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Buffett finally makes a big buy. NatGas and Mr Market are happy

Written By | Jul 9, 2020
Warren Buffett

A Natural Gas Pipeline Station at Bowling Green State University. Via Wikimedia Commons, credit mbrickn. CC license 4.0. Original image slightly modified to fit CDN format.

WASHINGTON – Yesterday was Wednesday. That signaled that Mr Market felt like reversing Tuesday’s stock market downtrend. Which itself had reversed Monday’s uptrend. And so on. Except for Big Tech, which once again rallied fiercely today, most stocks have been treading water for quite some time now. But beneath the surface, things seem to be moving slowly upward and the April-May-and-part-of-June uptrend may yet assert itself. One bit of evidence: Skinflinty Warren Buffett, whose Berkshire Hathaway conglomerate has long been massively flush with cash, finally made a very big buy.

Although this news is a few days old, post-holiday traders finally reacted to it, moving the market up significantly earlier this week.

Mish Schneider said on the big Buffett buy

Aside from one factual error, Mish Schneider sums up quite well what Uncle Warren did. And she summarized it quite succinctly in a short, free July 7 column for Stockcharts.com.

She starts by addressing an interesting chart showing an interesting countertrend move in UNG, the natural gas ETF. UNG made a sharp, significant up-move recently when Buffett announced his unexpected transaction. Writes Schneider:




“Rare to see an island bottom. However, the one in UNG, the ETF for natural gas, had a classic one. After making new all-time lows, an island confirmation suggests a reversal of the downtrend.”

Quick intermission: What’s an “island bottom”?

For chart fans, an “island bottom” is what appears to be the lowest price in a stock’s (or ETF’s) current downtrend. But unusually, this extremely short bottom drops the equity significantly below an earlier low.

But then, quite suddenly and without any warning, that move reverses in exactly the opposite way, by shooting up significantly above that very brief bottom moves. Moving from the end of a downtrend to the beginning of an uptrend without any transition moves is highly unusual in the wonderful world of charts. Chartists call that brief, possibly final bottom of a long downtrend, sitting all by itself, an “island bottom.” That’s because it sits there all by itself without any transition.

You can see what I’m talking about in the Schwab StreetSmart Edge 3 month candlestick chart of UNG below.

Buffett makes a big buy

Island bottom, UNG, the natural gas ETF. Note the isolated drop near the lower right of the chart, followed by a surprise jump back up.

Note the longish red candlestick at the bottom of this chart, the one with the tiny green candlestick next to it. That’s the “island bottom.” No transition between the previous day’s low and only the tiniest transition to the big jump up – from approximately $9.00 at the very bottom to around $10 per ETF share within two days. The move peaks out at roughly $11 just a few days later before settling down a bit again.

More on natural gas and the big Buffett buy

This may not seem like much. But that’s a big, quick move out of a long, negative pattern in an inexpensive ETF that follows a currently not-very-much-loved commodity, natural gas.

Which gets us back to Schneider’s comments. Which finally explain what happened to goose UNG shares so suddenly and so thoroughly.

“… Warren Buffett bought Dominion Energy (D), a company that heats and cools 7.5 million customers (small) in 18 states with electricity and natural gas. For Buffett, this is a value play. For me, after seeing the UNG chart, I like to think of it as also a commodities play.”

With all due respect to Schneider, Buffett did not, in fact, buy the entirety of Dominion Energy, which happens to be my friendly local electric utility, BTW. Buffett actually bought the big, Virginia-based utility’s natural gas transmission facilities.

Pipelines attempting to grow, like Dominion’s, have been the target of environmental freakazoids for at least a couple of decades now. Clearly, this well-run company decided it was time to get out of this sector and downsize a bit. In so doing, they largely revert back to selling electric power and natural gas in a mostly regulated environment.



Buffett also buys a bit of the East Coast’s only LNG export facility

Interestingly, Buffett also bought a piece of Dominion’s currently unique natgas asset. Namely, its liquefied natural gas (LNG) Atlantic Coast terminal. That’s literally the only one on America’s entire East Coast. So Dominion remains independent, gets some Buffett buy-in on its LNG terminal, and gets to unload a key asset that’s simply been a boat anchor on the utility’s earnings. What’s not to love for Dominion shareholders? (And maybe customers, too.)

Back to Schneider

“Why else is this island bottom so compelling?

“… UNG has begun to outperform that benchmark.

“The bottom chart [ed.– similar to the one I’m showing, but proprietary] shows our Real Motion indicator – and that’s where things get really interesting. The momentum shows price well above the 50-DMA [Day Moving Average], while the actual price trades just below the 50-DMA. This type of divergence is compelling and worth watching to see if price can catch up to momentum.

“Island bottom, momentum and Buffett – now there is an oh my!”

This chart talk may mystify some, but that last line is the payoff for those who don’t normally read crystal balls.

Schneider observes that traditionally, Buffett only buys a company or an asset when he can steal it. Legally. When no one else wants the damn thing, even though it has been or may very well be a great business, Buffett steps in to lowball the company or asset, which is in most cases willingly and gratefully sold. He then holds the asset seemingly forever, and patiently watches it recover. Obviously with a little help and advice provided by Uncle Warren along the way.


Also Read: Unemployment drop vs coronavirus spike roils pre-holiday stock markets

A key trend that Buffett sees

Buffett sees a massive recovery in natural gas and natural gas transmission assets. But just not tomorrow. No matter. He tries to work with long-term trends. Here, Buffett sees an inevitable and uncommonly strong economic recovery from our current coronavirus stasis. He also sees that the clueless but relentless eco-freaks simply won’t cease their efforts to make fossil fuel energy infinitely more expensive for the consumer. So he’ll hold these assets until this happens, and maybe beyond.

He also seems to be betting on more of a Trumpian economy than a Biden-style non-economy. This is slightly weird, since Buffett is an old, New Deal Forever Democrat all the way. On the other hand, he’s always been a realist. This current natgas move may not pay off in his lifetime. (He’s nearing 90.) But he expects it to pay off for his storied conglomerate, which is why he made the move.

Pre-supposing an eventual and massive recovery in fuel prices and assets, this move is driven in part by the transmission shortages the ecofreaks continue to force on this country. Which, if you play this idea out, means that everything else is going to experience a massive recovery as well. After all, without one, who’s going to buy all that fuel the US has sloshing around?

This may seem arcane to some, but it augurs well for patient investors. But perhaps not quite as well for those who want to make a quick buck. It’s also a possible indicator that Buffett expects Trump to win Election 2020. Otherwise, he’d never have bought an asset that will be under deadly attack by America’s small but vocal legion of Marxists and ecofreaks should Slow Joe Biden actually take the White House in November.

Thursday market note

True to form, Thursday morning, Mr Market reversed direction again, particularly in the Dow. Thus, while stocks keep struggling generally higher, skeptical, coronavirus-obsessed forces keep pulling it back, keeping markets in a general sideways pattern. That’s frustrating but OK. A durable bull market sometimes needs time to digest big moves.

More later today.

– Headline image: A Natural Gas Pipeline Station at Bowling Green State University. Via Wikimedia Commons, credit mbrickn. CC license 4.0. Original image slightly modified to fit CDN format.

 

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17