One of the things we look for in the markets is anomalies or disconnects from historical tendencies that signal some element of a traditional relationship between two things is changing or has changed. Often, the relationship is eventually returned to “normal”, meaning money can be made if an investor is on the right side of the trade. Other times, the relationship has been fundamentally altered in some way, so understanding the reasons behind the shift can become a source of opportunity, since it can either provide understanding about relevant long-term trends or signal a shift in an existing one. [Such being the case let's take a look at] the ratio between natural gas and crude oil [and determine how best to play this investment opportunity.] Words: 1069

So says Dr. Stephen Leeb (www.leeb.com) in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted (sub-titles and bold emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Who in the world is currently reading this article along with you? Click here

Leeb goes on to say, in part

Crude oil’s inexorable ascent back to… $100 per barrel has brought out all sorts of comparisons to the last time crude reached these levels, in the spring of 2008 and… it has brought the discussion back to ways that dependence on crude oil can be reduced. This got us thinking about natural gas…

Like with our silver and gold discussion this issue [see here (1)], the ratio of natural gas to crude oil is one that has traditionally been used to gauge the overbought or oversold nature of one of the two components…The ratio is now very near record levels, and will almost certainly be in uncharted territory near 30 once you read this issue. The ratio has traditionally run between 5 and 15 going back to the mid-1990s, and spikes have historically meant that the price of oil had risen too far. However, lately the relationship between the two seems to have come apart for a variety of reasons:

As you would expect, the heavily skewed nature of the ratio means one of two things can happen.

1. Either natural gas will rise in price, which is unlikely merely due to the supply overhang, or
2. crude will fall, [which is] equally unlikely, at least in the near-term future, given the geopolitical situation in the Middle East and the strategic demand from both emerging markets and the U.S.

Either way, the discrepancy highlights the fact that gas is incredibly cheap right now relative to oil. This got us thinking—where would this odd situation have the greatest impact? The short answer is not a natural gas ETF, which as a group were among the worst-performing ETFs in 2010 and are likely to remain low for the time being. Massive reserves around the world mean a large supply overhang is going to persist for some time regardless of what happens with oil, making a sustained rise in natural gas prices extremely unlikely. However, the low price of natural gas to crude oil makes Canadian oil sands extremely interesting, and thus we think a far more interesting way to play the situation is via the Guggenheim Canadian Energy Income ETF (ENY). As crude has risen, the economics of extracting oil from Canadian oil sands have vastly improved and made this avenue of production infinitely more competitive…

ENY tracks a tactical allocation between oil sands stocks and higher-yielding Canadian energy companies. The fund is designed to combine the most profitable and liquid of these companies based on the price trend of oil. In times of rising oil prices, like now, this strategy makes sense.  When prices are heading the other way, the allocation shifts to 30% oil sands and 70% Canadian energy stocks, thus providing equity upside when oil is rising and additional income security when it is not. The fund is relatively small, at $270 million, but is liquid (around 90,000 shares per day) and it currently yields 2.2%…

Oil sands extraction is extremely expensive and uses tons of natural gas in production and refining—the Athabasca oil sands deposit in Alberta alone uses over one billion cubic feet of natural gas per day – and although natural gas is abundant and relatively cheap, it is still your average oil-sands producer largest operational expense. In other words, the current record-low ratio means a profit boon to the bottom line of oil-sands producers as costs for natural gas remain low and revenue skyrockets.

*http://www.leeb.com/content/playing-ratio%E2%80%94-high-oil-and-cheap-gas

Link and Title of Article Referenced Above:

1. Silver: The Party Isn’t Over Yet

Investing is often a study of inconsistencies and contradictions. If it weren’t, the markets would be a simple game and there would no back and forth between buyers and sellers, greed and fear and technical analysts, fundamentalists and momentum players. Our experience with silver since the end of last year illustrates this [but] we [still] think it makes sense to get exposure to the metal. [Let us explain.] Words: 820

Related Articles:

1. What Happens to Oil Prices if Israel Bombs Iranian Nuclear Facilities?

We now believe that there is at least a 50% probability of Israeli airstrikes against Iranian nuclear sites… Iran has multiple retaliatory options at its disposal…[and it begs the question:] Which options would most adversely affect the price of oil? [Let's take a look at what those options would be.] Words: 544

Have you been wondering how commodities will fare in November? [Below is a chart of] how select commodities performed in the past 25 Novembers (since 1986). Words: 489

So says David Ristau (http://www.theoxengroup.com/)  in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Who in the world is currently reading this article along with you? Click here to find out.

Ristau goes on to say, in part:

A lot of that will depend on the dollar movement. It appears that the dollar may be ready to weaken further on Euro bailout plans for November, and that may give the dollar some ceiling. Historically, November has been good for some commodities and bad for others. [Take a look at the table below.]

*http://www.theoxengroup.com/

Related Articles:

1. Gold to Bounce Back to $2,250 – $3,000; Silver to $52 – $62; HUI to mid-900s by Year End

A tsunami doesn’t start with a bang, but with a whimper.  The first sign is a little hump in the water way out in the distance that is barely notable.  Anyone who catches a glimpse of it simply continues to expect the day to be the same as the last many days – calm and beautiful waters along the shore.  This is the point where we are, today in the Precious Metals sector. Many have seen the little roll of water out in the distance as Gold edged up in the first move of a more parabolic slope, yet most investors are mired in the same expectations of yesterday – a return for Gold to correct down into a lower base. Our analysis based on the fractal relationship to 1979  shows, however, that the mid 900s are a realistic target for the HUI by the end of the year or early in 2012; that $52 to $56 should be achievable for silver, with $58 to $62 as real possibilities; and that Gold should go the $2250 level followed by $2500 with the potential for $3,000, or a bit higher, now on the radar screen. Let me explain why that is the case. Words: 2130

2. Aden Sisters: Buy Gold NOW as it Corrects on its Way to $2,000

When you just consider the downgrade of U.S. debt, the jobs problem, the housing situation, the European bank concerns and their debt crisis, the negative outlook for the global economy, not to mention that the Fed will likely seek new measures to help the economy, we just don’t see gold coming down any time soon, other than having a normal downward correction [as currently is the case. Let us show you why.] Words: 1102

3. Chris Vermeulen: Gold to Rebound to $1,775 by Year-end

Crude oil, natural gas, gasoline — our civilization can’t live without them – so it’s no surprise that energy exchange traded funds (ETFs) are also big business. Today I’m going to give you a brief overview of the ETFs in this sector. As you’ll see, energy is a surprisingly diverse industry. Words: 870

In further edited excerpts from the original article* Ron Rowland (www.moneyandmarkets.com) goes on to say:

1. Big Oil Energy ETFs
Generic “energy” ETFs, almost without exception, are dominated by a handful of big multinational oil companies such as ExxonMobil (XOM), ConocoPhillips (COP), ChevronTexaco (CVX), British Petroleum (BP) and a few others.
a) SPDR S&P Energy (XLE), for example, has just two companies, XOM and CVX, accounting for around a third of its assets.
b) Vanguard Energy (VDE) looks much the same.

Such concentration doesn’t pose a problem with most such ETFs because huge companies like ExxonMobil are very diversified, operating many different business units in a variety of locations around the globe. Their sheer scale gives them some big advantages. On the other hand, it’s usually a good idea not to put too many eggs in one basket.

Some ETF sponsors try to reduce the concentration in Big Oil with different weighting strategies.
c) Rydex S&P 500 Equal Weight Energy (RYE), for instance, holds the same stocks as XLE, but only allocates 2.5 percent — 3 percent to any one stock.

2. Energy Service ETFs
Energy service companies unlike the multinationals, don’t own properties or produce energy for themselves but they do a lot of the work — and get paid well for it. They run drill rigs, perform seismic tests, build pipelines, fly helicopters, and many other sundry tasks and ETFs that specialize in energy service have performed well over the years. What’s the downside? When oil prices retreat, the major producers cut back on their activities. Thus the service companies can be hit hard. However, a lot of their revenue comes from long-term contracts, so they can be worth the risk. Here are two of my favorite such ETFs:
a) iShares Dow Jones U.S. Oil Equipment & Services (IEZ)
b) SPDR S&P Oil & Gas Equipment & Services (XES)

3. Exploration and Production of Energy Resources ETFs
Many of the companies in this group are the small, independent oil companies that take on projects too small or risky for the big guys to consider. Those that succeed are often sold to the major multinationals, or developed as joint ventures. Here are a couple of ETFs that specialize in the E&P subsector:
a) SPDR Oil & Gas Exploration & Production (XOP)
b) iShares Dow Jones U.S. Oil & Gas Exploration & Production (IEO)

4. Commodity-Based Energy ETFs
Not all energy ETFs own energy stocks. Some cut to the chase by trying to track the price of energy commodities. In theory, this makes sense. After all, the companies in ETFs, such as XLE, may go up along with oil prices, but not always. So why not cut out the middleman? Unfortunately, it’s not quite that easy. Some of the best-known commodity ETFs are fiendishly complicated instruments that don’t always move as expected. Moreover, these funds are under attack from regulators and may have to radically change the way they operate. Some use an exchange-traded note, or ETN, structure that is riskier than it looks. I am not down on all commodity-based energy but believe that they are not as magical as some people think and must be used with caution. Below are 2 such funds:
a) U.S. Oil Fund (USO)
b) PowerShares DB Oil (DBO)

5. Alternative Energy ETFs
The world needs new sources of energy and ETFs have been created to meet this need. Some are more generalized within the alternative energy business, while others target specific niches. Here are a few examples:
a) Claymore Solar ETF (TAN)
b) First Trust ISE Global Wind Energy (FAN)
c) Market Vectors Nuclear Energy (NLR)
d) Market Vectors Global Alternative Energy (GEX)
e) Market Vectors Solar Energy (KWT)
f) PowerShares WilderHill Clean Energy (PBW)
g) PowerShares Global Wind Energy (PWND)

The ETFs in this group often tend to be full of risky, small-cap stocks. On the other hand, their upside potential is enormous if oil prices move above $100 again.

Today I’ve barely scratched the surface of the massive energy sector, but as you can see, if you’re ready to take the leap, energy ETFs give you a lot of choices.

*http://www.moneyandmarkets.com/get-energized-with-energy-etfs-37618 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

One of the biggest threats to your portfolio’s performance over time is inflation. For every additional point of inflation, your portfolio will lose about 20% of its purchasing power over the next 25 years. In addition, taxes are levied on your portfolio’s nominal return, even if it does not experience a real increase in purchasing power. All combined, you can easily lose a third or more of the value of your portfolio over time with just a tiny bit of extra inflation. Words: 1335

In further edited excerpts from the original article* Kent Smetters (www.IgnoreTheMarket.com) goes on to say:

Inflation: Financial Death by a Thousand Cuts
Moreover, unlike jarring market crashes — such as the Great Depression or the recent crisis — inflation lurks in the shadows. It destroys value by gradually eroding real returns over time. It is financial death by a thousand cuts. Investors too often look at “the numbers” in their portfolio without asking what those numbers can actually buy over time. It’s a classic mistake that John Maynard Keynes termed “money illusion.”

There are two good reasons to now start paying close attention to inflation again:

1. The expansion of the Federal Reserve’s money supply during the past 18 months has been enormous and unprecedented and, as Milton Friedman most clearly articulated decades ago, more money chasing the same number of goods usually generates higher prices. In fact, had the recent monetary explosion happened during “normal” times, prices would have likely doubled.

2. Projected federal deficits are ballooning out of control. According to the Congressional Budget Office, the new Obama Budget will add almost $9.8 trillion to the national debt over the next decade. Astonishingly, the market has even recently priced some corporate bonds as safer than government securities. Eventually, it will be too tempting to reduce the value of this snowballing debt simply by printing more money.

Investing for the Short and Long Run of Inflation
To be sure, recent core inflation numbers (that exclude volatile food and energy) have been well below expectations and, given the severity of the economic slump, many experts believe that low inflation will continue for a while. For investors, however, the current debate over the inflation outlook is incomplete and misleading. Diversified investors hold many types of assets and some of these investments are more sensitive to inflation over the short run while some are more sensitive over the long run. As such, both time horizons should matter to investors.

a) Short Term
In the short run, say over the next three years, inflation is likely to continue to be quite low. One reason is that explosive growth in the Federal Reserve’s balance sheet has been mostly matched by enormous increases in excess reserves held by commercial banks despite a very steep yield curve. In other words, the banks are “hoarding the cash,” preventing it from becoming part of everyday transactions. Why? One reason that is the Federal Reserve now pays banks interest to encourage them to hold additional reserves. Some banks also fear that rising short-term interest rates will increase their costs over the life of the loan. (Their fears are indeed reflected in prices of one-year futures contracts for Fed Funds.)

There are three phases to the residential real estate mortgage for the banking sector:

1. the so-called “subprime” mess which we have recently been concluded

2. the defaults of “Alt A” types of residential loans that were often issued to sole proprietors with less formal income documentation which will begin later this year

3. the defaults of “Option ARM” loans in which interest rates sharply increase a few years after the loans start which will begin to increase next year.

Banks need to reserve against all of the above potential losses, however, if banks happen to be over-reserving for these losses, then inflation might come sooner if the Fed can’t quickly yank money out of the banking system but that scenario is unlikely. Indeed, “Phase Four” of the mortgage crisis — this one stemming from the commercial lending side — has received very little attention this far. If anything, banks are probably still not reserving enough for these defaults.
Combined with the recent economic slowdown in Europe, it is likely that inflation will be held in check for a while.

b) Long Term
Longer-run inflation (beyond five years) should be on everyone’s radar screen. In fact, it is unlikely that the current yields on 30-year Treasury securities will be enough to cover inflation over time, much less provide a real return. Present value shortfalls in Social Security and Medicare are in excess of $70 trillion and will likely lead to an “inflation tax.” Yields on 10-year Treasury securities — which policymakers try to keep low because of their indirect relationship to mortgages — may not be high enough to cover inflation.

What is an Investor to do About Inflation?
The traditional choice is to invest in commodities, metals, oil and the like. The broadest investible measure of commodities is almost 85% correlated with the Consumer Price Index (CPI) on an annual basis, meaning that the value of commodities tends to move in the same direction as inflation. Gold is almost 60% correlated, oil stands at 21%, and real estate and natural gas are both at 5%. However, contrary to conventional wisdom, none of these asset classes are actually good inflation hedges anymore. They are already too popular.

Don’t be fooled by correlation either. Two data series can appear to be highly correlated even though one of them consistently underperforms the other. In fact, commodities are about the only major asset class that actually underperforms the CPI over time. More targeted sector plays — such as gold, oil and natural gas — tend to beat the CPI, but not by nearly enough to compensate for their enormous risks (they are about twice as risky as the S&P 500). In fact, corporate bonds and equities actually appear to do a better job of “keeping up” with the CPI over time on a risk-adjusted basis, despite their low mathematical correlation.

Here are a few specific investment recommendations, starting with the lowest hanging fruit:

1. Increase your exposure to Treasury Inflation Protected Securities (TIPS) inside of your tax advantaged retirement accounts.

Put a quarter or more of your retirement stash into TIPS. While TIPS are not tax efficient enough for taxable accounts, they provide a good inflation hedge for retirement accounts where taxes are either deferred or already paid.

2. For your taxable accounts, buy $10,000 per year in Treasury I Bonds.

Like TIPS, I Bonds provide solid protection against inflation. Unlike TIPS, you are not taxed on “phantom income” along the way. Because I Bonds are such a “win-win”, the government caps the amount that you can purchase each year to $5,000 in paper form and $5,000 in electronic form. So do both.

3. Invest up to 15% of your portfolio in emerging market equities.

To be sure, many of these markets have already experienced large gains recently but they still offer a “twofer” of sorts:
a) a hedge against U.S. currency depreciation
b) diversification into countries that still have strong growth prospects.

4. Move some of your lower yield government bond portfolio toward Ginnie Mae centric mutual funds.

Ginnie Mae’s are the only mortgage-backed securities carrying the full faith and credit of the federal government. They usually provide a yield between one half a percent and one percent greater than comparable maturities.

*http://seekingalpha.com/author/nathan-kawaguchi/instablog (Nathan Kawaguchi is a Research Analyst for IgnoreTheMarket.com which provides independent, value-based stock and mutual fund research, a blog, and acts as a hub for value investing information and research.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

A basic information list for retail investors doing initial research into oil & gas companies. It’s not exhaustive, but the answers should provide the basic information to decide if you want to do more due diligence. Words: 820

In further edited excerpts from the original article* Keith Schaefer (www.oilandgas-investments.com) goes on to say:

Either call management or go to the company’s website and find answers to the following 10 question:

1. a) How many barrels of oil per day is the company producing?
b) How quickly have they grown production in each of the last 3 quarters?

2. How much of their production is oil and how much is natural gas?
Gas prices are very low right now and doesn’t produce much if any cash flow for companies.

3. How much net cash or net debt do they have?
This industry uses a lot of debt, so if a company actually has net cash, they could grow more quickly because they have an entire untapped line of credit waiting to go drilling, and grow the business. Of course no debt means no debt payments and flexibility in doing business.

4. Where are the properties?
Investors give North American assets a slight premium, unless the company is either growing very fast or has a management team that has built and sold an oil & gas company. Political risk shows up in the stock price.

5. How many wells will the company be drilling in the coming nine months?
This will give you an idea of how fast they may grow. Companies usually say in their presentation how many wells they will drill property by property, but don’t often give an overall number in one slide. Odd, but true.

6. a) How much will all this drilling cost, and do they have the money or cash flow to do it?
Most companies have a slide in their corporate presentation that shows their estimated cash flow for this year or next along with their estimated capex, or capital expenditure, which is their drilling budget.
b) Do they have to raise money in the market to do the drilling they want?
This is not good—when the market smells a financing coming, it drives the stock lower.

7. Are these wells higher risk exploration wells or lower risk development stage wells?
Development wells are just filling in an already discovered oil field. It means these wells will almost certainly repeat the success of the discovery well; the oil or gas formation is large and drilling success is “repeatable”. The market loves certainty, and most companies go out of their way to crow about their “undeveloped land acreage” and “X year drilling inventory”; the number of wells they could drill on this development stage land.

8. If the company is doing exploration drilling, what has been the company’s success rate in each of the last two years?
HINT: if it’s not on the powerpoint, guess what… There is new technology called 3D seismic that allows companies to see the producing oil/gas formations much better – and now means a much higher success rate for exploration. Anything under 70% success in raw exploration I get nervous. (I don’t buy the longshots.)

9. What has management done in the past – have they ever built and sold a producing energy company?

10. How many research analysts follow the story?
If the answer is 3 or less, why hasn’t management been able to secure more coverage–there is a reason. It might be because your target investment is small. It might be it is just not a compelling growth story as you think. Or it might be just because management doesn’t raise money much, i.e. rarely if ever issues equity… Without analyst coverage there is no institutional money flow in the stock and without institutional support, your stock will need A LOT of drilling success to move up, and will likely always trade at a big discount to its peer group.

There are LOTS of other questions to ask. This is just Round 1. In my next column, I will outline my Round 2 of questions I pose to management.

*http://www.resourceinvestor.com/News/2009/10/Pages/How-to-invest-in-oil-and-gas-stocks-part-1.aspx (Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets and stocks and writes about them in a public blog. He also has a subscription service which provides company specific information and recommendations. For more information about the Bulletin or to subscribe visit his site.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.