Crude Oil's Widening Contango


One of the best indicators of true oil demand is looking at whether oil is trading in backwardation or contango. If oil is in backwardation (front month contract is more expensive than future months) that shows there is strong current demand for oil and that is why people are willing to pay a slight premium. If oil is in contango (front month is cheaper than future months) it is an indication that demand for crude oil is currently weak.

With this said what can we tell about the future price of oil by examining oil's current price structure. Right now oil is in contango with current demand relatively weak but investors and the market believe that it will pick up again in the future. But what is particularly interesting for traders is that the amount of the contango has widened quite a bit. About 10 days ago the cost of rolling a an oil contract from one month to another was 30 cents. However by the close of today the contango had increased to $1.50 per month. To me this shows that current demand is weakening--against the general market expectations of increasing demand. It will be illuminating to see how this plays out: either demand for oil picks up dramatically in the next few weeks (typically May,June,July are good months for crude oil) or there needs to be a severe price adjustment lower to reflect market fundamentals.

I also like the fact that the entire oil market is heavily skewed to the long side which could help the accelerate the price adjustment by dumping their positions. You can see from the chart below that large specs are heavily long oil while the commericals (who are usually right) are heavily short.


You can see from the following charts that the fundamentals of oil are poor with high inventories, not only in crude oil but also in gasoline and distillates. One other factor that should also impact prices is the recent volcano eruption in Iceland which has grounded European flights. This had caused a large glut of jet fuel (which is an oil derivative) and add to the high inventory numbers. This is why I am currently short oil (have been for 1 month). However this is somewhat of a dangerous position because it goes against the seasonal trend in oil prices which usually leads to an increase in prices due to the summer driving season. But I am willing to take the risk for a good potential reward (like oil going to $65).

Crude Oil Inventories


Gasoline Inventories (egregious levels of inventories but I am still paying $3.30 a gallon in California LMAO!)


Distillate Inventories

Chart Sources: Nowandfutures.com

Black Swan Insights
(Still short crude oil)
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Market Thoughts 4.19.2010

Asian and European markets fell quite hard (over 1%) overnight but that meant little for US investors who in normal Pavlovian fashion bought the correction (defined as 1.5% drop in the market). All Us indices except for the Nasdaq closed higher by about .5%. However commodities got knocked with oil closing lower by $1.55 to 81.69 and copper ending fractionally lower. Its days like today when you feel the markets are being rigged. Unusually large block trades in SPY and S&p 500 futures jams the market higher on no news is always suspicious.

Even though the market was higher and I am mainly short the market, today was a good day. My oil short is finally getting back to even and my puts in OI are looking up. I am also short AUD/JPY at 86.88 which has been working. I am still short and have not covered any positions. I still think we are going to have a 10% correction in US markets and preparing accordingly. I think today's action was simply idiot dip buyers who desperately want in the market and will view any dip as an excellent buying opportunity. These people will get steamrolled during the real market correction.

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A little justice? GS stock tumbes on fraud lawsuit



Thank god the SEC finally got around to this lawsuit. Next up--CRIMINAL lawsuits against GS executives. These criminals need to be in prison for the rest of their lives. I think this is why GS stock is being murdered on high volume. The market expects more lawsuits by all of the clients who have been taken by Goldman. GS routinely sold bad assets (mainly mortgage derivatives) to pension funds when GS was short the same security. Investment banks should not be able to do this without first disclosing whether they are long or short. G

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Tax Day for American Slaves


Well today is one of the worst days of the year for American slaves--paying illegal and unconstitutional taxes to the US government. Its ironic that the US fought a war with Britain over illegal taxes but now we pay over 55% of our hard earned money to the government (started in 1913). Even medieval serfs only had to pay 33% to their lords. The founding fathers would be ashamed of us. Do our taxes go to anything worthwhile? Of course not. It goes to the private wall street banks who have stolen trillions and bankrupted the US economy. Also we get to pay for illegal foreign wars which make the defense contractors rich. And if you try to avoid taxes--the US will persecute you and send you to prison for up to 15 years (they are very effiecnt in this respect). But multinational companies do not have to pay taxes thanks to their creative tax lawyers. Goldman Sachs and Intel for example pay only 1% in taxes. The government will not go after corporations for evading taxes. In fact IRS audits of corporations are declining while audits of individuals are rising. We live in a police state which we are forced to finance through taxation. Americans are no longer free!!

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(AKA American Tax Slave)
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Market Thoughts 4.13.2010

Markets rose again as nothing seems to stop the bullish momentum (this happens when the FED is literally printing money). The only exceptions were some commodities such as gold and oil which declined slightly. The API oil inventories came out after the close which naturally showed an increae of 1.6 million barrels. This is the 12th straight increase in the weekly inventories but nothing seems to matter to crude which seems oblivious to market fundamentals. Natural gas enjoyed a rare up day and remains one of the few commodities I am willing to buy.

While I am not terribly bearish I am waiting for a significant correction before establishing any new positions. I am looking at NPK, ATRI, LZR, ACFN, and POT to buy on a pullback. I am also coming up wih a list of junior miners to purchase.

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EU/IMF bailout package for Greece approved

Well the bailout for Greece is now official as the EU elite pledged 30 billion euros to the bankrupt nation. You notice that it does not matter what the German or French people think--all that matter is what the EU elite decide behind closed doors without any accountability. This is what happens in the undemocratic EU. Along with EU money the IMF contributed to the bailout with 15 billion euros which I am told should keep Greece solvent for about 1 year. However an interesting tidbit from a Greek spokesman indicated that the money would be approx. 80 billion euros over 3 years. Of course anyone following the Greek situation will see that this does not solve Greece's problems. Giving a bankrupt country more cheap loans is like giving an alcoholic more liquor.

What I believe will be the important point regarding this situation is how the German and French public react to this. As the two largest economies in the EU they will be on the hook for most of the money. Do the German and French people accept the responsibility for Greece's overspending? Are they willing to suffer higher taxes and less social welfare? And more importantly are they willing to extend the same bailout terms to Spain, Portugal, Ireland, and possibly Italy? In my opinion this will be the issue that destroys the EU once and for all. Anyway the Euro is trading higher in early Asian trading. One would think that it would trade down on the news but then again the market is peculiar.

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My Investment in the Limoneira Company

UPDATE--Position Sold July 1--$21

I was first attracted to Limoneira because I live within 25 miles of the company's headquarters in Santa Paula, CA. I was intrigued with the company's many valuable assets, mainly its large land holdings. What is particularly interesting is that no one on Wall Street had ever heard of the company. There are no analysts following the company, and it is largely forgotten as it trades on the pink sheets. These kinds of companies are my favorite because they are completely unknown except to local investors. This creates opportunity!

About Limoneira

Limoneira engages primarily in growing citrus and avocados, picking and hauling citrus, packing lemons, and operating housing rentals and other real estate operations. The company also engages in real estate development:

Market Cap. Approx $197 million

Company Website: Limoneira.com


Investment Analysis

While growing and packaging agricultural products provide the company with the majority of its revenue, the real value in Limoneria is the company's land assets totaling 7,300 acres: 4,000 acres in Santa Paula, 500 acres in Santa Barbara, 700 acres in San Luis Obispo, and the rest in the San Joaqin Valley. Anyone who lives in Ventura County area will tell you how desirable the location is with the beach only a few minutes away and a pleasant climate.

The company's most promising assets are two properties called East Area 1 (563 acres) and East Area 2 (44 acres) located in Santa Paula. The East Area 1 property was entitled for development in 2006. This is a major accomplishment considering the strict zoning laws which normally prevent the conversion of agricultural land to better uses. The company did an excellent job of garnering local support for the initiative, and voters approved the measure by an overwhelming 80% majority. This makes Limoneira the only company currently approved for a major real estate development in the area. The development of East Area 1 is expected to be completed in a series of phases over a 20-year period.

Limoneira also owns other quality properties including a partial interest in Windfall farms, which is a 720 acre horse property  in Paso Robles. The company has invested over $25 million in capital improvements and plans to subdivide the property into 10 acre lots in 2012. While this is an excellent property, this is a slow moving project that requires time to sell. The company is also working on developing and selling a few parcels in Santa Barbara. The company was able to get the parcels entitled for development for residential and commercial units. As with Windfall farms, this will also take time because of the problems in the housing market but should move quickly when the market improves. The company has partnered with Bellagio Builders to construct two luxury spec homes in Paradise Valley, AZ. The company began this project at the top of the real estate market in 2007, is having problems selling the homes, and is currently leasing them out. Paradise Valley is an exclusive address and has held up better than other parts of Arizona in the real estate market. The company should be able to recoup its investment in time.

Limoneira also owns a few other real estate properties including workforce housing for their employees. These consist of small bungalow style units and apartment complexes.

Along with prime California real estate, Limoneira also owns significant water rights and interests in mutual water companies. The majority were acquired a long time ago and are thus valued at cost on the balance sheet ($1.2 million). But the fair market value of these water rights is much higher because it is such a precious commodity in California. From what I have been able to gather, the company has rights to approximately 15 million acre feet of water in the Santa Paula and Filmore Basins. These are important strategic assets and are worth a lot of money ($100's of millions at a minimum) to future developers or cities. The value of the company's shares in mutual water companies is uncertain, but I have read that they are worth approx. $100 million.

Management

Overall, I believe management is competent at Limoneira and is acting in shareholders' best interests. I give them credit for organizing the East Area 1 project, which took many years and required the company to work with the local community very carefully. I am also pleased that management finally decided to list on the NASDAQ even if it required them to implement the onerous Sarbanes-Oxly regulations. This move will help the company achieve a higher stock multiple compared to remaining on the pink sheets.

I have only two things against management. The first is regarding stock options. While not terrible compared to other companies, I would prefer if management used their salaries to purchase stock rather than diluting shareholders through stock options. The second reservation I have concerns a few peculiar business endeavors that the company strayed into previously including Movin' Mocha--a chain of coffee houses in Fresno, CA. Fortunately, the company has discontinued this money losing business. I hope that the company will stick to its area of expertise and focus on monetizing the company's real estate assets.

Financials

It is very easy to pass over Limoneira's balance sheet without seeing the real value of the company's assets. The company has been around since 1893, so the majority of the company's assets is valued at almost nothing on the balance sheet.

One other concern is the company's rather large amount of long-term debt at $69.2 million. This company has used debt to finance some of their real estate projects. The debt will be reduced when they sell some of their slow moving real estate. The good thing is that all of the debt is not due until 2013 and is structured at very low rates. The only thing I do not like is that all of the debt is variable rather than fixed so they are exposed to rising rates, but this is a small concern.

What I like regarding the company's financial position is that it can use the cash flow from agricultural operations to help finance its real estate projects. On average, the company will have $10-14 million in cash flow, which along with some debt, allows the company to fully fund its operations. I do not expect the company to have to raise capital through dilutive equity offerings.

Major Owners

Limoneira is a controlled company in the sense that the founders' families currently control 80% of the common stock. This certainly has its drawbacks as I have seen many family run companies systematically loot shareholders. In the case of Limoneira, I have not seen any egregious outrages which destroyed or wasted large amounts of company resources. However, there was one company action that I take issue with, and that is its "investment" in Charlie Kimball's auto racing career. Charlie Kimball is the son of the Limoneira's director Gordon Kimball who decided that the company should invest $500,000 to further his son's racing career. This smells of nepotism and misappropriation of company assets but is not large enough to merit much concern. Unfortunately, I have seen much worse in corporate America in many large companies.  As far as I can see, there are no other corrupt related party transactions at the company.

The only other major investor is Calavo Growers which owns 15% of the stock. A few years ago, the two companies agreed on a partnership which allowed Calavo to package, market, and sell Limoneira's crops. To consummate the agreement, both companies agreed to purchase stakes in each other with Limoneira purchasing 1,0000,000 shares of Calavo. So far, the investment has been sound,  and they have already realized a gain from selling 335,000 shares in 2009.

Opinion and Summary

Limoneira is a promising investment that remains under the radar of Wall Street and institutional investors. The company's excellent assets have been largely ignored and mispriced by the market. But I expect this to change as the company officially has listed on the NASDAQ stock exchange, which should bring it more exposure. It should be pointed out that this is not a get rick quick type situation but rather a long-term investment which will reward shareholders. The majority of the company's assets need to be developed over a period of years before shareholders  realize the company's full value. However, I decided to purchase shares now because I believe that now that the company lists on the NASDAQ, it will eventually get a higher valuation than it did on the pink sheets.

Full Disclosure

20% of my portfolio is invested in Limoneira (I know it is a large stake, but I am fine with that). My cost basis is around $12.40.

 Disclaimer

I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset.
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Market Thoughts 4.8.2010

Markets briefly took notice of the crisis in Greece but quickly ignored it sending indices higher by approx 0.3% to close the day. Gold continued to impress today climbing to over 1,150 an ounce. This is an important development for gold because it is no longer seen as simply an anti-dollar trade but more importantly a true safe haven trade. Oil closed fractionally down for the day at $85.49 and my troubled friend natural gas fell again to $3.92.

All I can say is markets remain well bid with plenty of people desperately waiting for a temporary dip in stock prices. Every intraday decline is vigorously bought even though volume has remained extremely light. Obviously there are not too many sellers at this point. However I still expect a 7-10% correction (particularly in commodities and related stocks). Overall stocks are not really cheap or really expensive and you have to do alot of research to find value. Right now I am developing a list of 20 junior miners I like. This sector has been decimated between 2007-2010 even with the 70% rally in markets. Most of them remain 70-90% below their highs. I will publish the list in the next few days.

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Greece's situation is getting worse

The only reason I cover the problems in Greece is because it is the canary in the coalmine for sovereign defaults. What happens in Greece will likely occur in Spain, Portugal, Ireland, and eventually Italy. So the situation is quite important to follow.

The news today is that large financial institutions (mainly European) are refusing to accept Greece government bonds as collateral for repurchase agreements. If true this is the beginning of the end for Greece as repurchase agreements are one the major sources of funding for the Greek financial system (outside financing by the ECB). Greek banks buy government bonds and can then use the bonds as collateral. But we are now hearing that they will no longer be able to do this if the news reports are correct. This could lead to a liquidity crisis.

So what's causing this situation to rapidly deteriorate? The bond market is calling the EU's bluff and is going to force an official bailout. Greek 10yr bond yield are now trading above 7% which is over 400bps more than the German equivalent bonds. This market action will force the EU/IMF to stop talking and craft a real solution to Greece's problems.

While you would naturally be concerned--US markets are largely ignoring the problem but this could change anytime. If you look at the chart below you will see the daily sentiment index for the Nasdaq--at new highs so market sentiment is extremely high and subject to a reversal. The only positive that I can see is that gold is finally doing what it has historically done--provide safe haven during a currency crisis.


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blackswaninsights.blogspot.com
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Market Thoughts 4.6.2010

The big news of the day was Greece again with bond yields rising (10yr 7%) and CDS spreads increasing to year highs (383 bps) as uncertainty reigns supreme. An interesting tidbit regarding Greek bond yields is the spread between the 3 and 6 month bills which increased to a record 250bps. This is highly irregular and indicates extreme problems in Greece. For comparison US 3-6 month spread is only 9 bps.




But you would not know this acute situation by looking at the equity markets which closed slightly higher for the day after briefly falling in the morning session. Oil was flat to slightly higher at $86.83 and gold closed higher at 1,135. Again oil was able to shrug off poor API inventory numbers indicating an increase of 1+ million barrels for the week (it seems that the more the inventories increase--the higher the price--screw demand/supply). This is in spite of continued dollar strength which rallied against most currencies.

One would think that the situation in Greece would be cause for concern but markets seem completely unaffected. As I have said before, markets are extremely overbought and do not represent a good entry position for establishing new positions. I am currently waiting for a pullback to at least 1150 on the S&P500 before buying anything.

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ISE Sentiment index hits dangerous extreme

An interesting tidbit from tradernarrative.com regarding the ISE sentiment index which just today hit an extreme level. This is a very interesting call to put index which excludes trades from market makers and thus gives a better indication of investor sentiment compared to other put to call ratios. The index today recorded a reading of 2.76 which means that investors/traders are buying 2.76 call options for every put option. This usually means complacency within the market. You can see from the chart that this index rarely goes above 250. An important note regarding this index is that it is a short term trading indicator and does not indicate major inflection points in the market. This further reinforces by short-term bearish stance right now.


Chart from Tradernarrative.com

Black Swan Insights
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Market Thoughts 4.5.2010

All market indices rose to new 52 week highs with commodities leading the way. Oil was up $1.75 to 86.64 and gold hit 1,132 as everyone jumped on the reflation trade. Even perennial under performer natural gas rose today. One thing to note today was the anemic volume which set a new low for the year. In the S&P 500 tracking index only 105 million shares traded vs an average of 150-160 million. The big news of the day was not in the equity markets but rather the bond market where 10yr and 30yr yields climbed higher. In my opinion this is the only problem for the equity markets right now. As yields rise, stock market P/E's generally decline as people decide to take the easy money and buy bonds rather than risk their money in the market.

The only thing I don't like about this market is the extreme amount of momentum trading (market goes straight up without stopping). The market remains vulnerable to a severe correction with the RSI indicator above 70 for 3 consecutive weeks. Even if you are bullish (I currently am) I would not be buying at these levels considering that the markets are extremely overbought in the short term. That being said do not under any circumstances be short this market--you will be killed (like me shorting oil).

Good luck and happy trading

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Understanding the US dollar Index

“Paper money eventually returns to its intrinsic value ---- zero.” Voltaire

I am always amazed at how people confuse the dollar index with the dollar's purchasing power. You will often hear on CNBC or Bloomberg that the dollar increased or decreased against the Euro,Yen,Pound, etc on any given day. Recently the dollar index has strengthened considerably from 74 to 81 indicating that it is increasing in value. This is terribly misleading because the dollar index only tracks how well the dollar is doing against other fiat currencies. Fiat currencies by their own definition lose value every year (in the US is is usually 3-5%). So when market pundits discuss the strong dollar and so forth and how this is great-- don't believe them. Instead focus on the dollar's purchasing power. You can do this by comparing the dollar to the price of food, energy, gold, etc. When you do this, you can clearly see that the dollar is not increasing in value at all. In fact the direction has been definitively down for the dollar.

Dollar vs. gold


Dollar vs. copper



Dollar vs. oil




The only reason I did not show 10 year charts is because it is even more depressing that the 1 year charts.

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Highlights from the Non-Farm Payrolls

Well the number came in below expectations at +162,000 for March. The real highlights were the +48,000 census workers hired (temporary jobs), +81,000 inferred by the Birth/Death model (all they do is guess), and a weather adjustment of +100,000. I would strip out the census hiring and the B/D model because these do not give you a good indication of how the real economy is doing. When you do this you get +33,000 jobs. Even this is a little suspect considering how the BLS calculated the Feb. weather adjustment into the numbers. Overall, the job market remains terribly weak but is slowly recovering. An interesting note--the US has to create 200,000 jobs per month just to keep up with the growth in the population. So in order to see a sustained drop in unemployment, you would need to have over 200,000 jobs created per month. We are a long way from that.


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Preview of Friday's Non-Farm Payrolls

Wall Street is currently expecting payrolls to increase by 190,000 for the month of March. Goldman Sachs is slightly more optimistic with an estimate of 200,000(revised down from 275,000). However this week's ADP number showed a decline of 23,000 jobs. So what is it going to be? One thing to note about the ADP number is that it only tracks private payrolls and does not include government hiring. The US government is expected to hire between 75,000-100,000 census jobs in March, which should provide an artificial boost. Then all of the simpletons on CNBC can finally say that the job market is recovering and now is the time to buy more stocks.

My guess for Friday's number is +50k which without census hiring would be flat to negative. Many US corporations have discovered that they do not need to rehire the people they laid off during the worst of the recession. I doubt they will be so quick to rehire them now. Corporations know that the recent boost in the economy has been due to inventory restocking and will likely wait until end-user demand appears before hiring more personnel.

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