A fearless look at tomorrow’s best investment idea
A British advisory says this is no time to cash out of a volatile market — and it repeats its recommendation of one big, cheap blue chip stock.
We’re got our foot down on the gas again, only harder.
Just over a month ago, we reported the audacious opinion of a British advisory that investors should take a fling on natural gas. And take a fling with a stock whose prices were just as beat up as gas prices (see Daily Buy-Sell Adviser, August 28).
The advisory is back on the same theme, and it’s pushing the argument even further.
This isn’t just about one stock, or one commodity — it’s about staying in the market even when you know that things could go horribly wrong.
It’s time to buck up and buy stocks, despite very justified fears that there’s trouble ahead, says The Fleet Street Letter.
And invest in Russian natural gas firm Gazprom (LSE-OGZD), says the advisory, repeating its recommendation of a month ago.
Mr. Theo Casey makes the case for what can only be called a serious breakdown of British reserve.
Playing chicken
Mr. Casey spoke to a player in the bond market who had the following comment on the stock market. “It’s mad. You’re all playing chicken with a market that you know will implode.”
That may be a fair argument, says Mr. Casey. But things just aren’t that black and white. “If we ‘cashed out’ every time there were dangers in the system, no would ever invest in stocks,” he points out reasonably.
“Risks can be mitigated by experience and having the right tools.” Yes we know we’re in an asset bubble, he says, and we know that rising interest rates will bring an end to the equity rally.
But we don’t know when interest rates will rise, or when LIBOR (London Interbank Offered Rate) will go up, the author adds. Inflation is still benign, although sooner or later things will change.
“So how do you invest when you know something’s not quite right?”
Cash is reckless
You have the option of walking away, Mr. Casey concedes. “You can cash out, but that would mean you miss out on the rally. Plus, cash as an investment offers a lousy yield. A little bit of cash in a portfolio is sensible, but too much is reckless.”
You can take your cue from “market neutral” funds, those that try not to get burned whichever way the market goes. Intelligent diversification will do the trick.
But this advisory takes it a step further, the author says. Options as insurance, gold as a hedge and corporate bonds for good yields all figure into its strategy. So does canny stock picking.
That means slow, plodding stocks alongside growth stocks. “And it is the growth plays we’re looking for now.” Here’s where we step on the gas.
Record cheap investment
“Natural gas is what corporate bonds were at the beginning of the year,” says Mr. Casey, “a record cheap investment opportunity that comes at a historically dangerous time.”
This advisory ventured into a corporate bond fund earlier in the year, and did much better than the broader market. “We are confident such bravery will pay off again.”
Gas isn’t just cheap, the author explains. It’s so cheap “that it has decoupled from an asset that has risen over 100% this year — oil.”
Investors like to couple certain assets, like silver and gold. But silver and gold don’t necessarily operate on the same fundamentals. Oil and gas do. “One cannot rise indefinitely without pulling the other along with it.”
The author looks at the Henry Hub in Louisiana, where natural gas prices are set in the futures market. The price averaged $3.41 MBTU (per million British Thermal Units) in September. It is now at $4.46. That’s low, but it looks as though gas has broken out of its downtrend.
This may have more to do with financial buying and selling than supply and demand, Mr. Casey admits. There is still a glut of supply in the U.S. and around the world, so the commercial fundamentals of gas may remain weak for a while, even with the winter heating season coming on.
“Nonetheless, it seems that the market is already pricing in the inevitable future — that gas will become scarcer and more valuable in 2010.”
Why Gazprom?
But why Gazprom? Because it’s big and it’s ridiculously cheap, says Mr. Casey. This government-controlled firm controls 60 per cent of Russia’s massive natural gas reserves.
“It pumps 20% of all the gas produced in the world every single day,” he says, “yet it is one of the most lowly-rated energy groups in the world, trading at a multiple of just 1.4 times earnings.”
Yes, it is flawed. Its CDS (cost of insuring against debt collapse) is hideously high. And, to put it mildly, the Russian business model does not inspire great confidence in most investment circles.
But things are turning around. “The fourth quarter is tipped to be strong for the Russian gas industry,” says the author.
When this advisory first recommended Gazprom, the price was $21.20. Now it’s at $22.70. The price of natural gas was well below $3 MBTU. Now it’s halfway to $5.
Natural gas is a cyclical rather than a structural risk, concludes Mr. Casey. “This is a market in flux, not terminal decline.”
If this is tomorrow’s best investment idea, as the advisory suggests, there’s no time like the present.
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