Mexico's giant Cantarell oilfield is now producing less than 500,000 barrels of oil per day. Just two years ago, it produced more than a million barrels per day. Friends of mine who've been working and investing in the oil patch for decades say 20% or more of the world's export supply of oil is in the hands of sovereign oil companies in places like Mexico, Iran, and Venezuela. Governments think they have better things to do than develop new oil resources with the cash they take out of their oil companies. They like to do things like... well... fight drug wars, for example.
Fighting a drug war is loud and messy and makes good TV. Meanwhile, creating real wealth in the form of new, developed oil reserves doesn't have the same political bite. It's much more fun for politicians to promise great new things from the country's anemic Chicontepec field, which has hard-to-extract resources spread far too and wide and barely pushes out 40,000 barrels a day.
With a big chunk of global export supply in peril and countries like China and India growing like crazy, it makes sense to get thee some oil stocks. I hate to toot my own horn (which is getting really hard to prove, because I do it all the time lately). But I believe I've got unquestionably the No. 1 best oil company recommendation you'll ever get in the July issue of Extreme Value, due out on Friday after market close. The company just added trillions of cubic feet of natural gas to its already substantial reserves, but it is cheaper than it's been since 2006. To sign up for Extreme Value and receive my next recommendation, click here.
It's déjà vu all over again... U.S. credit-rating upgrades are on pace to beat downgrades this quarter for the first time since the crisis began. Standard & Poor's upgraded the ratings of 238 U.S. issuers, while cutting 210. Moody's upgraded 200 issuers and downgraded 129. Upgrades haven't surpassed downgrades since the second-quarter 2007.
The upgrades "are a real indication that we're back to where we were," according to Burt White, CIO of the $284 billion money manager LPL Financial. We had better hope Mr. White is wrong and we're not back where we were. The second-quarter 2007 was a prelude to the biggest financial disaster in history. All seemed right with the world. Borrowers had high credit ratings and low borrowing costs. But their underwriting was so horrendous you had to apply not to get a loan. Now, with earnings improving and equity values back up, credit ratings are rising and cash balances are high.
Ratings agencies are right to believe a higher cash balance makes a safer credit risk. But equity investors should never rely on ratings agencies. High cash levels reflect frightened corporate managers who don't know what part of the economy the government will seize next or what new tax or regulatory burden they'll have to take on. The larger and more intrusive the government becomes, the harder it is for most of us to do business. Period.
Komrade Obama is destroying the U.S. economy with regulations and taxes, so investors are bearish and corporate managers don't want to risk making new commitments. Sometimes it's right to be scared. This is one of those times.
When it comes to ratings agencies, Warren Buffett is right. He says don't let them manage your money for you. That's not their purpose. The upgrades they're doing are logical and rational, for two reasons. First, higher earnings provide better interest expense coverage. Second, a higher stock price creates a larger equity cushion, a larger margin of safety for the debt holder. That's especially true for financial companies. When they can sell stock at higher prices, their creditors are holding safer securities than when their stock is cheap. It's not a ratings agency's job to tell you what stocks to buy and sell. Their job is to accurately rate the ability of a debt issuer to meet its obligation. And remember, it's possible a company could meet all its credit obligations and wind up with nothing left for the equity holder. There ain't no short cuts to equity analysis.
Another sign investors are getting skittish... The yield on 10-year Treasuries fell to less than 3% today for the first time since April 2009. The yield on two-year notes hit a record low of 0.59%. Investors are fleeing for the safety of Treasuries as the Dow and S&P 500 plunged more than 2.5% today. The overall fear in the market is currently keeping inflation at bay. Treasury yields have fallen from more than 4% in 2008 to 2.99% today.
It reminds me of what they said about Japanese government bonds that were yielding 3% once upon a time. Few thought JGB interest rates could possibly go lower. But they not only went lower, they went negative. And don't forget the U.S.'s Chief Money Printer made his bones in academia by saying the Fed didn't print enough money during the Great Depression. He said he'd drop dollar bills from helicopters to stop a depression. I can't believe anyone doubts he means what he says. So far, he's ramped up the monetary base of the U.S. from less than $900 billion in the fall of 2008 to more than $2.3 trillion today.
It's not at all unreasonable to conclude rates could go still lower. What's the best way to take advantage of falling interest rates? Holding cash is one way to benefit from deflation. But when inflation kicks in, as we are predicting, you lose money. Doc Eifrig has an interesting play in Retirement Millionaire...
In his latest Retirement Millionaire, Doc Eifrig tells readers the perfect play for a low-interest-rate/low-inflation world. He recommends a high-yielding, blue-chip stock in a sector that will "buck the overall slumping economy." And you can double your money in this stock in 10 years, even if the share price doesn't move. This company has paid a dividend for 125 years and increased it for 42 consecutive years. Eifrig explains his reasoning for buying these safe, high-yielding stocks below:
In times when inflation is absent (when prices are either flat or deflating), dividends are a crucial tool for building wealth. In Retirement Millionaire, we say, "cash is king." Getting cash from bonds or dividends is the perfect solution during times like now, since your net worth grows against the assets values that are stable or even dropping in price. This provides steady growth of your wealth.
Doc's recommended stock currently yields just a little less than 6% – a huge spread compared to Treasuries and the S&P's paltry 2% dividend. And this company's dividend is so safe, its earnings could fall in half before it would have to consider a cut. For more on Retirement Millionaire, where you can learn Doc's latest recommendation, click here.
New high: Enzon Pharmaceuticals (ENZN).
In the mailbag, subscribers have questions about some of our favorite investments... cheap blue chips and gold. Send your questions to feedback@stansberryresearch.com.
"It seems that ever since Apple Computer passed Microsoft Corporation in total capitalization recently, Microsoft's share price has been in freefall. Maybe that event was significant for the company and will continue its decline. Yes, the company does churn out a lot of cash, but investors have actually lost money if they had held the stock over the last 10 years. I know you classify Microsoft as a 'World Dominator' company, but maybe things are changing? Personally, I feel I've held on way too long as an investor." – Paid-up subscriber M. Stone
Ferris comment: Two things. First, I love it when investors say they've held on too long. There are few better sentiment indicators than the capitulation of the individual retail investor. He buys and sells based on how he feels because he doesn't know how or what to think. Second, 10 years ago, the market was peaking in the greatest equity bubble ever. It's meaningless to refer to any stock's performance since then as anything but evidence Mr. Market was smoking crack. Everybody lost money buying stocks at that moment. That's not a criticism of Microsoft. It's a criticism of anyone who owned the stock when Mr. Market was offering 68 times earnings for it. You will never catch me holding on to the stock at that price.
You could as easily have pointed out investors have made thousands of times their money on Microsoft since the late 1980s. Both observations are equally meaningless. You can't buy the past. If only you could...
Microsoft's earnings per share have more than doubled since then. Its revenues have nearly tripled. Its financial condition makes it one of perhaps two or three businesses on Earth at this moment that deserves a triple-A rating. It generates more cash than any other publicly traded company in existence. If history repeats, as it so often does, it means Microsoft will clock another good earnings performance over the next 10 years. It's dirt-cheap right now at around nine times free cash flow.
"Once in a while you mention some reputable dealers of precious metals that some of you boys have purchased through in the past. I meant last time to write down who they were, but failed to do so before deleting that Digest. I emailed your [customer service] but all I got was a canned answer about not being able to give specific investment advice. I am not asking for that – I just want to know who you consider to be reputable dealers in precious metals, from whom you would 'recommend' – but not advise – buying up some Kruggerands at a low premium or maybe some silver rounds." – Paid-up subscriber Jeremiah Workman
Ferris comment: If you're buying Krugerrands, the dealer is less important than the premium, which you can find out from a number of dealers simply by asking around. You don't need special dealer recommendations. Also, you shouldn't pay shipping costs for these coins if you can avoid it.
Krugerrands are the largest circulated gold bullion coin in the world, the Coca-Cola of gold bullion coins. Part of the point of buying such a coin is to worry less about the dealer. I paid 7% last week, a little higher than the 5% or so I've paid in the past. But folks are getting more interested in owning gold, and I plan to hold on to mine for a long, long time, so I'm OK with 7%.
We do have a short list of coin dealers we've heard good things about. To see it, first log on to the S&A website. Then, click on the "Help" link at the top right hand corner of the page. Click the link for number "10" on the FAQ, "What is Steve Sjuggerud's list of recommended gold coin dealers?" We receive nothing for mentioning these guys.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
June 29, 2010