Market Re-Cap for the week of February 1st - February 5th.
News:
- Employment Situation: Unemployment came down from 10.0% to 9.7%, a five-month low. The economy has purged 8.4 million jobs since the start of the recession in December 2007. With Americans increasingly anxious about high unemployment, President Barack Obama has declared that job creation will be his top priority in 2010. Analysts speculated the decline in the unemployment rate could see the Federal Reserve raising interest rates sooner than expected.
- Portugal and Greece: In Europe, credit default swap prices, which measure the cost of insuring against default, briefly breached records on Greece and Portugal. Greek CDS spreads were 2.5bp higher at 417.5, just short of January’s previous record of 421bp. Portugal was flat at 226bp, having been up 3bp earlier in the session.
- BetaPro launches new suite of HBP Inverse ETFs on TSX (the natural gas ETF could be an interesting hedging tool).
The new HBP Inverse ETFs and their ticker symbols are:
Horizons BetaPro S&P 500 Inverse ETF – HIU;
Horizons BetaPro Nymex Crude Oil Inverse ETF – HIO; and
Horizons BetaPro Nymex Natural Gas Inverse ETF -- HIN
Each HBP Inverse ETF seeks daily investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to one times (100%) the inverse (opposite) of the daily performance of its specified underlying index.
- Monthly Natural Gas Figures: At the end of each month, the U.S. Energy Information Administration [EIA] reports monthly natural gas production figures. Operators like Anadarko Petroleum (NYSE: APC) and Ultra Petroleum (NYSE: UPL) file with the government, is prone to revision, and is released on a two-month lag. That said, it's still one of the best tools for investors trying to keep tabs on the gas market. According to the November data, lower 48 gross production came in at an estimated 63.13 billion cubic feet [Bcf] per day. That's roughly flat from the prior month, and more than 1% higher than the prior-year figure. Production peaked in February 2009. The November average represents a decline of only around half a Bcf per day (or less than 1%) compared to that peak rate.
- Still Waiting for a Gas Supply Contraction
If the industry is doing more with less, and spending and activity levels are on the rebound, when, if ever, will natural gas supplies contract? We, like many others, expected the dramatic reduction in the rig count would ultimately translate into lower output. However, we haven't yet seen a marked contraction in supply, nor have natural gas prices rebounded to a price that grants the industry an adequate return on capital, in our opinion. Yet many of the largest gas producers look prepared to ramp up production over the next year. production declines won't bail out gas prices in 2010, that places greater weight on demand. And after one of the warmest Novembers on record, gas inventories entered winter heating season at record levels. We studied the past 15 winters and concluded that even the harshest winter weather will likely leave us with record spring inventory levels. Industrial demand also remains weak, and until a significant inventory restocking cycle begins in the Gulf Coast chemicals complex, we see weak demand persisting. So near-term demand fundamentals appear soft, and near-term drilling activity is likely to pick up. - Oil and Gas Fundamentals still Divergent in 2010
Like gas, oil and refined products face a considerable inventory overhang, and current production rates continue to trump demand (contributing to still high global inventory levels), making both commodities especially sensitive to near-term demand factors. This is where the similarities between the commodities end, in our opinion. We think oil supply will be challenged to top record output levels in 2007 and 2008, at least for the next three to five years. In an oil supply constrained world, should demand rebound above rates achieved in early 2008, demand destruction would set the price (i.e., oil prices could rise above our estimated marginal cost of new supply of about $80). Given the exploration and delineation success of the domestic E&P companies over the past decade in discovering and proving up new gas-producing regions, natural gas isn't likely to be supply constrained like oil. Given the right price, the industry will bring on supply as the market demands it.
Further, the demand outlooks for oil and gas have diverged. Global oil demand has perked back up, mostly due to a large increase in demand from China combined with stabilization in developed country demand. Because gas is still largely a regionally priced commodity, a still relatively weak U.S. economy is driving persistent softness in domestic gas demand. However, over the longer term we see more upside demand scenarios for natural gas both domestically and globally than we see with oil. Part of this is due to oil supply scarcity and the likely persistent pricing wedge between the two commodities--making gas much cheaper than oil on an energy equivalence basis. We think this positive relative price signal for gas won't go ignored by energy consumers over a longer time frame, even if the ability to switch is limited for the near term.
TECHNICAL ANALYSIS UPDATES
S&P: We are in a bearish descending channel(1-3 weeks); HOWEVER the long-term trend (4-6 months) is still up as defined by the black channels. Buy on a breakout of the green channel, or go go long at blue support levels. Stops at 1010.
NATURAL GAS--
We are still in an uptrend. Buy low, sell high. Try to get a good entry point!
GOLD
WATCH 1060. A break of that would mean gold is going down to 1020.
$CPCE
One of the most reliable indicators of future market direction is a contrarian-sentiment measure known as the put/call options volume ratio. By tracking the daily and weekly volume of puts and calls in the U.S Stock Market, we can gauge the feelings of traders. While a volume of too many put buyers usually signals that a market bottom is nearby, too many call buyers typically indicates a market top is in the making.
There's way too many puts being bought, which has me reason going long is the favourable play, but only at support levels (1017-1035) [this is a high probability trade.. if you go long at 1050 you face much more risk].
Thanks for reading, see you all next week.
Questions? E-mail me at zeeshan_maq@hotmail.com
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Zee.
