Market Opinion

This is what I call the “shopping season” for natural gas stocks. And even though I’m a longer-term bear on natural gas, there is one part of the natural gas market that is not well known, I think mis-understood, and potentially mis-priced. As a result, I think it could make me money this year – and I think now is the time for me to be buying this little subset.

The reason for these purchases NOW is that every year, summer is the weakest time of the year for natural gas and sets up an annual trade for natural gas stocks – buy in June-August, sell in December- January when North American heating demand should have natural gas trading at its year highs.

Last year gas stocks languished badly through the summer, forcing fire sales on assets and it took every bit of goodwill the bankers and producers (in Canada) had for each other for some of these companies not to go bankrupt. But September 2009 saw a large seasonal jump in natural gas prices – they roughly doubled from $2.50/mmcf to $5 in January 2010 – despite fundamentals remaining poor. And there was a great 4 month trading rally.

However, natural gas prices in the US and Canada actually turned up last week, enough to get the market excited. I see that the market wants this trade to work so desperately. I am not bullish intermediate or even long term on natural gas, so I expect that if there is a rally in gas, it will just be a traders rally. But like I said, last year gave investors a fantastic seasonal rally in natural gas stocks – as long as you sold in January, the seasonal high.

As a trader, natural gas does have some positive things going for it besides seasonality:

Technically, it had a minor breakout this week. The 28 week moving average for natural gas this week was $4.52. This is just my sense but as the price neared that level, more speculative fever came into the market that it would break through this level, and when it did, natural gas got a pop. And the Canadian market followed suit in sympathy.
The market is clearly willing to bid natural gas up on weekly injections that are only a bit smaller than last year.
It’s possible that at some point in the coming weeks the cumulative amount of gas going into storage will slip below last year, and the market could take that as a bullish point to move up the gas price. US gas is only about 2% above last year’s storage levels at this time. (See chart below).
And US gas prices will certainly get an emotional boost whenever the first hurricane is named.
Coal prices are trending higher, making natural gas more competitive in some areas.
US gas demand is up year over year and crude inventories are declining.
The blowout of a US gas rig in Marcellus shale could bring in new drilling regulations-increasing the cost and time to get wells into production.

So I’m going to establish some small starter positions in producers in one particular subsector of the natural gas market – that is potentially mispriced by the market. All boe (barrels of oil equivalent) are not created equal.

Now, as usual with the stocks in my portfolio, these companies also have large undeveloped land packages, and are low cost producers. I’m not making any big bets yet, but subscribers will see where I’m going and can decide their own comfort level and timing.

Hello, this is Keith Schaefer, editor and publisher of The Oil & Gas Investments Bulletin. I started my subscription service in mid-2009 because I could see there was no place where retail investors could go to easily find which oil and gas companies were creating huge shareholder wealth by using exciting new technologies, such as horizontal drilling, fracing and 3D seismic.

These companies are increasing cash flows – and stock prices – by finding ways to get more oil and gas out of the ground. And junior and intermediate producers – $2-$20 stocks – are leading the way.

I find the leaders in the new plays that are using these technologies. My research is finding higher and higher flow rates from new wells in old formations as management teams fine tune their use of these new technologies.

It’s amazing how technology is lowering operating costs – and increasing profits – for many publicly traded energy companies.

I find the ones who have the capital and the knowledge to be the fastest growing in their area – this usually means they have a large undeveloped land position in an area where either production costs are very low or production rates can be very high. They are covered by several research analysts, so there is research support and institutional money flow behind them.

Euro Fears Continue to Push Global Markets

Posted by Jamie Switzer and Marc Latta of Raymond James

on Monday, 7 June 2010 21:07

Please check out our website at:
http://www.raymondjames.ca/jamieswitzer

If you would like to receive our “Weekly Wrap”, please click HERE to subscribe.

Euro Fears Continue to Push Global Markets

Fear is no doubt controlling the equity markets as the bulls and the bears continue to battle it out. The flight out of the Euro and into the US Dollar over the past couple of months has been dramatic to say the least. This trend could continue until the Eurozone finds a viable solution to its debt problems. The equity markets have been manic with some very dramatic moves from day to day. On a technical basis, equities are oversold at current prices and a bounce is due any time. That being said, markets could experience another wave of panic selling to wash out the “weak hands” before any kind of a summer rally ensues. In preparation for what we believe could be a difficult Fall, we have been recommending clients take a measured investment approach by reducing equity exposure.

One characteristic of any lengthy, grinding bear market is its tendency to be compromised by a series of sharp pullbacks, interspersed with strong rebounds which usually tend to last several weeks. The 1930-32 bear market is probably one of the best examples, in which we had nearly a dozen separate retreats, each of which led to a sharp, short-term surge. Could we be on the cusp of another bear market? The interesting aspect of this type of environment is that the opportunities for the prudent, astute investor are tremendous. Ultimately we believe that the combination of “Tactical Equity” investing and ownership of quality fixed income positions will prove to be a successful portfolio strategy. We will continue to capitalize on the market volatility by buying equities when panic sets in and selling when the headlines are rosy.

Policymakers hold the key to easing investors concerns and it starts with the European banks finding viable solutions to the sovereign debt problems. The proposed global bank tax hardly looks like a pressing need until the European Union can stop the contagion from spreading any further.

Soundbites

Brothers Anil and Mukesh Ambani have seemingly ended an intense feud that has festered since 2005. Why is this important? The two brothers, who control a massive fortune through their Reliance conglomerate, account for more than 4% of India’s GDP. The announcement that they had put the country’s most colourful and widely-watched family drama behind them moved the stock market higher and boosted optimism throughout the nation. A peace agreement is rumoured to have been brokered by India’s Prime Minister, Manmohan Singh, after repeated visits to court failed miserably. Dhirubhai Ambani passed away in 2002, dividing the family businesses, made up of textiles, petrochemicals, refining and energy into two distinct tranches. Problems arose as the businesses continued to expand and Anil felt he got the short end of the stick.
It’s always difficult to gauge the size of a natural disaster and the potential impact it could have on the nearby coastline. To provide a little perspective, picture an oil slick stretching from the southern tip of Vancouver Island to Hope. The pipe is pumping out approximately 110,000 barrels of crude per day, forcing a fishing ban that now spans 160,200 square km’s.
A new survey by Royal LePage Real Estate Services says BC residents identify lifestyle as the chief reason for purchasing recreational property. 49% of potential purchasers are looking to improve their lifestyle while 44% see it as a good investment according to the Angus Reid survey. Those polled sighted waterfront or beach access as the most coveted feature with 44% desiring four-season use. Recreational property in BC is by far the country’s most expensive, with average prices between $345,000 and $1.5 million compared with Ontario at $140,000 to $1,050,000.

Marketwatch – A Look at the Week’s Newsmakers

Copper Mountain Mining Corp (CUM) – is officially on the road to becoming one of the country’s largest copper mines, and is scheduled to be up and running in a year’s time. The fully-permitted operation cleared its last hurdle Monday securing its final tranche of financing to complete development of its mine build-out. Copper Mountain entered into debt-financing agreements worth $322 million USD with Japan’s Mitsubishi Materials Corp, which also owns 25% of the project. Looking out 12 months, Copper Mountain will be Canada’s 3rd largest copper mine, pumping out 40,000 tonnes/yr at a cost of only $1.11/lb.
Gerdau Ameristeel Corp (GNA) – despite the uncertain economic environment we find ourselves in, foreign conglomerates are still trolling North American waters for takeout candidates. The latest is Brazilian steelmaker Gerdau, which is paying a hefty premium for GNA in order to acquire the 33.7% block of shares it doesn’t already own. Gerdau’s $11 CDN offer represented a 53% premium to Ameristeel’s Tuesday close and sent the shares soaring in Wednesday’s trading session. Rio de Janeiro-based Gerdau acquired a majority stake in Ameristeel back in 1999 and seeks to streamline the business and improve cost efficiencies by integrating the two units.
BP Plc (BP) – British Petroleum’s latest effort to tie off the oil gushing into the Gulf was a mild success over the weekend with the firm saying late Sunday that it was capturing approximately 10,000 barrels of crude per day. As fear continues to increase through Louisiana and surrounding coastal states, CEO Tony Hayward said a cap fitted over the leaking pipe some 1600 metres below the ocean surface appeared to be working. The capped crude is being pumped up to a container ship above and being spared from the 15,000 to 25,000 (no one seems to know the correct amount) barrels of oil per day that have been working its way towards the southern US coastline since April 20th. The massive slick now spans a radius of 320 square-km’s, with the bulk of it about 50 km’s off of the Louisiana coast.

“Quote of the Day

“A woman is like a teabag. It’s only when she’s in hot water that you realize how strong she is.” – Nancy Reagan

JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376
jamie.switzer@raymondjames.ca

MARC LATTA | Raymond James Ltd.
Senior Vice President, Financial Advisor
PH:604-981-3366 | FAX: 604.981.3376
marc.latta@raymondjames.ca

Suite 480, 171 West Esplanade
North Vancouver, British Columbia

This newsletter expresses the opinions of the writers, Marc Latta and Jamie Switzer, and not necessarily those of Raymond James Ltd. (RJL) Statistics and factual data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. It is not meant to provide legal, taxation, or account advice; as each situation is different, please seek advice based on your specific circumstance. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Within the last 12 months, Raymond James Ltd. has undertaken an underwriting liability or has provided advice for a fee with respect to the securities of the Royal Bank of Canada. Raymond James Ltd is a member of the Canadian Investor Protection Fund.

Voters in the US are likely to shift to the right because politicians like Ronald Reagan and Margaret Thatcher are needed to fix the world economic mess, Bob Janjuah, the chief markets strategist at RBS, told CNBC Friday. Janjuah also issued a bearish warning to investors, predicting big stock market losses, up to $15 trillion.

The golden years were the 50s and 60s then the 70s changed everything, he said about the political situation.

“Having elected people who said everything would be all right, ultimately the US and UK had to elect Reagan and Thatcher to get us back on track,” according to Janjuah.

The impact of reforms put in place by those two led to another 20 years of good times, he said. Similar action will ultimately be needed in the developed world now before he is willing to be bullish again.

“The US mid-terms will be crucial. We will see a shift to the right as the Tea Party movement demands change,” Janjuah predicted.

“There are 220 million people in middle America who are angry and believe stimulus spending has been wasted on vested interest and the banks that they believe got us into this mess,” he explained.

“For all the talk of positive growth in America, those outside of LA and New York are hurting and want cuts in government spending, not more borrowing and spending.”’

S&P 500 Set for Big Losses

As the G20 met in South Korea, Janjauh told CNBC he has no faith in institutions like the G20 or the International Monetary Fund and warned those who see positive signs in the US economy that they are living in a dream world.

“The policymakers’ response to the crisis has been new debt and this is an old game,” he said.

Over the coming months and years, this policy will have to be reversed, he predicted.

“The private sector knows this is not sustainable and is getting its act together. The consumer will do the same and sooner or later governments will follow suit,” Janjuah said.

With consensus views for growth too high in Janjuah’s view, he is calling growth over a 3-5 year time frame to be 5 percent in China, 1.5 percent in the US and flat within the euro zone as this trend plays out.

With firms, individuals and ultimately governments set to cut back on spending, growth will fall sharply across the world, according to Janjuah.

“Over the next 6 months we will see private sector deflation pushing 10-year yields down to 2 percent,” he said. “This will see the policymakers mistakenly attempt to kick-start the economy and market with a global quantitative easing program worth between $10 and $15 trillion dollars.”

With that in mind, Janjuah says Friday’s non-farm payroll number is a “complete nonsense.”

“Anyone trading today’s bogus number, well good luck to them,” he added.

Get out of Banks, Get into Gold

Like most bears, Janjuah says investors should get into gold and likes big mega cap stocks with no debt, the ability to set prices and exposure to Asia. One area he will not touch is the banks.

“We are seeing a repeat of 2007 and 2008 with the inter-bank market in trouble, people are ignoring this,” he said, adding that if he cannot see a bank’s balance sheet, he cannot make a decision to buy it.

“The S&P 500 [.SPX 1061.02 -41.81 (-3.79%) ] is flat over 10 years, if you want to make money in stocks stop focusing on the beta and instead to your homework on the alpha, not enough people are,” he added.

From a PR point of view — and Warren Buffett cares deeply about his public image — yesterday was arguably the single worst day of Buffett’s life.

…..read it all HERE

Action Alert

Posted by Jamie Switzer and Marc Latta of Raymond James

on Tuesday, 1 June 2010 17:52

Action: Buy Micron Technologies (MU-US)
Current Price: $9.15 US

Investment Risk Profile: Medium to High
Anticipated Duration: Short term (3 to 6 months)

Micron is one of the world’s leading semiconductor companies. Their DRAM, NAND, and NOR Flash memory chips are used in everything from computing, networking and server applications, to mobile, embedded, consumer, automotive and industrial designs. Over the past thirty years they have continually redefined innovation with their advanced semiconductor solutions. The company employs 15000 people worldwide and boasted net sales of $4.8 billion in 2009.

MU hit a 52 week high of $11.40 on April 14th and has corrected 20% since. We believe this is an excellent entry point for investors looking to capitalize on recent weakness in the broader markets through one of the premier technology names.

Investment Highlights:

– DRAM sales in the most recent quarter were up 24%
– Looking forward, management points to strong PC and server demand as the key driver to sales growth.
– They ended the quarter with $1.9 billion in cash, a 19% increase over the $1.6 billion in the November quarter.
– They recently acquired flash memory maker Numonyx in a deal valued at $1.27 billion US, bringing together two memory chip leaders and positions Micron to offer the most comprehensive, cost-competitive solutions in the industry to a broad range of customers and end markets.
– The book value of the company currently stands at $5.57, providing investors with an opportunity to own a leading semi company at a compelling price of 1.63 times book.

Investment risks include overall weakness in the equity markets, unforeseen slowdown in semiconductor demand, corporate integration risk and currency risk.

Please contact us by phone to discuss this recommendation and how it fits with your overall investment strategy.

http://www.micron.com/

Marc & Jamie

JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376
jamie.switzer@raymondjames.ca

MARC LATTA | Raymond James Ltd.
Senior Vice President, Financial Advisor
PH:604-981-3366 | FAX: 604.981.3376
marc.latta@raymondjames.ca

Suite 480, 171 West Esplanade
North Vancouver, British Columbia

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