The S&A Digest: The airlines go bust, again

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The airlines go bust, again... Running out of oil... Running out of rice... Running out of coal... Banning exports to America... How to sell short...

The poor airlines. If there's a worse business in the world, it doesn't come quickly to mind. Warren Buffett has famously suggested if someone had murdered the Wright brothers before their inaugural flight, it would have done investors a big favor. And so, here they go again, wiped out this time by shockingly higher fuel costs. Delta Air Lines, the country's third-largest carrier, lost $6.39 billion, or $16.15 per share, this quarter. But Delta is only a $2 billion company trading for $6.77 a share.

Commodities of all stripes continue to soar, for the simple reason that it's a lot easier to print money to bail out bankers than it is to produce oil, rice, or gold. Ali al- Naimi, Saudi's oil minister said, 'Limited capacity along the entire supply chain is the real source of current global supply tightness and represents the greatest threat to ensuring adequate energy to fuel future economic growth.' Al-Naimi says the world needs more infrastructure investment to find new oil wells. Saudi Arabia is the third major oil-producing nation to warn of shortages. This month, a Russian oil executive announced his country's oil production has peaked, and Nigeria claimed its output may fall by one-third due to under-investment. One thing is for sure: Americans are going to see their standard of living fall dramatically as prices for energy continue to rise. And no amount of solar-panel rebates is going to change this harsh fact.

Alberta, Canada, is one area with sufficient energy supplies. Alberta has a patch of land the size of Florida containing more oil than all of the Middle Eastern countries combined. But the oil is mixed with dirt, and harder to process. But with oil at $120, it is worth trying to sort the dirt from the oil. Canadians will invest $22.2 billion over three years on Alberta infrastructure. Most of this investment will relate to natural gas, which is becoming the most important fuel source in the region. Matt Badiali noticed the Alberta trend early and has several recommendations in his S&A Oil Report portfolio with operations in the region. To learn more about the S&A Oil Report and profit from $120 oil, click here...

Another easy way to profit on energy: Go long coal. China only has enough coal for 12 days of consumption. Some densely populated areas of the country have less than a week's supply. Coal fuels 70% of China's energy. The China Electricity Regulatory Commission reports the shortages are 'multidimensional' without elaborating.

Believe it or not, even in America, grocery stores are beginning to restrict the amount of rice customers are allowed to buy. Sam's Club will limit sales of jasmine, basmati, and long-grain white rices to four bags per customer visit.

Are we really running out of rice? Of course not. As with oil, the scarcity is caused by political blundering. India and Vietnam have banned exports in the hope of reducing domestic prices and inflation. While this might cause a temporary glut of rice on those markets, it also discourages farmers from planting more rice, which will inevitably make the situation much, much worse.

The Great Depression of the 1930s was caused, at least in part, by the Smoot-Hawley tariff, which essentially banned imports to the United States by imposing a stiff import tax. As a result, the amount of dollars leaving the United States was greatly reduced, making it impossible for foreign borrowers to earn enough dollars to repay their debts. Foreign banks began to fail, and a worldwide depression ensued. Back then, the basic cause of the trouble was too little trade with America and too few dollars around the globe. Today, of course, the problem is the exact opposite. America keeps sending too many dollars overseas, stoking inflation all around the world. The political solution: Ban exports to the U.S. It will be interesting to see what unexpected problems this causes...

New highs: Plains Exploration (PXP), Pioneer Drilling (PDC), International Coal Group (ICO), StatoilHydro ASA (STO), Occidental Petroleum (OXY), XTO Energy (XTO).

In the mailbag... The accusations have returned. We're inventing currencies, ignoring our subscribers... and spewing evil advertising. Shame on us. Send your comments here: feedback@stansberryresearch.com.

"You tell us to go short on xyz, and it makes sense to me the way you rationalize it. but I don't know how to go short. What action specifically is needed? Do I buy a call, put, or sell one? What is the meaning of going short and going long? Please send me an e-mail answer. Thanks. Incidently, I appreciate all the good advice but wish you would cut the hype by 50%. It would be appreciated by most subscribers." – Paid-up subscriber B. Young

Porter comment: Going "short" and "long" simply refers to the direction of the trade. You're short if you expect a stock's price to fall. You're long if you expect the price to rise. To be short, you might buy a put option, but you don't have to. A less volatile way to be short is to simply short sell the stock, which, from a volatility standpoint, is exactly like buying a stock. The difference is, rather than buying the shares, you're borrowing the shares so you can immediately sell them. Short selling a stock is no more difficult than buying it, in most cases. Speak to your broker about how to execute the trade. (Online discount brokers typically make it very easy to short sell stocks.)

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"Ian's chart (The US Dollar is Cheap vs. the Euro) isn't right. The chart goes back to 1973 but if I remember correctly, the euro wasn't created until 1999 and wasn't available to us 'regular folks' until a couple of years later. Am I missing something?" – Paid-up subscriber Bruce

Porter comment: Prior to the introduction of the euro, there was a basket of European currencies whose exchange rates could be combined to create a synthetic European currency.

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Porter comment: Marti... you've got it all wrong... We received a question about the "S&A Report." Not The S&A Digest. Given that the name of our publication is at the very top of the page, I honestly didn't know what the woman was talking about. (We frequently receive criticism about investments we've never recommended and letters we've never published.)

While I couldn't respond to the criticism about the S&A Report, which I don't believe exists, I did respond to the allegation that we do business in an "underhanded" manner, which is patently absurd. We have been in business for nearly 10 years. Despite having hundreds of thousands of customers in more than 100 different countries, we have never had a serious dispute with any subscriber, employee, or partner. The ethics of our business are absolutely clear-cut: We produce first-class research in a first-class way. We stand behind the quality of our work with a 100% satisfaction guarantee.

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Regards,

Porter Stansberry

Baltimore, Maryland

April 23, 2008

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