Notes From Underground: Ghosts (Past, Present and Future)

I want to wish every one who celebrates Christmas a very joyous season, and, most importantly I want to wish all my readers a year of good health and peace. The meaning of Christmas, Hanukkah and the spirit of the season should resonate with us everyday of the year. As I have told my children over the years about their wedding day: It is the least important day for it is the next day that matters most as does every day that follows. May we experience the meaning of the season each and every day of the coming year. I was always amazed that wars would halt for a Christmas truce but begin hostilities 12 days later. If you could stop for 12 days why not 12 months?

***Ghosts past: In 2005 — when Amaranth was blowing up — I had completed an interview with Steve Drobny for the book, “Inside the House of Money.” I told Steve that the natural gas market was badly diverging from the stocks of natural gas companies. Gas equity prices were trending down but the natural gas futures curve was reflecting a different story. Somebody at the time was bidding up the deferred futures contracts as the one-month/three-month spread was $3.00 wide as spot was trading $6.00 and the six-month futures were trading $9.00, a 50% premium. If the deferred futures were correct then the equity prices of gas companies were severely undervalued. The story unfolded that Amaranth was trying to manipulate nat gas futures and when the “corner” unraveled the futures market collapsed. In that case, the equities were the correct barometer.

The past two weeks has seen a divergence between natural gas and Cheniere Energy (LNG), as nat gas prices trade at 10-month lows and LNG is trading at two-year highs. Now I know that LNG is a global product as the U.S. ramps up the sale of liquified natural gas out of the Sabine Pass region outside of Houston. The Chinese have announced plans to import more LNG as they try to cut back on coal-burning electric plants. The natty gas futures are reacting to the increased drilling as oil prices remain elevated. Increased fracking results in the elevated natural gas production, which reflects greater domestic supply. Pay attention to this divergence, especially as respected traders such as Gundlach are predicting a strong year for commodities. I have been long LNG since early in the year (47.70) as I mentioned the stock many months ago. I am not touting the company but merely suggesting the need to watch the developing divergence.

***Ghosts present: Too many to name. Bitcoin; tax cuts/”reform”; gold/currencies; European bond prices; U.S. Treasury values with historic low term premiums out over 10 years; a 25% appreciation in the S&Ps in the 12 months following the election of Donald Trump. There has been a 10% appreciation of gold even as BITCOIN and global equity markets sought to replace the traditional store of value. Then, there’s the ABSURD valuations of global bond markets with 11 trillion in sovereign debt at NEGATIVE yields. Even Portuguese, Italian and Spanish two-year notes have gone into negative territory. And the U.S. dollar has been unable to rally even as the U.S. stocks and interest rate yields have moved substantially higher. The ghosts of divergence are upon us as complacency reigns in the minds of investors.

***The ghosts of the future will be expounded upon next week. But, Europe and debt will be a key theme for us in 2018. The St. Louis Fed recently issued a piece titled, “Is Record High Consumer Debt a Boon or Bane?” The paper deals with three key themes: 1. Household debt can boost consumption and GDP growth in the shorter term (within a year or two) but suppress them further out as debt gets repaid; 2. Debt can be a drag on economic growth as it is used to maintain consumption patterns; and 3. Low productivity growth, higher interest rates, banking and financial regulations and rising education costs can all be policy that impedes future economic growth. As Peter Boockvar has warned, the Fed’s rising rates can have a significant impact on a heavily indebted economy. Just rattling some chains as we prepare for 2018.


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14 Responses to “Notes From Underground: Ghosts (Past, Present and Future)”

  1. Bob Zimmerman Says:

    Happy Holidays Yra! Thanks for your newsletter. I have learned from reading you and your guest comments.

  2. Joe Stoutenburgh Says:

    Yra, Wishing you and all your readers peace and joy in this season and a prosperous 2018.

    Speaking of debt, today Bloomberg offered up this apparition with a familiar foul stench.

    • yra harris Says:

      Joe–thanks for the nice words and a link to an important article about the issues developing in the subprime auto market.In such a robust economy how can so many loans be in difficulty—hmmmm?

  3. Dennis Says:

    Thank you Yra! …And to you a good night :]

  4. Richard H Papp Says:

    Hmmmm! In a Bull Market stuff just “works out” until its over and the markets will tell us when.
    Best to All

  5. Sarah Lambert Says:

    cannot access …’read more of this post’…somethings wrong I don’t think its happened eve….in years.. sl >

  6. Guy Williams Says:

    Yra, Thank you for sharing your scholarship with me.  I respect and admire you. To you and your family, I wish you a very happy, healthy and prosperous 2018. Your friend, Guy Williams

  7. Donna Says:

    Happy Holidays to you dear Yra. I so appreciate your sharing your knowledge with us your admirers.

  8. Ronald Ferrill Says:

    YRA, you are a sage and your words ring Wisdom always. As a Christian (Jesus follower if you prefer), I seek understanding constantly through study of the Bible, both Old and New Testaments. I have grandsons, and my strongest advice is simple – To know how to act, read Proverbs. As a Christian, I tell my sons and grandsons that it’s really pretty easy: Love God with all your Heart, Soul, Mind and Strength, and Love others as you love yourself. Don’t make life more complex than that. So, I see the message of Jesus’ birth as a renewal of the great commandment.

    Not meaning to get too recitative, I join in wishing that all of us will feel the peace and live in the natural love that is of brothers and sisters in this world.

    Celebrate as you will, and abide in peace and understanding.

  9. David Richards (@djwrichards) Says:

    I now live on the equator in southeast Asia and it’s fascinating how much festive lighting and cheer they do here for Christmas (as it’s not a Christian society; they’re mostly Taoists and Buddhists). On Christmas eve, instead of staying home with family, here everyone goes out and streets are packed with Asians wearing decorative red antlers… it’s a hoot! Then we get to do it again on New Years and again for the biggest annual celebration on Lunar New in February.

  10. Mike Temple Says:

    Your Amaranth anecdote is a good example of a notable divergence. However,mi am not sure the Cheniere one is similarly apocryphal. Cheniere is now benefiting from lower feedstock costs while global oil prices are recovering. In fact, look at e of the nic stock formations of big oil companies, such as Chevron. Nice “spread” action for Cheniere as many long-term contracts are priced off oil indexes and Cheniere can also benefit by selling spot cargoes for nice premiums.

    Also, don’t forget that Cheniere is now “coming into its own” as it is bringing on two or three new “trains” this coming year, in addition to having brought one online this past year. So, Cheniere is maturing from a buildout story to an operating story during this period, and is beginning to produce eve growing prodigious cash flow. Moreover, management has done an excellent job “terming out” a lot of it’s bank debt into longer-term corporate debt at very favorable interest rates.

    So, I am not sure that LNG is the best “comp” or predictor of the fortunes of Nat gas prices. Companies such as RRC and CHK May be the better stocks to compare with Nat gas prices.

    As always, I enjoy your thoughts and opinions. Happy New Year to you and yours.

    • yra harris Says:

      Mike-this is a very informative and thought out response.Thanks for thinking this through and as the years progress and the contractual agreements with Asian clients who provided the capital for building out the Sabine Pass LNG terminals and other infrastructure are met Cheniere is certainly in a strong position to “play” in the LNG spot market–and the Japanese are interested in development of the global spot market–Jera Co. as one concern–certainly aids the advantage that LNG management has so adroitly developed–thanks again for the important add to this blog post

  11. Mike Temple Says:

    Speaking of divergences and other oddities

    1. As cheap as gold is and the myriad reasons why it could have a spectacular 2018, shares of major and solid mid-tier miners are cheaper still. When gold bottomed in 2015 and experienced a nice bull run during 1H 2016, gold stocks easily doubled. A similar explosion awaits this coming year, I believe. These stocks are extraordinarily cheap and very profitable at current prices. Imagine what a little gold fever will do for them if gold hits “just” $1500/1600 this coming year.

    2. Very little, if any, serious coverage of the de-dollarization campaign led by China. It bears watching just how successful their petroyuan oil futures contract (with convertibility into gold) will be in allowing China to pay Russia and MENA producers in yuan for oil. Already, Pakistan has announced its willingness to conduct bilateral trade with China in yuan and not USD. Not saying the USD goes the way of pound of sterling after her fortunes fell, but many international “players” have legitimate reasons to shun transacting international commerce in USD, especially when US imposes SWIFT sanctions like an overzealous Chicago meter maid.

    Add the fact that POTUS is increasingly unpopular with world leaders, momentum against the dollar could grow. And I am not even imagining what the Russiagate Mueller “witch hunt” may trigger.

    If you believe in mean reversion (and I certainly do) there appear to be a lot of overextended markets at year end. Bitcoin and sovereign debt yields/prices are conspicuously at the head of the pack

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