Wednesday, December 15, 2010

UNG and - A Great Place to Throw Your Money Away

Due to the cold weather and recent natgas price surge, the UNG and longs are coming out of the closet again.There is one very strange phenomenon I've been seeing in the markets. And that is the unstoppable and undeserving popularity of HNU on the Toronto Stock Exchange. Take a look at the chart here:

Since its inception in 2008, it had 6 months of prosperity where it doubled, and since then has lost about 99.7%. Its spent about 95% of its life within 10% of its ever-decreasing lows, yet it frequently is the #1 daily volume play on the TSX with anywhere between 5M and 20M in volume a day. Now why is that? Well for one, it a 2x levered fund on the daily performance of Natural Gas.
If we go to this very useful Nat Gas streaming price link: 

You'll notice 90% of people are bullish on nat gas at this price. Not to say this is a very scientific poll, but it does show that there are a ton of investors and speculators out there believing that nat gas is about to go up. Huge. 

So I ask myself, ok, let's say nat gas doubles to about $8. will go up about 4x, probably less than that unless the doubling nat gas price is literally straight up, from $6.50 to $26. However, something like Compton Petroleum would go from the 40+ cent range to I would think at least $3.50 as it would be massively profitable at $8 nat gas, nearly a 10x gain. And the downside risk in Compton is much, much less than the downside risk in HNU. is a real company with real assets. is some BS levered trading scam. I can only imagine what would happen to the price of Compton if it had 5M-20M a day in volume like has.   

Then you look at UNG in the States. People would rather buy that to speculate (or in their own messed up heads "invest") in natgas rather than buying a company with a ton of potential like Chesapeake or ATP.We all know China wants Chesapeake. Compton and ATP would be other things China would look at. What we know for sure though is that China does not want to buy or UNG. What is there to buy exactly?

Its probably a lesson that many people need to learn, not just on the natgas industry but everywhere. The popularity of short funds I can understand since there's very few companies out there who's success depends on the fall of the stock market and economy. But for leveraged long funds, there is ALWAYS an industry play out there that has a better upside potential than 2x or 3x and it certainly has less downside risk than, well, -99%. 

But people like to piss away their money. All their technical indicators suggest natgas is going up tomorrow so it's time to buy! Because might not go up that day even if natgas increases. But if they are wrong and natgas falls then their "trade" just turned into an "investment" where they forever average down into oblivion.

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