Wednesday, January 7, 2009

Opportunities in an Irrational Market Place

We saw another irrational knee-jerk market reaction on Jan. 7, 09. Oil price dropped more than 12% in a day in response to EIA's weekly inventory report, which shows an increase of 6.68M barrels. The un-warranted knee-jerk reaction shows the market interpreted the data completely wrong. If you scrutinize the data, oil price should jump up, not down.

Simply, if oil is being hoarded, of course the inventory will jump up. The data shows US oil imports of last week increased dramatically over the same week a year ago: 13.698M barrels a day versus 12.904M. So for the week an extra 5.558M barrels of oil was imported. If the USA is buying more crude oil, of course inventory will raise. When Americans are buying more, shouldn't the oil price be driven up in the international market? Inventory was up NOT because Americans are consuming less, but because we imported much more.

EIA report says oil products supplied was 20.1M barrels a day, down 2.9% from a year ago. Gasoline demand was down 2.2% from a year ago. Those are very small percentages. Early last year, due to high gasoline prices, many people switched to more fuel efficient vehicles. So it's not surprising that Americans may well be driving slightly more mileages but actually consume a bit less gasoline, simply because of better vehicle fuel efficiency.

I discussed in my last article that the fundamental demand on oil and automobiles have NOT weaken as mobility is a basic human needs, more important than even food. I cited the Great Depression story "The Grapes of Wrath" where a family lost everything but they kept the family truck as it was vital to the family's survival. The current weak auto car sales are merely postponement of demands, not disappearance of demands.

I did not sell my US Oil Fund ETF (USO) holdings during the panic on Wednesday. Shipping stocks like DRYS, EXM, EGLE, GNK, OCNF and NM all dropped heavily with oil, despite of the BDI index going up for the day. I used the opportunity to load up a lot more shipping stocks. My favorite now is EXM, because it is even more under-valued than DRYS. Hellenic Shipping News recently has a nice story about EXM. My initial entry into the shipping sector was on DRYS, but then I find that DRYS is a better known name in shipping. I would rather pick something a bit less popular. Why pay the extra premium just for a popular name?

How do you deal with an extremely irrational and volatile market, with stocks routinely move 10% up or down in a day? Just do NOT run with the mobs! Do things contrary to the group mentality. Buy on the dips, and NEVER set a stop loss sell order or panic sell. Why lose your positions to a computer, and then have to pay higher price to buy back the same shares? When people are selling in panic, it's good to buy. When people are complacent, then you should sell.

Not wanting to follow the majority is one reason why I was never interested in SPDR Gold Shares (GLD) and I recently get out of iShares Silver Trust (SLV) totally. I am always skeptical about the physical precious metal ETFs like GLD and SLV. The metals might actually be there as claimed. But they are not in your physical control. Someone else that you don't know, let alone trust, controls th0se metals. There is also counter party risks in these ETFs. I never understand why the banking Santa Clauses took all the trouble setting up precious metals ETFs and hire guards to watch the metals for you and help YOU make money without lifting a finger. Theoretically there can be one trillion shares of SLV held long and another trillion shares shorted. But the world does not have a trillion ounces of silver. You either buy and own physical precious metals and bury them in your backyard, or you merely own promises on paper.

Opportunities knock on the doors when you least expect it. Today I noticed something that shocked me. The trade volume of the E-TRACS UBS Long Platinum ETN (PTM) suddenly surged to more than 10 times the average daily volume, starting on Jan. 6, 2009, while platinum staged a remarkable multi-day rally. Some one must be buying the PGM metal massively.

I do not know what's behind the sudden surge of PTM trade volume. But I have done plenty of research in the PGM metals sector and I firmly believe the fundamentals of these metals are very bullish, despite of temporary set backs. I continue to hold a large position in Stillwater Mining (SWC), one of the world's only two mining companies who produce palladium as the main product. The other one is North American Palladium (PAL).

The sudden surge of PTM trade volume and recent strong rally of platinum and palladium prices are good news to shareholders of SWC and PAL. There have been some extreme daily movements of these two stocks lately, especially SWC's extreme price movement on Jan. 6, 09, which is also the first day PTM saw unusually high trade volume. I can only speculate that the price manipulation in SWC and the sudden surge of PTM trade volume could be connected.

I continue to monitor the coal sector even though I do not currently hold any coal mining stock. I believed that globally, the coal supply and demand was largely balanced, with a shortage of no more than 1% or 2%. The current economic downturn could well turn coal into a surplus, particular in the US coal market. I suggested that if you hold coal stocks like ACI, ANR, BTU, CNX, JRCC, etc., you should sell them in the next rally as the US coal market might be bearish in short term, although I believe coal has long term potential.

Surprisingly, international coal prices stabilized at not much below $100 per ton, and they are quietly trending up again, despite of oil price drop to recent lows. What gives? Maybe Europe figured that they need to rely more on coal as their oil and natural gas supplies become vulnerable. This is painfully clear after recent dispute between Russia and Ukraine shut down natural gas supply to a big part of Europe, causing panic. Predictably, Europe will need more coal and will need to import them from overseas. So the US coal market may not be bearish after all, if Europe starts to turn towards the USA to purchase coal.

But in such case, it's better to buy the shipping stocks at deep discount from their recent highs, rather than the coal mining stocks. The coal has to be transported by ships, right?

Full Disclosure: The author currently holds positions in SWC, EXM, EGLE, DRYS, PAL, OMG and USO. I do not own other stocks mentioned here.

1 comment:

sillybilly said...

you are smart!, that is a very clever analysis, I believe you nailed it.

However, the market moves irrationally - its stupider than you are, its knee jerk, its simple- minded.

One must react to the stupid market because thats where the money is. If you have the time money and patience, the stupid market will eventually realize "duh!, what was I thinking?" and have to buy your position eventually.

the problem is two fold:

#1 the market can remain dumb longer than you can remain in your position, you may be correct, but you lose if your position can't be maintained long enough(eg margin call)
#2 you miss out on all the stupid profit of stupid market predictably behaving along the conventional "knee jerk" moves.


I think you are "right", now how do we make money on that?