Time To Buy Natural Gas As Short Position May Be Ready To Unwind...

We've begun buying UNG here in the $29-30 range as we believe it is likely that the sizeable short position in natural gas will begin to unwind very soon. Natural gas has just filled a significant gap at $6.50 dating back to September 2007, and the commodity has been completely left for dead after hedge funds were violently liquidated out of their early-mid 2008 momentum trade. After 3 months of heavy liquidation, and a precipitous move to the downside it is likely that liquidation and margin call selling are now complete and what we have left is a significant short position ready to cover. The risk/reward profile is excellent at these levels with about 3 points downside to +10 points upside. Moreover, keep in mind that due to the recent decline in natural gas prices, major producers like Chesapeake Energy (CHK) have pared back major natural gas projects which should lead to a decline in future natural gas supply estimates which should be marginally bullish for natural gas prices in the future. Lastly, we are also entering the winter season where demand for natural gas tends to perk up due to home heating. Are we expecting natural gas prices to spike back to the $13 level overnight? No, but we like the ingredients here for a nice 30% short squeeze to the $8-9 level which should put UNG at around $40.

Government To Halt Equity Markets, Slash Capital Gains Taxes In An Attempt To Stem Slide In US Equities...

Just as we predicted last month in our September 15th post entitled "Equity Market Being Used As Source Of Funds By Financial Institutions," equity prices have fallen dramatically over the past several weeks as the largest financial institutions across the globe rushed to liquidate their largest positions to meet margin calls, satisfy redemptions, and stave off ultimate failure. Next stage of the meltdown? Watch for a global halt of all equity markets (including all US markets) as all markets are now trading on absolute fear, and watch for the government to propose a MAJOR cut in capital gains taxes in an attempt to stem the slide in equities. This tax cut proposal will likely be THE rally-inducing event the market has been waiting for as the potential return on equities now becomes perceived as significantly higher than that of treasury bonds now producing yields near all time lows. Remember this is an election year and there are a confluence of very strong forces battling it out within the financial system right now....Republicans have wanted to slash capital gains taxes for a very long time now, and with a meltdown in financial markets they now have the excuse they've been looking for and the ability to sell the idea to opposing Democrats.

Mortgage-Backed Securities: Wall Street Attempts To Create An Entity With No Consequences...

Banks can't stop lending forever, thats how they make money....they take your money, pay you an interest rate on it, then lend it out at higher rates....they can not axe out the latter part of the equation indefinitely if they wish to remain in business over the long run....right now banks are just waiting out the storm just as we are to see which institutions are going to survive so they know which counterparties they can do business with confidently.....risk aversion is extremely high across the entire landscape of our financial ecosystem right now....no one wants to take on any risk whatsoever.....equities known as the best asset class to own over the long run are viewed as extremely risky, real estate is still working off excesses and prices have yet to find an official bottom, and treasury bonds the least risky asset of all are paying out yields at multi-decade lows.....however the aggregate effect of extreme risk aversion will prove to be a good thing over the long run, as over this period of time where the financial system is adjusting from one of very high risk tolerance to one of very low risk tolerance, those parties who have based their models on taking on high amounts of risk will inevitably cease to exist as risk-taking counterparties pull capital at very high velocities.....those models predicated on demand for risky assets will fall by the wayside while those models less reliant on the returns of high risk assets will be just fine......its funny how easily we forget that risky assets paying high yields do carry RISK....did wall street just completely forget about the idea of risk when investing in subprime mortgages....say it with me "SUB-PRIME".....NOT PRIME......NOT HIGH QUALITY....LOW QUALITY.....HIGH YIELD......HIGH RISK! these wall street bankers were not idiots....theyve been playing this game for decades knowing that anytime you have anything that pays a higher than average yield on an investment it means without doubt that you are taking on additional risk.....that is why you are being paid a higher than average return....to ASSUME THAT RISK! so first mistake made by wall street....taking on higher risk assets without some sort of hedge or idea that these risky assets might in fact prove to be risky assets and lead to higher than average losses.....where was this in the game plan? i cant find it anywhere....its like going into battle without any plan for possible missteps, miscalculations or even outright losing.....now mistake #2, and this is even bigger than mistake #1, LEVERAGING HIGH RISK ASSETS....how on earth can global institutions rationalize leveraging assets which payout high yields and are known to carry higher than average risk without any sort of assumption that this plan (now carrying even higher risk due to leverage!) may in fact not work as planned?? seriously i cant figure it out.....the only explanation i can think of is the idea of herd or mob mentality.....institutions looked around and saw every institution across the globe taking on these high yield high risk assets and said to themselves, look we know theres risk here, but first of all we cant just sit around while our competitors pull in higher than average returns....we'll look like losers....we need to compete.....second of all, if these assets dont work out, and all of our competitors are holding them as well, well lets face it the whole system cant come crumbling down.....can it? no....we hope not.....no way the Fed will save.....they have to they no choice.....this was the backstop!......this is the idea of mob mentality.....you no longer become a single individual but rather one small part of something much larger which allows individuals to take on actions without risk of individual failure knowing that in the end any sort of consequence will be divided out between a host of individuals possibly equating to consequences less than that of the consequence of a single individual action.....and moreover that if the entity accumulates enough individual participation to become larger in size and in power than that of the overseer of the system then there becomes the possibility that the entity can not be stopped and/or that there remains no FATHOMABLE OR REALISTIC consequence to any action carried out by the entity.....ie TOO BIG TO FAIL. we've heard this idea over and over over the past several months....too big to fail.....what does that mean? it means that when an entity becomes large enough (so large that it becomes necessary for the survival of an entity even greater than itself), then the overseer of the system shifts from dealing out consequences to any negative action carried out by the entity, to one of trying to preserve the entity for fear of causing the destruction of the entity even larger than itself .....the overseer is forced into a position where the dealing out of consequences creates even larger consequences not only for the overseer but for the larger entity that the overseer hopes to preserve....this is what wall street knew and hoped for by taking on these risky loans and leveraging them....that in the end it would become large enough that no possible consequence could present itself without creating even larger consequences for the entity even larger than itself ie the entire ecosystem....this is the driving force behind the creation of large powerful entities...that when they are created, if they are able to breach a certain threshold of power and size within an ecosystem and work their way into all aspects of the ecosystems daily functions, then they can not be dealt any sort of consequence without creating much larger consequences for the entire ecosystem and are hence free to carry out riskier than normal actions because of the lack of any realistic consequences....it becomes an entity, while possibly negative for the ecosystem, is also necessary for the survival of the ecosystem...and therefore all entities are forced into a position of submission and are forced into believing that they need the entity for absolute survival.