Monkeys & Elephants

*Don’t Panic!

China appears to be slowing, US recovery is back in question, and Europe is collapsing once again…….Seems like a panic situation to me…..BUT, we’ve read this book before.  Back in August we started down a similar path, the US was downgraded, Greece was on the verge of bankruptcy, the Euro was on the brink of collapse and China looked like it was starting to slow.  Investors started to panic and rushed for the exits.  Then in October when things seemed bleak, the markets began to rise, things didn’t seem so rough, and the market rallied relentlessly upwards until the end of March.

My favorite Warren Buffet quote is “Be greedy when others are fearful and be fearful when others are greedy”.  When the markets are in panic mode that’s when you should be making your list and start buying into the market.  I mean, you don’t rush to the store when retailers raise their prices, you rush to the store when things are on SALE (unless it’s an Apple product).  So as the markets are coming off, you should be making a list of high quality stocks that you want to get into, or want to add to your current position.  I don’t really see a major catalyst to the upside in the near term.  Europe is like a procrastinating University student, who puts off their assignment  until the night before “I don’t feel the pressure yet”.  The next major positive catalyst that I can see is the Fed meeting in June, when Ben Bernanke could potentially announce QE3 or and extension of Operation Twist.  This is a definite possibility especially if Europe continues to deteriorate and Helicopter Ben thinks that the slow down in Europe could derail the US recovery train.

Right now I’d be looking at adding to names in the Gold sector.  Money printing is on the way, it’s the only way out for Europe and the US, so this great for Gold [and oil ]  The Big daddy’s of gold have come off and are presenting real attractive entry points. I’d be looking to add Golcorp (TSE:G) and/or Barrick Gold (TSE:ABX).  These guys are the biggest and the best, and at these levels we’re getting upside of 20-30% on the stock.  If you’re looking for a little risker but more rewarding gold plays, take a look at Elderado Gold (TSE:ELD), Agnico Eagle (TSE:AEM) and the stock that the markets absolutely hate Kinross Gold (TSE:K).

Once again, don’t rush into the market with guns blazing, slowly add to your position over the next few months, and always keep some cash in case the market gives you a blockbuster, gangbuster stock sale

*Holy Market Manipulation Batman

So last week I mentioned that I thought that CGX Energy (TSE:OYL) may have had some information leaked that the well they were currently drilling offshore Guyana (Eagle-1) might be a duster due to the large declines, high volumes and lack of news. Since then CGX has been a roller coaster ride. It surged May 3rd 43% on 6 times regular volume with no news and at one point was up 60% for the day. Then the following day CGX dropped 10% and is now hovering just above the $1 mark. What can we make of this? This looks like a classic case of manipulation. CGX is a mid-range volume stock, and traders and institutions know that small retail investors are sitting on their hands, feet, fingers and toes just waiting to hear about the drill results from Eagle-1 well. By piling into the stock or heavily shorting the stock, these guys can manipulate retail investors into buying and selling.

By heavily shorting the stock, traders and institutions try to trick the retail investors into thinking that there was an insider that leaked news that the well was a duster. This is designed to cause retail investors to panic and sell their positions at low levels. Then these same traders and institutions start to buy up the stock at low levels covering their shorts, which causes the price to take off, and causes retail investors to panic again and jump back in thinking that the well is going to be a winner. And once the retail investors pile back in, the traders and institutions do it all over again.

The moral of the story is, in this particular scenario, don’t trust the price action and don’t be fooled by these big swings. Be in CGX because of the potential that they have: but be cautious because this is not a sure thing, it is a pure exploration play. They are cashed up for 2 wells, Eagle-1 and Jaguar. If these are both dusters, CGX is not dead in the water, they have many more wells to drill, but they will be heading back to the markets to get more cash, which will dilute the stock and cause the shares to drop. But they have prime offshore blocks that have proven hydrocarbon systems, so I think they will eventually hit oil. But the question is when? How many dilutions? What will the share price drop to first? So if you’re in it, stick with it, if you’re interested in starting a position, I’d average in, don’t take a huge position now, nibble away and remember this is still an exploration name, don’t bet the spouse and kids on it (unless you secretly want the piece and quiet).

On a side note, Monkeys and Elephants is getting a face lift. We have hired (he actually offered) a talented young graphic designer, Gianluca D’Acchille to design a state of the art logo. This thing is going to rival the iPhone and the iPad for ingenuity, design and aesthetic appeal. Gianluca has flown back to Italy to use the wind tunnel facilities at Ferrari to design a logo so aerodynamic that Formula 1 teams will throw hundred of millions at Gianluca to design their cars. The completion date of this logo is TBD, but once it is ready, we will hold a press conference to unveil it…… stay tuned!!!

*Sell in May and Go Away?

So we’ve hit May, and the old adage looks like it may prove correct again “Sell in May and Go Away”.  The market has been coming off as of late especially the commodity heavy TSX.  We’ve been getting hit left, right and centre with weak global growth….BANG the US employment numbers……SLAP Chinese PMI and GDP number…..KABLAMO Spain debt, and European manufacturing date showing signs of slowing.

Not everything is doom and gloom.  We’ve gotten some positives. The earning season thus far has been like Barry Bonds, and hitting esimates right out of the park (drug tests pending). But with global growth appearing to slow, earnings can quickly disappear and those beats, can become beat downs next quarter.  So what can we do?

First thing is put that Vix trade back on (TSE:VXX), hedge yourself as the market goes south.  I think that we’re probably going to be heading down for the rest of May as economic data keeps coming in to the downside and the European political situation is uncertain at best.  But there is light at the end of the tunnel.  It looks like Europe and China may be getting ready to do some more quantitative easing.  Europe is going to need to devalue the Euro to help lessen the debt burden on Spain, Portugal, Greece and Italy.  Also the emerging markets like China will have to ease to help combat the GDP impact of Europe slowing and buying less of their products.  So there are two positive catalysts right there.  Also, the US unemployment situation is weakening and Helicopter Ben Bernanke said that his major concern is the employment picture.  So this slow down in US jobs is pushing Ben closer to my two favourite letter in the alphabet Q and E.  Operation Twist ends in June so the June Fed meeting would be the ideal time for Mr. Bernanke to announce QE3.  And isn’t that what we’re all waiting for??  The announcement of QE3 will make the markets do what Kris Kross sang about in the 90′s….JUMP JUMP!

It looks like we’re going to be in for a bump ride for the next month or so, so lets stay calm and wait for a great buying opportunity. And Remember:

Q-E will make the markets JUMP JUMP!

*Big Moves, High Volumes, No News?!?!

Ever watch a stock make a sharp move up or down, on high volume, and can’t find any news as to why? Then, do you ever ask yourself “Hmmm this is strange, does someone know something I don’t know?” Well, the answer to that last question is Yes, Absolutely Yes! Insiders leak news, and it happens all the time. Remember Quadra FNX (TSE:QUX)? The day before the take out bid was announced by KGHM, QUX was up over 7% on high volume and no news. Insiders leaked the beans (is that a phrase?).

There are two stocks that have had big moves on high volume lately and no news to speak of. One to the upside and one to the down side.

Legacy Oil and Gas (TSE:LEG):
Legacy has moved from $7.91 on the close of Tuesday to $8.75 at close today. That’s a better than 10% move in 2 days on more than twice the daily average volume. Something’s up! A take over? Leaked Financial results? Something good will most likely be released shortly. I have a bet with John (remember him, he last wrote an article on Monkeys & Elephants in November 2011): He thinks the move in LEG is a technical bounce, but I think he’s wrong. I think there is some good news coming. Legacy is extremely cheap, it’s trading under book value ($9.21) and under NAV ($16). I wouldn’t be surprised if someone took a run at them here.

CGX Energy (CVE:OYL)
CGX is drilling an offshore well off the coast of Guyana. If they hit they could potentially hit a multi-billion barrel find, which would make the stock sky rocket. They were supposed to announce well results on April 10th and during the 3 trading days prior to April 10th, the stock went from $1.40 to $1.20. Then on the 10th CGX announced a delay in the well due to issues with drilling. The stock then dropped some more. They said they would announce results after completion of drilling at the end of April. So, we are approaching the end of April and today CGX dropped 14% on strong volume and no news. I think that insider “leaked the beans” and the well results will be announced shortly and not be positive. So if you’re long CGX, you can stick with it as they have another well result coming in about a month, but I wouldn’t take a fresh position or add to my position on this drop. Bad news is coming, the beans are out, you just don’t know it yet!

*Earnings Driving Stocks

Earnings have been smashing through all expectations like the Kool Aide man smashing through a brick wall (OHHHH YEAH!!). These earnings beats have overshadowed the worries in Spain and Europe. So what do we do now? Well, first I’d take off my VIX trade (TSE:VXX) (if you bought in on my advice last week). In a choppy market where we could just as easily break out to the upside as to the downside, I’d stay away from the VIX. The next thing I’d do is find a few stocks that are reporting shortly that can give us more than just an earnings beat. Lets take a look at a couple of picks. One I’m going to suggest you go long before earnings are released, and one I am going to suggest you go long after.

Cenovus Energy (TSE:CVE)

Cenovus is set to report before the opening bell on Wednesday April 25th. I’m expecting strong earnings and cash flow (most likely supported more so from their refining than their crude production). But the real thing I am interested in are updates on two projects. First, I’m expecting them to give an update on their Christina Lake Phase D on steam date, which will add 40,000 boe a day of production. The expected on steam date is Q4 2012, and I think that if this is on time or slightly ahead of schedule, the market will pile into the stock. The second, and more important update is their progress on their joint venture on Telephone Lake. Cenovus had extended their joint venture process to accommodate last minute interest from other parties. This extension bodes well for what Cenovus will get in return for a 50% stake in their Telephone lake property. Cenovus said that they’d be interested in accepting additional coking or refining capacity in exchange for a 50% stake. Any clarity on this process will catapult the stock upwards as analysts can start to consider the NAV calculations associated with developing Telephone Lake (Telephone Lake 2C contingent resource is 2.1 Billion barrels, and estimated production capacity will be 90,000 boe/day). For these reasons I’d be inclined to take my position before Wednesday

Teck Resources (TSE:TCK.B)

It’s no secret that Teck is one of my favourite companies, but I would not be taking a position before they report on Tuesday April 24th, as they are heavily dependant on China. The Chinese data has been weaker than expected, and even if it doesn’t affect Teck’s numbers this quarter, they may guide lower for future quarters as there is uncertainty over Chinese demand. If the stock sells off after earnings, I’d take my position then since it’s still a great long term play.

*How Do You Like Your Landings? Hard or Soft?

I don’t know about you, but whether I’m on a plane, running on ice or talking about China’s GDP, I like my landings to be soft. Before North American markets open on Friday we will get the Chinese GDP numbers which will give us our first glance at whether China will have a hard or a soft landing (hard landing is growth less than the 7.5% target China set, and soft is above). Analysts are calling for a GDP number of 8.2% (which is soft, which is good, not like when your friend bails on your plans and you call him sooooft). If we can hit 8.2% or surpass it, commodities (oil, iron ore and copper) will be flying high, and the TSX will be off to the races.

What’s the best way to play the Chinese GDP data? Teck Resources (TSE:TCK.B) of course. No stock reacts more (to the upside or downside) to Chinese data than Teck. After all a large portion of their income comes from selling coal and copper to China. So if you feel like I do that the Chinese GDP data will be strong, then I think you should be taking a position in Teck Thursday (if you don’t have one already).

If the Chinese data disappoints, Teck will take a hit, but this is still a long term play. I mean, what’s not to like about Teck? Copper….good! Coal (for steel making)…good! Oil….Great! It’s trading cheaply at less than 8 times earnings, they are paying us over a 2% dividend. Teck is also reporting earnings on April 24th and I’m expecting a good quarter, which should again propel the stock upwards.

One last thing, I think that if Chinese GDP is weaker than expected, the Chinese government will cut reserve rates to spur growth. If this is announced, Teck will also be heading higher.

*The Week Ahead – Not too Pretty

Good Friday definitely was not a good friday for investors, as the US jobs number missed expectation and sent futures down over 1.5%.  The holiday food, drink and family get togethers did nothing to brighten investors moods as the futures are still showing deep declines.  If you had taken a position in the VIX (TSE:VXX) last week (like I recommended, wink wink, nudge nudge, say no more), you’re sitting pretty on some pretty hefty gains with more to come this week.  I’d hold my position or even take a position (if you haven’t done so), first thing Monday morning.  There is hope for a rebound on the horizon as this week kicks off the Q2 earnings season with Alcoa (NYSE:AA) on Tuesday.  Many analysts believe that Q2 earnings season will be a big disappointment, and if this is the case the VXX will be your best friend.  I wouldn’t be a hero this week, so I wouldn’t be buying on big dips, I’d wait to see the earnings and more importantly the guidance of the companies reporting.  I’d pay special attention to Titan Machinery (NYSE:TITN) on Wednesday which will give us a pulse on demand for construction equipment [may be a foreshadowing Caterpillar (NYSE:CAT) earnings].  Then before the bell on Friday we get two bank titans reporting in JP Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC).

I think that we’re probably heading lower for the next little while unless we get home run earnings.  I’m keeping my VXX trade on until Mr. Bernanke announces QE3 (which I believe will be at the June Fed meeting).  At that point we better be fully invested in commodities (gold and oil), and if we are not, then we should be taking positions during this correction.

Happy Easter!!!

*Natural Gas Naturally

I know what you’re thinking, Natural Gas?  That stuff stinks more than, well, gas we naturally create when we eat beans, broccoli and spicy food (ohhhh yeah, spicy food).  I believe that we’re a couple of years away from a North American Natural gas rebound, however I think there are ways in which you can make money playing Natural Gas stocks now.  For starters, the big players like Exxon and Shell have been buying beat up Natural gas companies and projects. Today we have another big name player, Petronas of Malaysia, announce that they are looking at spending over $5 billion to acquire a Canadian company with Canadian Assets.  There are only a few front runners, in my opinion, seeing as there are only a few companies that are profitable even with natural gas at $2.

The Possible Players:

#1) the front runner would have to be Progress Energy (TSE:PRQ).  Last year, Petronas paid PRQ $1.1 billion for a 50% stake in 3 gas fields owned by PRQ.  But management at Progress stressed that there have been no talks with Petronas about anything other than developing their joint venture assets and creating an LNG facility on the west coast (for easy shipping to Asia). To that I say: I smell the gas that comes off Bull Crap… I think there are discussions going on

#2) Tourmaline Oil Corp. (NYSE:TOU)
#3) Peyto Exploration & Development Corp. (TSE:PEY)

I personally like Tourmaline and I will probably be taking positions in both Progress and Tourmaline, as I feel these two are best of breed and that even if Petronas passes on these two someone else will come along and take them out.

You’re probably wondering why Petronas would want to invest so heavily in Natural gas and Liquid Natural gas with prices so low?  Well, the truth is prices are only low in North America, where prices are around $2. But in Asia, we’re looking at prices upwards of $16-17. So, Petronas is doing the opposite of what you do after you go to a mexican restaurant… they are taking the gas home with them (and not letting it out in the car with the windows down). If Tourmaline or Progress could get $16-17 a share for their natural gas and NGL, they would literally explode with money!

*The Week Ahead – Chinese European and US Data

The big question on every investor’s mind is, “Is China slowing significantly?”.  That is the 1 trillion yen question.  To further complicate this question, we just received some pretty confusing data out of China today.  The PMI (Purchasing Managers Index) data arrived, and it showed large companies expanding in February and smaller companies declining. Ideally, we’d like to get both large and small companies expanding but it’s better than both of them declining. The larger companies are most likely gearing up for production ramp ups now that winter is ending, where as the smaller companies have credit constraints and are not able to ramp up in the same way.  The decline in smaller manufacturers’ PMI does give me hope that the Chinese government will cut rates to spur growth and borrowing.  If there is a rate cut tonight, we will see the markets and commodities rally Monday.

But what if they don’t cut rates?  How do we make sure we don’t get our fingers stuck in a Chinese finger trap?  Well, the way I’m playing near term uncertainty and volatility is by buying the IPATH S&P 500 Short Term Future ETN (TSE:VXX).  This gives you access to the equity market volatility through CBOE Volatility Index^® (the “VIX Index”) futures.  So if there is high volatility or “fear” in the markets (aka the market starts tanking), the VIX will rise, and thus the VXX will rise and you’ll be gaining while your other long positions may be losing.  I like to use this as a hedge when I’m not quite sure which way the markets are heading: like this week as we just ended one of the best quarters in the US since 1998, and people may want to lock in some profits.

Monday, we will also be getting PMI data out of Germany, and we again need strong numbers so that we can rest assured that the engine (BMW Engine) that drives Europe is still going strong.  If we see bad numbers we may get some weakness and again you’ll want to be in the VXX.

Finally on Good Friday (lets hope its a great Friday) we’ll be getting March’s non-farm payroll numbers out of the US, despite the markets being closed.  We need to see continued strength in the labour market otherwise again, we will be heading lower (although if we get weak numbers, it opens the door for QE3… so now I don’t know what to hope for… but at least I’m hedged with VXX).