We saw another irrational knee-jerk market reaction on Jan. 7, when the price of oil dropped more than 12% in one day in response to EIA's weekly inventory report. The report actually showed an increase of 6.68M barrels, and the unwarranted knee-jerk reaction shows the market interpreted the data completely wrong. If you scrutinize the data - oil price should jump up, not down.
If oil is being hoarded, of course the inventory will jump up. The data shows that last week’s U.S. oil imports increased dramatically over the same week a year ago: 13.698M barrels a day versus 12.904M. Therefore, for the week, an extra 5.558M barrels of oil was imported. If the U.S. 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.
The EIA report said that oil products supplied was 20.1M barrels a day, down 2.9% from a year ago, and gasoline demand was also down 2.2% from a year ago. Those are very small percentages. Early last year, many people switched to more fuel efficient vehicles because of high gasoline prices. Therefore, it's not surprising that Americans may well be driving slightly more mileage but are actually consuming a bit less gasoline, simply because of better vehicle fuel efficiency.
In my last article, I discussed that the fundamental demand for oil and automobiles does NOT weaken, as mobility is a basic human need, which is even more important than 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 a merely postponement of demands, and not the disappearance of demands.
I did not sell my US Oil Fund ETF (USO) holdings during the panic on Wednesday. Shipping stocks like Dry Ships, Inc. (DRYS), Excel Maritime Carriers Ltd. (EXM), Excel Maritime Carriers Ltd. (EGLE), Genco Shipping & Trading Ltd. (GNK), OceanFreight (OCNF) and Genco Shipping & Trading Ltd. (NM) all dropped heavily with oil, despite the fact that the BDI index was up for the day. I used the opportunity to load up on a lot more shipping stocks. My favorite now is EXM, because it is even more under-valued than DRYS. Hellenic Shipping News recently had a nice story (pdf file) about EXM. My initial entry into the shipping sector was on DRYS, but then I found out that DRYS was a better-known name in the shipping industry, and decided that I would rather pick something less popular. Why pay the extra premium for a popular name?
How do you deal with an extremely irrational and volatile market, with stocks routinely move up or down 10% in a single day? Do NOT run with the mobs, and do things that are 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 a good time to buy. When people are complacent, that’s the time 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 got totally out of iShares Silver Trust (SLV). 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, because someone else that you don't know, let alone trust, controls those metals. There is also counter party risk involved in these ETFs. I never understand why the banking Santa Clauses took all the trouble setting up precious metals ETFs, 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 doors when you least expect. On Friday, 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. Someone must be buying massive quantities of the PGM metal.
I do not know what's behind the sudden surge of PTM trade volume. However, 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, which is also the first day PTM saw an unusually high volume of trade. I can only speculate that the price manipulation in SWC and the sudden surge of PTM trade volume might be connected.
I continue to monitor the coal sector even though I do not currently hold any coal mining stocks. 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 turn coal into a surplus, particular in the U.S. coal market. I suggested that if you hold coal stocks like Arch Coal Inc. (ACI), Alpha Natural Resources Inc. (ANR), Peabody Energy Corp. (BTU), CONSOL Energy Inc. (CNX), James River Coal Company (JRCC), etc., you should sell them in the next rally as the U.S. 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 despite oil price’s drop to recent lows, they are quietly trending up again. What gives? Maybe Europe figured that they needed 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. Therefore, the U.S. coal market may not be bearish after all, if Europe starts to turn towards the U.S. to purchase coal.
However, in such case, it's better to buy the shipping stocks at a deep discount from their recent highs, rather than buying 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 any other stocks mentioned here.
