A “Natural” Bet on Energy

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

As a result, your existing Global Bull Market Alert portfolio now boasts five double-digit percentage gains. The notable exception is your short-term bet on a correction in September through the UltraShort MSCI Emerging Mkts ProShares (EEV). Keep an eye out for a special alert for when we want to exit this position, and potentially move all of your “HOLDs” in the portfolio to “BUYs.”

This week’s Global Bull Market Alert pick, First Trust ISE-Revere Natural Gas (FCG), is a bet on a market that should, in theory, move independently of global markets — the highly volatile, but potentially highly profitable natural gas sector.

In a market where almost everything has gone up, natural gas has been one of the worst investments in 2009. The combination of reduced demand, new natural gas supplies, and a mild winter last year have led to record high inventories and the price of natural gas plummeting almost 60% this year.

But that is about to change. The economy is picking up. The venerable Farmers’ Almanac predicts a very cold, hard winter for the Midwest. Increased demand from developing countries combined with green energy policies around the world are set to increase demand for natural gas.

But most importantly, natural gas is just too darn cheap. The price ratio of crude oil to natural gas has averaged around 12x (i.e., the price of one barrel of oil averaged 12x that of one mcf of natural gas — mcf is the unit in which natural gas is measured). This ratio has recently spiked to more than 25x. With the economic recovery taking shape, this will likely return to normal. Several big hedge funds I know of are making the same bet.

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So why FCG? In contrast with the natural gas ETF (UNG), FCG has stakes in major natural gas names like Devon Energy (DVN), Quicksilver Resources (KWK), and Newfield Exploration (NFX). So, thanks to the rally in stock markets, while UNG is down 57.3% this year, FCG is up 37.6%. Betting on natural gas stocks is simply a safer bet.

So buy the First Trust ISE-Revere Natural Gas (FCG) at market today and place your stop at $13.80. Here’s a word of warning. This is a momentum play that had just broken out on the upside last Wednesday. So, it may be due for a correction in the next few days before it resumes its upward trend. If you want to try the options, I recommend the December $15 calls.

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) rallied 4.9% last week, as the Chinese stock market continued its recovery, Brazil emerged form recession, and Russia soared over 10%. BKF remains a HOLD.

Baidu, Inc. (BIDU) soared 7.8%, hitting highs for the year, as investors poured back into this institutional favorite. Tighten your stop to $315. I am keeping BIDU at a HOLD.

The WisdomTree Dreyfus Emerging Currency ETF (CEW) rose slightly as the U.S. dollar continued to weaken. With the U.S. dollar continuing to weaken, this low volatility, defensive position is now a BUY.

iShares MSCI Chile Investable Market Index (ECH) jumped 2.16% as Chile lagged more volatile emerging markets. ECH remains a HOLD.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) ended the week slightly lower. Israel’s Bank Hapoalim predicts that the Tel Aviv Stock Exchange will probably continue to rise in the medium- and long-term, as expectations of further improvement in Israeli companies’ results improve. EIS is a BUY.

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UltraShort MSCI Emerging Mkts ProShares (EEV) had a bad week, as emerging markets rallied. As they pull back over the next week or so, we will exit this position, which should gain sharply on any drop in the markets. With both Asian and European markets off this morning, it remains a BUY.

The iShares MSCI Hong Kong Index (EWH) jumped 3.8% this past week, as Asian markets bounced back last week. Hong Kong is a HOLD.

SPDR S&P Emerging Markets Small Cap ETF (EWX) hit $42.85 on Friday, yet another record high for the year. This leveraged play on emerging markets remains a HOLD.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) was flat this past week, in the face of a strong week in global stock markets. Some analysts point to China’s copper imports dropping by 15% for the first time in six months. This is reason enough to keep a close eye on the position and tighten your stop to $37.70. Dr. Copper is now a HOLD.

PowerShares Financial Preferred (PGF) rose 2.54% this week. Both oversold and yielding over 10%, this bet on a recovery in U.S. financial stocks remains a BUY.

Claymore/AlphaShares China Real Estate ETF (TAO) jumped 3.8%, as the Chinese market continued to recover. TAO remains a HOLD.

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If a correction in global markets is coming in September, it didn't start the day after Labor Day, as investors came back from their vacations ready and willing to add to their riskier positions. As a result, your Global Stock Investor portfolio had one of its best weeks of the summer.

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