Porter's oil prediction... This ratio is collapsing... The market forgets Mexico... Dell gets crushed... Where to find gold stock recommendations... What we mean by 'shorting'...
Last month, before giving a bearish presentation on oil... Porter asked the crowd at Casey Research's Recovery Reality Check Summit to raise their hands if they owned oil stocks. Most did.
If you know Porter, you can guess how that sentence ends. (Hint: It's a word you wouldn't use at the dinner table.) He's bearish on oil. Crude was around $105 a barrel at the time. It's down 1.7% today to $90 a barrel.
Much of petroleum's recent decline has been attributed to fears of an economic slowdown in China (which we discussed here) and a possible dissolution of the European monetary union.
But Porter sees a larger issue that could create a longer-term downturn in oil prices... He believes the drilling work going on right now to tap the huge oil reserves in shale-rock formations – in places like North Dakota's Bakken shale and Texas' Eagle Ford – is going to create a huge glut in domestic crude supplies. It's the same thing that led to the current extreme lows in natural gas prices.
As he wrote in the November 2011 issue of Stansberry's Investment Advisory...
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We are seeing the first trickle of oil from these fields, where drilling is now going on night and day. Tens of thousands of new wells will be drilled over the next decade. The amount of new oil that will be produced can't even yet be imagined. Trust me on this... every projection you'll see over the next 12-24 months about the amount of future production will end up being woefully, laughably conservative. |
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The amount of oil and gas that will be produced from U.S. shale plays over the next decade cannot even be imagined today. My bet is U.S. production at least triples over the next 10 years. |
And just today... the U.S. Energy Department announced crude oil stockpiles reached 382.5 million barrels – a 22-year high. (Our resource expert Matt Badiali wrote about this announcement in today's Growth Stock Wire.)
In addition to being bearish on oil, Porter is "extremely bullish" on natural gas. As he outlined in his April issue...
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Sooner or later, the price of natural gas will rebound sharply... and not just because it always has in the past. What will propel natural gas prices over the medium term (say, five years) is an economic truism: It's impossible for a surplus of energy to exist for long. As prices fall, more and more uses for natural gas will appear. At some price, natural gas becomes competitive with other forms of energy. |
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A barrel of oil has 5.825 million British thermal units (Btu) of energy. (Btu is the standard measure of energy content across fuel types.) One thousand cubic feet (MCF) of gas contains just a little more than 1 million Btu – approximately a 6:1 relationship. Thus, on an energy-equivalent basis, you might expect natural gas to trade for one-sixth the price of oil – or about $16 per MCF today. |
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Barring the end of the world, the price of oil is going to fall and the price of natural gas is going to rise. |
In that issue, Porter also pointed to a chart of the oil-to-natural gas ratio, saying "natural gas has never been cheaper compared to oil." The ratio was around 55.
Since then, oil has collapsed... And natural gas has risen. Natural gas bottomed in mid-April at less than $2 per thousand cubic feet (mcf). Nearly a month later, it's at $2.72 per mcf. Take a look at the oil-to-natural gas ratio now:
Last month, in the midst of Wal-Mart's Mexican bribery scandal, we argued the company's fundamental strength would outshine the short-term reputational hit...
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One final thought about Wal-Mart. I read a report recently by GMO, the money management firm co-founded by prolific market commentator Jeremy Grantham. The report noted that two-thirds of all corporate value lies 20 years or more in the future. In other words, businesses are valued based on future earnings. Most of that value lies 20 years out. |
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Will anyone remember the Mexican bribery scandal in 20 years? I don't know... but I doubt it. Even if the fines destroy an entire year of Wal-Mart's operating income (more than $26 billion last year)... the damage to the company's valuation would evaporate after two decades. If the company paid out a dividend of that size, the stock would soar... yet that would have about the same effect on the business' earnings power as a fine the same size. |
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I imagine the headlines will get worse and a big Wal-Mart executive or two will have to step down. But I doubt this will hurt Wal-Mart's business much. It'll remain a World Dominating, relentlessly growing retail network of more than 10,000 locations worldwide. – Dan Ferris, April 24, S&A Digest |
The stock hit a low of $56.97 on April 25... the day after Dan wrote those words. And it has marched straight up ever since. Yesterday, Wal-Mart closed at $63.73 yesterday, its highest point since 1999.
While the world fears Greece will exit the euro, people are still buying Wal-Mart's products. And they're still buying Wal-Mart stock. Markets have even shorter memories than we predicted...
As bullish as we are on Wal-Mart, we're equally bearish on computer manufacturer Dell... Dell is one of the short sales featured recently in our newest service, DailyWealth Trader. (Alliance members have had access to our "beta" prototype issues of this service... We'll open it to the public on Friday.)
Jim Chanos – who heads the hedge fund Kynikos Associates and is among the most successful short-sellers on Wall Street – brought up Dell at the Grant's Interest Rate Observer conference in New York this spring. Dell shares would decline as smartphones and tablets stole market share from personal computers, Chanos predicted. He said 55% of Dell's full-year 2012 revenue will come from desktops and notebooks. Another 17% of revenue will come from PC software and peripherals.
And if its dependence on a dying sector isn't reason enough to short Dell... the company also has a $5 billion portfolio of debt from customers it financed... 68% of whom have FICO credit scores under 660. (FICO scores range from 500-800... 660 or lower is considered risky "sub-prime.")
After market close last night, Dell announced revenue for the first quarter fell 4% from the same period last year to $14.4 billion, which compared with analyst estimates of $14.9 billion. First-quarter earnings totaled $635 million compared with $945 million a year earlier. The company also lowered its revenue forecast for the period ending in July to $14.7 billion-$15 billion. Analysts were expecting $15.4 billion.
Dell said consumers were shifting to "alternative" mobile computing devices, sending notebook PC sales down 13% year over year.
At the Grant's conference, Chanos called Dell a "serial restructurer," which keeps the company from addressing its core problem (the death of the PC)...
As if on cue, Dell said last night it is engaged in a reorganization that will train staff to sell a complement of Dell products instead of specializing in individual ones.
Shares plunged 18% today. If you took our advice in DailyWealth Trader, you'd be up more than 22% in less than three weeks. Again, if you're interested in DailyWealth Trader, stay tuned... We're opening our newest trading service to the public on Friday.
New 52-week highs (as of 5/22/12): Wal-Mart (WMT).
In today's mailbag... where to find gold stock recommendations and what we mean by "shorting stocks"... Send your questions and comments to feedback@stansberryresearch.com.
"For those newbies out here it would be great to have a stock recommendation or 2 when you are suggesting to buy. I would buy some gold stock right now but have no idea which stocks are best. I am trying to catch up fast to all of your readers who have been with you a while and know what to do, but as more and more of us catch on to your newsletters who have always had a broker or a lousy 4 or 5 choices to pick from in our 401ks we need a little more clarification when your making suggestions.
"In fact, even if I had to subscribe to yet another newsletter that was dumbed down for beginners and then moved along at a reasonable pace I would. I love docs newsletter what a refreshing way to gain a little knowledge, and I am so impressed by all the other news letters and bulletins but I have yet to make an investment because I'm still trying to set up my Etrade account. So can you give me any suggestions as to how I can catch up a little faster." – Anonymous
Goldsmith comment: Our resident geologist Matt Badiali frequently features gold stocks in his S&A Resource Report. And in the most recent issue, he recommended two junior gold mining stocks... These stocks have huge, triple-digit upside potential.
Matt has put together an excellent short primer for folks new to investing in resources. This guide includes the single-most important factor in your resource investment success. It also provides an overview of every potential investment or trading vehicle available to resource investors. Before you get started in this sector, it's vital to understand the concepts in the educational guide. And it's FREE to all subscribers of the S&A Resource Report. To learn more about Matt's service, click here...
"Add my name to your list of subscribers who have profited from your advice about Walmart. You alerted me to the value and it fits my long term goals." – Paid-up subscriber Jim Reid
"I have a question. When you talk about shorting stocks are you writing uncovered calls or is there another play at work?" – Paid-up subscriber Gregg Mathis
Goldsmith comment: When you "sell a stock short," you are borrowing shares of that stock from a broker and selling them on the market. Eventually, you will have to buy back those shares and return them to the broker (known as "covering" them). You hope that the stock price falls so you can buy shares back at a lower price (keeping the difference as your gain). If an editor wants subscribers to sell naked calls, which is also a bearish bet on a stock, he will say so specifically.
Regards,
Sean Goldsmith
New York, New York
May 23, 2012