Gartman: Gold Has Hit Low; Oil Hasn’t

Dennis Gartman is the man behind The Gartman Letter, a daily newsletter discussing global capital markets. He is also a panelist at the upcoming Inside ETFs conference, where he will be discussing emerging markets. ETF.com recently caught up with Gartman to discuss a host of financial market topics, including the recent volatility in commodities and junk bonds.

ETF.com: Natural gas has been absolutely crushed, with prices trading at 16-year lows. Is this sustainable?
Gartman: They can still produce from some of the most productive wells. They can produce natgas at $1.50/mmbtu and do it at breakeven. When you get down to these levels, people have to produce just to maintain cash flow. Is it sustainable? No. Will natgas be $2 or less two years from now? Probably not. But will it be less than $2 six months from now? Probably so.

ETF.com: The other energy commodity that's in all the headlines is oil. Are you still bearish long term? And what do you think about the short-term price action with prices moving below $35 on WTI earlier this week?

Gartman: [Monday] might have marked a short-term interim and reasonably important low that may allow crude to bounce back to $40 or $41 a barrel. But that's as high as they'll be able to take it.

You have so much that has been drilled for and capped. EOG Resources, for example, has 300 wells that it’s drilled in the Bakken, in the Permian and in the Marcellus Shale. It’s drilled them; it’s capped them. But it's already spent the money to have them drilled. Any time you get back to $40, they'll uncap those wells because there's cash flow to be gotten.

Monday's low might last for a month or two, but can you get front-month WTI above 40? I doubt it.

ETF.com: Do you think we'll see prices in the $20's in this down cycle?

Gartman: A year from now, we could be down into the $20s; that's actually quite probable. Look at Western Canadian Select, a grade of oil that for many years tended to trade at about a $5 discount to WTI. Western Canadian Select is at $13 a barrel right now.

ETF.com: Outside of energy, we’re seeing big declines in commodities in general. Is this bust in its final stages?

Gartman: Except for crude oil, I think we've seen the lows as far as the grain markets are concerned. We probably are seeing the lows as far as cotton is concerned. And we've probably seen the low for the softs like sugar, cocoa, coffee, etc. The great bust is probably behind us.

Keep an eye on what gold is doing. That's probably the greatest barometer of all. They keep trying to break it down. We are four years and one month into a bear market, and they keep trying to break spot gold under $1,050, but it doesn't seem to want to break under that. My suspicion is that we've seen the lows in gold also.

ETF.com: Do you have an opinion on the junk bond turmoil that we're seeing? Is there a crisis brewing there?

Gartman: It's going to get worse. When I write my rules of trading every year on the Friday after Thanksgiving, there are two rules out of the 18 that really are important. The most important is: Do more of that which is working, and less of that which is not. But the one that is the most fun is: There is never just one cockroach.

Whenever there's a problem, there's another problem. Whenever there's another problem, there's usually another problem. When a company issues a warning on earnings, rest assured that there will be more warnings on earnings, and earnings will fall.

When one company in biotech has a problem, rest assured that another is going to follow. When one steel company says its earnings are weak, rest assured that the next steel company is going to say the same thing. There's never just one cockroach; there's always more.

That's happening in the junk bond market. Third Avenue was the first to make its problems known, and then put restrictions on what you can't sell. If you're an owner of Third Avenue, what are you going to do? Well, you can't sell your Third Avenue holdings, so you have to sell something else.

Art Cashin has a great line that is applicable at this sort of time: "Sometimes you can't sell what you want; you have to sell what you can."

ETF.com: The stock market hasn't gone anywhere this year, though we've seen a lot of volatility. You've been a bull on U.S. stocks for many years. What's your outlook now?

Gartman: I'm neutral. The best thing to do is to go to the sidelines, say thank you and let other people trade.

ETF.com: Do you think the Fed did the right thing by hiking interest rates?
Gartman: They had no choice but to raise rates. They've signaled it so often that if they didn't, they would lose any and all remaining credibility.

We'll have one or two more rate increases next year, but that's probably as much as we'll get. At best, they’ll take the fed funds rate late next year to less than 1%.

That said, they should have begun raising rates two years ago. They should have already had the overnight Fed funds rate at 2.5%. They made a mistake in not doing so, and now they're stuck.

ETF.com: Do you think they're behind the curve now because they haven't moved for so long?
Gartman: Absolutely.

ETF.com: Are there any areas you're optimistic about?

Gartman: Not really. I love owning crude oil tankers, but that's about the only thing that makes fundamental sense to me at this point. You can own tanker stocks, but other than that, there's nothing I find compelling.

ETF.com: What keeps you up at night?
Gartman: One is geopolitical risk. We probably have enemies within the country already. Though it's nothing compared to what the Europeans have to deal with. We at least have two oceans to protect us; they don't have oceans to protect them.

My other concern is about the electrical grid in the United States. I'm concerned about potential hacking into and closing down of the grid. That's my real fear.

Editor's Note: ETFs related to Gartman's views include the Dow Jones-UBS Coffee ETN (JO | C-94), the Dow Jones-UBS Sugar Subindex Total Return ETN (SGG | C-94), the Dow Jones-UBS Cocoa Total Return Sub-Index ETN (NIB | C-96), the Dow Jones-UBS Cotton Total Return Sub-Index ETN (BAL | C-96) and the Guggenheim Shipping ETF (SEA | C-57).

Contact Sumit Roy at [email protected].