Strategy for Volatile Times: Accumulate

Many investors and speculators become excited about an investment idea, and, thinking that they sense a good buy-in level, they tempt fate and put too much of their investment capital into this idea all-at-once.

Too often they decide to plunge-in just before the markets are ready to slide back into correction mode.

I was discussing this topic with a good friend yesterday. We both are interested in adding several investment types into our portfolio, but it's hard to know where to enter on two of them.

It seems to me that Natural Gas at these levels makes for a reasonable long-term investment. For this purpose I use the US Natural Gas Fund ETF (UNG).

Natural gas certainly is now selling for a much lower ratio to the current price of Oil than is the historic norm. Right now it's a little over 19 to 1, with oil around $71 a barrel and natural gas currently at $3.71 a British Thermal Unit. My understanding is that the historic norm is closer to a 10 or 11-to-1 ratio.

I decided to begin the accumulation process by putting to work what I determined is a good starting amount with UNG at current price levels, with the idea of adding to my position (by making sure I keep some "powder dry") during the rest of the summer shopping season which could last until November this year.

The same could be said for the precious metals, whether we're investing in ETFs like GLD (GLD), SLV (SLV), ASA (ASA) and GDX (GDX) or, the physical assets themselves, or individual stocks like Barrick Gold (ABX), Goldcorp (GG), Silver Standard Resources (SSRI) or Silver Wheaton (SLW).

Those who are interested in bond-oriented funds could use that approach for the iShares Barclays TIPS ETF (TIP) or for the so-called "AAA-rated and/or Insured" Muni-bond closed end funds like BAF (BAF), BYM (BYM), and NIO (NIO).

Here's a red-flag warning about the broader stock market right now from the folks at the S&A Digest, which they wrote Tuesday when the S&P was over 940.

The combination of a market rally and rampant new share issuance from issuers whose future isn't terribly bright reminds me of 1999 and early 2000. That's when the Nasdaq soared from about 2,500 to a peak of just over 5,000, and IPOs were popping up everywhere like stretch marks on a fat man at a pie-eating contest.

Back then, nobody thought stocks were risky, and hot tips oozed from every cabbie, bartender, and shoeshine boy. No one knew for sure why the tech stocks and dot-com stocks were doing so well, but who cared, as long as you owned them and they kept going up, up and away.

Well, maybe it's not exactly like the tech bubble, since IPOs aren't the hot ticket today. But new equity is nonetheless being printed at a record pace... According to a recent Bloomberg story, more than 150 companies raised $82.2 billion in new equity last quarter – a faster pace of equity issuance than at the height of the equity bubble in 2000.

All the new shares have diluted corporate earnings by a little over 3%, using the S&P 500 as a benchmark. The widely watched index's total shares have grown 3.4% since March 31, meaning earnings are now divided by a larger number... making earnings per share into a smaller number. Standard & Poor's has reduced its 2009 earnings-per-share estimate to $57.23. With the S&P 500 around 940, it's selling for over 16 times earnings. That's historically about average.

Jeremy Grantham, the 70-year-old-plus legendary investor was interviewed by Morningstar Research at its conference on May 28th, 2009.

Mr.Grantham, who is the Chief Investment Officer and founder of $150-billion Boston-based asset manager, GMO, gave Morningstar an eloquent and quietly gripping interview.

As usual, the super-modest, irrepressibly shy Grantham struggles to look up at Morningstar’s Pat Dorsey, and for that matter the camera. What comes through instead is the soft-spoken, and truly understated genius, known for his prescient calls on the market.

These are not to be missed. And the first of these interviews where Mr. Grantham refers to a "Market Neutral" investing approach is definitely tried-and-true investment wisdom.

Here are the videos of Jeremy Grantham as he was interviewed by Morningstar and provided for us compliments of Greenlight Advisors on the web:

It is becoming clearer with every passing week that "accumulating" makes better sense during these highly volatile and uncertain times than an "all-or-nothing" approach. At least from my perspective, and certainly from Mr. Grantham's.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Disclosure: Of the fund and stocks I've mentioned in this article, UNG, SLV, and GLD are the only ones I'm currently long in.

Comments

[old guy:]

Great article ...... Thanks

Jun 11 07:29 AM

[stocknerd:]

UNG or natural gas is undervalued and will continue to be unless and until the inventory numbers lower and the economy starts to catch fire. There is surely an imbalance in oil/ng ratio. I think UNG is a long term sure buy. I mean, how low can NG go? $3? Possible but highly improbable. BUY UNG. It is always buy low, sell high as the mantra goes guys.

Jun 11 10:04 AM

[Alan Young:]

For small-scale investors, accumulation adds significantly to transaction costs, so it's not the solution for everyone.

On the NG/oil divergence: IMO this reflects the fact that NG is traded locally (within each continent, generally) while Oil is traded all over the globe. There is more energy demand in Asia than in the US (relative to historic norms), so oil is up but the US NG market doesn't follow.

Jun 11 10:30 AM

[long roh:]

I wonder if UNG suffers from the same contango problem that plagues USO. If so, I wouldn't be holding it for the long term unless you expect it to move significantly.

Jun 11 11:50 AM

[Energy Trader:]

Stocknerd,

"How low can NG go? $3? Possible but highly improbable."

Well do you know what the spot price is? About $3.50. Which is $0.30 less than the front month futures contract, indicating there is very little demand for it.

Last summer the inventory report for this week was around 60 BCFE, today it is over 100. LNG may very likely have no where to go except for the US. We have to remember while Asia and Europe use LNG, they have very little ability to store it, so anything they do not need is going to come here, we have much more storage than anyother destination to store. I ask everyone how low do you think nat gas will go if LNG is dumped here? On top of that forecasts are calling for a cooler summer in the NE, which is very bearish for nat gas. If we fill up storage, nat gas could easily see less than $3 and we are well on our way.

UNG is severly overvalued IMO.

Jun 11 11:56 AM

[optionsgirl:]

UNG is good fodder for a straddle. you can have your cake and eat it too.

Jun 11 01:06 PM

[Marc Courtenay:]

Concerning UNG. Based on today's massive volume and 8% upside move, it seems obvious that UNG and Natural Gas wants to breakout to the upside. Perhaps it won't be straight up, but it could be. Hope you all were ready, but frankly I still believe it isn't too late. Be in good health and prosper my friends!!

Jun 11 01:22 PM

[ChBobII:]

Buyers are piling into UNG lately so that is all that's needed for nice gains, trumping inventory & usage stats for now. At the same time they are selling out of crude oil long ETFs in favor of short ETFs in an attempt to capture both sides of the inevitable narrowing of the NG:oil ratio, which at 1:18 is way high.

Jun 11 03:39 PM

[optionsgirl:]

Nat gas is ready to roll into the august contract. For Ung, which publishes that information, and carries contracts in more than just the front month, this month's roll is from June 12th-17th. Expect a fall in prices after that is complete. Really, you don't think it will go straight up, Marc?

Jun 11 03:41 PM

[punk_ash:]

Stay away from UNG,OIL,USO. They are all bad investments. They all have contango built into them. There is a loss of 2-5% per month in all of them. These are all new funds, and they will not last long as they are all going to 0 sooner or later, no matter how high oil and natural gas goes.

Jun 12 01:49 AM

[one eye:]

Typical skewing of numbers. The comparison between what occurred in 1999-2000 and present is another fanciful self applauding obfuscation of reality.

The IPO's and secondaries of that misbegotten time allowed the principals to unload their shares in those companies to the Public, the Public was piling in as they where leaving.

This time around, there are virtually no IPOs and the almost all of the cash generated from these Secondaries is going straight into the Company's coffers. Since this totally wrong...

Is this another Fantasy, tossing in an Article in the face of prevailing wisdom. Just to see how many people you can fool?

Jun 12 05:48 AM

[Henry Buttal:]

Marc,

I would rank this as a "trading"' opportunity, (I like optionsgirl's suggestion for a straddle) but not as any kind of responsible suggestion for a Macro play because the realities of the nat gas supply and demand work against it.

The North American suppy of producing natural gas has exploded over the past several years, with fields like the Barnett Shale and Haynesville, to name a couple. This is a complete reversal from when capital was spent to build a LNG mooring location in the Atlantic near Maryland. This is why T. Boone and others want Nat Gas cars, and more nat gas electricity generation. Hell, there are still big gas wells in Texas that haven't been hooked up to the feeder network.

In absence of any speculation pressures, this is a long, slow climb in price that will require the economy to fire back up more fully.

Jun 12 11:20 AM

[Whippet:]

That's an extremely narrow point of view. They should be approached as any leveraged ETF- but instead of the constant leverage trap, you have the contango trap. Some have done quite well to do structured plays on USO over the last several months, and it has tracked spot price rather decently over multi-month periods.
Long run, go with producers (CHK). Short run- there's nothing wrong with UNG for swing plays.


On Jun 12 01:49 AM punk_ash wrote:

> Stay away from UNG,OIL,USO. They are all bad investments. They
> all have contango built into them. There is a loss of 2-5% per month
> in all of them. These are all new funds, and they will not last
> long as they are all going to 0 sooner or later, no matter how high
> oil and natural gas goes.

Jun 12 04:16 PM

[harammph:]

If want to go with something Going Up, even as NG builds its base, go with FCG.

Follow what Courtenay says with extreme caution, he likes to "Play Games" with readers.

Jun 13 12:00 AM

[capt Brian:]

Was there any talk of AUY being taken over? I thot I heard static to that end.

Jun 28 07:08 PM