The VIX Dropped To 20, Still Don’t Be Complacent. Also, LNG Is Very Interesting Right Now

Five liquefied gas storage tanks.

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Looks like Powell will raise 0.50% and that makes me wrong

I also said there was a Fed meeting this month. That is an error, May is the next Fed meeting. I don’t know how I let that slip by me. As punishment, I put on a bunch of hedges going into this week. I actually did it in anticipation that the market would react to what I believed would be strong employment numbers for March this past Friday would be received as a negative. My thought was as more and more talk about a half-point rise in May that the prospect of raising a half-point for every other Fed meeting will be pressed. Also, earnings will soon dominate the market consciousness, and if there are any warnings from major companies they should be soon. Finally, there are the Fed minutes for March will be published on Wednesday. I am willing to take a risk that as we had turbulence 2 weeks ago and last week we should have some this week as well.

I think the VIX is pretty much bottomed at 19-20 and we should have a bounce off this level and rise several points. I will talk further about my hedges in the My Trades section. Since we are at the “My errors” section I want to address my strongly held belief that the inflation we are witnessing is an aberration that will be corrected. We will see a moderation in prices in the latter half of the year. That said, with everyone including Powell saying that a half-point rise is coming I can no longer say that Powell will end up taking a light hand in regard to inflation. Will he raise 6 to 7 times and a half a percentage point each time? I believe I have lost my right to prognosticate. I will keep to myself the notion that Powell is using the bully pulpit to such great effect that interest rates are already much higher this year with him raising only once.

The rising chatter about half-point rises ‘til the cows come home by the bear camp pushes the conclusion that Powell will overtighten. The Fed almost always tightens to the point it causes a recession so why not now, is the refrain. I don’t agree, I think Powell who had a real-life financial job outside academia and the Fed, will thread the needle and will do an excellent job of fluffing up the rates without much actual tightening. I believe he will stall for time, and by the latter half of the year, as inflation starts to roll over, he will drop the hawkish attitude. I know this isn’t much of a mea culpa, but I want to wait and see. Meanwhile, turbulence is going to be a feature of our market and we should all act accordingly.

That’s why I asked you to start building cash as the market is going up. I know this is hard to do since you are selling into a rally, that seems to be the wrong time to be reducing. We must learn from the past, as the indexes rise sharply we forget that the market will fall sharply as well.

Are you selling positions when stocks are going down and buying stocks when they are up? Yes, you are.

Look I have been guilty of this practice just like you are. You love to buy stocks and hate to sell them. Are you looking to get every last dollar from every stock position? Do you look at stocks you sold and kick yourself for every nickel you didn’t get as they go up? When you buy 100 shares of a company as a stock goes down thinking you got it at the button only to see it go down a further 20%? Are you cowed out of your portfolio when you hear that interest rates are shooting up only to see those shares you sold in a panic going up even in the face of higher rates? How many times have you broken the rule to buy low and sell high? Instead, when the market is soaring and you want to be part of it, you buy high and hope to sell higher.

Don’t despair, everyone goes through this phase. Also, the guys who boast that they made a killing in the market are usually full of it. Most traders who do really well don’t need to boast about their successes. Those that do are trying to sell you their “system”, yet if they were really making the bazzilions they say they are, why would they hawk some book? The truth is there isn’t any one magical formula, the market is an ever-changing kaleidoscope of information. You must interpret what that data means and anticipate the market action. Be sure that the information is as fresh as possible lest they be only echoes of news that is already old by the time you hear it from a friend or neighbor. You need to either get as close to that fire-hose of data and trends to give you enough time to anticipate how this will affect the market. Or you can sometimes wait for the excitement to die down and use the charts to plot the course. That is if what you have sussed out is a durable trend or some new piece of data is about to change a valuation. I find that using a combination of knowledge of a sector, and using a means to understand the trading pattern i.e. charting of stock in that sector can yield positive results.

Trading success is very often about anticipating the rhythm of the market.

Almost like jump rope, the idea is to anticipate when the rope is coming and jump over it. That has a cadence to it, and so does trading. I don’t care if I have to repeat this 1000 times, trading in large part is managing your emotions. Many beginners will chase a stock and think they must buy 100 shares at a time or they aren’t “doing it” right. So getting back to the original premise, your emotions can get the better of you, you need some mental tricks (or at least I do) to push emotions to the side and not let them rule you. In previous articles, I often give you little exercises to help avoid greed or let FOMO rule you. Sometimes they seem silly, If you can create your own, more power to you. So if the market is soaring and you are excitedly buying shares all the way to the peak of the market only to panic and sell as the market sharply reverses and slams down, the last few paragraphs are for you. Try to do the opposite and trim positions into the rallies so you can take advantage of slides. Once you get into the groove it becomes automatic. When I say trim I mean a few 3-4-5 shares at a time for each of your positions. Forget about the full lots – 100 shares, that was in the days of brokerage commissions. Now it is more advantageous to buy and sell small lots many times a day.

Charting and technical analysis – the reality that the market has certain mechanisms that rule its behavior is a great way to remove emotion from picking a stock and what price to buy it for. Find ways to sell stock in a company that you have grown attached to (don’t laugh, people do tend to hold stocks out of “loyalty” like they are part of a team). This is why I periodically call for building cash. I say just trim a few shares from each position, and give a percentage cash level to attain. This allows you to take profits without causing cognitive dissonance from buyers’ or sellers’ remorse.

It’s often darkest right before dawn.

Consumer sentiment has plunged, and the University of Michigan’s Index of Consumer Sentiment has fallen more than 25 percentage points over the last year–one of its biggest 12-month declines since 1952. Fortunately, however, plunging consumer sentiment can have the opposite effect on the stock market. Chances are the stock market will have great gains over the coming year. When consumers have a negative outlook they tend to sell stock. Since the individual investor rules the market these days, this is even more true. Consumer pessimism overcorrects stock prices suppressing the upside. This is a contrarian indicator, something that I look for because when this misapprehension is corrected it will add to the powerful rally for the latter half of the year. It also gives a great explanation as to why we are getting these waves of selling.

How did I do this week? Pretty, pretty good.

My embrace of oil and gas as a growth sector has given me the conviction to build positions for the long term and not just trade them. While not a perfect hedge it has been a great counterbalance to my many tech names. I have made no secret that going long in the oil patch has personally been a punishing exercise for me for years. I started trading it again this year but doing fast trades, where the alpha was minimal. Even though intellectually I realized that the oil patch was the real deal in the last 12+ months or so. Though I have an admission to make, I did bank shares in my long-term account, some for the dividends, some just anticipating the direction they were clearly going. The way I do that is to start with tinier positions than I do in my trading account. I also add way slower as well. So I have Tellurian (TELL) shares mostly in the 2s and 3s, similar to where I bought Kosmos (KOS). The other names that I have been talking about are all in the 30% to 50% appreciation in that account. Many are not even 100 shares, but I have so many that it does add up.

I believe that we will see the consolidation in the oil patch will accelerate

The great T. Boone Pickens once said “It is easier to drill for oil on Wall Street than to dig a hole in the ground.” The economics of buying a nearby field is fantastic, you can cut costs, and because skilled labor is so hard to get, you can very likely reallocate drilling to the most fecund geology on the leasehold. Part of the way oil companies are valued is by the oil that is still in the ground as well, as the estimated reserves. One of the biggest and most controversial deals several years ago that was considered too expensive was Occidental Petroleum (OXY) taking over Anadarko Petroleum. Now it seems like a prescient masterstroke today. In fact, OXY is now so apprised that Warren Buffett bought 14% of it. I think this foreshadows what may be a frantic acquisition panic as the long-term nature of the oil patch’s elevated value becomes even more clear.

My Trades

Over the last several weeks, I started adding back Oil and Gas names in my trading accounts. All the usual suspects I have shared with you previously. I do have a much greater interest in NatGas and LNG, so I started a new name Range Resources (RRC). I have been building a decent position in TELL and have even taken some Calls in it. I was gratified by the nice pop in TELL on Friday ending up at 19%.

New Fortress Energy (NFE) is a new LNG play for me that I will likely pull the trigger on this week. They have a fascinating setup for processing LNG. If they are not BS, and I don’t think they are, they have found a way to quickly create a facility and start exporting at the end of ’22 or the beginning of ’23. They have been prepping an abandoned Oil platform in the Gulf (15 miles from the coast) that is no longer pumping oil and are building an LNG train on them, it sounded like it was multiple platforms near each other even (not sure). What the founder shared was that the slowest thing to build that needs the most licensing approvals are the storage tanks. The energy concentrated in them could be as powerful a bomb as a small nuke. So they require a lot of permitting, and construction is slow and expensive. Instead what they are doing is storing the LNG on ships that are docking anyway. Not sure whether these are old LNG ships that are the interim storage or they plan on having a constant stream of LNG ships that they will be filling serially and so don’t need on-site storage. I would think the logistics of that latter choice could be over-complex. Still, theoretically, it still seems doable.

Another LNG play that is on my buy list is FLEX LNG (FLNG) +4.4% on Friday. It rallied to an all-time high on news that Cheniere Energy (LNG) +2.8% exercised its option to employ a fifth Flex LNG carrier. If you go on the Seeking Alpha site and search for FLNG there are some slides that were shown on a recent investor day. Very informative and bullish.

I did open a position in Intrepid Potash (IPI) which sold off hard this week as WTI oil fell. I believe there were some rumblings of peace talks in the war. It came to naught and with images of the horrible mass murder of civilians by the Russians. I think the notion that Russia will be joining the world anytime soon after these atrocities isn’t very likely. It was not just IPI, CF Industries (CF) and others in the fertilizer space fell hard as well. Fertilizer has very similar economic trends raising their value, as the need for more agricultural productivity is most acute.

In addition, to TELL calls, I also added Devon Energy (DVN) calls, both are in spreads. I believe that Biden’s release of oil from the Strategic Petroleum Reserve once again pressuring WTI price will only be temporary. The Strategic Petroleum Reserve is just that, Strategic. That means that high oil prices being the reason for this release is purely political. They will have to be refilled, the release will not make a big dent in the coming shortfall. Also, those 180 Million barrels that will be pumped out of the SPR will need to be replaced. The price of oil will be elevated at least until 2024, if not longer. So, if the hostile attitude toward the oil and gas industry by the Biden administration and governments in Europe as well, then the under-investment will continue and all the frackers will continue to mint coin.

My hedging was very simple. I went long in SQQQ, SXPS, and UVXY. These are all triple leveraged ETFs betting that the Nasdaq 100, and the S&P 500 will go down and the VIX will go up.

These ETFs are recommended for one-day trading and they should be used very carefully. I intend to close out these positions this week whether I have profits or losses. The reason is the three times leverage, it can work for you and against you. The longer you hold them the bigger the chance that you got the hedge wrong.

I am still holding all my tech names, I am still trading around the position, to bring my avg prices down.

In summary, we have to use the sharp rallies and the steep dives to our advantage. Long-term investors need not do anything except collect dividends. The longer I look at the facts surrounding Oil, Gas, and especially LNG, the more I am convinced that you can consider them a growth area for now. Another prediction is that M&A will accelerate pushing the EnP companies even higher.

Good News! If you enjoy my weekly stock analysis and the idea of having my daily take on the message of the market and unique stock ideas. You will be happy to learn that I finally am going to offer a subscription service. It won’t just be me, I am bringing on Serop Elmayan, a brilliant young man who brings a quantitative approach using his custom-developed algorithm to surface high probability fast-money trades. I think the combination of my narrative style and his no-nonsense engineering approach will give you a very unique value indeed. Stay tuned!

Please note: You should not take the above text as investment advice. I am not a broker, a registered investment advisor, or a certified money manager and I cannot give financial advice. What I am doing is chronicling my thought process, and I hope you gain from it. Always do your own research and understand what you are buying, what your risk is, and be sure before you make a purchase. Also, only trade what you can afford to lose.

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