Remember those halcyon days when “less
bad” was, to quote that champion of a healthy breakfast Tony the Tiger,
G-R-E-E-A-T! Now we have home prices rising two months in a row,
durable goods orders rising close to 5% and a national ISM
Manufacturing Index that not only moved into positive territory but
beat expectations by 2.4 index points and the markets are unimpressed
to put it mildly.
The market had been on a tear as of
late although given the sharp move down in mid August only to be
followed by a move to new highs before the panic producing plunge
yesterday the thing that is most torn is the P/L of yours truly. The
CDS market was taken on the inverse of the same roller coaster and
that’s our indicator of choice so we’re sticking with it. Besides,
nothing works all the time. Does it?
If the stock market needs an example of
how to make its way lower there is a product out there that has had a
lot of practice moving in that direction this year and that would be
natural gas. The CFTC has spent a lot of time trying to figure out if
UNG, the ETF that represents a long position in the methanous mixture,
is giving those dreaded “speculators” an unfair advantage. Given that
an inert gas cannot go bankrupt it is unlikely there will be rampant
CDS buying on the futures contracts.
Recent finds and a lack of demand have
moved Nat Gas prices down by 30% since early August and the fear in the
market is that there will be more gas than there is storage space. The
good news here is that the Energy Information Administration is
expected to announce additional storage capacity of approximately 100BN
cubic feet soon.
I am not sure if that will help prices
at all but that’s an awful lot of space and it makes it abundantly
clear that someone should put some effort into figuring out how to use
more of the stuff than we do.
There is hope and it is coming from the
most unlikely of sources, Congress. Well, maybe not so surprising when
you learn that it’s a variation on the “cash for clunkers” bill and
will be using your tax dollars in the process.
The House of Representatives has a bill
waiting for it when it returns from summer recess that would offer tax
credits of up to $12,500 for the purchase of cars and trucks that run
on natural gas. Included in the bill are additional credits of $64,000
if you run a fleet of vehicles and $100,000 if you open up a filling
station.
Providing the economic impetus for a
move towards natural gas makes some sense when you consider the energy
independence, infrastructure building and green technology aspects of
the proposal.
Chesapeake Energy (CHK), El Paso (EP)
and Kinder Morgan Energy Partners (KMP) are the names responsible for
finding more gas than we can use at the moment.
Companies like Wal-Mart (WMT) and
PepsiCo (PEP) as well as all of the long haul shippers that frequent
the 184 truck stops that dot the North American landscape all fall into
the end-user category.
The CDS/equity relationship for CHK has
been as volatile as the gas itself this year making sharp moves in a
trading range that has $13.00 and $25.00 as bounds. The CDS has like
wise moved primarily sideways between 850bps and 550bps.
Although the specific numbers are
different, in general, the same can be said for both EP and KMP. It
will take a clearer picture of when a true turn around in the economy
begins as well as more information on how to use all of the gas we are
pumping into storage before the CDS/equity trends in these names
becomes clearer.
WMT’s CDS slid down a pretty smooth
slope this year peaking at 111bps in March and bottoming on 8/7 at
33bps. Since then it’s been up for the CDS and down for the stock with
the pair closing at 48bps and $50.97 respectively last night.
PEP has had a bit of a better time of
it with its CDS topping out at 80bps this spring while the stock
bottomed ($45.81) around the same time. Since then its been down for
the CDS and up for the stock albeit in choppy fashion at times. PEP’s
CDS closed at 40bps last night up from a recent low for the year of
32bps in early August. The stock closed last night at $57.29 after
topping out at $59.06 during that same time early last month.
