S&A Digest: The Gold/Oil Ratio Is at an All-Time Low

'My money's on gold'... A $14 million license plate... Bank dividends rising... Eli Broad broods about "the worst"... Bill Gross writes to Obama... ATP Oil & Gas correction...

 Signs of a top in oil... Having a nice car isn't enough for Middle Easterners anymore. And they have plenty of nice cars – the UAE, with a population of just 4.6 million, is one of Rolls-Royce's top five global markets. Now, oil-rich Arabs are spending millions on license plates. One Abu Dhabi businessman made the Guinness Book of World Records when he paid $14 million for a license plate sporting "1." You can watch the auction here. The man's cousin, an Arab stockbroker, paid $9 million for "5," the second-largest sum ever paid for a license plate. There are still plenty of three-digit plates left, but you're going to pay at least $175,000 at auction.

 If you're ready to hold your nose and buy bank stocks, M&T Bank and Bank of New York Mellon may be the ones to buy. According to data compiled by Bloomberg, M&T Bank and Mellon are the only two banks in the S&P 500 projected to raise dividends. Both companies reported 15% gains in first-quarter profits. Meanwhile, more than a dozen other U.S. financial institutions lowered dividends in the past year – more than the past five years combined – and lost or wrote down more than $400 billion in assets.

M&T and Mellon might be exceptions. After all, Warren Buffett's Berkshire Hathaway owns M&T Bank shares. But we think it's so much more important to let you know plenty more pain is on the way for bank stocks.

JPMorganChase Chairman Jamie Dimon said two months ago the growing recession will be worse for the banks than the mortgage crisis. That took me aback. That's not some money honey on cable TV. It's the chairman of one of the biggest banks in the country. I can't get it out of my head... worse for the banks than the mortgage crisis... Think how bad it's been for bank stocks already. Many have fallen 50% or more.

But Dimon says the growing recession will be worse than this...

 Billionaire Eli Broad (rhymes with "road") is the founder of homebuilder KB Home. He also founded an annuity/retirement services company, SunAmerica, then sold it to AIG. So he knows a little something about finance. He's 75 years old and been around long enough to have seen the economy go up and down several times.

Well, Eli Broad says the U.S. economy is in the "worst period" of his adult life and recovery in the housing market is "several years away." Says Broad, "This is worse than any recession we've had since World War II." This isn't some sensationalizing talking head on CNBC. This is the founder of the largest homebuilder based in the largest city in the seventh-largest economy in the world (Los Angeles and California, respectively).

 Bond King Bill Gross released his monthly economic outlook today, in the form of a letter to Democratic presidential candidate Barack Obama. Gross writes, "Your administration will produce this nation's first trillion-dollar deficit! While the Republicans will blame you for years and label you 'Trillion Dollar Obama' in future campaigns, there is in fact not much that you or any other President can do."

After pages of cutesy ranting, Gross finally gets to the meat... "intermediate and long-term yields on government bonds have already bottomed and will gradually rise throughout your first, and perhaps second Administration. Your term will not go down in history as investor friendly."

 And on the subject of Obama, what professional group donated the most money to the Democratic candidate? Also, which U.S. company donated the most to Obama?

 We're publishing our second quarterly Monthly Dividend Program Top 10 portfolio after market close today. Our portfolio consists of 10 high-yielding securities covering energy, bonds, conventional stocks, and REITs. It's currently yielding 9.18%. If you invest just $6,536 in each position, you'll be collecting around $500 a month in income.

We're extremely pleased with the performance of this service. Last quarter's Top 10, released April 1, has returned 3% in three months. The S&P 500, meanwhile has plummeted... down 6.3% over the same period. We set the portfolio up to manage just such a downturn, while still throwing off big income payments. It's done exactly as planned. If you're interested in collecting 120 extra paychecks a year and learning more about this month's Top 10, click here...

 New highs: Comstock Resources (CRK), U.S. Natural Gas Fund (UNG).

 We'll take trivia answers and anything else you want to throw our way at feedback@stansberryresearch.com.

 "I do not believe Matt Badiali got 'tripped up' at all on ATP Oil & Gas. The fundamentals are solid. 30+% growth rate over past year projected to grow over 20% over the next 12 months (prior to their recent acquisition today). My calculations value ATP at $60.00 so it is undervalued at its current price which is supported by a P/E of 8.4 well below the Sector average of 15.44. The stock was recommended during an industry pullback/correction which started on 5/21, however there was no way to know how far it would drop. For example (PBR) dropped about 18%. The industry now appears to be returning to it's trend upward. (ATPG) made the turn with above average volume similar to the level that propelled it up 17 points in three weeks at the beginning of May, Hmm!!!

"This is not what prompted me to write though. Matt doesn't need me defending his recommendations, His record speaks for itself. Keep up the good work I love getting new ideas to RESEARCH!! Which brings me to the point, Porter.  Mr. Samuel's research obviously was only done after he was down 25%. Which is evident by his remark 'if I had realized'... 'I wouldn't have invested'. I guess it's easier to blame someone else when you don't do your homework. Not an attitude shared by the most successful people.

"By the way ATP is based in Houston, Texas. I could go on to list where and what assets are owned in the Gulf of Mexico, North Sea, and the United Kingdom but that would make this email way too long. Anyway, I'm not buying the Nigerian connection that Mr. Samuels speaks of. Then again, why not blame the Nigerians I am sure one of them must have hit that BUY button." – Paid-up subscriber Van Isler

Badiali comment: Mr. Samuels is confused. ATP Oil and Gas (ATPG) focuses on offshore oil and gas in the Gulf of Mexico and the North Sea. Not Nigeria. This guy has his companies mixed up.

I recommended ATP May 13 at $38.47. It closed yesterday at $39.47, and we're up 1%. So maybe it's not my best recommendation ever. But it's getting tougher to find cheap, solid oil companies. I think ATP is one – give it time.

I recommended the company because it wins awards for deepwater production technology. The CEO and management are brilliant, innovative, and motivated. ATP has a 98% success rate (since 1991) of taking nonproducing or undeveloped projects to production. Over the last three years, ATP's operations grew by triple digits, (sales by 314%, earnings by 427%, operating margins by 113%). It also added oil fields, platforms, and pipelines (which grew the book value by 688% and cash flow by 613%). We bought this remarkable company for less than $10 per barrel of reserves.

 "In your Stansberry & Associates Hall of Fame, you mentioned TXN with gain of 301% for just in 270 days on PSIA?!! As far as I read your pub, you recomended this stock just couple weeks ago?! Please, explain." – Paid-up subscriber Galina

Ferris comment: The Hall of Fame is for closed positions only. The Hall of Fame listing for Texas Instruments (TXN) is from a past recommendation, made and sold years ago. What's confusing you is Porter re-recommended Texas Instruments in June.

Regards,

Dan Ferris

Medford, Oregon

July 1, 2008

The Gold/Oil Ratio Is at an All-Time Low

By Ian Davis

Right now, one ounce of gold is worth less in terms of crude oil than at any other time in more than two decades.

The price of crude oil is up 46% so far in 2008. Gold, on the other hand, has only appreciated by 10.7%. So the price of crude oil is increasing almost five times as fast as the price of gold.

Crude oil's spiking to unimagined levels... And readers who jumped onboard with my pairs trade two months ago are being burned.

A pairs trade is often used by quant funds and takes advantage of the traditional relationship between two different (but similar) investments.

A pairs trade generally assumes two similar investments should have a stable relationship relative to one another. When the relationship gets out of whack, it's often profitable to buy one asset (betting it will go up), and sell short the other (betting it will fall). This type of trade is a bet on things returning to normal.

Two months ago, the relationship between gold and oil seemed as out of whack as it could get. One ounce of gold could buy about 7.8 barrels of oil... This is extremely unusual. In the last 26 years, gold has only been cheaper in crude-oil terms 2% of the time.

So I told Digest readers to buy gold and short crude oil.

But now gold is even cheaper in relation to crude oil. One ounce of gold will now buy only 6.5 barrels of oil. In the past 26 years, this has never happened.

The following chart shows the relationship between the two commodities...

Gold Is Cheap Relative to Crude Oil 

Since the bull market in commodities began (around 2000), gold has remained cheap compared to crude oil. In fact, it's stayed in a trading range between 7 and 15... below the ratio's historic median of 15.

Based on supply-and-demand concerns, crude oil may be undergoing a permanent revaluation.

I think a higher oil price is probably justified, in both gold terms as well as real dollar terms. New oil reserves are becoming more difficult and costly to obtain. Also, demand for fuel has grown at an unprecedented pace, as developing nations like China undergo modernization.

But even if we assume the new range between 7 and 15 is now the norm, gold is still cheap.

Since 2000, one ounce of gold has bought less than 7.5 barrels of oil only 4.7% of the time. During these cheap periods, gold has outperformed oil by an average of 14.1% in the following three months.

Over the next three months, my money's on gold.

Good investing,

Ian Davis

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame

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

As of 06/19/2013