I just got back from Vancouver, where I spent a whirlwind week talking to analysts and companies alike. And one thing we were talking about was the wild action in the energy markets …
Natural gas prices exploded, just like I predicted last week in “The Long, Hot Summer … of Profits.†I said natural gas prices were about to take off because the summer heat was cranking up demand at utilities.
Flash-forward to this week: It seems like Wall Street has woken up to the fact that natural gas, long viewed as a winter play, is now the hottest commodity of the summer. Prices jumped as much as 31% before a pullback today!
That pullback is just profit taking, and should be a short-term event. The summer ramp-up in natural gas is just about to begin.
Why?
- Last week the U.S. set an all-time record for electricity demand, according to industry trade group The Edison Electric Institute. It reports that “domestic utilities delivered 96,314 gigawatt hours (GWh) during the week ending July 22, surpassing the previous record, which was set last year during the week ending July 23, 2005.â€
- U.S. inventories of natural gas shrank by 7 billion cubic feet last week. Industry insiders I talked to said that’s the first time they could remember that happening at this time of year — ever.
- The summertime is when natural gas is usually injected into storage. While natural gas stockpiles are still at 27.6 trillion cubic feet — above the five-year average — increased demand for electricity and a busy hurricane season could change that.
Speaking of hurricanes, Tropical Storm Chris is churning its way toward the Florida Coast and Gulf of Mexico. It doesn’t even have to strike “Energy Alley†in the Gulf — which is chock-a-block with oil and gas rigs — to shift energy prices into overdrive.
But if the storm does strengthen and cause some damage to Gulf of Mexico operations, we could see natural gas back at $10 very quickly.
There are many factors in play: Water temperatures, wind speeds and el Niño just to name three. One thing I’m keeping my eye on is wind shear. It has kept the lid on big storms in the Gulf and Atlantic Ocean, but it’s starting to weaken. If this continues, batten down the hatches!
Bottom line …
It’s Not Too Late
To Get in on
Last Week’s Ideas
The good news is if you bought any of the three natural-gas-friendly investments I profiled last week, congratulations … they’re all taking off.
And while the early money usually gets the biggest returns, the same investments are still great buys today:
First off, I don’t think you can go wrong with the Energy Select SPDR (XLE).
Also, check out U.S. Global Investors Global Resources (PSPFX). This no-load fund has a low total expense ratio of 1.3% and carries a four-star Morningstar rating. It rotates to the natural resource sector it thinks is hot — precious metals, base metals, oil, gas, you name it. It has returned 54% over three years and 35% over one year. It’s up from last week but still down from its highs. I’d say that’s a golden opportunity to get in on the cheap.
And there’s nothing wrong with old favorites like the Enerplus Resources Fund (ERF). This is a Canadian royalty trust with nearly 3,000 natural gas wells and 2,000 oil wells. What’s more, Enerplus yields 8.3%.
By the way, I recently recommended two small-cap energy stocks in my Red-Hot Canadian Small-Caps. I may have been a little early on one — it’s slightly under water. But it’s bouncing back, and I doubt I’m wrong. The other is already showing an open gain of 12% in three weeks. I think the profit party is just getting started!
Of course, natural gas isn’t the only under-loved, underappreciated, and underpriced commodity that’s getting hotter in a hurry. Have you seen the action in metal stocks? Holy moly!
Merger Mania Should
Drive Metal Stock Prices
Large-cap metal stocks are wrapped up in a regular soap opera right now: Marriages being proposed … new suitors showing up at the altar … fights breaking out. A company that was previously a pursuer, quickly becomes the pursued!
For example, Inco gave up on wooing Falconbridge, and Xstrata claimed victory. But then Teck Cominco readied another bid. Meanwhile, Grupo Mexico suddenly announced that it’s pursuing Phelps Dodge.
It’s getting so complicated you can’t keep the deals straight without a scorecard. But most investors don’t realize what’s driving this clash of the titans. Here’s what they’re missing …
The big-cap companies are buying each other at a time when the prices of the metals they mine have doubled or even tripled. And they’re paying hefty premiums above current market prices. Are these the actions of miners who expect prices to go down? Hell no!
My take: These companies, who know more about metals than just about anyone, don’t see prices going down for years, or even decades, to come.
Also, they’re pursuing these deals because they can’t replace their reserves through exploration of their existing properties. After all, these big mines have been worked for decades. Those veins are just getting plain ol’ worked out.
I’m talking nickel, zinc, copper and lead; I’m talking uranium, the energy metal; and I’m talking precious metals — gold, silver, palladium, and platinum.
My Canadian Trip Yields
Three New Targets
My wife and I had a great time in Vancouver. In fact, I think Cindy’s shopping spree at the jewelers on Robson Street was partly responsible for gold’s $22.50 move higher last week. Oh, my aching wallet!
Meanwhile, I met with a lot of analysts up there, and more than one agreed with my view — that what you saw this summer was an ordinary, mid-cycle correction, and that the best is yet to come.
I’m already getting ready for my next round of buying. Here’s just a taste of the stocks I’m looking at …
- Target #1: A white-hot uranium company that is determined to bring its latest find, a uranium bonanza, from resource to mine by 2010. Have you seen what’s happening to the price of uranium? The spot price for uranium jumped $2 to $47.25 per pound just last week. And no wonder … there are 442 nuclear power reactors operating worldwide, and about 130 more being built or in the planning stages. One analyst I talked to said that power generators are trudging through the uranium sector with bags of money trying to line up future sources of fuel. In other words, uranium is only going to get hotter!
- Target #2: A Canadian Play on Mexican Silver. I’ve found a company with a working silver mine that is trading at about a third of the value of its defined resource — and it’s finding more silver all the time. What’s more, its production is going up … and its mining costs are going down. What a deal!
- Target #3: A Canadian copper miner with about 25 million metric tones of ore that is 2% copper. With copper going for more than $3.50 a pound, that means the company is currently sitting on well over $3 billion in defined resources. And yet the stock’s market cap is roughly $40 million. In other words, you can pick up its resources for about 1.5 cents on the dollar. What’s more, I think that with a little more work, it could easily double those resources.
More details to come next week!
Yours for trading profits,
Sean
P.S. Remember to check out my blog at redhotresources.blogspot.com
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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