An Ayn Rand moment... 'Government investing'... Not just a river in Egypt... The only sure thing in the stock market... Oil and riots... Matt's "oil hoarding" play... Housing still weak...
Life in the good ol' U.S. of A. feels more and more every day like something out of an Ayn Rand novel...
Take, for example, the growing battle between public employee unions and taxpayers. On one side are the Randian parasites, the state employees who think you owe them a livelihood, full health benefits, and a stout retirement income. On the other side are the producers, the taxpayers who've had no voice in government for decades.
In Wisconsin, Ohio, Oklahoma, Indiana, and Tennessee, politicians (believe it or not) are trying to make desperately needed cuts to state budgets. But union leaders don't want the gravy train to stop. They like living off your taxes. They like having you guarantee them a comfy retirement. So they're mounting a $30 million campaign to stop budget cuts, which they've labeled "anti-labor measures."
Here's what I want to know: What happens if the unions win? Don't they understand the money isn't there? Don't they know you can't squeeze blood from a turnip? If your worldview requires a total denial of reality, maybe it's time to change worldviews.
Governments excel at stealing money… Not so much at making it. To fix the state's unfunded pension liabilities, ex-Illinois governor Rod Blagojevich once hatched a scheme to borrow $10 billion at 5% and earn 8% investing the money. But when he executed the plan, the return wasn't 8%. It was 3%.
Stunningly, Illinois is planning to do the same thing again. Only this time, the math doesn't work right off the bat. Illinois is planning to sell $3.7 billion of debt this week and use $2 billion in proceeds to fill the $40 billion hole in the teacher's pension system. Hmmm... $2 billion to fill a $40 billion hole? Something tells me this won't work.
Of course, denying reality is de rigueur in the stock market. For example, nobody really cares that OpenTable, the Internet restaurant reservation system, isn't worth close to 100 times its earnings. (Is any company?). OpenTable could sign up every reservation-taking restaurant on the planet, and it would still be way overvalued.
All the market losers think they'll be the lucky geniuses to get in and out with a fat profit before it all collapses. That's the gambler's mentality. It's the noise a loser creates in his mind to keep reality at bay.
Truth is, most individuals and the mutual-fund managers they trust will fail to match the market's return... From 2001 to 2010, the S&P 500 returned 1.7% per year... and most mutual funds and other investors didn't even make that much. I promise you, index-fund shops like Vanguard aren't going to point out that stock indexes can go nowhere for decades at a time. And with stocks trading for more than 20 times earnings, returns for the next 10 years look pretty dismal. But all is not lost...
The stock market does offer one sure thing: dividends. These cash payments are the only source of return Mr. Market can't take back. They are the only source of return that's never negative. Once you get the cash, it's yours.
Numerous studies show dividends offer your most reliable shot at making money in stocks. A study by well-known investor, entrepreneur, and researcher Rob Arnott, showed dividends beat inflation, earnings growth, and bull-market valuation increases. In other words, if you aren't mostly buying dividend-paying stocks, the odds are against you.
In the March 2011 issue of The 12% Letter, I've got more research showing that investors who don't earn dividends will lose their shirts this year and probably for the next 10 years. If you don't get The 12% Letter and want to find out about the easiest money in the stock market, click here.
Up until now the riots in Egypt and Tunisia have been essentially political events… They meant little for the larger global economy. But the civil unrest is spreading to "important" countries… ones that control the world's oil and food supplies. And when that happens, our already fragile economy will see commodity prices soar.
As you probably know by now, violence broke out in Libya (which is flanked by Egypt and Tunisia) over the weekend. Libya is the world's 18th-largest oil producer (pumping some 1.8 million barrels a day, or around 3% of the global daily output). It also sits atop Africa's largest oil reserves. The uncertainty sent oil prices soaring more than 9% to $94.08 a barrel. (They've since settled around $91.50 – still a 6% increase.)
To gain perspective on the situation, it's worth going over a few numbers…
According to the most recent data from the U.S. Energy Administration, Russia and Saudi Arabia are the world's largest oil exporters. Both ship out more than 7 million barrels per day. These two nations are the "indispensable producers."
After Russia and Saudi Arabia, the largest exporters are No. 3: Iran (2.5 million barrels), No. 4: United Arab Emirates (2.3 million barrels), and No. 5 Norway (2.1 million barrels). Libya comes in at No. 12, exporting 1.5 million barrels.
So what happens when riots break out in one of the top five oil producers? Oil prices will jump to more than $100 a barrel… And the situation is nearing in Iran, where protesters are taking to the streets, calling for the removal of Supreme Leader Ayatollah Ali Khamenei.
BP estimates global oil consumption is around 84 million barrels per day. Libya's 1.5 million barrels are at high risk of being curtailed. If you consider Iran's 2.5 million barrels or (less likely) Saudi Arabia's 7 million-plus barrels face some risk of being curtailed… you have more than 12% of global exports in focus. (This doesn't count the large exports coming from Kuwait, United Arab Emeriates, and Iraq).
Given the huge amount of global oil production coming from the unstable Middle East/North Africa region, it's no wonder the value of Canadian oil assets is surging. As our editor in chief, Brian Hunt, said at dinner last night, "We don't foresee any terrorist threats from the moose in Athabasca." S&A Resource Report recommendation Suncor is up 18% in the past month… and just hit a new 52-week high. Suncor is one of the major pure plays on Canadian oil.
S&A Resource Report editor Matt Badiali also has another Canadian oil sands play in his model portfolio. Almost no one knows about this stock. It's super-cheap… and it's just starting to break out. As Matt recently wrote:
| There is no exploration risk and little technical risk. It continues to trade as if oil prices are around $80 per barrel. It owns one of the simplest and safest oil businesses in the world. It's entirely focused in Canada... among the most stable countries in the world for resource businesses. All its assets are in one place... a giant asphalt sandbox. |
This stock is another "hoarding" play. Among his strategies in the Resource Report, Matt has been recommending companies that control the world's largest and best resource deposits. As commodity prices continue to surge, the value of these companies' reserves will soar. And it seems clear oil prices are going higher. Matt's latest recommendation is the safest way to play this trend. To learn more, click here…
On the subject of hoarding, another mega-cap resource company is buying shale gas properties… BHP Billiton, the world's largest mining company, will buy Chesapeake Energy's Fayetteville shale gas assets and some pipeline holdings for $4.75 billion in cash. The deal will increase BHP's gas reserves by 45%.
Last year, Royal Dutch Shell announced it would pay $4.7 billion for most of East Resources' shale gas assets. And in 2009, ExxonMobil paid $31 billion for XTO Energy, the largest natural gas producer in the U.S. Most recently, Chinese oil giant CNOOC invested nearly $1 billion in Chesapeake's shale gas assets.
Why are so many companies scrambling to purchase natural gas? For one, oil is getting more expensive and harder to find. And natural gas is too cheap (especially considering the booming demand coming from China and India). As we wrote in the February 2 Digest:
| The belief that we have more gas than we could ever use is pushing the government to use natural gas instead of oil for transportation fuels. Also, two liquefied natural gas (LNG) exporters are applying for permission to add extra export facilities. If granted, the two terminals will have the capability to ship 3.4 billion cubic feet of gas a day – 5% of total production. The exporters believe natural gas will stay cheap (less than $5 per mcf) through 2023, attracting European and Asian buyers. So at the same time, the appetite for natural gas in China and India (aka "Chindia") is booming, the U.S. wants to increase its usage. Matt says this will eventually lead to an "oh s**t" moment when the natural gas supply can't keep up. |
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New 52-week highs (as of 2/18/11): WisdomTree Japan SmallCap Fund (DFJ), First Trust Dow Jones Select MicroCap (FDM), Cambria Global (GTAA), Forest Laboratories (FRX), DirecTV (DTV), Automatic Data Processing (ADP), Calpine (CPN), HMS Holdings (HMSY), Molina Healthcare (MOH), iShares Silver (SLV), ConocoPhillips (COP), Abraxas Petroleum (AXAS), EV Energy Partners (EVEP), North America Energy Partners (NOA), Brunswick (BC), Philip Morris International (PM), Alexander & Baldwin (ALEX).
In today's mailbag, more questions – and answers – about our marketing… send your e-mail to feedback@stansberryresearch.com.
"Same store, same Wrangler Jeans: 2009 $17/pr, 2010 $19/pr, 2011 $24/pr" – Paid-up subscriber B.B.
"I have been around the block a few hundred times, and I know a scam when I see one. If Steve's buy recommendation in March of 2009 was a scam I will kiss the a** of your accusers in the public square. Same deal for the 250% I made on Mike William's Freescale bond recommendation, not to mention the fact that after buying the bond at 31%, I am receiving 33% interest.
"Porter, your End of America essay was presented in an extremely logical fashion and was backed up with fact after fact. I have been an alliance subscriber for a number of years and have never thought to ask for my money back because I get what I paid for and more every year. Take heart guys. I am willing to bet that the vast majority of your subscribers are just as satisfied as I am." – Paid-up subscriber Kenneth Graber
"'Of all tyrannies, a tyranny sincerely exercised for the good of its victim may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated, but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.' – C.S. Lewis" – Paid-up subscriber Jim Vance
"Concerning the Promotional Videos, including Porter's 'End of America' video. All the videos of this style are very poor and virtualy unwatchable.
"The Daily Wealth weekend addition is full of these and sometimes I make the mistake of clicking on them thinking they are something, only to be quite disapointed in the way they are presented.
"I have started to watch Porter's 'End of America' video many times, the information and facts contained in this are very important, but the way it is presented is terrible, and I've never managed to watch the entire thing. Even worse is the pop up when I try to exit any of these videos. These are just cheap and sleazy marketing tactics, and I dont think they are necessary, and I certainly dont think they represent your company very well.
"This is not good marketing. I dont think it presents your company very well. I doubt if it leaves the wanted image in any viewers mind. And, I think you guys are easily capable of doing much better. Everything else you offer seems to stress integrity and blunt truthfulness, and then you blow it all with some cheap marketing trick.
"With all the money and thought you put into these ideas, you can certainly create a presentation that represents your values and ideas better than this." – Paid-up subscriber Ken Long
Porter comment: Randomized testing involving large lists (100,000-plus) consistently demonstrates our "cheap and sleazy" text-only videos produce five to 10-fold increases to response (purchases) over identical plain-text letters. Additional testing involving higher-quality production quality (i.e., TV-like production) reduces response by roughly 50%.
I can't tell you why this technique is so effective for us. Personally, I can rarely sit through one of these things. But clearly, our customers prefer text-videos to any other form of advertising.
In regards to my values... well... a core value to me is earning profits for my partners. Another core value to me is earning a profit to share with my employees. And finally, a third core value to me is communicating effectively with as many people as I can because I believe our message is important (and profitable) to our clients.
Judging by these values, we're going to stick with the text-videos – until they stop working so much better than anything else.
I hope you'll understand my decision in this regard. I know you've been a subscriber for a long time – thanks for your business.
Regards,
Dan Ferris, Sean Goldsmith, and Porter Stansberry
Medford, Oregon and Baltimore, Maryland
February 22, 2011