John Gilluly

Special situations, long/short equity, etf investing
John Gilluly
Special situations, long/short equity, ETF investing
Contributor since: 2007
I have always been a great believer in Jeffrey Saut - been that way for 10 years. Use a microsoft browser if you wish to listen to this link - ie. - not Chrome (http://bit.ly/VNkpHA#).
I am long today the Dow futures (1 contract), and right now it is at 16,715 (-202). It has dropped 800 pts. in 2.3 trading sessions, and the 10 day M/A of the index is now 2 standard deviations below normal. Except for the Great Bear Market of 2008-09, -2 STD has always been a high probability trade.
Go to indexindicators.com and plug in dow jones 30 index - breadth - stocks above 10 day moving average - and then look at the green line. It is end of day data (Thursday evening), but it was almost "there" yesterday, and right now we are another 200 pts down. So I am in. At (-160 I turn green. Yes, I was early on this one).
Saut says that this is day 24 of the selling stampede that began at the July highs, and 24 days is usually the max before these run their course. I don not think the Fed will raise rates amidst a Yuan devaluation, an all-out stock market rout in China and the Emerging markets -which are tied together through the commodities market. I have never heard of Janet Yellen leading suicidal forays into the interest rate markets. She is an extremely cautious and caring individual who will only do the right thing. I believe that to be leaving the panicked markets alone. No rate cut in September, maybe not all year.
Best,
John
Duru,
Nice article. Been many years since we corresponded. Good luck to you. Shorted DHI today at 32.05. Looks like it is in mother-of-short-squeeze mode. Nickel by Nickel, day by day, rising about 50 cents a day for 12 of the last 16 days. DHI is as far above its 10 day M/A as it has ever been. Push push push.
Tempted to write an update to my article from 5.5 years ago, "A Simple and Timeless Way to Trade the SPX 500 Successfully" (http://bit.ly/1bCDO3a).
For only the 2nd time since January 2008, the Dow's 50 day M/A has crossed below the 200 day M/A, and the Dow itself is below the 300 Day M/A. This is the biggest of big deals. The two previous downturns in the summers of 2010 & 2011 were followed by big drops in the Index. In 2008 (the third previous time), it presaged the 2nd largest financial crisis in history.
I haven't written the article, but if I were to give it a title, it would be, "What to Do When Long is Wrong?". Not much luck with going long lately. 80% of the Dow's members are -15% or more below their 52 week highs.
Market tops are interesting creatures - they are of long duration, flattened curves. In 2007-08, the 50, 200, and 300 day M/As leveled off like mesas close to each other (by degrees horizontally), so it didn't take much to penetrate the 300. The 50 pierced the 200 and then the 300, and down the index went. It bounced gain in August of 2008 - right back up to the 300, and then went down in earnest.
I've written it before, I'll write it here again: the Federal Reserve will not be raising interest rates for the remainder of this decade. The only way the lower 80% in our society have been able to "keep up with the Joneses" has been to borrow money for practically FREE (okay, 0.25% interest rates). Take away that free money, and the edifice collapses. That is what the labor participation rate is telling us. Every baby boomer will have to retire first - and a new generation of money-makers and salaried workers re-appear - before the Federal Reserve will be able to comfortably raise rates (IMHO) again.
The huge commodity sell-off in 2008 pre-saged the market crash to come. Too many raw materials and no economies out there to fully utilize them. Look at the situation today: oil oil everywhere and not a drop to drink (Rime of the Ancient Oilman). No genius on my part here. I got the bottomless bottom of the oil market dead (as in it almost killed my account) wrong, but these long-term moving averages have a way of becoming irrefutable once they get going.
China's stock market crash no big deal? Stock market crashes in bubbles like that have always been followed by real estate crashes and crisises. China is naturally a capitalistic country, and nobody saw the end of the Soviet Union coming, and then all of a sudden, it came. What a surprise if something "cracked" in China and a new reality emerged? With crisis comes opportunity.
The one question I had was, "Why the CFO?" (terminated). Too, Terminated was the word that was used in the media. The thing that tipped Whitney Tilson off was the out-sized profit margins that started to appear on the company's earnings reports.
Is it possible that the CFO really liked those profit margins and was an ardent decision-maker in buying the products that maintained those profits? We'll likely never know. But no matter how it shakes out, looks like he was blamed - in part - for the decision to go with the questionable laminates from China. He had been with the company for many years and had helped to drive the profit rise that lifted LL from $10 to $92.
Homes are still selling well out here in CA. It's the Spring selling-season and a lot of remodeling is going on. If sales steadily climb, and they settle amicably with the DOJ ($10 ML), we could see $30 over the next quarter.
Sorry. I knew that would come up. CL is the futures ticker for crude. On Wednesday after the Fed announcement, April crude was $44.50, May crude was $46.50. Wow, sit on a barrel for a month, and receive an extra $2 for doing so? I have read that it only costs 45 cents a month to store oil at Cushing; and if you are a regular user of the services, it may even be cheaper. That was a locked-in guaranteed $1.50 profit.
I don't trade futures, but I think we witnessed the first of the dollar's many dead cat bounces yesterday.
By the way, gas rigs (not mentioned here) slipped to 242 on Friday. That's the lowest print recorded by Baker Hughes in 28 years. 2015 is also the year when EPA has mandated/planned the largest coal to natgas transformations at power plants in decades. Not a bad time to start doing that, in my mind. Probably the best opportunity to buy Natgas stocks since 2012 (FGC, FRAK), and GASL (for the risky, but it's got great names in its index). Natgas rigs are down 40% in a year.
Doug, I thought that too, but when I ran some charts on the dollar and its behavior vis a vis oil prices, it appears to me there is some kind of lock-step in tandem.
Steadily-lower oil prices heat an economy up and the dollar (which is really a "representative" of the strength of the US economy) steadily rises. And in this case - the ever present Wall Street worry over the Fed and interest rates also boosted the dollar, so there was a double-whammy on oil - both crude overproduction/ strengthening of the economy combined with interest rate gyrations.
But when oil hit $42/bbl on Wednesday AND the Fed did not tighten on the same day, I think the sudden drop in the dollar says that the bottom in Crude was in. Have you seen the sudden tightening in the near to forward CL contract over the last 2 days? Breathtaking.
In some respects, I think the economic effect of dramatically lower crude prices in a short amount of time are a little like an inoculation or Vitamin B shot. It's in the system. Now it has to work its way through.
I did some comparisons between 2008-09 and 2015 in an recent SA article comparing the two oil bear markets (http://bit.ly/1C8q7c0), especially regarding the role of the dollar.
Doug, if all the headlines care about is what at's Cushing's Storage facility, then it doesn't really matter what's available some other place and at whatever price it costs to store there. It won't figure in the price of WTIC.
As the real estate guys say, "Location Location Location".. You might think it irrational (people in a room on fire can be irrational) but the news Cycle is going to be Cushing Cushing Cushing until the supply in storage at Cushing goes down.
That's the reality. Not the hope (which bullish articles are full of, and of which precious little has come, besides more information that the market has ignored in its relentless trek downward).
Nat Gas rig count today fell to 242, the lowest since Baker Hughes began keeping records in 1987.
I was hoping that it was the first of the one-day wonders for the dollar at the beginning of its downswing - or at least a consolidation for it.
A friend sent me these two links (below) from zero-hedge today. They go into the strong negative relationship that the dollar has had to commodities, and especially to Emerging market economies, which may be worth an investment-look if the dollar begins to weaken now. EM has been decimated by the strong dollar and commodities drop.
1 (http://bit.ly/1EwANhE) and 2 (http://bit.ly/1EwANhF)
JCH57, thanks for the nice background on GASL. One last item- if oil doubled (factor of 2x1) from $44 in a couple of years, the highest GASL would ever get to again is likely (6x1) or $15-$16. That's the problem with these 3x funds - they go down by a factor of 5x1 or even 6x1 on a sustained, trending drop, and that's what's happened to GASL in the last 9 months. With something like UWTI it's much much worse. It will likely never rise above $12 ever again, unless there is a reverse stock split.
The three things to look for over the next month will be: dollar (up or down); inventory build (up or down); and rig count (how much down). Virtually all the real growth in the world oil market has come from the American frackers. They are the ones who have filled the oil tea-cup up to its brim. If/when they back off appreciably and measurably on their production, the "spill-over" that's been resulting will stop, and with it, the "drops" in crude over the edge of the cup. The big question will be how much and how actively they respond to market forces.
Saw this article today about oil production slowing. Also mentions March time frame: http://seekingalpha.co...
Well, it's after the Fed announcement - they're not raising rates as I expected - and the dollar is dropping like a rock (good).
That's one obstacle out of the way.
I also noticed the terrific tango in the May CL contract - it's two bucks higher than April's (!) +5% in a single month? You could buy April's contract - store it for a month - and deliver it in May for a guaranteed $1.50 profit (3.5%); annualized that's 36-40% for switching between storage tanks. Doesn't look like Mr. Market plans on keeping oil down near $40 for long.
Next batter up is the rig count on Friday afternoon. (See: http://bit.ly/1xfg6de) We need rigs to drop another 66, with 50 of them being the highly productive horizontal ones. That will put us at the -50% attrition mark. If another 50/per week drop between now and mid-May, the number of operating oil rigs in the US would be about 400, or half of now, and 25% of the peak.
Oil Volatility (OVX) is dropping big today too - now down 11% and counting. If it crosses below 46 by Friday, it will take out support
Last, but not least, seasonal demand needs to pick up 5%, and I think we round the bases and bring this one home.
Needless to say, the oil stocks are rocking today, and the fans are cheering. Let's hope this is not another one-day wonder.
No, I know nothing about that; but past is not necessarily prelude, yet saying that - especially when I was looking through the rig data - March was always the lows for gas rigs (1991, 1992, 2012); and Q1 was the lows for almost all the oil bottoms I could find, going back 45 years.
Come April 1, I have read that a lot of small oil companies may not get their credit lines renewed going forward by the banks. Sooner or later the rig cuts have to bite, although the way it seems now - if natgas is any indication, a few hundred oil-fracking rigs (400-500) could keep the largest economy on earth fully-stocked with oil indefinitely.
Over-supply is a worldwide problem. The Saudis act like their supply of oil is inexhaustible, and it hasn't proved them wrong for almost 50 years.
*
To make the case that the Fed is not raising rates any time soon, the following data is helpful:
Real Median Household Income in the United States is at a 20 year low (See: http://bit.ly/JqxJPC)
The labor participation rate (the active portion of an economy's labor force, in this case, all those in the US 16 years or older who are either employed or are actively looking for work, as a percentage of the total population) is at a 10 year low. (See: http://1.usa.gov/pSpjQo).
Inlfation expectations are hovering just above 12 year lows, and just under the Fed's target rate of 2% annual deflation. (See: http://bit.ly/1xeRQYJ)
I don't see any main-street case to raise rates here, and the strong dollar is affecting our overseas multi-nationals, so I don't see them clamoring for a rate hike, either.
The truth is - we are now the strongest economy in the world, growing stronger by the day, and the energy fiasco will only prove that strength going forward. Cheap energy - expanded across all sectors in the US is quietly underpinning the secular bull market we are in. The US could be energy-independent much sooner than anyone even dreamed-of 5 years ago. We are swimming in a glut of oil and natural gas, extracted by a technology that can do more, sooner, and with less equipment, than ever before.
I read a very detailed article on CHK that its cost per BOE is $27/bbl. The CEO of EOG resources (the largest fracker) said his company could make more money today at $65/bbl than they could 3 years ago at $95/bbl. Let's assume that the technology has gotten so much better they are able to do this. Most of the reports I read is that American frackers would be overjoyed at a semi-permanent $55-$60 oil price.
Nice article. First of its kind in MONTHS. One out of maybe a 1,000 articles on oil. That in itself is bullish. Long ARP and GASL.
GASL is a 3x leveraged ETF composed of the best of the best of blue chip E&P oil and gas companies. See Page 2 of (http://bit.ly/1z9VqAz) for a list of the companies. The two MLPs - ARP and LINE - are also picks, along with UPL. All 3 of these companies have their oil and gas production hedged at much higher prices.
Hawk,
You write some of the clearest, easy-to-understand articles I have read on SA. Thank you.
If readers are interested, you made a point about impending interest rates. I think interest rates will remain unchanged or low for the remainder of the decade. The recovery period we are going through now - with its large unemployment rate among the boomer generation - is likely to be a permanent secular drag (not a cyclical one) for the remainder of the decade.
I don't see anything out there that even hints of strong secular growth. Our situation today is similar to the long recovery after the Great Depression years when interest rates stayed low for THIRTY YEARS (1932-62).
For charts and a detailed discussion on interest rates, see these two articles below (from 2013):
4% Mortgage Rates for the Remainder of the Decade? (http://bit.ly/1aAUA4R)
Are Bonds on a Collision Course with Housing, History, and the Fed? (http://bit.ly/1kazLC7)
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Lastly, from a technical perspective, a pattern of higher lows in oil-sector ETFs and stocks is developing - See GASL, ARP, UPL.
Today - when the Dow was down 350 pts - oil-related stocks were flat or up on the day. Some were up as much as 6%. They have not followed crude down.
It is my understanding that the oil-stocks lead the price of crude out of a bear market by as much as 6 weeks. Mid-March is what I have been hearing as the period when the savage rig-count cuts and Capex cutbacks will finally begin to affect supply. The oil stocks will likely rally on the day the largest oil inventory (supply) in history is recorded. When you reach the lowest place on earth, there is only up to go. With a 6 week lead time (stocks are anticipatory), January 30th is the new mid-March. It's likely that Spring in the Oil Patch has already arrived.
I am long GASL. ARP, LINE, UPL are also picks.
Oil to gold ratio rose to 28.6 bbls per oz of gold at the close today. Anything could happen, but we are closing-in on the all-time record spikes of 1986, 88, and 89 when oil was $10/bbl.
"Invest" on the basis of a few ephemeral spikes - that lasted brief moments in time during the last 10,000 days - or the other 9,900 days (99% of the previous 29 years) - when the ratio of crude to gold was lower than it is now?
It's a month later and EDC ($24.51, +25%) and BRZU ($9.16, +25%) are rocking.
"By the time it looks good, you're too late." (Helene Meisler, street.com)
That is why so few buy low and sell high. It's human nature to work with what you are given, rather than with what you "might" be given. Thus risk/reward is chosen according to each person's tolerance of probability.
I think this particular article is accurate, and speaks in simple layman's terms about what is transpiring in the oil patch. One can't know all there is to know about a subject - especially oil (which is why NO oil analyst has called a bottom); but one can know enough to dollar-cost average-in at extremes in valuation (like now).
Superb article Hawkinvest. I couldn't have said it better.
Yesterday you could buy 28 barrels of oil with a single oz of gold. The last time was 2008, and that just for a single day (like yesterday). Readings of 26-28 barrels per oz of gold have marked the tops of the last 3 great surges; and then the market turned. (See: http://bit.ly/1AOvecw).
The only other times in the modern period (1945-2015) where you could buy more barrels of oil per oz of gold were the crazy oil years of 1986 and 1988, when oil was priced in the $10-$15/bbl range.
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The oil stocks have been putting in lower lows for about a week. Not a day goes by where there is not a major oil producer announcing Capex and labor cuts for 2015. Yesterday it was Baker Hughes, before that Schlumberger, today it's Total and ENT.
All this supply destruction - combined with the slight rise in demand which cheap oil will create via automobile purchases (US & Emerging market auto sales for SUVs are booming) - will put a floor under crude. By March, the rally should be in full swing.
My two favorites are:
1) ARP - for the dividend that will likely NOT be cut because of the company's superb oil and gas hedges for 2015-2017. (See: http://bit.ly/1AOvcBv)
2) GASL. 3x leveraged play on blue-chip E&P producers.
Average Price of all UWTI trades is $4.25, UGAZ is $4.49, UCO is $10.26.
Oil is now down $4.84 in a single morning session of 5 hours (-9.5% since the pre-open, -4.2% since the open). I just read that oil is selling in North Dakota for under $30/bbl.
Yesterday's flash in the pan was truly an anomaly and nothing has changed in the relentless downturn story. One might wonder how an international commodity - that's used to the tune of 91 ML/bbl a day (-$445.5 ML loss today) - could lose that much value in a single session, let alone a half-session, but this is the current situation today. The commodity will probably turn when there is not a single person left standing. The best time to revisit this will likely be in March.
Yesterday's rally may have been just one more head fake. A two-day 16% rally in crude, followed by an 8% drop from the pre-open today. All the oversupply news (it is virtually ubiquitous) again makes it seem like the $30s are an inevitable prospect.
Sudden rally today - out of nowhere it seems. Strange things can happen, but if you look at charts like this (http://bit.ly/1AgIGFX) and this (http://bit.ly/1AgIGFZ) you can see just how RARE an event we have just experienced.
The despair in my comment yesterday probably signaled the bottom, because these things end with the sign over the door that reads, "Abandon all hope, ye (oil investors) who enter here." I have not experienced something so relentless and one-sided, ever. By January 13th, there were only a few 20 minute periods during the day when oil would go up a little before it inevitably turned down. There has been weeks, months of this one-sided action.
But if gold is a measure of true value, then yesterday was the day that gold valued oil at the same ratio it had at almost every other bottom. Apparently we are now at an 80 year inventory high for crude. And drillers are going to keep drilling? There have been hundreds of negative pieces on oil. Not one positive that I can remember.
BTw..I added more today at 2.67 and at the close at 2.87. When the market opened today, I was wondering how low GASL would go if oil hit Goldman's figure of $41 ($2.20) and if it matched the 2008 low, then we would probably break $2.00 on the downside. I didn't consider what it would do if it went to zero, but the last time I had these thoughts were about the banks in 2009. Next time you get paranoid about GASL, look up the components in the FCG Revere Index (http://bit.ly/14liVVa). These are the best of the best in E&P companies.
What a slide since summer! From the $60 to $2s. That's a 98% drop.
Straight-up and straight-down seems to be oil's way, so maybe GASL will work for this one. I really like the names in the FCG index and most of them are hedged.
I noticed also that the yield on the 30 year treasury and on European and Japanese long-dated bonds are also approaching 10 year - if not all-time - lows in yield.
I would like to add a few things this morning.
1) The purchases of GASL have continued, even down to the $2.70 mark: and BNO, down to $19. For some reason SA is not publishing my updates to this article anymore. Can't say I blame them. Oil is like a bottomless pit.
2) The technical superlatives that have occurred on the negative side now equal some of the worst that have ever hit the commodity. For example, this morning at $44.20/bbl, you could buy almost 28 barrels of oil with an ounce of gold. That's 7 more barrels than you could buy with that same ounce in December, a month ago. There has been only one brief window in the 70-year history of modern oil where you could buy more oil with an ounce of gold - 1987. That's going all the way back to WWII.
Also, the Oil/Gold ratio hit 0.0357 this morning, slightly lower than the other low-water marks of the last 30 years: the financial crisis, the Clinton Impeachment scandal, and the mini-bear market of 1994. Again, you have to go back to the 1980s to find valuations like this.
You might ask, "WHY does gold matter?" Because it's real money that can't be funny-monied. You plop that gold bar down at any time in history and it will buy what it will buy, and its value will not be questioned. Gold is golden when it comes to valuation.
3) But then again. has any of this mattered? No. It has not. Maybe I am just sensing my own tiredness, but the volumes of trading in oil stocks seem to have fallen off today, as if no one is willing to step in again, and have their head handed to them (again), by a purchase that will INEVITABLY turn to a loss within a matter of minutes, hours, or a day or so. Oil has dropped 20% in just the first two weeks of January.
That is probably why it is best to just put this trade on automatic, keep it small (maybe 50 to a 100 shares at a time), and wait it out til this interminably long cycle has run its course. I am really discouraged, and frankly, I can't see what government or economy anywhere on earth benefits by ruthlessly throwing-away a non-renewable fuel resource at prices below what it takes to produce it. It is the height of hubris and fool-hardiness on a global scale. The conservationists of the 1970s and 80s must be gnashing their teeth that after so much work and political action to raise people's awareness of global warming that it has come down to this: we now have a license to exploit oil resources at an unheard-of amount, and will be doing so for the foreseeable future,
Blue ice - thank you! Best link I have received in a long time.
Take a look at this chart: http://bit.ly/1AFrSv3
I like charts because they graph previous sentiments at previous prices. 0.36 on the chart in the link is $44-45/bbl crude. We hit $47.16/bbl on Friday. Two or three more bucks down from here - after a $60 drop already - is a 3% to 5% margin of error.
Lastly, draw a trendline through the lows of this chart: http://bit.ly/1AFrSv4
"Safety" on the investment highway is entirely-based on what you are driving and when something occurs. The more steel, the safer you are before an accident.
But after a big "highway" accident - and after everything has been cleared away - all the cars drive will drive away - beginning (of course) from a standstill - at a different pace (units of distance traveled per unit of time).
For our analogy, the Big trucks (majors) lumber out slowly and steadily; and you will surely get to your destination safely and well-protected in that big truck. But you will get there twice as fast in a small to mid cap car. And in a leveraged fund? You will get there at Ferrari-speed.
TIME carries all the muscle. How much happens in what space of time. And there is an odd corollary to this too: by the "time" it looks good, you're too late.
That is why I dollar-cost average at the beginning point (and we are into this trade a full month now), based on my view of the fundamentals and technical patterns I see repeating.
Since the "when", the TIME is all-important (in terms of productivity $), my first consideration is to get that to work for me instead of against me.
I would say the entire human endeavor is based on what we do with TIME - the currency we have been given in this life, and it is the single most important thing in investing too.
Long-term? I don't know about that one. But production ($) per unit of TIME - I can wrap my head around that one easily. And if we are to drive away from this once-in-a-blue-moon oil debacle, I want to be in the first car and the fastest car heading onto an extremely uncrowded highway.
That's GASL, or something like LINE, NDRO, GDP, CRK, UPL, or MEMP. The value of BNO is it tells you how far you have to go before you get "there".
Saw this new article today. *See (http://bit.ly/1FxnAvi) MOST of the GASL stocks are mentioned and their December/January performance is included (e.g., Apache, Matador, Stone, Devon, etc).
See these 2 articles: http://bit.ly/1xIExNQ, http://bit.ly/1xIExNQ
And check out this page on the LINE website: http://bit.ly/wuLewg. While on that page, click on "Is LINN Energy a Master Limited Partnership (MLP) or a corporation?" You will notice that it has a unique tax-deferred status as a neo-MLP, which is perfect for investors in a taxable account.
In sum, there were financial questions (that had suddenly surrounded the company) "fixed" by a quick liquidating of assets to raise cash and pay down debt.
They also announced a 50% reduction in the dividend. Up until Dec 1, the dividend was not a problem. It had a been a reasonable 10% or so. But when the stock was cut in half, and then by another third, it was prudent they took action, which they did.
Remember, all this rapid card-shuffling took place in a matter of weeks. They also - in the near term only (2015) - have outsourced the financing of their new drilling projects to a hedge fund in exchange for 15% of the profits.
So on several fronts, they slashed their costs, raised cash, out-sourced the financing of near term drilling, and kept enough cash in their profile to take advantage of "stressed-asset sale" opportunities with other small oil producers if such assets became available in a fire sale.
Going forward? The stock is now near financial-crisis lows; oil has gone down 10% since January 1 and yet LINE is up 10% in the same time frame. As an investor, I get a rock-solid distribution of 10c/share per month (that I can reinvest in LINE shares); a likely capital gain in the next year or two, and yes, if profits return - an increase in the distribution.
That's a lot to like, and I think investors feel the downside is limited and the upside is substantial. On a technical basis, it made a perfect double bottom (almost to the penny) last week, and traded the most shares in the company's history on that day, in which it rose almost 30% off its lows in a single day.
I've watched LINE and NDRO carefully. Thus far, they have not been affected by the new Jan 1 downturn in crude oil. Another one to look at is BBG (down 7% today) which has one of the most complete hedge-books in the industry. Almost all of its production is hedged at $90. At $9.19, it would be a great ticker to sell puts on.