The bull is back...

The bull is back... Barton bullish (sort of)... Greek bondholders: 'We'll take 30 cents'... Why Greece is toast... Natural gas wealth creation... Congress proves it's financially illiterate...

 It's a bull market... The stock market is up 20% from the lows of early October. Many believe when the market rises 20%, it's officially a bull market.

Lots of folks think this is meaningful. I'm not really sure how they come by that insight, but there it is. To me, the more expensive any asset gets, the less attractive it becomes. If stocks are a good deal with the S&P 500 just below 1,100 (like they were back in early October), given the same approximate level of earnings, a price above 1,300 is less attractive. I can barely fathom why anyone is more bullish now than he was a month or two ago.

But that's not how most so-called "investors" think. Most people wait to see which way the herd moves... then they move that way, too. The American Association of Individual Investors Sentiment Survey is like a satellite photograph of the herd as it moves across the financial landscape. Through last Wednesday, the survey shows that more than 47% of investors questioned are bullish. Less than 24% are bearish. Over the long term, investors average 39% bullish and 30% bearish. So right now, sentiment is at extreme levels.

 It's not just the small fry who is bullish. Author and Wall Street legend Barton Biggs – who founded the money-management firm Traxis Partners ($1.4 billion in assets under management) – says he's "terrified" that having 65% of his money long stocks isn't enough if the market keeps rising. Biggs was 80% long in November, so he's not as long now. And yes, he also claims to be terrified he's overexposed if Europe blows up. If I were his client, I wouldn't be filled with confidence at hearing how terrified he is that the market will go up or down.

But maybe Traxis' clients won't do so badly. I doubt they'll do as badly as Greek government bondholders are going to do...

 Right now, Greece is negotiating with its major bondholders to accept some fraction of the money they're owed to retire those debts. The idea is for the government and bondholders to come to an agreement, rather than for Greece to default and force the issue. That's what everybody would love to see. That would be like saying, "It's bad, but we worked it out. So it's not the end of the world."

Charles Dallara, the managing director of the Institute of International Finance – an association of more than 350 global financial institutions – is negotiating on behalf of the bondholders. Dallara says the biggest loss the bondholders are prepared to accept is in the neighborhood of 65%-70%. We don't know what the government wants them to take. But it can't be much if they're volunteering to give up 70% of their investment.

 Greece has its work cut out for it. To get a 130 billion-euro rescue package, it has to make a deal with Greek bondholders AND make substantial spending cuts. Greece cut its budget by 2 billion euro in 2011 and has to cut another 7 billion this year. It needs more and bigger cuts in wages, pensions, and health care spending. Progress has been tiny... Yannis Stournaras, of Athens-based financial research think tank IOVE, says "nothing substantive" has been done since Greece ran to the European Union and the International Monetary Fund 18 months ago.

Greece will default. The only thing we don't know yet is precisely what form the default will take. I figure the market knows this. On the day it becomes obvious enough to be reported in the press as an historical event, the market will have already digested it and moved on.

Think of it this way. If bondholders will voluntarily accept a 70% loss and there's still a big chance that won't be big enough... hasn't the Greek government already admitted the bonds are worthless? If that deal was sufficient, it would've been snapped right up, if for no other reason than to restore the market's confidence and get Greece much closer to that 130 billion euro of bailout money. But the 70%-loss scenario wasn't snatched up. I have to conclude Greece is headed for default, one way or another.

 We've written a lot about how new drilling technologies have led to a boom in U.S. natural gas supplies... and how the flood of resources is transforming the domestic energy and manufacturing sectors. This trend is at the heart of what I've termed the "American Industrial Renaissance."

In short, the new technologies have allowed industry to extract gas from shale rock formations. And the U.S. has huge gas deposits in shales. The Marcellus shale alone is half the size of Spain. And it sits between two other large shale formations, the Utica shale and the Upper Devonian shale play – neither of which have been explored much.

As a result of these huge new supplies, the price of natural gas is coming down. To profit in this environment, natural gas producers are cutting their costs... My favorite natural gas stock produces the stuff for much less than $1 per thousand cubic feet (mcf). That's all-in costs... And that's a huge competitive advantage when the best its peers can do is nearly $6 per mcf.

This company is well on its way to becoming a major natural gas producer in North America. If you want to discover what real wealth creation in natural resources is all about, read the September 2011 issue of Extreme Value. To get access, click here.

 In addition to vast new natural gas deposits, massive new oil resources are also being exploited all over the North American continent. Thanks to the oil-rich Bakken shale within its borders, North Dakota is on pace to produce about as much oil as Ecuador, a member of the OPEC oil cartel. The Eagle Ford shale in south Texas is shaping to become the largest oil find in U.S. history. We already produce so much oil in the U.S. that we've started exporting the stuff. It's only a matter of time before big new supplies reduce the price of oil and gasoline.

But Congress knows nothing of the marketplace. It deals in politics only, not economic fact. So six Democrats from the House of Representatives have proposed a new "Reasonable Profits Board," which would apply a windfall-profits tax as high as 100% on oil and gasoline profits. Naturally, the proposal contains no indication of what would constitute a "reasonable" profit. This issue has been in the air for most of my life. I was born in 1961 and vividly remember sitting in lines at the gas station in the morning on my way to school, when gasoline was rationed.

 You HAVE to be a politician to be this stupid. Selling gasoline is one of the crappiest, lowest-margin businesses around. If you don't attach a convenience store to it, it's generally not worth doing.

And refining oil isn't much better... I just looked up a couple of refining stocks. Tesoro made losses three times in 10 years and reported net margins of less than 2% three times. Valero really knocked the cover off the ball with only two losing years out of 10 and three years of sub-2% net margins. And when they're firing on all cylinders, net margins rose to more than 5% once at Valero (in 2006) and more than 4% once at Tesoro (also 2006). I never recommend refiners in my newsletters for the same reason I don't recommend airlines. They're just not profitable on a consistent basis.

But Congress says they're making too much money. If the legislators wanted to guarantee a reasonable profit from selling oil and gasoline, they wouldn't tax it. They'd subsidize it. Instead, they're running around trying to get votes by putting refineries and gasoline stations out of business, claiming they make too much money.

 What about people who lend out your bank deposits (10 times over) and forbid Wal-Mart from entering their business because the retailer's model would only benefit customers, not cronies? Are they making too much money?

What about people who get protection and money from the government to keep the national price of sugar double the global price? Are they making too much money?

What about people who get money from the government to grow corn so they can do the most expensive possible thing with it – turn it into ethanol? Are they making too much money?

None of those people are making too much money because Komrade Obama and his ilk love them. But people who sell gasoline... one of the skinniest margins on Earth... a product without which life as we know it comes to a grinding halt... they're making too much money.

The politicians are only doing what any rational person expects of them. They're trying to make good sound bites for the voting masses, as if the political process had all the depth and meaning of a Disney movie trailer. "Coming soon: Hope, Change, and Reasonable Profits!"

 Last, but not least... Bull market junkies take note of the new highs list for Friday's close. It's almost all World Dominators (except Enterprise Products Partners). These stocks have been the focus of my research for years... If you were listening (and buying), you're doing much better than most folks today...

New highs (as of 1/20/12): Enterprise Products Partners (EPD), McDonald's (MCD), Intel (INTC), Wal-Mart (WMT), and Microsoft (MSFT).

 We'd love to hear what stocks you're buying... if any at all. Send us a short e-mail telling us your favorite three stocks right now. We'd love to see what's getting you excited. And we know somebody is excited, because the market is 20% off its October lows. Write us at feedback@stansberryresearch.com.

 "I'm confused and hope you can help me sort this out. You and many of your colleagues often say things like 'the Federal Reserve has exercised its considerable power to print money.' But when I look at the responsibilities of the U.S. Treasury I find 'The Treasury prints and mints all paper currency and coins in circulation through the Bureau of Engraving and Printing and the United States Mint.' The well-known Bernanke statement about having a printing press is also frequently referenced.

"Can you help me follow the money? How does it get from the Treasury to the Fed if the latter is supposedly a 'private' institution?" – Paid-up subscriber L.R.

Ferris comment: That's physical dollars (and coins), which make up a relatively small part of our money. Most of our money is "checkbook" money. It only exists in the form of the electronics on the screen at a bank. (That's highly simplified for illustration purposes.) The Federal Reserve is the real money-printing machine.

To get a small lesson in this, check out the Fed's "factors affecting reserve balances" from September 3, 2008 through December 31, 2008. The Fed's outstanding credit totaled less than $900 billion in September, but more than $2 trillion in December. Where'd the money come from? The Fed simply printed it into existence. But it didn't use a literal printing press. It used its computers. Wouldn't it be nice if you could go to your bank account, enter "$1,000,000," and spend $1 million on anything you want? Well, that's essentially what the Federal Reserve does.

 "Your report needs the aid of an economist. I forgive your ignorance – but I'll be terse here. I don't hate anybody -- it just sounds that way sometimes.

"You failed to mention The US dollar is GAINING against the Euro.

"You failed to mention The USA ran a SURPLUS budget – until BUSH and the Conservatives destroyed it with tax cuts for the rich during a 2 $Trillion War of Choice

"You failed to mention Bush and the CONSERVATIVES refused to enforce existing regulations on Wall street – ending in the Great Recession.

"You failed to mention LIBERALS H-A-D to step in and implement Deficit spending – as all governments must do – as spenders of last resort. Thank you Conservatives for further destroying our budget surplus.

"You failed to mention LIBERALS are the only reason we avoided a GREAT DEPRESSION. I'll take deficits over a great depression, anyday.

"Economist understand monetary policy – you? – not so much.

"If you really love America, you'll recant this negative doomsday unfounded diatribe in favor of the whole Truth and the hope of a People's agenda.

"Your utter refusal to even mention the facts of how the CONSERVATIVES destroyed our economy says everything about you.

"'Socialism' saved your white ass – and you don't even know it. Capitalism is every American's dream. Regulation (your 'Socialism') is our only hope of preserving Capitalism. Capitalism is inherently self-destructive. It MUST be regulated to preserve it. I hate 'cops' too – but try living without them.

"Where is your Tax policy? Will you cut taxes to ZERO now to save America? Explain that please. Your monetary theory has been discredited now. Fortunately, the 'Multiverse' theory allows for your hell to exist – somewhere. I'll be enjoying the blessings of a honest Government – for the people – elsewhere – in another Multiverse. Your wecomed there too.

"We literally create our own reality/multiverse. Please consider creating a better reality for yourself and stop dragging others into the pit you are digging. God has a better Universe for you and yours. Thank you God. Again, I forgive you, I'm not mad – just hopeful you get something from this. God bless you." – Paid-up subscriber Ron Pineda

Ferris comment: Thanks, Ron. Nice racist undertones. How typically liberal of you. Liberals love humanity from afar, but never take the risk of getting close to the people they claim to care about. As for your other points, I'm going to let them speak for themselves. After all, they don't say much about anything but your state of mind, and I figure anybody who agrees with you isn't worth conversing with on this topic...

 "Your honesty and candor in your Report Cards is, to say the least, refreshing. I subscribe to a couple of your publications with Retirement Millionaire being my favorite.

"Your report card has me thinking about getting a couple more, Retirement Trader and True Income. I was laid off after almost 25 years at the age of 61 and now know very well how living on a fixed income can be very challenging. Safety is critical and both Doc and Mike seem to fully understand this point. Keep up the good work but please improve the video infomercials. Thanks." – Paid-up subscriber Barry R. Sellick

Regards,

Dan Ferris

Medford, Oregon

January 23, 2012