Issue #30, Volume #2
You Can’t Power AI With Windmills
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| This is the start of the most important financial trend in the world… Ken Griffin’s Citadel makes a bold move into natural gas… You can’t power AI with windmills… Demand for LNG will soar as demand for electricity surges… A personal note from Porter… |
| A Personal Note From Porter – I hope you won’t mind a brief personal note… Next week my son (Seaton) turns 14, and it is also his school’s spring break. Like me, Seaton has a passion for fishing, so I’m taking him to Pinas Bay, Panama, to the most legendary marlin fishing lodge in the world, Tropic Star. There’s a good chance Seaton will get a shot at catching a huge (over 500-pound) black marlin, something that takes a lot of strength, skill, and determination. I don’t think he realizes how difficult it will be. But, whether that happens or not, I know these kinds of experiences and spending time with my sons is the greatest investment I can make as a father, which is my most important job. Why am I telling you about this? I’ve always believed that publishing information that our subscribers rely on when they put their capital at risk is very personal. When I write to you, it’s exactly the same as when I write to my father. I hope you notice the difference in the quality and thoroughness of our work. And because our service is deeply personal, I invite you to join me next week on my trip with my son. I’ll be posting videos and pictures of the trip and of our adventures on Instagram. You can follow me here. To be clear, there won’t be any investing advice offered via Instagram. But you will get to see a 14 year old learn some important lessons about being a good man. And you may learn more about me as a person and a father. Thank you very much for subscribing to Porter & Co. You’ve given all of us the opportunity to pursue our passion for finance and investing in a way that’s both challenging and rewarding. |
Hedge fund management company Citadel announced a $1.2 billion investment into natural gas today.
It bought Paloma Natural Gas, a relatively small (~140 billion cubic feet) Haynesville shale gas producer that’s well-positioned to sell into the growing global demand for U.S. LNG.
And that’s all most people will ever know about this deal.
But there is far more happening here.
This is the start of the most important financial trend in the world.
For you to really understand why this is so important, you must know a few things about Citadel.
Ken Griffin, Citadel’s founder, has been the smartest investor in the world for the last 40 years. He started doing quantitative trading in convertible bonds in his dorm room at Harvard in 1987. With this trading, you buy the bonds and short the stock, capturing the risk-free profits. (As we’ve tried to explain to investors for two decades now, most people would do a lot better with their own investing if they only bought bonds, not stocks. And that’s why I’m making corporate bonds the foundation of my Second Life.)
It’s possible, if you’re good at this kind of trading, to make ridiculous returns because you can apply a lot of leverage, boosting returns. And Ken was simply the best in the world at this strategy. Plus, he got lucky: he was heavily short stocks during the 1987 crash. He turned his initial capital (around $250,000) into $13 million by the time he graduated from Harvard.
His trading was genuinely extraordinary – so good that it caught the eye of the most sophisticated investors in the world at the time: Frank Meyer (Glenwood Capital) and Ed Thorp (Princeton Newport).
If you haven’t read Thorp’s book A Man For All Markets yet, you should.
Thorp helped Ken develop new mathematical models to build ever-more sophisticated strategies for bond arbitrage. They were far ahead of Wall Street in using computers and reams of data to gain an unbeatable advantage in the markets. And Ken absolutely crushed the markets. In just seven years, Ken turned his $13 million into over $1 billion.
At that scale, Griffin had to diversify into bigger, more liquid markets. But, at every step along the way, Griffin never entered a new market until he’d developed an edge using better data and better statistical models. Today, Citadel employs over 300 PhDs in computer science and data analytics. Their securities trading business (Citadel Securities) handles about 40% of all retail investor trades, giving them unmatched real-time access to market dynamics. That information powers their strategies at the hedge fund, which has produced 20% annualized returns since 1990, and more than $125 billion in profit. Today, Citadel is managing more than $60 billion.
Their move into physical commodities isn’t new. Ken started buying gas pipelines in 2014 to gain an edge in natural gas trading. But this deal – buying a producer – signals a much bigger commitment to energy.
Sebastian Barrack runs commodities at Citadel. Before joining Citadel in 2017, he spent 21 years at Macquarie Group, which is an Australian infrastructure giant. He built that firm’s entire physical commodity trading operation across Asia and Europe. The other key player in Citadel’s push into natural gas is Jay Rubenstein, who joined from Morgan Stanley in 2020.
These guys understand the real world of energy and physical commodities trading better than anyone else. With Citadel’s unbeatable data and analytics, they have an incredible edge.
And I can tell you exactly what their models are telling them: demand for American LNG is going soar as insatiable demand for electricity emerges. The spice must flow.
Just look at this chart:
And realize, we are still in the first inning.
With Europe facing a victorious Russia, it’s going to have to get serious about rebuilding its energy infrastructure, because it cannot hope to contain Russia while continuing to depend on its energy.
Likewise, all around the world people are going to suddenly realize you can’t power AI with windmills.
And prices for American natural gas are going to soar.
Chinese Issue New Financial Threat to America
Presented by Jim Rickards
The global economic war has arrived.
This announcement from China means they are set to implement massive tariffs on America any day now.
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Or are you going to sit on the sideline and become one of the victims in this new economic war?
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Three Things To Know Before We Go…
1. U.S. stocks enter correction territory. As of Thursday’s close, the S&P 500 recorded its fastest 10% drop since the COVID-19 outbreak in March 2020. (The Nasdaq is down 12%.) The broader index’s decline has erased $5.3 trillion in stock market value, with just over half of that from the Magnificent 7 technology stocks that have led the market higher in recent years. Historically, a 10% correction has led to a bear market (a decline of 20% or more) only 25% of the time. If the rapid drop is just the beginning, history shows there’s more pain ahead – with the average bear market lasting 338 days and resulting in a total decline of 33% from the peak.
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2. A bleak picture of consumer confidence. Despite Wednesday’s lower-than-expected inflation report, inflation still clocked in at 2.8% – well above the Fed’s 2% target. And inflation expectations are climbing. The University of Michigan’s one-year inflation-outlook survey surged in March from 4.3% to 4.9%, marking the third consecutive increase of 0.5 percentage points or more. Meanwhile, long-term inflation expectations rose to 3.9% in March, up from 3.5% in February – the largest month-over-month jump since 1993. Consumers are very concerned… this won’t end well.
3. An emphatic rise in policy uncertainty. Tariffs on, tariffs off. Government shutdown coming, government shutdown averted. The mercurial policies of U.S. President Donald Trump have led to the second-highest policy uncertainty levels in the U.S., according to the Economic Policy Uncertainty Index – which is calculated by looking at the number of news articles focused on economic uncertainty, the disparity of opinions among the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters, and other indicators. Except for a brief spike during the pandemic, February’s levels are the highest since the creation of the index in the 1980s. And of course… stocks don’t like uncertainty.
Porter & Co.’s Latest Recommendations
Last week in the Daily Journal, Distressed Investing senior analyst Marty Fridson explained his two approaches to investing in distressed equities: 1) simultaneously buying a company’s bond and stock as a way to get the bond’s downside protection and the stock’s upside potential, and 2) taking a profit on a company’s bond and investing the proceeds in the stock, which tend to rebound months after the bond.
It’s working: To date, the return on the equities portion of the Distressed Investing portfolio is 35%. And yesterday Marty and his team added another distressed equity to the portfolio, recommending shares of a company whose bond has appreciated 23% since being recommended in December 2023…
Porter recently shared a presentation about his own personal experience investing in distressed debt, showing exactly how to beat the stock market, by a wide margin, by using corporate bonds. You can watch it here, right now.
Also… In the latest The Big Secret On Wall Street, released yesterday, we added a new stock to the portfolio that’s following in the footsteps of one of Porter’s all-time favorite stocks – and no, it’s not The Hershey Company (HSY). This company’s shares are trading at a heavily discounted valuation after a series of missteps that it’s recovering from… but which investors don’t yet understand.
Porter Stansberry
Stevenson, MD
P.S. Gold hit a fresh all-time high yesterday.
It’s up 38% over the past year… a lot better than the S&P 500’s 7%.
For an asset that’s often dismissed as nothing more than “portfolio insurance”… that’s pretty amazing.
And even better… gold is also excellent insurance. Since the S&P 500 has fallen 10% from its recent highs, gold is actually at an all-time high.
What’s going on? Porter & Co.’s go-to source for insight on what’s happening with gold is Marin Katusa – a friend of Porter’s who’s one of the world’s premier experts on natural resources… and gold in particular.
Marin breaks down gold’s story – and whether now is still a good time to invest in it – in a new presentation… check it out here.
Please note: The investments in our “Porter & Co. Top Positions” should not be considered current recommendations. These positions are the best performers across our publications – and the securities listed may (or may not) be above the current buy-up-to price. To learn more, visit the current portfolio page of the relevant service, here. To gain access or to learn more about our current portfolios, call Lance James, our Director of Customer Care, at 888-610-8895 or internationally at +1 443-815-4447.