An update from your resident bear on natural gas... You might recall my previous warnings, beginning in 2006, about the looming worldwide glut of natural gas, and in particular about the madness of building LNG (liquefied natural gas) import facilities:
I believe over-investment in domestic drilling and production has already produced a glut of natural gas that will persist for many years. Unlike oil, natural gas is almost totally a North American market. New technologies recently have unlocked huge supplies of gas in the United States. Heavy investment in the sector since 2003 is now beginning to bring these new reserves into production. Far from running out of natural gas, we're drowning in the stuff... – PSIA June 2006
As I foresaw, the combination of huge new discoveries of so-called "unconventional" natural gas and the development of global LNG infrastructure has produced the largest glut of natural gas in at least 30 years and perhaps ever. The glut is still getting worse. We're about to run out of storage. Still, more LNG facilities continue to be built. Exxon is launching three additional LNG facilities in Qatar this year. Each will produce more than 3 billion cubic feet of gas a day. The target market for this gas is Europe. But because the U.S. has the world's largest natural gas infrastructure and storage facilities, if the gas doesn't sell in Europe or Japan, it ends up here. Analysts are already predicting total storage capacity in the U.S. (3.9 trillion cubic feet) will be completely full by year's end. What do you think will happen to natural gas prices when there's no more storage? I'd bet on lower prices.
Finally... what is going to happen to all of the highly leveraged natural gas producers? Gas shipped from Qatar to the U.S. costs about $2 per million Btu. But it costs about $7 per million Btu to produce it profitably in the U.S. Which would you rather buy, $7 American gas or $2 Qatari gas? I'd be very cautious in the domestic sector. By the way, natural gas futures are still sitting around $6 for winter delivery, which is interesting given the supply glut and the new LNG supply.
The mainstream financial press has been saying for months that the "next shoe" to drop will be commercial real estate. Everyone can now drop the "next" modifier: Standard & Poor's is preparing to downgrade some $235.2 billion of commercial mortgage-backed securities (CMBS). When these downgrades occur, the banks and insurance companies that own this paper are going to have a big problem. Prices are already down around 25% in the past year. Dan Ferris says one of the best-known insurance companies in the United States is in dire straits because of its commercial real estate portfolio. See Extreme Value for more information.
While it's not impossible for conditions in real estate to get worse nor is it impossible for investors to demand still more premium in the future, I think we've likely seen the peak of the REIT spread [an important timing indicator for REITs]. And that means REIT share prices are likely to continue rallying. Why do I think the bear market in REITs is over? Because the floodgates of new capital have opened. – PSIA May 2009
In the May issue of my advisory, I recommended buying a fund that owns REIT stock and preferred shares. Its largest position is in the world's largest mall owner, Simon Property Group (SPG). It also owns a chunk of preferred stock in Manhattan's largest landlord, SL Green (SLG). We're up nearly 13% in a little more than a month on the recommendation and still collecting an 11% annual yield – and it's likely headed much higher.
As we predicted, the public is regaining its confidence in REITs... Both Simon Property and SL Green recently raised billions of dollars in the public markets to shore up their balance sheets. And Marc Holliday, CEO of SL Green, just told Bloomberg, "A lot of the correction has already occurred... Everybody thinks the world is falling apart – it is tough out there – but I can see that in the next six to 12 months we'll be at an inflection point."
Despite the difficult market, SL Green has been signing around 300,000 square feet of new leases a quarter at rents 20% to 25% above the expiring rents – a rate Holliday expects his company to continue for the next three to four quarters.
Manhattan office prices fell 13% in March from a year ago, and rents are down around 28% from the peak. Holliday expects rents to fall another 10% to 15% before bottoming. But he's not concerned... He says SL Green plans to hold its properties for a long time... "Green is going to be viable, a survivor in this market, and it's going to have a balance sheet to take advantage of these opportunities."
He is literally the single best investor we've ever met – including much more famous luminaries. We hesitate to even tell other investors his name – Chris Weber. I met him 13 years ago. I've never seen him make a bad decision. He got out of stocks, all of them, in November 2007 – just the latest of the legendary market calls he's made in his 40-year career. This weekend, we republished his current big call: "The greatest currency trade of the millennium."
In essence, Weber writes that since around 2001, whenever any currency has risen too much, the local workers that make their living exporting goods start to whine. Their governments respond by lowering the value of their currency, thereby making exports cheaper and benefiting the domestic economy. New Zealand, Switzerland, Australia, Canada, and Norway have all seen their currencies strengthen recently, and they're all taking drastic measures to devalue.
In an extreme case, the New Zealand dollar has climbed 23.6% against the U.S. dollar from mid-March through mid-June of this year – the fastest three-month climb for the Kiwi dollar since 1971. New Zealand's economy is based on agricultural exports, and exports are plunging. The government cut the interest rate to 2.5% – a surprise, considering New Zealand had the highest interest rates in the world from 2005-2007. It is also printing money and actively shorting its own currency.
This type of government intervention always happens, and that currency always falls against its trading partners. But the move is only temporary. Soon, their trading partners start devaluing their currencies... It's a dangerous, downward spiral. But since 2000, one currency has avoided the massive devaluation... It's actually returned hundreds of percent...
To read the full essay (completely free), click here:
By the way, if we met in person, I'd beg you to read Weber's latest essay – which explains the most important financial trend in the world. I'd also beg you to subscribe to his investment newsletter, which along with Jim Grant's, are two of the best in the world. But knowing these kinds of endorsements are a dime a dozen, I'm willing to wager you'll ignore my advice. That's fine with me. The less people who know about Weber, the better.
S&A FDA Report editor George Huang has already made nearly 150% for his subscribers this year with his recommendation of Dendreon – trading the stock in advance of its release of critical trial data for its prostate-cancer vaccine, Provenge. He sees a similar trade setting up right now...
This new company is currently developing an oral rheumatoid arthritis (RA) drug. The RA market is more than $14 billion and growing, but there are zero effective oral drugs. Almost all RA patients require injections.
It's a classic biotech conundrum... If George's company wins FDA approval in July, its stock will probably double. Its new drug will easily be a multibillion-dollar seller. If it fails, the share price will plunge.
But George doesn't care if the drug gets approved or not...
Rather than playing one side or the other, George has designed a trade that will return between 100% and 230% regardless of the trial results... The payoff for this trade is probably only days away. And our special offer for the S&A FDA Report ends tonight at midnight. To learn more, click here...
New highs: Hatteras (HTS), AmeriGas Partners (APU), Crucell (CRXL).
We asked you for your thoughts on our "No Way Out" letter – a newsletter that would only cover companies we believe can't escape bankruptcy. And although we didn't even offer a penny in return, we got hundreds of letters. Thank you very much.
Now... a tougher challenge: We'd like to hear from any longtime reader who has gotten an education in investing from our pages... and has done well using our strategies despite the tough markets. Do we have any success stories out there? Please let us hear from you: feedback@stansberryresearch.com. (By the way, all replies to this request will be treated with strict confidentiality. We won't publish your name unless you give us permission.)
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"Your call on GM was so damn refreshing I just freaking LOVED it!! I hope Amerika wakes up but I, like you, think we have some tough times ahead for our way of life and what we used to all take for granted. Keep up the great work!" – Paid-up subscriber GA Catalano
Regards,
Porter Stansberry
Baltimore, Maryland
June 29, 2009