Don't Dread the Natty, It Bottomed! (UNG to soar)

Well, today I was kicking myself over a post I wanted to do this weekend but didn't. I had wanted to post about the presumably bearish SEC filing from the managers of UNG on Friday afternoon. The news that came out was that UNG is going to start issuing shares again, in other words go back to being an open ended fund (note that a "closed end" fund is not a shut down fund). This was supposedly the news that the bears had been praying for because it meant that UNG's "huge" premium would go away and the UNG stock price would crash. Actually, that's not completely true, the news the bears had really hoped for was that UNG would be shut down like DXO last week. But seriously, no one expected UNG to be shut down, that was just the ramblings of idiots and thieves on message boards which had been mixed in with the usual crap articles coming out of Jim Cramer's junk website thestreet.com. No, this wasn't ever a real possibility but the street wanted you and I and anyone holding UNG or anyone dumb enough to short it to think so. No, UNG was not closed down, rather they will start issuing shares again to expand the fund in response to investor demand.

While the fund was closed, pending CFTC and SEC comforts, investor demand for natural gas did not go away, it in fact increased causing the ETF to outperform the NAV (net asset value (natural gas futures and swaps)). This led to a massive premium, unheard of in ETFs, of nearly 20%. Oh the bears jumped all over this, they screamed that longs would loose their ass when UNG started issuing shares again. The message boards were, of course, a zoo. Bears were screaming in all caps that "idiot bagholder longs" had low IQs and what not for buying UNG with a premium. Then on Friday UNG announced that they would start issuing shares again and UNG cratered 6% in the after hours. What a joke the headlines were recently like this weekend one: "Dion: Investor Alert -- UNG Shares to Slide" where the author says foolishly (in hindsight) that "in a filing Friday, managers of the United States Natural Gas ETF(UNG Quote) announced that the fund would resume the creation of new shares, a move that could send the fund tumbling more than 16%." Oh really, the market is that stoopid? No, the UNG NAV increased 14.8%, while the shares increased 2.5%, actually. Here is a six month continuous natural gas chart:

Today the front month natural gas contracts that you own when you buy UNG surged 14%. Why? Well, there was a bullish report about natural gas by Goldman Sachs (and we know they run the show), but it doesn't take a genius to say, oh, hey, natural gas is cheap, it might go up. I mean, I've been saying that for weeks! And I ain't no genius. No, I think natural gas went up so much because of the UNG announcement. UNG is clearly one of the biggest natural gas players in the market now and they told the market, hey, we are going to increase our positions going forward to meet huge and increasing investor demand. If that isn't bullish for natural gas, I don't know what is. Currently there are about 400M shares outstanding but UNG has approval from the SEC to expand that by up to 1 billion shares. They could expand their natural gas futures holdings massively if demand for UNG so merited it assuming the CFTC was cool with it. Clearly the CFTC must have given UNG the green light based on Friday's announcement.

So what happened to that big premium that the bears have been screaming about? It pretty much disappeared in a single day. Here is the UNG NAV (net asset value) compared to the UNG share price over the past week. Premium is gone (pretty much). I'd note that the premium can not go negative because redemptions would happen first(fund would completely evaporate before UNG fell below NAV)). Now it certainly looks like we are back to the good old open ended natural gas ETF that we want, one that is targeted to move with front month natty. So UNG can't under perform natural gas (by more than a few % annually), but of course, its now unlikely to outperform natural gas also.

So at this point we can expect that UNG will closely track natural gas and looking at natural gas (see top chart) I now see an obvious and solid long term bottom. I'll repeat that, natural gas has bottomed. Personally, I don't think natural gas will ever be cheaper in history than it was a week ago when the $2.40 low was made. I'm tempted to not even show the UNG chart because I'm so bullish on their holdings, but here it is:

The UNG chart doesn't look as great but that's because of the creation of and then dissolution of the premium (UNG was up only 2.5% today despite the surge in their holdings). This UNG chart does show capitulation, it shows bullish signals on the stochastics and almost on the CCI. It also shows a wedge that is about to confirm a failed breakdown reversal. I don't really see any other scenario possible besides a massive short squeeze to begin the next bull market in natural gas. Its too early, of course, to call this a bull market. But I bet that by the end of Fall I'll be posting about the new natural gas bull market that began here right now. There are issues, and always will be with investing in ETF's like UNG that roll through commodity futures, but the fact is its the simplest and most accessible method for profiting on the insane gains coming for this commodity. I think another great way to profit from the coming bull market in natural gas will be solar energy, but that's for another day, and another post. For now, this is a day for natural gas bulls. Hold them GAZ or UNGs!

Disclosure: I still own UNG calls.
More infon about UNG here.