Monday, September 14, 2009

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.

8 comments:

Ticker Street said...

America is not ready for oil > 75$ yet. That's enough to crash UNG back to lows., after this silly hype is over.

Get out while you can.

pythagoruz said...

Americans don't even see much of the movement in natural gas in terms of their cost. I saw that my electricity bill is supposed to only drop by 30%, where the hell is the other 50%? If natural gas doubles it mostly means that the utility companies won't see as much of a windfall rather than consumers will get pinched. Obviously natural gas has completely decoupled from crude so I don't see what your argument actually is.

pythagoruz said...

By the way, I checked out your blog. Nice charts, you seem to dig the fibs. I use them but usually leave them off my posted charts because they get too busy. I see you're also interested in solar. Thanks for the comment.

Saoirse said...
This comment has been removed by a blog administrator.
pythagoruz said...

Hey Saoirse, glad you like the blog. Thanks for stopping by.

Anonymous said...

Enjoy the blog. What do you think about UNG's afternoon drop and the drop of NG in the afternoon trading? I'm still bullish on it, you?

HR

pythagoruz said...

HR, today's drop was more significant in the futures than in UNG. I was thinking its likely just profit taking from futures traders, after all, the futures are up much more from the low than UNG (because of the premium issue). Spot is up something like 70%, although UNG does not "own" the spot price. So a little profit taking in natural gas is nothing to worry about. If we roll over from here on increasing volume I'd start to worry.

By the way, I thought it was interesting and surprising how UNG outperformed it's NAV by a pretty wide margin today. Apparently the market doesn't seem to care that UNG will be issuing more shares in the coming months (and that will depress the premium again). I guess UNG shorts are starting to get squeezed, if a full blown panic squeeze sets in we could see that 20% premium come back in a hurry.

The current premium lies at 7.8%, up from 2.9% last night.

Anonymous said...

Agreed on the return of the premium. However, I was glad to see it go. (As crazy as that may sound....) The dissappearance of the premium should lead to more stable trading days, imho. Anyway, hope the uptrend continues. Have you ever done an analysis on UYG? I traded it for a while, it seems to have broken a critical resistnace level of around 5.75 yesterday.

Keep up the blog, I'll keep reading and enjoying it. HR.