacity of more than 14,000 MW. We could see units of ENI continue to climb over the next year. Meanwhile, you’ll be able to collect large dividend yields for as long as you hold it.

While they’re bigger than most of the opportunities that we talk about in the Sleuth, they offer the some of the best exposure to the burgeoning utility sector in Brazil. I expect them — and other Brazilian ADRs — to do well in the coming months regardless of where the market heads here at home.

Sincerely,
Jim Nelson

November 6, 2009

Two Brazilian Plays to Beat the Market was originally featured in the Penny Sleuth.

Regular investors can actually take a cut of every single bill payment you and your neighbors make. Today, we’ll show you how…and give you three small-cap plays you need to get into right now…

When embattled in a game of Monopoly, the three sets of properties we typically shoot for are Boardwalk and Park Place, the railroads and the utilities. Why would Parker Bros. make such a fuss over these three assets?

Well, luxury real estate like the dark blues is typically lucrative. In today’s world, however, that probably isn’t your best bet.

How bout the railroads? Owning transportation and shipping systems is always a profitable venture. But with competition from cheap air cargo and trucking, railroads just don’t have the appeal they once did.

That leaves the utility companies. If you can own the transfer of water or electricity, chances are you’ll make a pretty penny. That’s why we’re big proponents of utilities.

These companies can pay such high dividends because they make so much money off the growing demand for natural gas, electricity and even water.

Buy why is now the best time to load up on utilities? Because they are as recession proof as it gets.

Time to Take a Trip on the Electric Avenue

Josh Peters of Morningstar writes, “Even during recessions, people have to heat their homes, take showers and keep that TV set aglow.” Even if television doesn’t sound like a necessity, try telling that to the majority of Americans. While ad revenue has crashed in the last 12–18 months, TV viewership is as steady as before…if not better.

While we think natural gas is the investment you need to make right now, electricity is the easiest and most lucrative. You see, the average American will actually use more electricity during recessions…a lot more time spent in their living rooms watching TV and surfing the Web.

Sure, industry has slumped a considerable amount. But electricity companies have seen only a nominal drop in revenue, most of which is already factored in. Meanwhile, they are paying larger and larger dividends.

When looking for an electric utility, the No. 1 characteristic to seek out is cash flow. The more cash running through a company, the better. You also have to consider whether the company is taking steps to curb spending. Today’s we have three small-cap utilities that have done expert jobs of both.

Buy These Three to Shore Up Your Income Portfolio

First up is UIL Holdings Corp (NYSE: UIL). UIL is an electric utility in New Haven, Connecticut. The company has a solid customer base of nearly 325,000. Only 5.6% of its revenue comes from industrial businesses, which helped the company escape the last market collapse relatively unscathed.

But the best part about UIL is its dividend. The company has paid out its income to shareholders dating back to 1977. Over that period, its dividend grew considerably. Now you can get a solid, consistent 6.3% dividend yield, without worrying about where the stock goes. You can’t get that with a savings account.

Next is NorthWestern Corp (NYSE: NWE). With both electricity and natural gas operations, the company has over 650,000 customers in South Dakota, Montana and Nebraska. NorthWestern has little-to-no competition in its operating region, which makes it a true semi-monopoly.

While it’s only been paying dividends for a little over a year, the company has already raised its payments to 34 cents per quarter. That works out to a solid 5.4% yield. Now is the time to lock in this growing income.

Finally, we found Empire District Electric Co (NYSE: EDE). Empire generates, transmits, and distributes electricity in Kansas, Oklahoma, Arkansas, and its home state of Missouri. While the company’s stock is a bit more volatile than others, it does offer another upside most don’t.

Empire also has water operations in various places in Missouri. This could become a lucrative business, as the cost of water continues to skyrocket.

Empire’s 7% dividend yield is enough to give it a serious look. High yielders like this don’t come along too often. We suggest you jump on it.

All three of these should be consistent income generators for years to come. If you are worried about a second market drop, or you just want to get your share of your neighbor’s energy bills, these are your best bets.

After all, where else can you get safe income in this market?

Sincerely,
Jim Nelson

October 27, 2009

Get Paid When Your Neighbor Turns on His Kitchen Light was originally featured in the Penny Sleuth.

But like most investments, successful commodities trading requires knowledge of what’s going on in the market right now.

Buying oil or corn contracts without a deep understanding of where these resources stand is a sure way to lose. That’s why today I’m going to fill you in on where some of the most popular commodities sit, and how they relate to the stock market…

That last sentence may surprise you. Even though the stock market is a few levels removed from commodities trading here in Chicago, I’ve said it before and I’ll say it again: “It ALL comes back to commodities…”

Up, up and away Superman…Dow hits 10,000 again.

Stocks have made new yearly highs and the prognostication of the S&P 500 climbing back to the breakdown point of 2008 on the downside at 1200 seems very attainable. The technically driven stock market ignores the news and sees earnings only through rose-colored glasses.

For the week ending October 16 stocks kept the rally moving with new highs in all the major indices. The broad based S&P 500 was up 16 points, +1.5%, to lead the way followed by the Dow up 131 points, +1.3%. Technology struggled to keep pace with the NASDAQ only up 18 points, +0.8%, to finish the week.

The economic recovery in prices started in everything last March – to be clear the overall market and the commodities market are inextricably tied together.

The S&P 500, the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows it provides insight into future moves in other markets. The CRB Index, maintained by the Commodity Research Bureau, broke above the 267 level making new yearly highs last week. It’s now on target for the 335 objective, which represents a 50% rally in commodities.

Higher Oil prices (wow what a turnaround in the last two weeks from $65 to $80) are a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.

Lower Gas Bills – 20% Off Sale

One market that my Resource Trader Alert subscribers have been keeping an eye on is natural gas.

This from Reuters:

“U.S. consumers are expected to pay lower natural gas bills this winter compared with last year due to above-normal gas supplies and cheaper energy prices, the American Gas Association said on Monday.

“Plentiful domestic natural gas supplies and lower wellhead prices will drive bills down this winter and provide relief for natural gas customers struggling in a trouble economy,” the AGA said in its annual winter outlook.

“Natural gas inventories have already hit an all-time high and are expected to remain at record levels by Nov. 1, which is the start of the U.S. heating season. Utilities built up those stocks throughout the year with gas that was much cheaper than in 2008.”

I get emails here at RTA asking why I’m in bullish positions in almost everything we trade. Well the easy answer is in the risk to reward. At historic low levels the upside is much greater than the limited downward potential. One market for me that is possibly setting up for a bearish play is Natural Gas. It used to be very tied to Crude but that relationship has changed dramatically in the last few years.

Gains in the Grains

The Grains, namely Corn and Beans have reverted back to fundamental news to move prices. New relative highs last week were a result of weather fears delaying harvest and hurting yields. When the near term forecast showed less extreme temperature drops a profit-taking sell off hit the trend Thursday.

After further analysis the 60 cent ($3000 per contract) run for Corn and over a one dollar move ($5000 per contract) in Soybeans can be traced to a technical breakout rally October 5th. That day also marks the month low for the S&P, a break in the Dollar Index below 77 and Crude finding support levels. So in reality this Grain rally is as much about global economic recovery and the weakening Dollar adding inflationary fears as the temperature outside tumbles.

As the stock market continues to climb – justified or not – commodities trades are going to keep seeing those bullish sentiments trickle over to commodities floors. Right now is as good a time as any to take the market to task for some serious short-term gains. And I’ll continue to be here to help you do just that.

It ALL comes back to commodities,
Alan Knuckman

October 22, 2009

Your Exclusive Glimpse at the Commodities Market was originally featured in the Penny Sleuth.

Here’s everything you need to know to profit from the best metal ETF on the market.

Forget gold and platinum -– and even exotics like palladium -– the only precious metal that you need to own right now is silver. That may come as some surprise given the rally that gold has had this year, and given the analyst sentiment that has pushed the SPDR Gold Trust ETF (NYSE: GLD) to the world’s sixth-largest holder of gold bullion -– ahead of Switzerland and China.

But from a valuation standpoint, there’s no question that silver is the best metal to buy right now.

Making a value case for a commodity –- like gold, silver, or oil –- isn’t quite as simple as it is with a stock. That’s because while stocks have easily defined assets, the value of a commodity is simply whatever people are willing to pay for it. It all comes down to scarcity, or how much of a given commodity is out there.

In the case of precious metals like gold or silver, the metal is worth something because there isn’t a lot of it out there. Likewise, nonrenewable energy sources like oil are valuable because it’s in limited supply.

Traditionally, investors have looked at the relationship between gold and silver’s prices to determine whether one of the metals presented a good value play. At present, the gold-to-silver price ratio sits at approximately 59:1, which while high recently is nothing compared to its peak of 98:1 back in 1991.

But the fact of the matter is that the gold-to-silver price ratio is a worthless measure of the two metals’ value. To get a more meaningful indicator, let’s take a look at each metal’s “market capitalization” -– the value of all of “above ground” gold or silver multiplied by its price.

The results are startling…

You see, unlike gold, which has limited industrial uses, silver is used in a number of manufacturing processes. Some of these processes, known as non-recoverable industrial consumption (NRIC), result in the destruction of the metal and lower the amount of above ground silver. According to silver analyst Theodore Butler, in the last six decades NRIC has resulted in more silver being consumed than mined – from 10 billion ounces above ground in 1950 to just 1 billion today.

Compare that to gold, which has seen its above ground supply increase 150% to 5 billion ounces during that period.

As recently as 1975, the value of the world’s gold was 23 times higher than silver’s. Today, with depletion taken into account, gold is currently priced 250 times higher than silver. That’s a shocking difference.

And it’s one that suggests silver is grossly undervalued as an investment right now.

The Best of the Silver ETFs

The best way to play silver right now is clearly exchange-traded funds (ETFs).

While buying bullion direct is a good option for silver investors, the premium you’ll pay suppliers — often in excess of 5% — and the costs and risks associated with storage make it a poor choice for the vast majority of investors.

Investing in silver companies also adds a lot of risk over ETF plays. That’s because while precious metals are a point of refuge for investors when stocks are flailing, companies that mine the metals aren’t immune to the market’s overall trend –- they might do “better” than the rest of the market, but in a bear run that has most equities down double digits, “less worse performance” is little consolation for losses.

Not only do ETFs offer pure commodity exposure that’s nearly free of market irrationality, the best funds physically hold the silver bullion that your shares represent.

A vault filled with silver bars is a big draw for investors who are nervous about a fund failing to meet its investment objectives.

Though silver’s ETF offerings aren’t as varied as gold’s right now, there are several funds worth looking at right now. The biggest of the silver funds is the iShares Silver Trust ETF (NYSE: SLV), which has a market cap of $4.97 billion, and is one of the largest owners of silver bullion in the world. Other smaller funds include the PowerShares DB Silver Fund ETF (NYSE: DBS) and newly formed ETFS Silver Trust (NYSE: SIVR).

But in truth, the only silver ETF worth trading right now is the stalwart SLV. That’s because the other two funds lack the liquidity, cost-effectiveness, and options that SLV offers. And right now, SLV is on the verge of a technical breakout that could equal double-digit gains in days…

Taking a look at the chart above, the first thing that becomes clear is the uptrend that this fund has been on for the last year. And year-to-date, SLV has been constrained within a tight trading channel, which it’s currently right at the top of.

While nearing the top of a channel would normally signal a bounce back down, in this case, with SLV currently at a 52-week high and little risk of profit taking, the potential for a breakout above the trading channel is very real. If shares break through the top of the channel at the $17.70 mark, the breakout is underway and it’s time to consider grabbing onto shares.

Supercharging Your Silver Play

As usual, options are the best way to supercharge this silver play. With a move imminent, a shorter-term out of the money call option on SLV packs the highest profit potential. That could mean as much as triple-digit gains by the end of the month…

That said, if your risk tolerance is lower, the fundamental potential of silver easily justifies going with a more conservative option trade for this fund. You can take a look at all of SLV’s available option at Yahoo Finance.

Cheers,
Jonas Elmerraji

October 9, 2009

This Precious Metals ETF Could be Gold’s “Silver Bullet” was originally featured in the Penny Sleuth.

Silver is the most flexible metal on earth. We’re not talking about its malleability. We’re talking about how it is used.

Let’s take the point of view of those expecting a quick, painless recovery. In that case, silver is a great investment. It has many industrial uses other precious metals don’t. As the global economy kicks back into gear, we’ll see more demand from electronics manufacturers, battery makers and solar cell producers — all of which use silver in their products.

There are thousands of uses for silver in industry. It is used in water purification, medical machinery and, of course, jewelry. All of these industries will begin to pump out products again, which will put a strain on our limited aboveground silver reserves.

Now take a look at the world through the eyes of those thinking we are going to see a second collapse. The best place to store wealth is in precious metals. Of course, gold is the most common place to store cash, but silver is no slouch.

From 2006 until now, the physical holdings of silver funds have jumped 11-fold. That’s because more people than ever are interested in holding silver — or at least a fund that holds silver.

Silver is both a way to safely store your wealth and to spend it. Over the past several centuries, silver has been used as currency. In fact, our own U.S. dollar was once backed by silver. For those expecting the worst, silver is a must-own. These ETF holdings don’t even take into account how many people are stocking up on personal physical holdings.

There’s no shortage of demand. Everything is in place for another massive run-up. Gold already broke the $1,000 per ounce threshold last month. And it busted through its 2006 highs this week. Even so, silver is still lagging around $16.50.

David Morgan from Silver-Investor.com notes that when gold breaks through $1,000 and stays there for a length of time, silver will shoot up. He even went as far as to say silver will break through last year’s $21 high and hit $25 per ounce sometime in 2010.

Are we suggesting you buy silver? Well, yes. But we have a much better way for you to make money off this rise…

Buying shares of a major primary silver miner like Silver Wheaton (NYSE: SLW) would do the trick. It’ll certainly leverage its massive reserves and production against silver’s rise and return larger profits to shareholders than simply buying silver will. But even these gains will be miniscule compared with what you could see with small-caps.

We have an opportunity to get option-sized gains on silver’s rally without the downside or expiration hassles of actually buying options. By buying shares in a junior silver miner, like Hecla Mining (NYSE: HL) or Mag Silver (AMEX: MVG), we can take advantage of huge price swings without worrying about it expiring worthless, as options often do.

In just the last week, Hecla is up 15%, and Mag is up another 5%. As I write, these stocks are continually pushing into new 2009 highs ever day. When the silver boom gets traction in the market, expect small players like these to rocket as a result.

Sincerely,
Jim Nelson

October 7, 2009

Finding Option-Sized Gains from $25 Silver was originally featured in the Penny Sleuth.

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

September 23, 2009

Natural Gas’ Triple Could Give Us a 416% Gain By Year-End was originally featured in the Penny Sleuth.

In the last year, my Resource Trader Alert readers have already had the chance to book 143%, 148%, even 200% gains thanks to the commodities market. And in the current economic climate, as commodity prices start to heat up once again, the profit potential is amazing.

Here are the resource plays that I see rocketing right now…

Gold and Silver are leading the markets higher with the decline in the U.S. Dollar.  The greenback is at its lowest levels in since September 2008.  Gold is solidly above $1000 an ounce and looks positioned to easily make new all time highs on a course to $1200, from my projections.

Silver has made an impressive rally as well – one that I see continuing into the upper teens.

Recently I’ve been concerned about the lack of recent strength in Crude compared to new highs in stocks and metals.  Last week, that disconnect was repaired with a 5% move in prices putting oil solidly above $70 a barrel again. And it looks like oil hasn’t stopped its ascent either…

More Fuel for Higher Market Prices

The Organization of the Petroleum Exporting Countries (OPEC) did a good job of pushing oil prices up this summer. While OPEC managed to boost oil prices in the last six months, at current levels black gold is still a far cry from where it was a year ago – and where it could be again soon. This from Bloomberg:

“OPEC’s success in more than doubling oil prices since a five-year low in December will probably persuade ministers to maintain production quotas after this week’s meeting.

“Reducing shipments beyond record cutbacks last year would endanger the global economic recovery, the Organization of Petroleum Exporting Countries’ president said last week. Oil rose to $75 a barrel on Aug. 25, the price Saudi Arabian King Abdullah says is fair for consumers and producers.”

A major flaw in the governments’ unfair obsession with speculators is the failure to acknowledge the role of OPEC in energy prices.  They are a cartel!  Traders can buy and sell but only OPEC colludes to determine price levels.  Until hybrid cars, solar and geothermal technology, and algae fuel replace black gold we can fight the battle for financial gains.

We’ll continue to do just that.

It ALL comes back to commodities,
Alan Knuckman

September 14, 2009

What You Need to Know About the Future of Silver, Gold and Oil was originally featured in the Penny Sleuth.

On Wednesday, I told you how out of control breakeven prices for oil producers were a sign that oil prices were due to push back into the triple digits. I also told you that one ETF was the best way to make a play for black gold right now.

That’s because only oil ETFs let you take advantage of oil’s moves just as easily as you’d invest in a regular stock…

There are a large number of oil and oil-related ETFs trading on the market right now –including funds that invest in oil futures and those that hold shares of oilfield service companies. But investing in oil through companies that service oil producers is a risky play; as the Exxons of the world continue to see their margins evaporate, they’ll be unlikely to enter into many major development obligations that these companies live on.

Right now, there are only three oil futures ETFs trading on the market: the U.S. Oil Fund ETF (NYSE: USO), the PowerShares DB Oil Fund ETF (NYSE: DBO) and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL).

But of the three, only one stands out as a good investment right now…

For starters, the iPath fund isn’t actually an ETF at all – it’s an exchange-traded note (ETN) — a debt security that’s linked to changes in the crude oil commodity markets. Instead of directly investing in oil futures (like the two ETFs do), this ETN is basically a promise from the issuer that they’ll track the performance of oil. That fact adds a lot of risk to OIL – to be precise, it’s known as counterparty risk – because the investment’s performance isn’t just tied to oil, it’s also tied to the financial health of the issuer. We’ll pass on this one…

Commodity ETFs have taken a lot of heat recently because they don’t perfectly track their underlying commodities. In the last 4 months, for example, the spot price of crude oil has risen 36%, while USO has only rallied 28%. One of the biggest reasons for the huge tracking error is what’s known as “roll yield”. Because futures have expiration dates, USO’s administrators have to constantly trade in their old futures for new ones. Unfortunately, because of the way future prices change over time, they often post a small loss on each position as they roll into the next futures contract.

As time goes by, this roll yield adds up to a big discrepancy between the performance of oil and the performance of USO.

But negative roll yields aren’t a problem for DBO. This ETF, which is based on the Deutsche Bank’s Optimum Yield Oil Index, uses the an optimum yield formula to replace expiring futures contracts with contracts that have the highest possible positive roll yield. And even with the added yield advantage, DBO’s expenses are 37% cheaper than USO’s.

While even DBO can’t track the spot price of oil perfectly, the ETF is the only fund worth considering if you want to invest in oil. And the technicals suggest that right now is the time to open a position …

Maximize Your Oil Profits with Smart Timing

For the past five months, DBO has been in a sustained uptrend from its March lows. Currently, there are several very bullish indicators that suggest DBO is going to keep up – or accelerate – its rally. First, onto the chart:

DBO has been trading in a fairly well-defined channel since March, and while this ETF’s current share price is sitting toward the midpoint, a recent bounce off of its 50-day moving average (DBO’s average price over the trailing 50 days) means that the price has a safety net to keep it from tracking back down to the lower bound of the channel.

Translation: DBO will continue to push higher…

Another bullish signal right now is the crossover of the 50-day moving average over the 200-day moving average. That intersection is a leading signal that means a large positive change is underway in this ETF. Given that this is taking place during a big bullish move, it’s a very strong positive signal for traders.

DBO’s Fibonacci retracements are also looking very solid right now…

Fibonacci retracements are a tool used by technical analysts to determine key points of support and resistance using mathematically significant numbers. DBO has bumped off the vertical blue Fibonacci lines six times in its latest rally – which tells me that this ETF is highly influenced by these levels. Right now, it has just broken out above its most recent high (and the 0% retracement level on the graph above). That’s a significant development because it means that there aren’t any obvious stumbling blocks left for DBO to hit.

All of that said, I’d like to see a healthy pullback to either the lower bound of the price channel or either the 50 or 200-day moving averages before taking a position in this ETF.

As usual, the options on this ETF have a much higher profit potential than buying the ETF itself can provide. If your risk tolerance is higher, there are a number of DBO options with a decent trading volume right now.

Cheers,
Jonas Elmerraji

August 7, 2009

The Only Oil ETF Worth Investing In was originally featured in the Penny Sleuth.

Over the course of the next six months, major changes are going to shape our economy… The only one you should care about is the price of oil. Turn on CNN, Fox News, or CNBC, and you’re all but guaranteed to see a panel of “experts” who are betting on cheap oil. They’re making a huge mistake.

Now more than ever oil is poised to rocket back up to triple-digit prices – and the investors who make smart bets now are going to make a fortune in the process.

Americans are getting misled about the oil crisis that we’re really facing. Despite media contortions that suggest speculators in the futures market are responsible for the monumental price swings in oil that we’ve seen in the last two years, the price of oil isn’t in line with where it should be right now. It’s absolutely true that oil speculation fueled oil’s run-up to $147 last summer, but what the pundits leave out is the fact that oil’s intrinsic price is on the rise regardless of supply and demand.

Prices that aren’t based on supply and demand… What kind of market is this?

The Real Reason for Rising Oil Prices

One of the reasons is the fact that the cost of extracting and processing oil has been rising over the course of the last few years. Peak oil is a frequently mentioned justification for the growing cost of oil extraction. Under the peak oil theory, as we pump the good, easy to find oil out of the ground, we’re left with lesser quality oil that’s deeper in the earth and more difficult (and expensive) to extract.

But peak oil isn’t just a theory; it’s a certainty.

Some oil experts even believe that oil may have peaked back in 2005. If that’s true, it means that as time goes on the price of oil will continue to climb very quickly. That said, the evidence that worldwide oil production has already peaked is anecdotal at best.

The chart above shows worldwide oil production from 1960 to 2005. While crude oil production reached new highs in 2005, we’re currently in a place similar to the late 1970s where oil saw a short-term “false peak” then continued to climb. And for every expert that says we’ve already hit oil’s production peak, there are two that say we have reserves to last us decades more, and that the peak is a long way off.

But that doesn’t change the fact that the cost of oil is rising for producers.  Could it just be a case of poor budgeting?

Right now, a handful of Middle Eastern nations are in a tight spot. Despite access to one of the most precious commodities in the world, places like Saudi Arabia, Dubai, Qatar, and Oman are at serious risk of posting big budget deficits for 2009. For some, like Saudi Arabia, it would be the first deficit posted in almost a decade… For others, like Qatar, this would be the first budget deficit in the country’s history.

And over spending isn’t relegated to the oil producing nations… oil producing companies are feeling the hurt as well right now:

In the last nine months, oil giant ExxonMobil (NYSE: XOM) saw its profits drop 73% to $0.92 per share. That’s a colossal tumble for a company that just a few months before announced the he largest annual profit of any company in U.S. history.

Before the oil boom took off, the operating cost for extracting a barrel of oil was $38. In the last several years, the bottom line break-even price for a barrel of oil has averaged $87.24 – that means that in order for companies like Exxon and Chevron to report a profit from their oil production divisions, they need to see oil prices 22% higher than they are now.

But it gets worse…

Between 2002 and 2008, oil prices rose steadily – at a rate of nearly 18% every year. With projections of $100 oil in the late 2000s (like we saw last year), oil companies and producing nations grew their obligations, building new facilities and spending nearly 60% more on exploration of new oilfields. Those huge expenses are going to have to be priced into each barrel of oil going forward, raising breakeven costs even more.

Why High Oil Costs Mean High Oil Profits for Investors

Even though the cost of oil (and its intrinsic price) has little to do with supply and demand, those two market forces are more or less what drive the market price of oil. In the past year, we saw oil prices fall as far down as $33.87, a painful spot for the oil companies and producing nations that I mentioned earlier.

As long as making a profit on oil continues to be difficult for companies, we’re going to see the playing field contract. Middle Eastern countries will have two choices: tighten their belts and cut spending, or pressure OPEC to cut production and increase their margins.

Make no mistake – high oil prices aren’t going to throw our country into anarchy. We’re not facing disaster at the return of $150 oil. But oil prices must go up, and many investors are just starting to realize it. Those who do are going to find their portfolio values go up as well.

I’ve found an ETF play that is poised to capitalize on the rising cost of oil. In fact it’s set to take off in the next week. That said, it’s not quite time yet – I’m hoping for a healthy dip before we go in for a buy. I’ll be back Friday with the ticker and the reason why it’s the only oil ETF you should bother with.

Remember, I’m releasing this recommendation exclusively to Penny Sleuth readers this Friday…

Cheers,
Jonas Elmerraji

August 5, 2009

Profit from the End of Cheap Oil with This ETF was originally featured in the Penny Sleuth.