KEY TAKEAWAYS FROM THE JEFF GUNDLACH CONFERENCE CALL
Bond guru Jeff Gundlach offered some macro insights on today’s conference call. I’ll cut straight to the chase with the key takeaways:
- His favorite investment right now is natural gas. He says it’s like buying gold in 1997….
- Buy stocks when they’re in the single digit PE range.
- QE3 is already underway in operation twist.
- Still worried about the national debt….
- Europe remains the biggest risk to the equity markets.
- The biggest risk to his funds and outlook is surging interest rates.
- The Fed won’t raise rates unless inflation kicks up further.
- Believes rates will remain low to stable.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
Follow Me:
57 Comments
What do people recommend as the best way to play nat gas? UNG is garbage, I believe. Is it drillers? Is there any way to buy the commodity directly?
On another note, does anyone else feel similarly about coal? ANR, CLF, and WLT look like screaming bargains.
I’ve been asking myself recently that as well. In terms of investability, XOM may be a lower risk long term play (personally, I think the NatGas story is longer term as it will take a while for enthusiasm on fracking to wane because of forced drilling on expiring leases near term, but at the same time industrial conversions increase.) XOM will have enough (oil) cash flow to hold or expand no matter which way it goes, although for years I find they don’t even tell you what their oil reserve life index is.
@ Bob
I’ve never seen a long term chart look like a wave at Pipeline Beach, HI.
I say we all buy UNG together..me first then you guys follow
We’ll do that until the long term chart looks like a skateboard ramp.
Good question for small investors. I think UNL invests in all 12 monthly contracts so has a lesser roll problem, but I’d be interested in hearing if anyone else has a good small investor approach here. Index funds through equity exposure might be the only bet that isn’t a gamble, but I am not super familiar with this space from an ETF approach….
via Twitter:
“Gundlach has some small stakes in Hugoton (HGT) and San Juan Basin (SJT) nat gas royalty trusts.”
More ideas from Twitter:
“WPRT and CLNE on downstream side, pipelines and LNG tankers + HEK for water treat in mid- and CHK, SWN, APC, DVN, ECA down-” plus UPL.
Do your own research boys and girls.
Buy a pure play Fracking company as they have been crushed.
CJES is trading at a 5 PE and growing 30% a year. No debt.
I’m long.
First thanks to everyone for suggestions.
TA I have no idea of anything regards US Natural Gas. I do hold some Canadian ex-Trusts that have been very good to me…and still are.
So I googled CJES. Top of the screen is Superstockscreener with a strong sell on CJES!!!
I’d be inclined to go contrarian! However I’ll watch a little longer and try to learn something in the meantime.
Thank you for your input.
My personal favourite play in this area is The Weir Group
http://kelpie-capital.com/2012/04/06/the-weir-group-weir-l-drill-baby-drill/
Like selling picks and shovels in the gold rush these guys are the facilitators of shale oil and gas drilling with their frac pumps.
AMLP is the ETF for the Alerian Master Limited Partnership, many of which have nat gas, oil and/or NGL exposure and most are paying distributions in the 6 – 8% range. Because of the ETF format, no K-1s to deal with as far as I recall.
Research the space and the structure of the index, of course, but it’s another option – though “less natural gas only.”
I’m glad to read Jeff’s in HGT I have a 3% investment in this. I own ECA, ERF and ACI as a coal play. I like these for the dividend pay out in case I have to wait a while for this to all work out.
The best way is through futures (NG). Total 24hr control and you can start small. Maintenance margin is around 2800 per contract. Forget ETF’s. Now that even TD Ameritrade offers futures, there is no excuse for going the retail way anymore.
Lots of incentives being introduced to lift nat gas demand: Obama’s tax break for gas-fuelled truck; the first project (Sabine Pass liquefaction plant) to export LNG from the US was recently approved by the fed energy regulator; etc. With nat gas price at the current level, it is worthwhile to examine the opportunities in this sector.
CNX offers a play in both coal and nat gas.
Of course, but not every small investor is trading futures….
A few more NG ideas:
- When the shale gas depletion rate problem becomes more widely known/experienced and prices rise again, the low cost producers of conventional gas such as MCF and CNX should do very well. Personally I think it is too early to do anything but cautiously sell OTM puts against them and nibble at the fixed income..speaking of which…
- CNX,ANR,LINE (who is buying BP’s conventional gas operations in the hugoton)and maybe Comstock and Exco for the very agressive all have debt trading at YTM of 7-9% for 8-10 years that could be a good place to start.
I have followed this idea for some time and gas prices are highly-likely to rise significantly since the “100 years of new supply” is almost certainly widely overstated and only available at much higher prices (check out the TheOilDrum for some great writing on this topic). However there is no good way to know when that will occur and if it is not until 2018 for example, shale-focused players could be out of business by the time it does and the conventional players could be in major difficulty, so staying light on the equity side seems prudent for now until a truly sustainable rise in the spot price is clearly happening. A lot of the new demand won’t be online for a few years (new power plants, extensive vehicular use etc.) and even with the fast depletion rates of the shale plays, it could still be a few years before the price rises in a sustainable trend.
Good post Uncle Tupelo
CR, what is your view on shorting German Bunds?
Pipelines!
http://www.bloomberg.com/news/2012-04-18/exxon-inferior-to-pipelines-in-energy-investing.html
Agree UNG is trash.. a loser long term. A great way to play Nat Gas now is through the NG tankers. We are going to be the worlds largest exporter of nat gas. TGP, TNT, and GLOG offer great growth prospects and dividends now.
I think the best would be CQP 7.4% yield and assured growth in the LNG exports. Long term investment, big payoffs should start in couple of years.
If these are the key takeaways, I’m shocked. Not that much insight for someone who manages $30B. They are smack you in the face obvious.
Bond guru’s top trade is natural gas? Hmm…what’s the DV01 on that?
It’ll trade below $1 before it trades above $3. Probably sometime this summer.
My guess is he’s referring to holdings outside of his core bond holdings….He runs another couple of funds also that combine other asset classes….
I believe the conference call was from his asset allocation fund.
Oh yea I’m sure…and would guess he is investing in companies and not buying UNG. Point is, managers tend to run into trouble when they venture out of their core competency.
Natgas will definitely be a fun one to watch. Producer economics are to continue producing well below the marginal cost of production since they need cash flow to pay royalties. We could easily reach max storage capacity by the end of the year and will be interesting to see how the market reacts as we approach that level this summer. On the bullside, don’t see the political will to do anything about the environmental catastrophe due to fracking ahead of the November elections. Near $1 though, probably not a bad idea to get long call skew.
Characterizing hydraulic fracturing as an environmental catastrophe is nonsense. As a professional geologist I have seen no credible evidence of groundwater contamination due to this process. There are legitimate issues to address concerning handling of waste water disposal and insuring that oil and gas wells have competent casing design and implementation, but describing these issues as a “catastrophe” is foolish and unfounded.
I was referring to the earthquakes:
http://oilprice.com/Energy/Natural-Gas/U.S.-Government-Confirms-Link-Between-Earthquakes-and-Hydraulic-Fracturing.html
The U.S.G.S. report is interesting, I believe that the conjectural linkage of earthquakes to oil and gas activity is related to disposal of produced water in deep acquifers. The injected water is theorized to have migrated into fault systems and provided “lubrication” that promoted slippage along the fault systems. The water disposal is not related to the actual process of hydraulic fracture stimulation of oil and gas reservoirs. Most injected water is formation water produced along with the hydrocarbons. If fault slippage has been increased due to water disposal, restrictions on placement of disposal wells near known fault systems can be put in place. In most U.S. sedimentary basins that are home to oil and gas activity, the locations of deep faults are well known to the geoscience communities. Thousands of water disposal wells have been in use for decades with no observed impact on seismic activity, and certainly to date no “catastrophic” earthquakes have occurred in the U.S. with any links to either water disposal or “fracking”.
The only catastrophe here is that the huge increases in natgas supplies is pulling down electricity prices and making wind, solar and other “renewables” grossly uneconomic and requiring massive subsidies.
The current leadership’s drive for “green” energy depends on $150/Bbl oil and $16/MCF natgas.
So now they have to attack the very technology that has increased the natgas supply.
Ban mining – let the bastards freeze in the dark”
“As a professional geologist I have seen no credible evidence of groundwater contamination due to this process.” Seriously? …and if you want the truth on tobacco, just ask Philip Morris.
MLPs at least give you a dividend for waiting. LNG and GLNG are great long term plays on pullbacks. They will get bought by the big guys eventually. Exporting is gonna be a big business considering natgas is 3 or 4 times more expensive overseas. They’ve had a good run and LNG needs to raise some money so I’m not buying this moment. Like others have said, prices can go to $1 before they go back up. And contango is a killer. As a hedge, short UNG. That turd is going to 0.
Aaron, please know the tax ramifications before investing in MLPs (partnerships). I would suggest most people don’t own them outright because of the k-1 hassles, especially for IRAs where they could possible cause taxes to be realized prematurely. Secondly, poor correlation between MLPs and energy prices. MLPs are regulated by FERC and cannot set their own prices. Third, they are dividends.
Cullen you might want to look at FCG. Believe that is the route that I am going to take.
Sorry, they are not dividends, they are distributions.
Yes, I’ve been investing in MLPs for a while. Anyone that uses TurboTax or TaxAct can fairly easily fill out the form. It takes longer but it’s not complicated to do in the software. And yes, if you get too much $$ in distributions in an IRA you could be susceptible to taxes. However, nobody at the IRS understands MLPs anyways. It’s hilarious. You talk to 3 different people and get 3 different answers. My grandpa convinced the IRS that because he’ll be paying taxes on his IRA distributions, there’s no reason to pay taxes on MLPs within his IRA.
The fact that MLPs are not correlated to asset prices is a plus IMO. They (the pipelines at least) get paid based on the volume of gas and oil they transport, not the spot price. That way, if the spot price doesn’t increase, but natgas consumption increases, they should benefit. A spike in interest rates should hurt them however. I also agree with you that FCG is probably the only ETF that should be bought by the normal investor. Stay away from UNG and UNL, or any other spot price ETF. Gundlach could possibly be buying the actual commodity and storing it himself. Something the rest of us can’t do.
I believe Gundlach mentioned in a previous call that natgas MLPs in 2012 would be a good buy. I could be wrong on that though.
I am no expert, however my grandfather worked his whole life as an accountant for pipelines and is now an active energy trader, my bro-in-law is a trader for an energy-only hedge fund, brother is an accountant for Apache, 1 uncle was a natgas trader for BP and is now a natgas broker, 2 uncles are accountants for Exxon and Chevron, and a cousin that is a petroleum engineer for EOG. You can’t help but pick up a few tips every holiday.
Aaron,
With you on the dUNG and UNL. Great way to lose money. I am thinking FCG after winter 2013.
MLP are really more of an energy infrastructure play. I like to play MLPs via mutual funds. I prefer the ROC without K1s, hold long enough and you are looking at long-term gains instead of dividend tax rate (could be important in 2013). Also keep in mind that last year was the first year custodians were required to keep cost basis for tax reporting reasons, you really don’t want to file out FORM 990. That said UBTI has recently been a small piece of distributions. And yes, MLPs are credit sensitive, if interest rates start going up, it will be time to bail because so much of their business is dependent on credit costs.
Another factor that concerns me with MLPs is what I would call “political risk”. They were created/permitted by the feds to encourage oil and gas exploration and development.
When you hear politicians talking about ending tax breaks for “big oil”, and closing “millionaires loopholes”, MLP’s are exactly the kind of thing they are talking about.
Combine that with folks running for office (and some already in office) who publicly state that they want to increase the cost of carbon based energy products, and you’ve got a potential double whammy aimed at MLP’s.
“When you hear politicians talking about ending tax breaks for “big oil”, and closing “millionaires loopholes”, MLP’s are exactly the kind of thing they are talking about.”
I agree there is political risk, but I think it would be because of collateral damage. Linn Energy, EV Energy Partners, Whiting, et al are not who the politicians and their constituents think of when they talk “big oil” or “millionaire loopholes.”
What would seem more likely is sloppy legislation that affects taxation of partnerships (aimed at private equity, Big Law, etc) and ends up encompassing the MLPs.
Coal looks better than nat gas down here. Both are facing oversupply, but the demand story for coal is stronger in emerging markets, where natural gas is still very expensive to export. That said, I don’t see any compelling catalysts to own either group.
Yes, coal is also worth looking, but NG is cheaper and coal supply can be expanded way more than NG as well as provided easily (plus there are plenty of local reserves everywhere, not so much for NG which benefits from supply constraints).
I agree. Fortunately is one of the big winners so you don’t really need to buy while still is in a downtrend and you can wait until it flattens.
Probably not a sure long until we have clear perspectives on how demand is gonna behave due to recession-depression & deflation; but I agree is a ‘gold story’. I prefer buying and rolling future contracts rather than owning ETF’s or NG corporations equities, in the first case due to backwardation and in the second due to profit potential (being commodities more volatile).
Right now I would rather sell oil & PM’s.
Just make sure that you understand contango if you want to play this game.
http://www.efficientfrontier.com/ef/0adhoc/stuff.htm
http://commodityhq.com/library/understanding-contango-natural-gas-example/
I have to play devil’s advocate here. Gold and gold stocks really did nothing from 1997 to 2003; then zoomed up. If natural gas is like gold in 1997, then your investment will be dead money for 6 years (which translates to 2018), and in 1997 you would have missed all of the potential returns from the tech bubble of 1997 to 2000. I have to agree with Leverage – if natural gas is going to turn around big-time you will have a window of at least 3 or 4 years to buy.
Maybe we should start an ETF that holds physical nat gas
How about drillers? HAL, SLB etc?
Rich, you mean potential losses in the tech bubble, right?:)
Yes, I like the drillers and riggers for now. I’ve been studying this industry for about 5 years. I spend a lot of time in northern PA, which is a hotbed of shale gas activity. I was just there last weekend, looking at the progress on some wells on land a friend of mine owns.
The drillers and pipeline construction folks are the only ones making money at this point. There are dozens of wells that are drilled and then capped. The attitude is “drill now, while the legal environment allows it and money is cheap, and wait for the market to develop.”
It will be YEARS until the distribution infrastructure is in place to allow the gas to make it to a profitable market, so IMO, investing in the producers or gas itself is long term play.
I have been dabbling with MLP’s for a few years too. They are a good, fairly conservative way to get into the market. But they too are long term plays, only suitable for buy and hold investors. They are ticking tax time bombs, and if you don’t plan properly, you can get slammed with capital gains taxes if/when you sell. The uncertain future of capital gains taxes add another unknown to the mix.
Jaymaster,
you may be familiar with The Weir Group then? Undoubtedly my favourite way of playing the shale led boom towards US energy independence.
http://kelpie-capital.com/2012/04/06/the-weir-group-weir-l-drill-baby-drill/
These guys have so much pricing power right now and they own the aftermarket.
Never heard of them till now. They do look interesting, and I will put them on my watch list. The short float looks kind of scary, but not necessarily a bad thing.
Thanks for putting them on my radar!
Aren’t these two things contradictory?
“Still worried about the national debt…”
“Believes rates will remain low to stable.”
I think he doesn’t know what he is talking about and is just lucky.
Being worried about national debt is a fashion nowadays. Either you are worried or you don’t make the news, such is the state of things, sad.
I’m worried about the national debt too.
I’m worried it’s not big enough to get us out of this recession!
Didn’t France outlaw Fracking?
Must be the Nuclear and Perrier lobbies.
I agree with all those who commented that it will take 3-5 years for gas producers to show decent profits, the way to go in my opinion is with the old “provide the picks and shovels” mantra, in other words, drillers, waste water treatment firms, and innovative new fracking companies like GasFrac Energy Services GFS-V that uses propane instead of water and polluting chemicals, and it is at a very good buy point right now because of the media attention to pollution fears from conventional fracking. Also consider Poseidon Concepts PSN-V which has a vastly superior waste water storage/disposal service.
I have also done well with Westport Innovations WPRT also dropping from a $46. high recently back to around $33.00. Have sold covered calls at a profit 3 times already and some analysts are predicting a DOUBLE from here as 18 wheelers switch from diesel to natural gas. Complementing that is CLEAN ENERGY FUELS having a deal with PILOT truck stops to build 150 refueling stations across the country. For further ideas register at, or keep checking my website weekly @ http://www.myronswinningjuniors.com for stock profiles and buy and sell reports.
Best plays are Canadian oil and gas names. They will ALL eventually be taken out.
You can buy the biggies like Encana and Peyto but the better names are the smaller ones. These are the ones that make you the most money.
Cequence Energy (CQE-tsx) and Crew Energy (CR-tsx) are the top 2 at present price.
Others to look at are CLT-tsx, BIR-tsx, and LEG-tsx.
it must be noted that these names can survive $1-1.50 gas and have very low debt ratios.
As with ANY basic commodity, anytime it’s at historical lows, especially on a comparison bases, then you need to consider buying it. As a long term investor, I think the average investor would have to look at stocks. As a Futures Trader I only consider the Futures Markets. Therefore, having been bearish NG, at these levels, I just can’t be short any longer… even though it may go lower. I am now only looking at the long side, but I have a Trading Plan and in that plan I always place stops. I can say, that markets have a tendency to stay down much longer than most traders/investors can or will hold on. So, create a plan and stick to it! You have to BE THERE when it moves. I remember being short the Mexican Peso for almost two years, loosing money every month, before it was devalued. So, it takes staying power and a real conviction to BE THERE!
However, I don’t consider the trade the same as gold in 1997. To me, GOLD had to go up, it was just a matter of time! NG doesn’t have to go up, everything else could collapse… so maybe it’s better to consider a spread… even if NG does go up.
To bet on natural gas as the next gold seems to be a bet on either of two extremes. Unprecedented global prosperity, or the entire Middle East blows-up in war. Maybe that’s the fork-in-the-road Gundlach is looking at.
Cullen
What is your take on his concern with National Debt?
——
I know he has compared US to Ancient Rome and reading between the lines it seems his concern might be more of the decreasing competitiveness of the US given going forward with increasing debt to GDP ratios.
That is, the high level of unemployment, the degree of dependency of citizens on the government (via direct stimulus, high proportion of government jobs and social programs) which seem to increase the dependency of citizens on national debt to sustain a growing economy (GDP). And he also alludes that interest rates may potentially need to rise in the future when inflation becomes more pronounced in a previous presentation.
To me it sounds like a reasonably explained and tamer version of the currency crisis meme without the fear mongering. What is your take?