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A Drought That Just Won’t Die

On our Precision Profits editorial call earlier this week, Chris Orr and I chatted about California’s current drought, largely considered the worst one since the state began keeping records in the 1800s.

While California’s dry stretch is reaching desperate proportions — leaving crops desiccated and reservoirs drained — it is not exactly a new phenomenon, which is something I shared with you earlier this year.

Well, Californians are now waking up and realizing they need to make longer-term preparations, and this is exactly the sort of thing trend spotters like us want to be paying attention to.

Here’s Chris:

The Golden State’s water problems aren’t getting better anytime soon.

California’s Governor Jerry Brown finally ordered mandatory state-wide water restrictions two weeks ago. And now the state’s cities are turning to the Pacific Ocean and planned desalination plants to quench their thirst. The state is in its fourth year of drought and even though there was rain this winter, it wasn’t enough to bring meaningful relief. Just as I said in a January dispatch.

The desert areas of southeast California would need about six inches of rain in the next 12 months to halt the drought. The rest of the state needs up to 18 inches of rain, and the mountain areas need roughly 100 inches of snow. All told, that’s about 150% of the average amount that falls in a year.

To encourage water conservation, Governor Brown said that people need to realize that this drought is the new normal. However, as you know, there’s nothing new about it. The fact is that California regularly swings from deep droughts to deluges, cycling between the two every five to 15 years. Granted, this is the driest it has been since the Dust Bowl, but droughts have always been part of California’s climate. That’s why the state has more than 1,000 surface storage reservoirs.

Relief is coming eventually. I wrote about the Pacific Decadal Oscillation in the spring weather outlook and how it forces the jet stream to flow north of California, preventing rain from drenching the state. The current ocean temperature pattern associated with the PDO is showing signs that it will reverse during the next five years. When it reverses, the jet stream will take aim at the West Coast, slamming California with rain and mountain snow.

The changing PDO will start to affect the weather pattern next winter, bringing more rain and snow to the state. Rainfall and snowfall will be about 75% of the normal amount — which is about twice the amount we saw this past winter.

The complete reversal of the ocean temperature regime will take up to five years, but rainfall will increase during each rainy season between now and then. By the time 2020 rolls around, California will likely see rain and snow amounting to 200% to 400% above normal.

But, remember, this is a cycle. So if it continues, the next deep drought will start between 2025 and 2035. In a way, it’s as if the drought never really ends, it just takes breaks.

For this year at least, Californians better save up their water — they’re going to need it.

As I mentioned above, these are the types of patterns we want to keep an eye on. By paying attention to seasonal cycles, such as California’s déjà vu drought, and analyzing Wall Street, we’re able to turn trends into profits.

Now, before I sign off, I want to share an update on Cabela’s…

Cabela’s is Moving

Cabela’s (NYSE: CAB), our chain of outdoor recreation stores, was downgraded from neutral to sell by Goldman Sachs. This comes after investors pushed the stock to lofty valuations on expectations that were unreasonably high. And that is exactly why we bought put options in the first place. We are entering a weak period for the company, and our June puts position us to benefit.

The Street’s high expectations for Cabela’s performance stem from the company’s aggressive expansion plan. Goldman has raised concerns about it, stating that the plan will force Cabela’s into more direct competition with rivals and lead to the cannibalization of its existing stores. I completely agree. In fact, I believe selling pressure will return to the stock as it continues into its seasonally weak period. So while our position is underwater at the moment, I expect the downdraft to bring us profits ultimately. We have until June to see this play out.

As for the rest of our portfolio, our three other positions won’t expire until June or later in the fall, and they are pretty quiet for the time being. You can see how they are doing by clicking here.

Looking ahead, I have a new recommendation on my radar that I will likely send next week, so make sure to stay tuned. Chris is also putting together his hurricane forecast, which we plan to release within the next month. In the meantime, if you missed Chris’s severe-storm report, you can watch it here.

Until next time, good trading…

Jeff Opdyke
Editor, Precision Profits