I know. “WHAT!? PSSSHHH CAIN HAMMOND THALER YOU ARE A FUCKINGIDIOTYOUSWINGWHYWOULDUSAYSCH2HINGS…..”

Save it.

I know where the Middle East gets its food.

So if they want to play chicken with the oil, well…that oil gets loaded onto ships which get taken to storage centers that refine it into, amongst other things, diesel, that gets shipped to farming operations who’s harvests – the preponderance of the world’s food supply – get loaded back onto ships and sent to places like Iraq or Egypt that have so many fucking idiots crammed into large population centers that are definitely not self-sufficient (and in the middle of nowhere), that at the point hunger set in these people would literally start to cannibalize themselves.

Besides – let’s say the Middle East desert dwellers decided to play rough and throw some sanctions on the US. No more oil for us; so bad, we’ve been…

Okay, so how does that make prices go up? Are they not selling this oil to anyone??

No, more likely they’re just selling it to China…who would no longer have to worry about competing bids from the US.

SANCTIONS DESTROY MARKET FORCES

The heavy competition that’s keeping oil elevated here (we’re going into another recession, so oil’s over $80 a barrel?) can only be eliminated by the Iraqi cave dwellers screwing with us. Unless China’s about to triple their oil consumption, to help spite us, they’ll probably just start getting their oil exclusively from the Middle East – at a nice comfortable $60 a barrel, of course.

Because the Middle East won’t be finding any other buyers.

Meanwhile, the US can just go to the markets China leaves while they’re gobbling up cheap crude oil at “exclusive buyer” prices, and get our fix there.

As long as the middle east keeps on pumping and that oil goes somewhere in the system, it benefits us.

So I guess Iraq’s other option is to see how long they can go without those oil revenues.

Yeah, that’s what I thought. Fuck off.

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Despite the market weakness, natural gas futures continue marching steadily higher. Considering the above average warm weather in most of the country (first cold wave seems ready to set in this week), and it would seem that the shortage of storage space has been worked through in one way or another.

This was the very thing I was interested in betting on when I took a position in BAS. I was too afraid to bet directly on the price of natural gas for fear that this warm weather would be the stake driven through the heart of natural gas.

If prices continue to shore up, it will become increasingly more feasible to drill for natural gas again. Accordingly, I expect activity to pick up in the fracking services – weakness in fracking was the primary driver behind BAS’ most recent earnings trouble.

I remain unconvinced on the need for panic. But every day we do not rally herds us closer to a wash out. It has been too long since we had a flood of fear drowning us. My intention is to sit on my 20% cash position and watch things closely, rather than give in to that same that has hindered us for so long.

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Well, CCJ reported earnings and the stock is getting the homo hammer, off 6% on the open (7% on completion of this post). Yesterday’s price ramp is all gone, and whichever trolls were pushing that purchase are now a pool of putrefaction.

The problem with CCJ is this: if you believe that $0.21 quarters are the new normal, this stock is ridiculously expensive. We’re talking somewhere between 20-30X earnings expensive. To rectify that, you’d have to bring CCJ’s price down. A lot.

CCJ would need to be a $13 stock to justify this pricing with the earnings they’ve been reporting.

But here’s the thing. They’ve been reporting these earnings for two years now.

So the real issue is that the stock market is a medium of instant gratification. People want to make money. And they want to make money right now. There is no patience to wait for developments, or to stick out a rough patch. That’s the entire thesis behind buying CCJ is the first place.

Now, I’ve read their release, and I feel the developments were good. CCJ is taking their foot off the pedal on projects. They are forcing the economics to work. And they’re big enough to affect uranium prices.

Now, a reactor only has to refuel once every few years. So CCJ has to be calm and wait. They can get higher prices by one of two means – Wall Street can accommodate them with higher pricing, or they can force higher pricing (they’re something crazy like 20% of global production, on their own). Uranium prices ARE going higher. It’s a matter of when, not if.

That’s what’s happening here, I think. Cameco is intentionally dropping their revenues, with the goal of increasing spot price, which will make the economics of their new mines work which will lead to higher sales volumes and superior pricing. They have the weight to pull it off.

Now, the second point I want to address is their assessment of global demand by 2021. I feel it’s conservative.

For instance, it includes such projections as assuming that net reactors in Europe decrease by 3 over the next 10 years.

Not going to happen.

To assume that, you’d have to take Germany at their word when they say they intend to close down all their nuclear plants. But this same Germany just shuttered any new development of wind energy (throwing in the towel). Solar is next. So what’s taking nuclear’s place? Natural gas? Yeah, Russia would love that – natty is expensive enough in Europe as it is.

Coal? Oil? There’s only so many places the load displacement can come from. Germany’s going to cave, just like Japan is in the process of caving now.

Now, looking at CCJ’s gross profits and sales volumes, it looks like they have a cost of $30 per pound of uranium produced (before expense cuts, which CCJ says they’re looking into). So let’s say that they can push uranium prices back to $50. That would increase their revenues by 43% by itself. Now you’re talking earnings closer to $0.30, putting the company at a more reasonable 15X earnings.

If they can get uranium back to $55, their earnings are going to blow out by 78%.

If uranium hits $60, they’re looking at a 114% increase in earnings. It’s worth noting that $60 is the long term delivery price of uranium right now (Ux LT 308); it’s only the spot price that’s really hemorrhaging – the long term price (which is used for multi-year contracts) has floored at the $60 price.

And it’s here that Cameco looks cheap. This is the situation where I look at CCJ and say, “this company is going back to $27 a share”.

But I don’t think the long term price of $60 is fair. I think the price is going higher.

The long term price of uranium in 2009 was over $90. The spot price was right around $50. If Cameco can force the spot to $60 and start locking in long term contracts for $90, you’re golden. In this situation, you’re talking about Cameco going for $40 to $50 a share.

And I think it’s totally feasible. The supply and demand aren’t matching up here. The expectations for weaning off nuclear energy are just too rosy, and the price is way too low, even if no new reactors come on line. We don’t have enough fuel right now – higher prices are warranted to expand production.

That is the only thesis for owning CCJ right now. But it’s a good one.

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BAS is off 4% this morning on earnings which were, in my opinion, both very bad and very well known. After reviewing the case, I broke my own rule and increased the position by 25% around $10.80, slipping into the old habit of borrowing money to bet on prosperity.

But just a few percent so not too badly…

This isn’t some kind of shock here, like with Apple. We’ve known the entire gas well service sector was sucking wind for 8 months now.

BAS took the hits and issued more bad guidance, but that’s no reason to take them at their word and sell – because the stock is dirt cheap.

Please, come in further and I’ll get out of this chair and show you.

You see, the troubles in BAS have been industry wide. The management of BAS admits personally that they were suckered into the surge in demand for gas drilling. And at that time, so were dozens of new competitors who entered the market trying to get a slice of the pie.

And right around that same time, natural gas prices went into a total tail spin, forcing well owners to curtail spending and leaving all these new business out to dry.

The results have been predictable, really. The companies all slammed into a barrier as hard as these stone walls you see around you.

Thus, utilization rates for the services firms have been plunging, and in order to try and stay in business, margins have come under intensive pressure.

The company has planned for more of this sort of action in guidance, for the fourth quarter of 2012, and the first quarter of 2013.

But, here’s where I’m intrigued in continuing to buy and hold BAS.

For starters, I think that the energy revolution here in the US is just getting started. I think politicians on both sides of the aisle are going to foster this growth for a myriad of reasons, and I think alternative energy sources, like nuclear or oil, are pricey enough to keep the natural gas revolution humming.

So the trend and development is intact.

And, when I was looking through the space, what I noticed was that BAS’ peers are really total garbage. I had to LOOK to find a company that had any cash on their books. BAS has enough to run their operations on no revenue for a third of a year. So BAS has the chickenpox, but these new competitors aren’t quite up with their antibody game, if you follow 14th century disease proliferation references.

So lots of BAS’ competition, which has really been putting the stress on their profit margins, is about to go away, in my opinion.

Which brings us finally to natural gas prices. They’ve been going up.

Now, I don’t know if the natural gas pricing recovery is legitimate, or if it’s merely a product of some speculators who haven’t been respectful of the storage issues that were causing the problems. But I do know higher natural gas prices can’t hurt to coax some money back into well exploration and development.

So, I see a situation where BAS has caught a cold, and for that the markets are pricing in $0.16 quarters for eternity.

As I look out this window, I can see clear skies on the horizon. I think this ship turns back around sometime next year – maybe the year after that.

And in the meantime, BAS will just have to bide their time by buying out some key competition and watching the others go under.

If BAS can manage to average $0.25 a quarter over the next year or so, the immediate issues notwithstanding, this company is going to $18. I think that’s reasonable. They’ve already made more than that in the first 9 months of 2012. This is a rut, not a canyon.

Now get the door while I put on my coat. I’m out for the day.

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I’ve been holding CCJ basically since that reactor went critical in Japan. In fact, the only reason I bothered to purchase CCJ was BECAUSE of the reactor.

As an observation, in the face of natural disasters, people are horrible at honestly judging a situation. They ALWAYS skew to the pessimistic, end-of-the-world viewpoint. And especially with radiation, where the radiation level does not even determine health risks so much as radiation-time, people get goofy.

Case in point: I say to you, “you’ve been exposed to ‘high’ levels of radiation for a few hours.” Let’s suppose that “high” is around the range where death becomes 50/50 according to statistical observation. Rank the following outcomes in terms of likelihood: Death, cancer, sickness – no cancer, and no impact.

Most people, upon freaking out at this statement, would immediately order these outcomes in terms of the fear they have to them – death is most likely, followed by them developing a cancer, followed by them only getting sick, and finally leading off with them scraping by unscathed.

In reality, this is completely wrong.

When exposed to high levels of radiation, the most likely outcome is cell death; since we’ve already specified 50/50 chance of mortality, this is the highest outcome (as all others must fit inside 100% probability), followed by sickness without cancer (survivable cell death), and finally followed by no impact occurring.

The likelihood of developing cancer from 1 hour of exposure at any magnitude of radiation remains effectively the same – zero (this is not to be confused with the implications of absorbing radiating materials into your body, which is why unprotected exposure to radioactive materials is frequently associated with cancers).

This is a good example of panic creating opportunities. The fact that none of the Japanese workers have died from radiation is indication that they will be alright and a reminder that nuclear energy, while complex and potentially dangerous, can be managed safely.

Other examples include the Macondo well in the Gulf of Mexico, the threat of an Iranian blockade of the Hormuz Straight, the impact of peak oil on net global oil supplies, the relevance of the Y2K bug to global finance, etcetera.

Now, I will demonstrate first hand again the kinds of profits that can be made by keeping a level head when “freaking out” is the cool thing to do.

You see, CCJ’s price has been lackluster of late, to say the least. Yet, I continue to hold it after purchasing logarithmic intervals from the entire spread of $29 all the way down to $17. It comprises an enormous portion of my allocations (just under 20%).

But that is about to change.

In a matter of months, Russian recycled nuclear warheads will stop entering the marketplace as fuel. At such point, current uranium production is insufficient to maintain current fuel demands of all global reactors.

And the number of those reactors is increasing – not decreasing.

Germany’s promise to switch from nuclear fuel to alternative energy sources is weak. They have no chance of accomplishing this…nadda, zilch, zero. The technology does not even exist is terms that could make this possible, at this time.

And Japan will not be decommissioning any of their own reactors, despite public mood on the subject.

The reason they cannot do this is China.

Japan is an island nation with few natural resources. The majority of their consumption comes from abroad. The whole reason they went nuclear to begin with was to create a quasi-self-sufficient power grid for the country. The major catalyst for that choice was fear of China’s naval capacity.

Your standard nuclear plant can run for upwards of 500 full power days before needing to reshuffle the fuel rods. That’s a year and a half of power, without fear of supply disruption.

If Japan were to start converting away from nuclear, it would expose itself to two risks it currently doesn’t have: the first is daily fluctuations in the price of fuel (all of which it must import), and second, the risk that China tries to blockade their supply routes.

If Japan made the switch, and China ever decided to interfere with them, then they would have literally a few months to respond before watching their entire grid fault out. Nuclear gives them options to respond to military provocations – as the Chinese have so kindly reminded them of.

Uranium is set to soar, and CCJ is the biggest beneficiary. By this time next year, I will be insufferably gloating.

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As the market is off a whopping fraction of a percent, commentators are literally soiling themselves on live television, trying to time the next selloff.

Oil reversed yesterday – to a flurry of publications informing us that the move higher is over with.

Bond analysts are flipping out about Europe.

Romney made some comment most everyone I hang out with agrees with – half of all American’s are lazy tits with zero self-worth – and now a few ancient and withered CNN “journalists” are creaming their pants insisting Obama now somehow has this election in the bag.

And China is thinking of crushing Japan because of some island that might have oil rights.

Folks, this is obviously a drama day. I’m checking my brain out.

Do you understand insignificant this selloff is?

Do you get how high all commodities ramped over the last three weeks as the QE announcement was obviously leaked?

Do you see that European bond yields are still lower than they’ve been all year?

Do you understand that CNN journalists all dorm together in a crawl space and haven’t made a correct prediction in the last 15 years? That the polls coming out have fluctuated consistently by 3% or more, leaving Obama and Romney (the guy supposedly nobody likes) in a virtual tie?

Do you get that Japan has nukes too?

Seriously, this is ridiculous. I’m closing the 9th floor for business early today. My things are packed. I’m closing the door behind me – the lights are flipped off as my hand slides quickly out before the latch locks tight.

Today is just too stupid to get involved with. I’ll see you tomorrow.

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