Oil and Natural Gas equities have rallied on the prospect of an economic recovery, reflation gaining traction and dollar weakness. Although I do understand (and agree) that dollar weakness should act to support all commodities in general, I’m confident that the fundamentals on the whole favor sustained weakness in prices as supply, demand and inventories are all likely to pressure prices both short and long term. If the emerging view that rapidly declining land rig activity signals a speedy return to balance in natural gas supply and demand as inventories get drawn faster than is generally expected is incorrect (as I believe it is), then you have an excellent opportunity to short natural gas levered equities like [[DVN]], [[XTO]], [[CRK]] and [[RRC]].

If I’m right, then sustained natural gas price weakness is apt to weigh on profitability, cash flow and multiples. Estimates for 2010 would have to come in considerably and multiples would compress such that shares of most nat-gas producers would decline significantly. And I have little doubt that the bulls, which hang their hat on significant rig activity declines leading to meaningful production declines, will be wrong. They'll be wrong because although land rigs are coming offline at a rapid rate, the production decline is likely to be less sensitive than generally believed and has historically been the case. I think production will remain high for several reasons but the most under-appreciated in my view has to do with the nature of recent production increases. It's going to take many more rigs coming offline than most think in order to rebalance this market and get prices going up meaningfully.

On January 29th of this year, I wrote a comment to a crowd of writers and readers at Seeking Alpha on the semantics of the many Milton Friedman disciples which were essentially arguing that inflation wasn’t inflation unless it was accompanied by simultaneous increase in money supply. Ridiculous I said, because the author wrote what seemed like a 10 page tome which not once mentioned purchasing power. My counter-argument was that purchasing power was what really mattered as that’s what dictated consumption which at the end of the day also dictated production, profits, incomes, spending, investment and everything that makes the world go round (or not).

I went on to say:

I figured I’d share a few quick thoughts on yesterday’s massive rally. If you’ve read my posts you know that I’ve been very bearish for a long time now, especially on banks, energy, agricultural equipment and steel. I’ve been long a few healthcare names and building a position in an industrial name I will discuss in detail soon. In the last week, I tried to get a little cute and play for an oversold bounce and rally in crude which whipsawed me – got long, sold long, got short and covered short at the open yesterday (thankfully did it small). I also have been buying a battery company, caught a nice quick move in [[GE]] (not typical for me because I have been avoiding troubled names no matter how apparently cheap; but thought I'd catch a 15-20% move in a couple of days so I took a shot with a 5% stop Friday and sold yesterday morning), and a bought a small bank and Japanese consumer electronic name at the open yesterday.

I also covered half of two small positions in natural gas stocks I’ve been short for a while now (still negative), and covered half of a short position in a steel name. And yes, I wish I covered the whole thing but I’m committed to staying short some natural gas equities because I think many are still too bullish, the market is positioned to keep prices weaker, longer than most expect and sentiment is still not sufficiently bearish given fundamental developments in recent weeks and months. I’ll have more to say on that soon as I discuss more natural gas shorting opportunities in the coming days. I also covered my agricultural equipment short way too early (couple of weeks ago almost 5 points and 25% higher).

The whole idea of using taxpayer money at the Treasury to stabilize the economy and arrest the collateral economic damage which Wall Street has wrought on Main Street is either naïve or sinister. Naïve if Paulson and Congress really thought this was the most efficient and effective way to restore liquidity and viability to the banking system and thus circumvent unnecessary business failures. But sinister if Wall Street intentionally conned Congress into buying an economic Armageddon (by the time the Asian markets opened if we didn’t do this) scenario so they could effectively rob the Treasury.

Although they would never admit it publicly, you have to believe that these bank CEOs were smart enough to understand that they had screwed up the risk management and leverage to a point where they were in no position to use the lion’s share of the cash they received from Treasury to make loans. Surely they knew that this capital would be used to plug holes in severely over levered balance sheets and make good on some counterparty claims rather than make new loans in a stimulative fashion or renew revolving credit to creditworthy and current borrowers reliant on bank lines to run their businesses effectively.

I don’t want to belabor the point but wanted to stress the fact that credit, saving spending and investment will be changed for a generation. People will be forced to save more to buy stuff they could previously buy with little or no money down and low interest. Frugality will be a way of life, not just in the consumer sector, but also in the business and government sector. And the government (federal that is) can not create enough jobs to mitigate the economic pain in any meaningful way because the private sector is likely to cut another 6 million jobs this year and state and local governments will cut more than the federal level is apt to create.

I can’t see how and when consumers and businesses will be willing AND ABLE to spend more. Generation X & Y have pulled forward a lifetime of sales. Many hundreds of billions of dollars worth of stuff bought on credit in the last few years would have been bought in the period ahead if folks had to save for it. Instead, consumers and businesses alike have to retrench in order to pay overwhelming debt service burdens. And one man’s spending is another man’s revenue; and so it goes, the multiplier effect in reverse.

Everyone seems to be bashing the 60 Minutes story about speculation causing oil to surge to $147. After reading the articles published here; I felt compelled to see how bad this segment was, so I went to the 60 minutes website to take a look see. I expected to see a chop job; but what I saw was an excellent laymen's explanation of how speculators and investors with fiduciary duties turned speculators contributed to a bubble which helped send billions of Americans' hard earned money to Saudis, Iranians, Venezuelans and others who laughed all the way to the bank.

These CBS bashers here either have no idea how energy markets work or are spinning the truth because they have an axe to grind with CBS. It's a shame, because for people that have a cursory interest, these clowns just effectively made a very enlightening report questionable to those honestly uninformed who would like to understand the issue better. And all they say to support their position is that the EIA has a graph that sort of makes it look like price tracks demand very closely. The truth is EIA estimates change with the wind - if your memory is that short you too should check the record. The EIA makes intermediate and long term energy supply and demand estimates that are awful - they failed to anticipate the CYCLICAL market tightness and failed to anticipate the cyclical downswing.

In the last 2 weeks it seems that the bulls are coming out of the woodwork. Don’t get sucked into the idea that you should chase this rally! What may appear to be a light at the end of the tunnel is probably a train. No one seems to have a good idea of what earnings might be, yet all of a sudden, bullishness abounds. Very well managed companies are guiding down multiple times early in a quarter, with no improvement in sight, yet the fast money crowd doesn’t seem worried.

I’ve watched the credit bubble popping events unfold in the context of a volatile history. I’m cognizant of the fact that is has never paid to stay very bearish for long as America is a remarkably resilient nation – we’ve overcome Herculean challenges like the depression and WW1 and Korea and Vietnam and oil embargoes and gulf wars and internet bubbles and more. However, none of these challenges compare to what decimation this credit bubble popping has wrought.

Ideas that are somewhat countercyclical in nature but also have a good chance of support from industry specific trends and/or company specific dynamics which can yield cash flow and earnings acceleration lead me to like Mylan (MYL). I view this as an out of favor name in an out of favor sector; a contrarian idea which would effectively surprise positively if they simply met guidance or a consensus) of non-belief) below management's guidance. Expectations are very low in my opinion, and it's understandable given the history; but Mylan suddenly appears positioned to beat expectations and gets no credit for that prospect. Management sounds very confident regarding their financial prospects yet the street says single digit forward multiple until Mylan shows us the money.

The history, for those of you that don't know, is that a couple of years ago the company had improved new product momentum, was valued cheaply and primed to fly as it blew out estimates for the first time in a while. Instead of leaving well enough alone, it did a pharmaceutical ingredient company acquisition, which made sense strategically and was bought at an arguably fair price but then quickly got into a bidding war for Merck KG's (MRK) generic drug business. Merck KG was more than twice its size and also made sense from a longer run strategic perspective as it gave MYL access to new faster growing markets in Europe and Asia and effectively would make them a global player which would leverage the new ingredients, lower cost manufacturing capacity and distribution.

A quest for value and alpha in well financed, well managed defensive names with solid visibility, reasonable growth prospects and discount valuation leads me to digital mammography and pap test leader Hologic (HOLX). The shares are off to historical trough multiples at significant discounts to what appear to be lesser peers. But with a solid quarter, reset and achievable expectations and a conference call that detailed how upside to '09 expectations is probable, I cant help but think about what can go right at this juncture.

The shares have been in a slide for the better part of a year in reaction to a major acquisition (Cytyc) which looked suboptimal and expensive initially and proved naysayers right when the sales growth of the acquired product portfolio slowed, profitability suffered and investors began to aggressively discount the expected sales and margin benefits that prompted the Cytyc deal in the first place. And then came the currency headwind. And then a sales miss. And did I mention the push out of a new sales and margin driving product?