The S&A Digest: The Coming Carnage in Natural Gas

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/01/2013

Sjug goes Japan crazy… Gross is bearish on bonds… It's time to buy in Thailand (really)… Greenblatt owns only two stocks… Carnage in natural gas…

Steve has gone crazy for Japan. He's talking seriously about writing a book on the country with the world's best-known Japanese investor.

I've seen Sjug get on these investment kicks before. It usually happens about once a year. One year, it was gold coins. Then it was Icelandic bonds. The last big trend he saw was in timber. Now it's Japan. Luckily for all, he's always right about these big themes. In fact, he gets obsessive about knowing everything about the investment. It's fascinating to watch. And I'll have a front row seat for the next four days…

Tomorrow, Steve Sjuggerud and I are flying to San Francisco. We're meeting with a few of the contacts Steve made recently in Japan. For the next four days, I'm sure I'll hear nothing but Japanese research from Sjug… but that's okay. We'll be in Napa Valley most of the time. I know, I know… it's yeoman's duty – especially at this time of the year. But we do it for you, dear subscriber.

Due to my travel tomorrow, look for the next Digest to be published on Friday.

Bond king Bill Gross, who manages nearly $700 billion at PIMCO, is as bearish on bonds as he has been in two years. Cash and cash equivalents – bonds due in less than a year – equal 43% of total assets in his $99.9 billion Total Return Fund. In short, he's put nearly half his fund in "cash." To read Bill Gross' monthly market outlook, click here.

More trouble in Thailand… Last week, Thai army chief Gen. Sondhi Boonyaratkalin said he wanted Shin Satellite returned to Thai control. Last year, former Thai Prime Minister Thaksin Shinawatra sold Shin to a Singapore investment firm for $1.9 billion. Gen. Sondhi said he wants to "salvage the country and its assets" for the sake of national security. Equity analysts fear that the sale may be forced. Thai stocks have been slowly recovering from a P/E of 5x last month to a current P/E of 6.5x. Even with this latest bout of bad news, Thai stocks have continued to move up. It's probably time to buy. And it's definitely time for us to get some feet on the ground over there… Goldsmith, pack your bags.

Value investor Joel Greenblatt of Gotham Capital pioneered a focused strategy of investing in "special situations" – like spinoffs, divestitures, and rights offerings. By owning large positions in only a few stocks, he was able to achieve a 50% annual rate of return in his flagship fund. In his latest 13-F filing with the SEC, Greenblatt says he only holds two stocks – Wal-Mart (WMT) and American Express (AXP).

I'm sure you've seen the subprime mortgage lending companies New Century Financial (NEW), Countrywide Financial (CFC), and NovaStar Financial (NFI) have blown up. (NovaStar is down 40% today alone, as I write this note.) The yields these stocks seem to offer are very enticing. But you should know something before diving in: Some of them are leveraged 20 to 1. The assets they've levered up to buy are high-risk mortgages that have begun defaulting at a record pace. While not all of these stocks will go bankrupt, some of them will. When you've got 20-to-1 leverage, your assets only have to decline by 5% to wipe out your equity. If you go hunting in the sector, look for firms that aren't so highly leveraged.

We wrote it… did you buy it?

I won’t be surprised if you (along with most of your fellow subscribers) take a pass on this recommendation. After all, I'm telling you that I expect a stock-option scandal will be revealed here, and the company obviously has compliance issues with the dozens of different regulatory bodies it must appease in order to operate. But businesses this good don't get this cheap without a few warts. And this is a great business that's trading at an unbelievably cheap price… On this basis, Career Education (Nasdaq: CECO) is probably the safest stock I've ever recommended. – Porter Stansberry, PSIA, October 2006.

Today, Credit Suisse upgraded Career Education. We're up 25% on CECO in about four months.

New highs: Anglo American (AAUK), American Real Estate Partners (ACP), AutoZone (AZO), JP Morgan Chase (JPM), McDonald's (MCD), POSCO (PKX), Raytheon (RTN), Sigma-Aldrich (SIAL).

In the mailbag today, we've got the usual bit of name-calling, but this time it's mostly subscriber-on-subscriber… which is a very refreshing change for us. Send us your bitter pearls here: feedback@stansberryresearch.com. We promise to read all of your notes – each one. But we cannot reply to you individually.

"The end of the world is always around the corner it seems... I would love it if someone would make a counterpoint movie to An Inconvenient Truth. I think the title A Convenient Lie has a nice ring to it." – Paid-up subscriber Mark Snodgrass

"Seems to me we should be far more concerned about the 'gas' spewing from the likes of 'Donald B. Roberts, BS in physics, Caltech, 1955 (with honors); one year at MIT in the PhD program in physics (one B and five As); MD, Harvard Medical School, 1963' than about greenhouse gases." – Paid-up subscriber Art S.

"Scientists have no bias? This global warming hoax is designed to get federal funding (translate: our tax dollars) to support more grants for meaningless research. That is the bottom line. In the '70s we had 'global cooling,' a serious problem, for the same reason. As usual, academia is overpriced and overrated. All professors ought to have to do a stint in the real world every 3-5 years just to understand what the real issues are. Start a business, become an entrepreneur, and see how meaningless your research actually is." – Paid-up subscriber Dr. T Howell

"I trust Steve is doing well with his Confidential. I just cancelled my TW subscription. I am not fond of paying for leftovers." – Paid-up subscriber Allen Ris

Porter Comment: Allen… you've got it all wrong. In True Wealth, Steve shows subscribers how to make better-than-stock-market profits without stock-market risk. Almost all of his recommendations in True Wealth are unique securities with little or no downside risk. In Confidential, Steve swings for the fences. He writes about much more speculative opportunities, which are too small and illiquid to recommend to a large number of subscribers. Trying to compare the two letters, or say one is better than the other, is like saying vanilla is better than chocolate. They're both good, but they're totally different. Besides, truth be told, True Wealth has a better average result. It's not leftovers; it's the main course.

"Porter, like many of your readers, I think you are a pompous ass… [But] listen again to what subscriber Dr. Roberts said: 'Why do all reputable scientists believe that global warming is largely an effect of human activity? Why? Because they have studied the subject objectively and have no bias directing their thinking.' Can you believe a smart guy like that could write such idiocy? Why do we believe that scientists are without bias? That's wackier than you are. We can't predict the environment 100 hours in the future, but now we're certain of long-term trends? Please..." – Paid-up subscriber Miles Newton

Porter Comment: Miles, I've never enjoyed being called an "ass" quite so much.

The Coming Carnage in Natural Gas

"The number of rigs drilling for natural gas increased to 1,473 for the week ending February 9, according to Baker Hughes. This is the highest gas-directed rig count for any week since record keeping by fuel type began in 1987.

"The number of natural gas rigs is about 11 percent greater than last year at this time, and about 69% higher than the 5-year average for this week…

"Although prices are much lower in recent months, the number of natural gas rigs has continued their upward trend... One factor is that producers are reported to have been relying more heavily on price hedging… this can insulate them from at least some of the impact of the falloff in price."

The above quote, from the federal Energy Information Administration (EIA), doesn't explain who is paying for those hedges. But what's holding future gas prices above the spot price are the billions of dollars lost by Brian Hunter at Amaranth hedge fund. Although Amaranth is out of business, its trades have continued to skew the market.

It's not hard to imagine what will happen to futures prices when the artificial Amaranth demand is finally expended. A record number of rigs will lead to a record amount of new supply. That will create a record amount of gas in storage.

All these trends should converge around the end of this year… which will be just in time for a huge new source of natural gas capacity to come online: Cheniere’s new LNG port.

All four of the other LNG ports built in the U.S. went bankrupt within months of opening. Cheniere (AMEX: LNG) will be no exception.

Regards,

Porter Stansberry

Baltimore, Maryland

February 21, 2007

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame