Some good employment news

and what it leads to...

There is a sale going on today. Mr Market is giving us an opportunity to load up. The primary reason for the market’s reaction today was the ADP employment report. The ADP employment report showed significant gains. The 568K increase in jobs was well higher than the 428K that were expected.

Most of the jobs created were in the leisure and hospitality sector (266K); followed by education and health (66K); professional and business (61K); trade, transportation, and utilities (54K). Manufacturing (49K) and construction (46K) also added to the bottom line number.

This is the most workers hired in three months. It has caused the market to fret over renewed concerns that the Fed’s taper might make a difference. Just last week we had a similar story. At that time it was the Fed officials talking up the taper.

This time around it is good employment news. Since the Fed has been hyper-focused on timing the taper after “substantial further progress” was made, the news began to demand what that phrase meant. Powell let everyone know that it was employment that they were talking about. Now when we get good employment report figures, traders are reminded that the taper is coming. This is what has led to today’s selloff.

One opportunity in particular looks especially juicy. That is natural gas.

Natural gas has been an all-star since the end of August but it has been kicking butt since early spring. It has gotten very volatile as of late. Also, the volume being traded has increased greatly.

One reason that this looks like a good opportunity to mean is that European natural gas prices have gone parabolic.

Prior to 2021, there was a profitable arbitrage trade that one could make between European and US gas prices. This pair would typically move in unison. However, there were times when they would separate. Savvy traders would short the one that went up and buy the one that was low. This would net them a tidy profit when the prices came back together. Unfortunately, something broke this trade at the beginning of the year.

Euro gas has rocketed higher. Those that had shorted it and bought US gas are now in a tight spot. This story was picked up by Reuters two days ago. Reuters reported that these commodity trading firms, who had put the trade on expecting to profit, are looking at margin calls instead. These guys are being told by their brokers to deposit “hundreds of millions of dollars” to cover their exposure. Some are trying to stick with the trade but it is tying up a lot of capital.

Earlier this morning, Zerohedge reported that European gas prices exploded 40% higher overnight. My guess is one of the commodity traders pulled the plug on the trade. It has sent European gas higher and US gas lower. This is because someone had to cover their Euro gas shorts and sell the US gas stocks. I would not be surprised if a smaller commodity trading house went under. This isn’t the first time a fund has gone broke trading natural gas. James Cordier, the head trader of OptionSellers.com, became infamous after blowing up his fund when he was trading natural gas options. At the time, it sent the price of natural gas soaring. This time around traders will have to cover their Euro gas shorts and sell their US gas stocks. This will give opportunities to buy US gas after forced selling. This ride is far from over and Mr Market is giving us a great opportunity. US shale drillers and UNG are both good ways to play this.