Peak Oil

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/08/2013

Baltimore, Maryland

* * * Schedule update: I’m leaving today for our Alliance conference in Aspen. Tomorrow, I’ll be in our meeting all day and won’t be able to get a Digest written until well after business hours. Ergo, look for the next S&A Digest on Friday. I’ll give you my notes from the Alliance meeting… so it should be worth the wait.

* * * Intel’s CFO told Wall Street’s finest this morning, "We think the worst is behind us." The company began shipping the world’s first "quad-core" chips last quarter, beating rival AMD to the punch for the first time in several years. It’s hard to beat Intel for more than a few market cycles in a row. The company spends close to $6 billion per year on R&D… and it holds more than $7 billion in cash.

* * * I suspect the blue chips will continue to run higher. My S&A colleague Brian Hunt tells me the Investor’s Intelligence newsletter poll shows multiyear, near-record bearish sentiment. As you know, the stock market has a lot in common with a teenager’s mother: It does whatever it can to embarrass people.

Another, perhaps better, indicator of public sentiment… the shoeshine guy. He hangs out all day in the men’s locker room at the Downtown Athletic Club, ostensibly to shine shoes. I can’t recall ever seeing him put rag to leather, but he’s there every day, half asleep, stuffed into a small couch, in front of the TV. "How’s ya shoes," he grunts at me each morning. I asked him yesterday what he thought about the Dow making a new high. "Ahhmmoraugh… " When he starts watching CNBC again, I’ll let you know.

* * * As long-time readers will recall, I used to live in Miami, in South Beach. I was working out of my home (when I wasn’t traveling or at the office in Baltimore), and I’d go down to the pool for lunch. It was an interesting crowd: trust-fund kids, strippers, hedge-fund managers, nightclub owners, and wholesale drug dealers. My favorite guy to eat lunch with was the wholesale cocaine guy. He spoke several languages, had been everywhere, and seemed to know everyone in town. The local cops kept an eye out for him. One day, the FBI raided his house. I never saw him again.

Why does this matter to you? Well… according to banking regulators, 44% of sub-prime loans have "limited documentation." In other words, houses are a great way to launder money. The drug dealer I knew funneled almost all of his profits into the Miami real-estate market. And I know the same is true across the country. I wonder if this kind of cash will support the Miami condo market longer than "straight" economics would expect? Or… will tightening lending standards force the guys with dirty money out of the market? If you have any firsthand knowledge, tell us what you think.

* * * More on the track-record debate from my editorial team. Seems like I’ve found a way to make everyone angry… Says Jeff Clark: "I can stay silent no longer… In my Big Trend Report, we’ve had five triple-digit winners (PAL, SWC, DEZ, NXG, and XING) – all in less than a six-month holding period… I would love to be able to buy and hold some of my recommendations for longer periods. But when the market gives you three years worth of returns in only a few months, then you have to take ’em… P.S. I think XING qualifies for inclusion in your top 10. It’s up 112% since February, and that just edges out ELN."

Jeff’s right. And so’s Dan Ferris. Here’s what we’re going to do… First, we’ll continue to print all the open positions. These are what matter now. Second, we’ll publish the average of all recommendations since inception in each newsletter. Third, we’ll set up a "report card" website for each publication, so you can see for yourself all of the recommendations ever made. And fourth, we’ll create a stock pick "hall of fame" that will show you our best ever picks, not merely our best current picks. This will take some time… but we’ll get it done. (Actually, Sean Goldsmith will get it done… poor guy.)

* * * One weakness in the report-card system – special reports won’t be included. Last year, in July, I saw Carl Icahn orchestrate the kind of deal only a few investors can pull off. He bought WestPoint Stevens, a company with $1 billion in sales, for about $80 million. How? The company was bankrupt. Icahn volunteered to take it off the judge’s hands and bring it out of bankruptcy. Minus most of its debts and all of its union agreements, this business was worth big bucks – probably around a $1 billion in profit for Icahn within three years. As the deal was done inside his public holding company, American Real Estate Partners (ACP), I knew I could get our subscribers in. Problem: Dan Ferris had already recommended the stock, and I had another great pick that month for my newsletter. So… I wrote a special report, "Three Safe Stocks to Buy Now," and gave it away for free – all you had to do to get it was sign up for our auto-renew program. A little more than a year later, American Real Estate Partners is up 98%.

* * * Jim Wood qualifies his e-mail to us: "I am not a relative; I am not drinking; I am sane." Then he tells us something we hear often: "Steve Sjuggerud is the only analyst I NEED, but I am definitely profiting from Dan Ferris." He then proves his sanity, his sobriety and his lack of kinship with a complaint: "… when you decide to throw in a superfluous paragraph, just because you want to rant about some political philosophy you don’t like, I feel assaulted."

* * * We read every e-mail you send us. And lately most of them have even been pretty nice. Mmmm… Must be because stocks have been going up lately. Send your editorial feedback here: feedback@stansberryresearch.com.

* * * Answer to the riddle about why door locks open counterclockwise. Most people are right-handed. The right-hand wrist has a far greater range of motion in the clockwise direction, because the two bones in your forearm aren’t the same length. Got a better riddle? Send it to me at the feedback link above.

* * * * * * * * * * * * * * * *

"The oil companies, as a group, seem to believe the future production potential of the world is very large, very wide open…

"ExxonMobil [says] oil is not peaking, nor is there any peak visible that’s going to impinge on production in the next 20 to 30 years and claims there is no practical limit to the oil it can find and there are new supplies that are developable…

"…Exxon is not taking on any leases for deep-water drilling after 2008. They haven’t leased anything. If you think deep-water leases are going to be very important, and the recent big discovery in the Gulf of Mexico suggests they will be, you would have contracted for the future use of rigs. But if you think the deep-water leases aren’t going to be important because the oil found will be more expensive than the common garden-variety Texas oil from 6,000 foot down, and that you will have lots of oil coming from sources like that then you don’t need these high-cost leases down the road… "

– Charles Maxwell, the dean of Wall Street’s energy analysts, in last weekend’s Barron’s

About four years ago, at a telecom conference (of all places), one of the smartest guys I know started talking about peak oil.

I looked into the idea, which at first glance seemed neo-Malthusian enough to be written off without much thought. Humans don’t run out of things. People such as Thomas Malthus and Stanford’s Paul Ehlich, who like to talk about eminent scarcity, are always proven wrong. High prices stimulate innovation… and eventually abundance. The history of the oil industry demonstrates this as richly as any other commodity. You can find articles about running out of oil from 100 years ago. The idea comes back, like a fad, about every 30 years.

But my friend was really worried. He was even telling folks that buying property, bonds, and currency in New Zealand wasn’t a good idea, because fuel would soon be so expensive no one would be able to fly there…

So… when I did my own research on peak oil, what did I discover? Lots of interesting facts, none more important than the first: Hubbert was wrong. Marion King Hubbert, whose work is the basis for peak-oil theories, was wrong. At a 1956 meeting of the American Petroleum Institute in San Antonio, Hubbert predicted American petroleum production would peak in the early 1970s. His prediction was based on a bell curve, made from production rates in Oklahoma. Not surprisingly, when oil is found, production increases for many years… then… production tends to decrease as the big and easy-to-find resources are tapped. Hubbert believed this production bell curve would hold true for larger areas as well. Using these assumptions, he predicted when American production would "peak."

There’s only one problem: Hubbert was wrong about Oklahoma. Oklahoma’s production curve, in fact, didn’t decline in the shape of a bell. Instead, production fell substantially… and then revived, greatly, in the late 1970s and early 1980s. Thus, the empirical work behind Hubbert’s prediction was incomplete at the time of his analysis. The rate of oil and gas production from geographical areas does not resemble a bell curve. Instead, production tends to stabilize at about half of the peak rate, as additional capital and new technologies are exploited to maintain production.

Why, then, did American oil and gas production "peak" in the late 1970s? Simple: economics. It’s much, much cheaper to drill for oil in many other places in the world.

Will the world run out of oil? Maybe. Does this matter in terms of the world’s energy markets? Almost surely not.

Charles Maxwell – a Wall Street analyst who helps to raise money for new oil companies – says Exxon is making a big mistake for not planning on peak oil.

I’m betting on Exxon.

Good investing,

Porter Stansberry

P.S. Peak oil or not, there are some very good oil companies trading at great prices, measured against the value of their reserves. Some are cheap enough to interest Warren Buffett.