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Jeff Saut: Natural Gas Looks Like Strong Buy


Petrohawk, Goodrich, Chesapeake particularly ones to watch.

"We've seen the wholesale destruction of wealth on an unprecedented scale, and the best we can say is that it will end when it ends - and not a moment before.

"Idiotic though that might seem, it is true wisdom borne of 30-plus years of doing this every day. It was only a year ago that our Global Index traded upward through 10,000; it is now down nearly 45% from its high. This is, by any stretch of the imagination, a fully stretched bear market. A bounce… and perhaps a material, violent bounce, lies straight away, but it shall be a bounce that is again sold by those who are too long... too exposed... too frightened of their economic futures and have the need to reduce their exposure on strength."

Dennis Gartman, of "The Gartman Letter"

As I read Dennis Gartman's prose, I felt almost as though he were describing me: Since June of this year, investing correlations which have worked for years have stopped working, leaving investors very few places to hide from the downside devastation.

The asset devaluation has been ubiquitous, with all asset classes, other than cash and Treasuries, being sold off in equal measure regardless of their fundamentals. For reference, between October 9, 2007 and October 10, 2008, the S&P 500 (SPX) shed some 42.5%.

October was particularly unkind for many individual stocks: While the SPX lost nearly 17%, certain select stocks slid a lot more than that. To be sure, the SPX's trailing 12-month performance pales in comparison to the 1929-1932 experience, when the S&P 500 fell 86.2% over 33 months. Still, participants are going to be shocked when they get last month's brokerage account statements and actually see how bad October was.

Nevertheless, my firm has been telling accounts that the time to raise cash and hedge your portfolio was some time ago - not now! Indeed, over the past few weeks, we've suggested a bottoming process was at work in the short/intermediate-term, with the capitulation "price low" recorded on October 10th (839.40), and the "psychological low" recorded on October 24th.

Interestingly, the "psychological low" never even came close to breaching the intraday "price low" of October 10th. Accordingly, for investment accounts, my firm has been recommending various attractively yielding convertible preferreds that play to companies with clean balance sheets and decent fundamentals.

Additionally, last week, my firm "dialed in" the trading account (for the first time in weeks) by recommending a number of exchange-traded funds (ETFs) and, in some cases, employing a hedging strategy to reduce trading risk. Our trading/investment vehicles of choice were ANY asset that has been slaughtered over the last 3 months. Of particular interest were the materials and energy complexes, with particular emphasis on the unloved natural gas stocks, all of which are rated Strong Buy by my firm's fundamental analysts, like Petrohawk (HK), Goodrich (GDP), and Chesapeake (CHK).

However, the real trick here is to figure out which assets collapsed simply due to the liquidity crunch, and which ones collapsed because of the slowing economy. As the astute GaveKal organization notes, "In the first category are Asian and US credits, US non-cyclical large-caps and exporters, Japanese equities, deposit-taking banks, etc. In the second category, we would leave Eastern and Southern Europe."

In addition to the massive oversold readings (see chart), and other "bottoming" metrics so often mentioned in my reports, the Federal Reserve made the unorthodox decision last week to grant "swap lines" of credit to Korea, Singapore, Brazil and Mexico. This unprecedented move will likely ease the worldwide US dollar shortage that's been hurting economic growth in emerging markets.

Click to enlarge

Consequently, I would expect not only a rally in our markets, but a rally in emerging markets and commodities. Moreover, my firm's bullish stance on the dollar since this time last year is now waning, at least on a short/intermediate term basis. Indeed, the weakness in the "carry trade" currencies, combined with the recent reduction in credit spreads, should permit the equity markets to gain traction at least into Thanksgiving. From there, the market should further ponder how severe the recession is going to be.
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