Normally, predictions from a single market participant don't warrant too much attention from this blog. But McDonald predicted the subprime mortgage crisis (and the subsequent collapse of his old firm Lehman Brothers) two years before it happened. On "Talking Numbers" back in January, he correctly predicted Puerto Rico would have trouble selling debt. And very recently on TN, McDonald also predicted that the Russian stock market would rally. It did, and up until very recently, was among the top performing indexes in the world.
Now McDonald is making another contrarian call. He believes there's one market where sellers have sold as much as they can, creating an opening for buyers: natural gas.
"What we're seeing is a tremendous amount of capitulation," McDonald said. "We're seeing what I would call 'seller exhaustion.' We're getting very close to that period. And with the election coming up in the fall, we see substantial upside for natural gas as well as natural gas producers."
McDonald believes one of the biggest catalysts for Nat Gas will be the midterm elections for the U.S. congress.
"Right now we only have three LNG [liquefied natural gas] export facilities that are up and running," said McDonald. "If Republicans take the Senate, we feel strongly that number can go up by nine to 12 and the U.S. can become a true exporter of natural gas. And in that case, you're going to have much more in terms of export but also more pricing power to the upside."
McDonald is basing his election predictions on polls over the president's popularity. "If you look at presidential approval ratings and the impact on midterm elections in the Senate, Obama's rating, down at 40-41 [percent], is very powerful," he said. "In history, the other parties always picked up seats with an approval rating below 45 [percent]. So all the Republicans need is to pick up six seats in the Senate. And we think it's a very high probability that happens."
Based on his election outlook, McDonald sees the UNG, the ETF that tracks natural gas prices, as gaining a significant amount by early next year. "Right now on the UNG we are $21," he said. "We're expecting a move back up to $28 by, say, the first quarter of next year, and that would give you a return of 27 percent."
To see the full interview with Larry McDonald on what's next for natural gas and energy, watch the above video.