Oil's big drop... U.S. crude supplies soar... New high for a WDDG... China hits a three-year low... Chanos is bearish on Apple and Treasurys... Learn how to sell puts...
As Porter so eloquently told the crowd at Casey Research's Recovery Reality Check Summit this May, he's bearish on oil.
At the time, oil was trading around $105 a barrel. As you can see in the chart below, six weeks later, oil bottomed around $78... before marching back up toward $100 a barrel...
Expectations – and then the actual announcement – of the third round of quantitative easing (QE3) floated all asset classes.
Despite the unlimited amount of money Federal Reserve Chairman Ben Bernanke pledged to improve the economy, Porter maintained his short position. Porter is bearish on oil for several reasons. As we wrote in the September 20 Digest...
|
Several factors suggest oil will perform poorly. China is slowing down... And debt-laden European Union countries (notably Italy and Spain) are on the verge of collapse. As these economies slow, so will their demand for oil. |
|
But Porter sees a larger, more fundamental reason for oil prices to fall... The drilling happening in the huge oil reserves in shale-rock formations across the U.S. right now (in places like North Dakota's Bakken shale and Texas' Eagle Ford) will create a glut in domestic supply. |
|
Natural gas prices provide a good window to what a glut can do to prices... Natural gas prices spiked to almost $14 per thousand cubic feet (mcf) in 2008, but sit at $2.75 per mcf today – an 80% decline from the top. |
And thanks to new drilling technologies like hydraulic fracturing – the process of using high-pressure pumps to shoot fluid into oil- and gas-bearing rock layers – we will be able to extract huge amounts of oil from U.S. soil. In an August special report, titled "America's Big Power Shift," Porter gave his Investment Advisory subscribers an idea of the amount of new oil we could see...
|
New drilling technologies – such as hydraulic fracturing (fracking) and horizontal drilling – won't merely allow the discovery of many large, new oilfields, they will also completely reshape the production curves of existing fields. That's a big part of the equation that most people haven't figured out yet. New technologies won't just bring new fields into production, they will revive our existing fields. Many older fields may even surpass their previous total production. |
|
Of course, no one knows exactly how much more oil and gas will be discovered. Looking at what his firm has found so far, Anadarko Petroleum Company's CEO says total American production will double in 25 years. "The resource is there, and the technology is there." |
|
Goldman Sachs came out with its forecast recently, too. It now says America will be the world's largest crude oil producer by 2017 – surpassing even Saudi Arabia. |
This week, Bloomberg reported U.S. supplies of crude rose by 8.5 million barrels in the second week of September. That was more than eight times higher than analysts' estimates. The surplus has caused oil prices to plummet... Oil fell from $98.94 last Friday to around $89.50 today – a 9.5% drop.
In addition to increased domestic supply, a number of other factors helped push down oil prices. Hurricane Isaac disrupted oil imports when it hit terminals along the U.S. Gulf Coast in late August. They're now back online. Also, Saudi Arabia has led OPEC to produce 1.6 million barrels of oil per day more than the world requires. The increase was intended to cushion the world from any sudden shock caused by Iran's erratic regime. But these short-term factors are inconsequential to Porter's long-term bearish outlook.
As we mentioned above, the main factor driving oil prices down is the huge increase in domestic production. Economics professor Mark Perry reports (on his Carpe Diem blog) North Dakota's oil production (from its Bakken shale) exceeds 20 million barrels per month. This was 59% higher than one year earlier. North Dakota also produced 62% more oil than Alaska in July. It's the fifth consecutive month North Dakota has beaten Alaska... and it has solidified North Dakota's position as the second-largest oil producer in the U.S., behind Texas.
Over the last 12 months, an average of seven new oil wells came online in North Dakota each day. As Perry says, "each of those new wells is the equivalent of adding a new $8 million-$10 million business to the state's economy." According to Porter's thesis in his Investment Advisory, this is just a small glimpse of things to come...
Another World Dominating Dividend Grower continues to hit new highs...
Biotech titan Abbott Laboratories (ABT) is one of Dan Ferris' favorite blue-chip stocks. It produces 11 different No. 1 products in the health care industry. It has an unassailable competitive advantage in the medical field. And it has a proven track record of rewarding its shareholders. Here's what Dan wrote about ABT in the January issue of The 12% Letter...
|
Abbott is one of the best dividend-payers ever. It has paid a dividend every year for 88 years, and raised its dividend for 38 straight years. Over the last 10 years, Abbott's dividend has grown 7.69% per year, on average. And in the last three years, that's accelerated to 9.95%. I think it can and will continue that kind of growth in the years to come. |
Yesterday, Abbott Laboratories hit an all-time high. As of yesterday's close, 12% Letter readers have made 35% on Dan's recommendation since May 2011.
Jim Chanos, the billionaire founder of hedge fund Kynikos Associates, is one of the world's best short-sellers. He's best-known for calling the collapse of Enron and WorldCom. But in the past few years, Chanos has made headlines for his bearish stance on China.
He believed China's economy was slowing and the government was fudging the numbers. To profit from the trend, Chanos shorted commodity producers that were highly leveraged to China. (As China slowed, it would consume fewer commodities.) One of his favorite shorts in that sector is iron-ore giant Fortescue Metals, which derives 98% of its sales from China. We explained Fortescue's troubles in detail here.
To date, Chanos' China thesis has been correct... Today, China's benchmark Shanghai Composite Index hit a three-year low. You can find the complete story on the "Chinese slowdown" in the August 24 Digest.
How do you make headlines after shorting the fastest-growing economy in the world? You go after Apple...
In an interview with Bloomberg, Chanos said he's skeptical of Apple after the stock gained 71% this year... "We're getting afraid of heights," he said of Apple's $700-plus share price. "It has had an enormous run. Something about it is holding us back in that it's had such a run."
While we're all for contrarian thinking... we'd need a little more to go on than a "fear of heights" before we sold our position or went short. As longtime readers know, when an uptrend gets going, there's no telling how far it can run.
And at the Clinton Global Initiative in New York City this week, Chanos also said he would avoid Treasury bonds after the third round of quantitative easing (QE3)... "You're taking an awful lot of principal risk for very little reward."
Our colleague Jeff Clark agrees. Last week, he told readers of our free e-letter Growth Stock Wire that the Fed just destroyed the bond market...
|
QE3 is open-ended. There is no end date. We have the Fed's assurance that it will drop buckets of money on the market for as long as necessary. There's nothing left for bond investors to anticipate. We won't see bond prices rally and interest rates fall again in anticipation of the Fed doing anything. It just promised to do everything. |
Jeff also warned Growth Stock Wire readers last week about a possible short-term pullback in gold. "Too many people are too bullish," he wrote. "And it has run up so much so quickly, there's too much risk of a pullback." A few days later, the metal spiked at $1,775... before pulling back 1.5% over the next few days.
This morning, Jeff told his S&A Short Report subscribers that gold stocks appear to have entered a short-term downtrend. He believes investors "should have a great shot at buying back into the sector in a few weeks."
New 52-week highs (as of 9/25/12): Fluidigm (FLDM) and GenMark Diagnostics (GNMK).
In today's mailbag... We show you where to find the best instructional material for selling puts. Send your feedback to feedback@stansberryresearch.com.
"I really do want to sell puts (using you to pinpoint attractive trades) but I don't know the lingo and the websites (Scott Trade, etc) look intimidating.
"What I would like to see is a place I could go and get some actual training in on a fake website that explains to me what I am supposed to be doing. I understand theory but application is another thing entirely when you are on a website you don't know much about. If I could gain confidence that I know what I'm doing on a website, it's off to the races for me." – Paid-up subscriber Mike Hudson
Goldsmith comment: Doc has produced several educational videos to help his subscribers get comfortable with selling puts. One particular video has a great overview of the lingo put sellers need to learn to be successful.
If you want to find out everything you need to find out about put selling, we encourage you to check out Doc's excellent training videos and follow along with his easy-to-understand directions. To learn more about Retirement Trader, and access Doc's subscriber-only educational videos, click here... Remember, we're currently offering Retirement Trader at a generous discount.
Regards,
Sean Goldsmith
New York, New York
September 26, 2012