The big question remains whether the stock indices are indicative of an imminent improvement in the U.S. and World economy. In general, the correlation seems obvious, but what the public should understand is that just because the DJIA has moved up from its lowest point since 1996, we’re not out of the woods yet. The Dow hit its low point of 6440 in March 2009 and has since rebounded 2000 points closing above 8500 points recently. Our GDP has still been contracting, and the ramifications of all these job losses are coming full circle.
I fear that there is a little too much speculation and not enough substance to keep the Dow climbing too much further without a market reset. Volatility in the Dow these last ten days is indicative of those same fears on Wall St. Fundamentally, we are better than where we were two or three months ago. The government “stress” tests of the banks were stringent and renewed confidence in the U.S. financial sector. There is still an uphill battle, but the good news is that those banks are offering equity to raise capital rather than having to resort to more government bailout money. Although, mass stock offerings dilute the value of current stockholders, this behavior is better than the alternative for the American people. It also provides an opportunity to strengthen a position buy buying low in a strong company.
One sector that has hit its bottom, in my opinion, is Natural Gas. Traditionally, natural gas trades at 1/6 of what crude oil trades at. So, if a barrel of crude trades at $60, you would expect natural gas to trade at $10. However, natural gas closed at a low of $3.60 on Wednesday and may even fall a little more on Friday with news that stockpiles have increased greater than expectations by 103 billion cubic feet. The fear is that there is not enough demand to combat the burgeoning supply of natural gas out there right now. However, looking at natural gas on a long time horizon, there are several fundamentals in its favor. Although the Obama administration has been concentrating on cleaner energy like wind and solar, natural gas is a back up for both. Also, natural gas burns 50% more cleanly than coal. As the economy improves and idle facilities in the U.S. come back online, natural gas will be needed to power our nation’s cleaner burning power generators. Also, even though you haven’t heard much from T. Boone Pickens lately, broadcasting his plan for energy independence via commercials, he is lobbying President Obama just as fervently as ever. Natural gas is on the verge of swinging back up again. Maybe not tomorrow, maybe not next week, but it should start ascending soon. Also, if crude prices are trading accurately, the implication is that natural gas should be trading at $10. Now, I don’t think natural gas is getting to $10 anytime soon, but it is certainly foreseeable that it should get to $5-6 by the end of the year.
There are several stocks that might be good natural gas plays. The CEO of Linn Energy (LINE) was on a popular financial show the other day. Linn is a master limited partnership that hands out a hefty dividend. Any dividend stock should be scrutinized closely to ensure the company will remain solvent enough to pay the dividend. Linn did a great job of hedging 100%, 102%, and 92% of its 2009, 2010, and 2011 natural gas when crude was at $100 per barrel and natural gas was above $8 per thousand cubic feet. With guaranteed margins of $3-5 per TCF, and a sweet dividend of $2.52 and a 15% yield, Linn should be considered strongly. Anadarko, Sandridge Energy, and Chesapeake all deserve a good look also.
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