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The Natural Gas Market Isn’t Heating Up

Natural gas prices remain low. The storage buildup was 49 Bcf – higher than normal for the season. Extraction season should start in the coming weeks. The rise in production efficiency more than offsets the drop in rigs. Even though the natural gas market is getting closer towards moving from injection to extraction season, the price of natural gas remains low. This upcoming winter is still expected to be warmer than normal. And the rise in efficiency in producing natural gas more than offsets the decline in operating rigs. This trend will keep production higher than last year, which could keep pressuring down the price of natural gas. The recent EIA storage report showed another buildup of 49 Bcf; it wasn’t far off market estimates but was still higher than normal. When it comes to the futures markets, a lot has also changed there, as you can see in the following chart of the differences among prices of near term (next month) and future months. (click to enlarge) Source: EIA Right before the end of October, the contango in the futures markets picked up – an indication for a rise in expected future price of natural gas in the coming months. Since then, however, the contango has contracted and the prices have converged to a narrow spread. This could suggest the market doesn’t anticipate the price of natural gas to sharply rise anytime soon. For holders of the United States Natural Gas ETF (NYSEARCA: UNG ), this could result in a more modest adverse impact from the contango on its pricing with respect to the spot price due to lower roll decay. Looking forward, the market still projects the EIA will report additional buildup in storage next week albeit at a much slower pace; the storage depletion will be reported the following week – at a lower rate than the 5-year average. The EIA, in its recent monthly outlook , expects the U.S. storage will drop to 1,862 Bcf by the end of March – the end of depletion season; this will reflect a modestly lower than average withdrawal from storage due to warmer than normal winter. The EIA projects the overall demand for natural gas will only slightly rise in 2016 compared to 2015 – most of this gain will come in the industrial sector that will offset the decline in power and residential/commercial sectors. But if natural gas prices were to remain this low for a while longer, this may push even further up the demand for natural gas in the power sector, which already is expected to experience a sharp gain in consumption in 2015 of nearly 17%, year on year. These projections don’t vote well for natural gas producers, which have already suffered this year from low oil prices. In terms of rigs, according to the latest update from Baker Hughes , the natural gas rotary rig count fell again by 6 rigs to 193 – nearly 45% lower than the levels recorded last year. Although production has recently declined – as of last week, U.S. natural gas production slipped by 0.5% week over week and is only up by 0.8% for the year – the EIA still estimates production will be up by 6.3% for the year and 2% next year. The higher efficiency of gas producers will more than offset the drop in rig activity. But if prices were to remain this low, this may eventually lead to a slower growth in output as producers scale back on projects and cut capital spending. The natural gas market is likely to remain soft in the near term even as it turns into the extraction season. Unless the winter outlook changes or the number of operating rigs start to tumble down again, prices aren’t expected to rise much higher than their current levels in the near term. For more see: Natural Gas is Still Floating… Barely

Is It All Downhill For SLV?

Summary The silver market cooled down in recent weeks. The rise in U.S. treasury yields and stronger U.S. dollar dragged down the price of SLV. The low price of silver didn’t raise the physical demand for silver. The silver market cooled down as the market is slowly adjusting to a possible rate hike by the FOMC in December. The price of the iShares Silver Trust ETF (NYSEARCA: SLV ) dropped by more than 8% since the beginning of the month. The lower price has yet to ramp up the physical demand for silver. The upcoming minutes of the FOMC meeting could revise market expectations with respect to the Fed’s rate decision, which could impact SLV. Even though the recent NFP report was better than expected and led the market to revise up the odds of a hike – the implied probabilities for a December hike grew to 70%; it’s still not a done deal that the Fed will raise rates in December. These odds could come down if the next NFP report in early December disappoints and the growth rate in wages declines again to around 2.2%. And these chances still suggest the market isn’t fully convinced of a rate hike this year. As long as there is uncertainty, the price of SLV is likely to benefit from it. This week, the minutes of the FOMC will be published. Last time, the FOMC issued a hawkish statement, in which it mentioned December as a possible timing to raise interest rates. In recent weeks, the U.S. dollar resumed its upward trend, and medium-term and long-term U.S. treasury yields bounced back. And if the upcoming minutes of the FOMC meeting were to present a hawkish stance, after all occasionally the minutes are revised up to their release, this could further boost the U.S. dollar and treasury yields – trends that are likely to bring down SLV. Another report worth noticing is the U.S. CPI, which will be published on Tuesday. The U.S. core CPI reached 1.9% – close to the Fed’s lower bound inflation target. But the weakness in the energy market could also trickle into the core CPI, resulting in a possible decline in the coming months. If the core CPI were to fall back down to 1.8% or lower, this could reduce the odds of a rate hike and slightly reduce the downward pressure on SLV. But let’s not only dwell on the demand for silver for investment purposes. Has the low price of silver drove up the physical demand for silver? On this front, in the U.S., the leading country in importing silver, the market has also cooled down in the past several months, as indicated in the following chart: Source: Bloomberg and U.S. Mint During the past month and a half, sales of American Eagle Silver reached a monthly average of 3.9 million ounces – nearly 16% lower than in Q3 2015, but 2.3% higher year on year. The amount of silver sold doesn’t seem to be strongly correlated with the monthly changes in the price of silver – the linear correlation is only -0.17. So, even if the price of SLV is expected to come further down, it’s not likely to push the demand for silver in the U.S. much higher. The decline in the price of SLV was inevitable as the Fed moves closer towards raising rates. The recovery of the U.S. dollar and rise in long-term yields have also helped push back down the price of SLV and erased its gains from October. This week’s release of the minutes of the last FOMC meeting could raise the chances of a December rate hike, which could also result in another blow for SLV. In any case, the bearish sentiment for SLV isn’t likely to dissipate anytime soon. For more, please see: Is SLV about to change course?

Best And Worst Q4’15: Large Cap Growth ETFs, Mutual Funds And Key Holdings

Summary The Large Cap Growth style ranks fifth in Q4’15. Based on an aggregation of ratings of 24 ETFs and 604 mutual funds. QUAL is our top-rated Large Cap Growth style ETF and MIGNX is our top-rated Large Cap Growth style mutual fund. The Large Cap Growth style ranks fifth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Growth style ranked fourth. It gets our Neutral rating, which is based on an aggregation of ratings of 24 ETFs and 604 mutual funds in the Large Cap Growth style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 647). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Growth style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Destra Investment Trust II: Focused Equity Fund ( DFOIX , DFOCX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) is the top-rated Large Cap Growth ETF and Massachusetts Investors Growth Stock Fund (MUTF: MIGNX ) is the top-rated Large Cap Growth mutual fund. Both earn a Very Attractive rating. Columbia RP Focused Large Cap Growth ETF (NYSEARCA: RWG ) is the worst-rated Large Cap Growth ETF and Quaker Strategic Growth Fund (MUTF: QUAGX ) is the worst-rated Large Cap Growth mutual fund. RWG earns our Neutral rating while QUAGX earns our Very Dangerous rating. The Travelers Companies (NYSE: TRV ) is one of our favorite stocks held by Large Cap Growth ETFs and mutual funds and earns our Very Attractive rating. Over the past decade, Travelers has grown after-tax profits ( NOPAT ) by 14% compounded annually while improving NOPAT margins from 4% to 14%. Travelers currently earns a return on invested capital ( ROIC ) of 12%, up from 4% in 2004. Despite the stock gaining 5% year-to-date, shares remain undervalued. At its current price of $112/share, TRV has a price to economic book value ( PEBV ) ratio of 0.7. This ratio implies that the market expects Travelers NOPAT to permanently decline by 30%. If Travelers can grow NOPAT by just 1% compounded annually for the next five years , the stock is worth $172/share today – a 53% upside. Palo Alto Networks (NYSE: PANW ) is one of our least favorite stocks held by Large Cap Growth ETFs and mutual funds and earns our Very Dangerous rating. Palo Alto Networks went public in 2012 and since then its NOPAT has fallen from $2 million to -$106 million in 2015. The company currently earns a bottom quintile ROIC of -51%. Despite the downward spiral in profits, PANW has risen on investor exuberance in the cyber security sector, and shares are now significantly overvalued. To justify the current share price of $157/share, Palo Alto Networks must immediately achieve 5% pre-tax margins (-13% in 2015) and grow revenues by 31% compounded annually for the next 16 years. These expectations seem unrealistic given Palo Alto’s inability to grow profits since 2012. Figures 3 and 4 show the rating landscape of all Large Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.