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An Unusual Twist on the "Bad to Less Bad" Style of TradingBy
Wednesday, April 4, 2012
Most DailyWealth readers know the simple formula to safely making money in the stock market...
You simply look for what Steve Sjuggerud calls "bad to less bad" trades.
This is when an asset gets sold off by the rest of the market... spends time being ignored or hated... and then rockets higher when things get "less bad." By the time an asset is ignored or hated, there's no one left to sell... so your downside is limited. Meanwhile, an asset can get so cheap, there's also tremendous upside.
But right now, there's one "bad to less bad" trade contrarian investors should avoid...
That trade is natural gas.
Regular DailyWealth readers are familiar with crude oil's "clean cousin," natural gas. It's used as a building block to make chemicals, fertilizers, and plastics. It's also used to fire power plants and heat homes and factories. And it's becoming widely used as a motor fuel.
In just the past 10 years, America has gone from expecting to import natural gas to boasting the world's largest supplies. That's thanks to advances in drilling technologies, which are allowing natural gas producers to find more and more of the stuff every day.
The U.S. is now "the Saudi Arabia of natural gas," which has resulted in a glut... and much lower gas prices. Just last week, natural gas plummeted to a new multi-year low:
 This huge drop in gas prices has many contrarian traders looking for a "bad to less bad" rally in natural gas.
People will be waiting on that rally for a long, long time. Natural gas prices are due for an extended stay in the basement. Here's why...
Prices are falling to incredible lows because supplies are more than 50% greater than the five-year average for this time of year. Most industry professionals are citing weather conditions. Temperatures were much warmer than normal across most of the country over the past few months. This led to less natural gas being used to heat homes.
But that's just a small part of the problem. The "big trend" here is the incredible abundance of supply. According to Steve Farris, CEO of big natural gas producer Apache, the U.S. has at least a 300-year supply of natural gas.
To give you a better understanding of how much gas this is... If every heavy-duty truck in America converted to the clean fuel right now, we would still have about 270 years of supply.
Sure, we may export natural gas to China and India one day... But that's at least five years away.
To make matters worse, natural gas producers are not cutting production fast enough. There's been some production cut announcements from major producers like Chesapeake and Talisman. Still, too much gas is coming online.
Rick Rule, founder of Global Resources and legendary resource investor, explained the reason for this a few weeks ago on my S&A Investor Radio podcast. He said most of the costs to drill wells are upfront. Once you put up the money for a project, companies will do everything they can to recoup these costs. That includes drilling for natural gas with prices lower than they've been in a decade.
Consider all this before you make that contrarian natural gas trade. Prices are going to remain low for the next three to five years. We may see the occasional bounce due to weather fluctuations. But new technologies have opened up huge amounts of natural gas. That gas will continue to flow... And the supply glut won't lift anytime soon.
I'm sure fast traders will be able to profit during short-term rallies, but longer-term bets on rising natural gas prices are unlikely to work.
Rather than betting on a price increase, consider owning assets that benefit from low gas prices. This group includes pipelines in gas-rich areas and firms that can ship our cheap gas to overseas markets. Readers of my Small Stock Specialist are making great money (up more than 175% now) in Westport Innovations, a company involved in building engines powered by cheap natural gas.
Natural gas prices are a great investment opportunity. But it's not the "bad to less bad" kind. It's "bad... and staying bad."
Good investing,
Frank Curzio
Further Reading:
Frank recently interviewed Rick Rule on his S&A Investor Radio podcast. They talked about the potential for natural-gas engines in privately-owned automobiles... And Rick listed his top five places in the world to find the best junior mining companies. To listen for free, click here.
Read more from Frank on how to profit on the natural gas glut...
This massive boom is going to make household names out of a few little-known energy stocks...
"Unless trucking companies want to lose money, they will make the switch to natural gas."
Market NotesIT'S STILL A BULL MARKET IN COPPER... Sure... you can track the "China situation" by watching iron ore miners... But make sure to give copper a look from time to time...
As we reminded you last month, China is the center of a great financial debate. Some world-class analysts, including Jim Chanos, say the country is a powder keg of government malinvestment... which will cause a huge economic slowdown. On the other hand, you have many "China bulls," who say the bearish arguments are overblown and overhyped.
We keep track of this situation by watching shares of big iron ore miner Vale (VALE). China is the world's largest iron ore consumer. If Vale's stock were to crater, it's an indication China is faltering. Same goes for copper...
Copper is in nearly everything around you... from cars and homes... to refrigerators and computers. This "in everything" attribute makes the metal rise and fall with global economic activity... especially activity in the world's workshop, China.
As you can see from our three-year chart below, copper suffered a big selloff last year (A). This selloff exhausted itself in the $3 per pound area (B). Since bottoming, copper has surged toward $4. Until copper breaks this bull trend... and declines past its old low of $3, we remain optimists on China.
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