in Australasia, Financial Markets, Resources & Commodities /
First up today, let’s clear the air on ‘thin air.’ A few comments on popular message boards have taken us to task for spruiking the idea that you can make money out of ‘thin air.’ Just to clarify, ‘thin air’ is, uh, a metaphor for natural gas. It’s not short-hand for, “from nothing.” As all good philosophers know, something cannot come from nothing.
Most people probably figured that out after reading into the story a bit and realising the report – from Kris Sayce at the Australian Small Cap Investigator – is about which smaller Aussie firms are best placed to see rising share prices from the LNG and natural gas boom. So there you go.
And by the way, Dr. Graeme Bethune, the director of research firm Energy Quest, says Australia could become one of the world’s top ten countries as measured by gas reserves. “We expect that Australia, in the very near future, will be among the top 10 countries globally measured by the size of its gas reserves. The size of Australia’s gas reserves means that further strong growth in this country’s LNG exports is assured,” Dr. Bethune said in Energy Quest’s latest quarterly report.
At the moment, Australia has the 14th largest known gas reserves on the planet. Dr. Bethune reckons that when you add up proved, possible, and probable gas reserves along with other potential resources, you get a reserve figure of around 200 trillion cubic feet (tcf) of gas.
This is quite a generous use of the word “reserve,” which is typically reserved for well-drilled, well-defined resource or ore body that you know you can produce (capital spending and operating costs) economically. You wouldn’t typically use the word “reserve” to describe resources that haven’t even been drilled yet.
But the point about Australia’s growing gas status is well taken. Australia will never compete with countries like Russia (1.5 quadrillion cubic feet of reserves) or Iran (981 tcf), or Qatar (904 tcf). It doesn’t have to. Conventional gas from the Northwest Shelf and WA’s Carnarvon Basin is already being produced and sold to customers in Asia.
The gas is there and the customers are buying it. When you throw in more projects in the NT, Papua New Guinea, and unconventional LNG projects in Queensland, there are a lot of exciting opportunities. And for the record, Kris tipped his first LNG stock in November of last year. He has three open positions in the sector at the moment.
Here comes the fear. We mentioned yesterday that we reckon now is a good time to look on the short side. Other than the mysterious technical indicators of our colleague Gabriel Andre, how do we come to that conclusion? The volatility index of course!
Bloomberg reports that, “The benchmark index for U.S. stock options closed at the highest level since July 9. The VIX, as the Chicago Board Options Exchange Volatility Index is known, increased 12 percent to 29.15. The gauge, which measures the cost of using options as insurance against declines in the S&P 500, reached a record of 80.86 in November. The index is still above the average over its 19-year history of 20.”
The VIX is referred to as the fear index because when the cost of buying put options on S&P 500 stocks goes up, it means investors are actively hedging against a fall in stocks. You can see from the chart above that yesterday’s action took the VIX above its 50-day moving average. What’s more the entire index remains elevated. That shows you just how uncertain investors are about the stability of this rally.
Is the VIX a good proxy for the amount of fear Aussie investors are feeling? After all, the VIX measures options pricing on S&P 500 stocks, not the All Ordinaries. We put the question to Gabriel this morning when he came in the office. We also asked him if there were other volatility proxies that better fit the Aussie market…and were leading him to believe now is a good time to go short.
Gabriel thought about it and wrote to us a bit later. “Yes,” he said. “We can use the VIX as the correlation between markets worldwide is obvious. Choppy markets and high volatility in the US stock markets typically imply choppy market and high volatility here down under on the ASX.”
“Even though there’s no official volatility tracking index in Australia, there are several ways to track implied volatility. For the biggest stocks, you can have a look at the options pricing. The premium of an option depends a lot on the expected volatility priced by the market makers. That’s a good indication. But mainly for all the stocks you can use technical indicators like the Bollinger Bands, the Volatility Chaikin’s and of course the daily true ranges (difference between high and low for each session). This will give you the historical volatility (not the implied).
By the way, Gabriel sent out his first short-sell recommendation today to Swarm Trader readers today. We couldn’t do it last year when the service launched because ASIC had briefly banned it on all stocks following the collapse of Lehman Brothers in September 2008 and the ensuing financial near-Armageddon. But now that we can do it, we are!
And in case you’re wondering, we’re not accepting new members to the service at the moment. In fact, the membership level has been permanently capped at 500 for a variety of reasons. The charter members (those who first subscribed in October of last year) are up for renewal in the next month. If they choose not to renew their spot, some membership spaces may open up. If you’re interested in getting on the wait list, send us a note to firstname.lastname@example.org
Here’s a thought: has the trading in five government-backed stocks accounted for most of the rally? That’s the question prompted by a Wall Street Journal article that studied the volume of trading in Fannie Mae, Freddie Mac, Citigroup, and AIG. Those names are all familiar because they all received sizable investments from the U.S. government to prevent insolvency last year.
You might also recognise them because they all go taken to the woodshed in trading action yesterday. The Dow fell 2% yesterday and the S&P 500 2.2%. But that was nothing compared to AIG’s 21% decline, or Fannie’s 18% fall, or Freddie’s 17% fall, or Citi’s 9.2% fall. Ouch. The Journal suggests the financials may lead the market down just as they led it up.
But the better question is if the financials led the market up in an honest fashion. Or was it the Plunge Protection Team at work? Over at the Big Picture blog, Brett Steenbarger shows that just a handful of financial stocks accounted for a huge percentage of market volume in August. Just where the capital that was pouring into the stocks came from is a very good question, but let’s look at what Steenbarger says first.
“I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocketed to well over 50%.”
“Recently, however, the volume in these three stocks has hit astronomical levels relative to total NYSE trading, as all three have made phenomenal percentage gains during August. Indeed, the composite volume of these three stocks alone has recently doubled total NYSE volume. If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume.”
Hmm. What do you reckon? The above-board answer is that program traders and institutions are investing alongside Uncle Sam. This would mean big money flows into those fives stocks. If big-money investors are betting that government-backed stocks aren’t going to be allowed to fail, that might explain the free-riding.
But you can’t help but think that buying these stocks is a back-door way of boosting equity capital without having to directly inject more tax payer money (which didn’t prove to be too popular). If you’re the Fed or the Treasury and you want to keep the operation low-key, you just need to find a middleman to do the buying for you to bolster the equity capital at these firms. Hmm. You wonder how short Goldman is these firms.
Is that scenario too conspiratorial for you? It reminds us a bit of the rumour that the Fed was loaning out money to other central banks this year under the table so that those banks could come back and support the U.S. bond market. The Fed creates the money with a few keystrokes and then shuffles it around until it eventually makes its way back into the bond market, keeping yields from spiking, the greenback tanking even more, and the U.S. government from having to actually cut spending for a change.
But nah, the government wouldn’t actively intervene in financial markets to support asset prices and keep the public from panicking, would it? That’s just…not possible…is it? More on the destruction and formation of capital tomorrow.
for The Daily Reckoning Australia
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