Through my homefront perspective dollar weakness isn’t all that bad. It benefits the US corporations through increased overseas sales with the relative price discount. It also benefits commodities. They rise as the dollar drops because foreign currencies have more buying power for goods denominated in US currency. More gold, oil, and stocks can be purchased and add to the bullish market tone.

Although this take on the situation still doesn’t answer the global conundrum of currency valuation— which clearly has some added profit opportunities.

Lately, questions have been raised who will rise to the top and become the go to reserve currency in the basket of bad choices. One non-currency answer that’s often posed is our profitable friend, gold. Indeed, gold could possibly fill the gap for financial stability and asset value retention.

Other than gold, three main commodity countries exist in the major currency market.

First up on the list, the Australian Dollar. But lately the aussie has been held in check by the issues in Japan. The geographical proximity of island nations make this currency heavily dependant on exports and the economic situation of the now 3rd largest economy in the world.

That leaves two big currency winners from the crude oil run that have more upside: the Norwegian Krone and the Canadian Dollar.

Oh Canada…

Our neighbor to the north has a solid balance sheet partially because of the resource based economy in the times of increased global demand. The financial crisis was not as hard felt in Canada and the recovery much faster as commodities reversed higher from the extreme lows. Take a look at the chart:

“The peak-to-trough decline in Canadian real GDP,” according to Wells Fargo, “was 3.3 percent, not as severe as the more than 4 percent decline in the United States and a far cry from the 6.4 percent decline in the United Kingdom.”

With interest rates held low at 1% any Canadian tightening monetary action in the future should be supportive of the currency. Higher rates mean less CD$ and make each loonie more valuable.

Strong Canadian dollar support sits at par and the next pullback will be a buying opportunity that you should keep your eye on.

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

May 10, 2011

One Great Place to Plant Your Assets was originally featured in the Penny Sleuth.

For instance, you can buy a binary saying that a currency will by above a certain rate. You can bet whether it will be above that rate in a few hours, by the end of the day or even the end of the week. If you’re right, you win — collecting double- or even triple-digit profits.

But even though plays are set up every day and even every few hours, I make most of my weekly Strategic Currency Trader recommendations Monday morning. Why?

The answer is one of the most powerful movers of binary options… and a concept that could lead to super-sized opportunities next week. Yes, I mean super-sized even compared to the kinds of gains my readers are seeing with binary options now!

The key word is “surprise.”

Simply put, currencies make their biggest moves when something surprises the markets.

For instance, last week the Financial Times reported an unexpected fall in the United Kingdom’s inflation rate. Its CPI in March increased 4%, down from 4.4% the month before.

The immediate reaction was a drop in the British pound.

The move was easy to understand: There is growing fear around the world about rising inflation. Central banks typically fight inflation by raising interest rates. Higher interest rates make a currency more attractive. And the expectation of a rate increase brings in speculators who hope to ride the currency up.

So the sudden revelation that Great Britain wasn’t actually seeing much inflation took its toll. As James Knightley, an economist at ING Bank, told the FT, “The prospect of a May rate hike has been significantly reduced by today’s surprise drop in UK CPI.”

Keep in mind, investors weren’t reacting to the absolute value of the CPI. For instance, the Bank of England’s (BoE) official inflation target is 2% — meaning March’s number is double what the BoE wants. But investors aren’t paying attention to that.

Instead, it’s all about currency economics 101 — the value of a currency rises or falls based on expectations of inflation. If inflation expectations are strong, the market sees an increased probability of the central bank increasing rates.

But it would be a mistake to perceive the GBPUSD reaction as simply a local U.K. event. The fact is, this is the open salvo leading to a much bigger surprise — one that is just a week away.

For now, however, all you need to know is how to put surprise to work for you. It may sound counterintuitive — after all, by definition you cannot plan for a surprise. But that’s not entirely true… especially when it comes to binary options.

On Monday morning, I scan over 20 binary contracts with over 100 strike prices. I sort through them using a sophisticated algorithm. Then I narrow them down to just plays with the biggest reward-to-risk ratios. After that, the real work begins.

You see, it’s not enough to find binaries that offer outsized profit potential. Any binary selling for under $50 is a chance to double your money… but you’ll want to have more going for you than that. That’s why I use technical analysis to show where prices could go, based on proven patterns and cycles.

Still, success or failure depends mostly on surprise.

That’s because a binary’s price reflects investor’s expectations. Every binary has chance to pay out $100 — and no one is going to buy it unless they think it has a chance of paying off. An option that has a trading ask price of $80 tells us the market expects there’s an 80% chance the binary will settle in-the-money.  In contrast, an option that costs $25 translates to 25% market expectation of success. But the other side of that is a potential 4:1 return, just for being a contrarian.

That’s why I like making binary plays on Monday morning. Coming out of the weekend, market expectations are likely to be at the height of error. The crowd-mind is most likely to be wrong because there are five days of unknowns. But my charts highlight the most likely moves. So if the market is caught by surprise, we enjoy high roller returns!

If you’re not familiar with binaries yet, you can read the brief tutorial I wrote for the Penny Sleuth just a few months ago.

Sincerely,
Abe Cofnas
Penny Sleuth

April 19, 2011

Big Surprise Behind Big Binary Profits was originally featured in the Penny Sleuth.

For many, it’s an ugly city, but I loved it right away. While gloom and doom hover over the economies of the U.S. and Europe, it is impossible to maintain a sense of pessimism in São Paulo — or Brazil, for that matter. It’s a showcase for the kind of changes sweeping over the emerging markets.

São Paulo had a humble beginning. Jesuits founded it on the banks of the little Tietê River in the 16th century. It was for hundreds of years an insignificant settlement. Even as late as the 1870s, it had only 26,000 inhabitants, cobbled around narrow streets.

But it would go on to put up perhaps the greatest population growth curve of any major city in human experience (as the Fernand Braudel Institute maintains). A great coffee boom in the 19th century was the kindle that sparked São Paulo’s growth. By the 1890s, the population tripled. And today, there are 20 million people in greater São Paulo.

The state of São Paulo has 45 million people and makes up nearly a third of Brazil’s economic output. Half of the country’s tax base is here. If it were its own economy, the state of São Paulo would be the second largest in South America — behind only Brazil and ahead of Argentina and Colombia. It is also home to Brazil’s stock market, the fourth largest in the world by market cap.

São Paulo did not grow up slowly around a center, as did the cities of Europe. Rather, it grew hastily and in an improvised manner. You can see the consequences of that process today. Traffic is horrendous. It can take more than an hour to move only a handful of blocks. The subway system is not up to the task of serving the entire city. And record car sales overwhelm the construction of new roads.

There is also an acute housing shortage, which is where an interesting investment opportunity lies. There are a lot of ways to show the data on housing. One common way to measure housing shortages is to look at how many families have three people per bedroom. This measure shows about 13% of families live in substandard housing. Expressed as a number of units, Brazil needs nearly 6 million new homes.

That’s really not surprising when you think of the swelling ranks of the middle class. Millions of people have become consumers in the last decade. Housing has not yet caught up with that demand. By some estimates, Brazil needs to build about 1.6 million homes every year just to keep up with new families entering the market.

In São Paulo, you can also see the shortage in the price of homes. New construction often takes three years. People now taking delivery for housing units bought three years ago find that the value of their dwelling doubled.

All that frothiness has some people worried about a housing bubble. Brazil’s mortgage market, too, is in hyper-growth mode. Take a look at the total loans to homebuilders and buyers.

It looks impressive, but the starting base was very low. Brazil’s home lending market is still only a fraction of that found in other Latin American countries, such as Mexico or Chile. Brazilians also have much more equity invested in their homes. Typically, loan-to-value is 70–75%.

Eventually, supply will catch up with demand, and maybe even exceed it. Then you’ll have a correction. But that day seems years away.

Sincerely,
Chris Mayer
Penny Sleuth

October 11, 2010

How to Profit from São Paulo’s Housing Boom was originally featured in the Penny Sleuth.

I can say the caipirinha — Brazil’s national drink — is a potent cocktail. Brazilian meats are very salty. Brazilian desserts are very sweet. This taste for the extremes of the flavor spectrum extends to Brazil’s monetary brand, as well.

Today, the Brazilian real is strong (and the dollar is weak). The real is now at a 10–month high against the U.S. dollar (having risen 40% from its lows in early 2009). This prompted the Brazilian finance minister to threaten weakening the real. You’ve probably heard of his comment about a “currency war.”

What he fears is that the strong real will hurt Brazil’s export goods by making Brazilian goods more expensive, hence weakening Brazilian economy. It is a tired line of reasoning. This idea that a country gets rich by destroying the value of its currency is a weed that won’t go away no matter how many times you pull it from the soil.

What’s curious about this is that you’d think a Brazilian would appreciate the dangers of weakening a currency more than most. Brazil has had a habit of blowing up its currency over the last 60 years.

From 1942 to the present, Brazil went through eight different currencies:

• Mil Reis, 1833-1942
• Cruzeiro, 1942-1967
• Cruzeiro Novo, 1967-1986
• Cruzado, 1986-1989
• Cruzado Novo, 1989-1990
• Cruzeiro, 1990-1993
• Cruzeiro Real, 1993-1994
• Real, from 1994.

The present-day real is but a teenager, a mere youth sprung from a bad family. Yet it is among the world’s strongest currencies today, bolstered by the commodity wealth and strong growth rate of Brazil’s economy.

Say what you will about the U.S. dollar, which has been a poor currency as far as retaining its purchasing power over time, but it’s never gotten so bad that we had start over — at least not yet. Brazil’s experience makes the dollar look like a gold standard. It was not that long ago that Brazil’s inflation rate hit 2,700%. It happened in one 12-month period from 1989-1990.

Even as late as 1999, Brazil was a financial basket case. In 1998 and 1999, its finances were such a mess that Brazil got the biggest IMF rescue package in history up to that point, $41.5 billion.

During the 20th century as a whole, Brazil had a cumulative inflation rate of more than a quadrillion percent. If you were a net saver in Brazil and kept that money in Brazil’s currency, you lost big. You might as well have set the money on fire.

Today, Brazil is in a different position. The currency is so strong, its politicians fret. American travelers find no bargains in the shops of Sao Paulo or Rio. Brazil, too, has huge currency reserves and is now a net creditor, not a debtor. Brazil is even accumulating gold — the real thing. We met with an economist on our trip here who made a presentation that showed Brazil’s central bank has 5% of its reserves in gold — and it’s been buying more.

Today, U.S. investors go out of their way to buy products that give them exposure to Brazilian reais, instead of U.S. dollars. It’s incredible when you think how much things have changed in just the last 10 years.

Of course, Brazil could screw it up again.

There are some worrisome signs. The new favorite for president is Dilma Rousseff. She is a former Marxist guerrilla. Captured in 1970, she was beaten and tortured. Hers is a quite a tale, and you can find out more about her on the web. The Wall Street Journal also recently featured a front-page story about her.

Suffice to say, she has since mellowed out, supposedly. Most see her as simply continuing the policies pursued under current President Lula. But we’ll see…

As with any emerging market, there are big problems, but also big opportunities. Still, Brazil’s economic challenges seem less complicated and smaller than those in the U.S., where debt and deficits are much larger. And currency screwups are relative. Forced to make a choice, I’d rather bet on the Brazilian real than the U.S. dollar.

[Editor’s Note: If you want to add exposure to economic growth in Brazil, the easiest solution is to buy Brazilian stocks – thereby avoiding (some of the) risks of inflation in the real. If you’re not familiar with specific Brazilian companies, the easiest option to buy shares of one of the popular Brazilian exchange-traded funds on the market.

Leading the pack is the iShares MSCI Brazil ETF (NYSE: EWZ), a fund with more than $11 billion under management, weighing in as the largest single country ETF outside of the United States. But for penny stock investors, another attractive option is the Market Vectors Brazil Small Cap ETF (NYSE: BRF), a much smaller fund that focuses exclusively on small-cap stocks in Brazil.]

Sincerely,
Chris Mayer
Penny Sleuth

October 7, 2010

Two Ways to Add Brazil to Your Investment Portfolio was originally featured in the Penny Sleuth.

For investors who’ve been wary of investing abroad in recent years, that’s a telling metric. Unlike the fragile, tentative recovery we’re experiencing here in the United States, China’s economy is pushing ahead.

September’s manufacturing data are far from the first sign that China is a wise choice for U.S. investors in 2010. Earlier this year China’s economy moved into the No. 2 spot in the world, usurping Japan’s place on the list of largest economic powers. In all, it’s just the latest chapter of what’s been a tremendous growth story for the last three decades.

China’s economic growth has far outpaced U.S. GDP in the last few decades, giving rise to a new, high-consuming middle class.

If you’ve been following our analysis of investing in China for the past few months, you know that we’re big believers in the consumption spree that China’s burgeoning middle class is starting on. An estimated 50 million people per year are being added to the Chinese middle class — a group that already includes around 20% of Chinese households. While members of the “middle class” in China have much lower incomes and spending power than their Western counterparts, their sheer numbers make the potential rise in spending truly significant.

And one of the biggest industries to benefit from that increased spending is the travel business…

In last month’s issue of Penny Stock Fortunes, we said that we were already bullish on the Chinese travel business (see Another Potentially Profitable China Play, September 2010)… And for good reason. Chinese airlines have seen record increases in passengers in recent years — and passenger numbers are expected to triple to 700 million annually in the next decade.

China Southern Airlines made news in 2009 when the airline recorded the third-largest passenger count of any airline in the world, making it the largest carrier in Asia — a first for any Chinese airline. But China Southern isn’t alone…More significantly, two other Chinese carriers made the top 10 list, eclipsing CSA’s passenger count by a landslide.

Airlines are just the tip of the iceberg. Right now, we’re seeing major segment growth in everything from hotels to tours. All in all, the Chinese travel industry is in full-boom mode — and this month, we’ve discovered a pure-play Chinese travel stock that stands to deliver 131% gains at current levels.

[Editor’s Note: Just before we recommended buying shares of this Chinese travel firm earlier this month, a misguided short attack sent shares lower, giving us a better buying price, and an even higher potential return. Our due diligence shows that this stock is more attractive than ever right now – and we’ve updated our Penny Stock Fortunes readers on the full details.

With shares just under our target buy-up-to price right now, there’s still time to buy this stock, but it won’t likely last long. To get our complete report on this exciting company, click here now…]

Sincerely,
Jonas Elmerraji
Penny Sleuth

September 30, 2010

Why We Could See a 131% Gain on This Chinese Travel Firm was originally featured in the Penny Sleuth.

In our meetings, we met an economist who got everyone’s attention when he started talking about Brazilian financial products and how he’s averaged 25% a year in the last few years without doing any work (I’m suspicious). Asked how to get into these products, he said they are open only to Brazilian residents. Initially, he made his investments through his wife, who is Brazilian.

This led the reader to say, “I’m going to invest in a Brazilian wife.”

While that may not be a bad investment for some, the opportunities in Brazilian agriculture are what inspire our trip.

We started in Campo Grande, which is in an interior state called Mato Grosso do Sul. It is a big producer of soybeans, sugar and more. Seasonally, we’re at the end of what passes for winter in these parts. Yet temperatures hit 100 degrees while we were out and about. It was dry and dusty with strong winds.

Water comes from nearby rivers and a huge underwater aquifer. There is also a healthy amount of rain for about half of the year. The land is also flat. Professionally managed, it becomes highly productive farmland.

Anyway, we endured the heat and some long bus rides to see farmland properties in the cerrado, the vast grasslands of Brazil and the soil bank of the world.

This is the land that will help feed the growing global population. Brazil is a great beneficiary of that need and has become an agricultural power. (One that’s fuelling more than a few small-cap stocks right now) It also has a lot of room to go, as it has more usable arable land than any other country in the world.

The New Middle Class of Brazil

This really gets to the heart of change in Brazil. There is a rapidly expanding middle class here. Over the last six years, Brazil’s added some 30 million middle-class consumers. They are only starting to enjoy products we take for granted, like yogurt. “Brazilians are eating yogurt for the first time,” Renato Roscoe told us.

Renato is a soil expert and former Embrapa hand. (The latter is a government agribusiness research institute). He holds a Ph.D. in soil science and knows these lands well. He gave our group a good presentation before we embarked for our farmland tours. In that presentation, he also made some interesting remarks on the politics of Brazil.

“We’re happy because we are getting richer,” Renato said. That happiness is reflected in voter patterns. Whereas the incumbents are in trouble in the U.S., in Brazil, they enjoy widespread support. Of the 26 states that will elect governors this year, 18 will re-elect their existing governors or vice-governors by wide margins. And Dilma Rousseff is way ahead nationally in part because she is seen as continuing the policies of President Lula.

Not only is the middle class expanding, but Brazil is also minting millionaires. Only nine countries have more millionaires than Brazil, according to one study cited by Larry Rohter in his new book Brazil on the Rise. “With about one-sixth the population of India, Brazil has more millionaires than India,” he writes.

Rohter goes on:

“In a matter of a few years, Brazil has seen a new surge in entrepreneurs who have built fortunes from activities as diverse as airlines, cosmetics, slaughterhouses, shoes, toys and computers… This phenomenon, particularly notable in sectors such as agriculture and ranching and oil and mining, was accompanies by a burst of spending on luxury items ranging from jewelry and designer clothing to private airplanes and yachts.”

Given that context, you can understand some of the success companies are having in Brazil. Whirlpool is one example. According to the company, one in six Brazilians already has at least one of its appliances. In agriculture, AGCO — a maker of farm equipment — saw sales in South America rise 71% in its second quarter, thanks mostly to Brazilian farmers.

Then there are the Brazilian companies. Vale, the giant mining firm, is looking to become one of the world’s largest fertilizer companies. It wants to boost potash output tenfold by 2017 and triple its output of phosphates. It will do this through acquisitions and investments in its own mines. Clearly, it sees the opportunity to serve farmers in its own backyard.

I’m looking at other opportunities to tap into Brazil’s growing markets and have much more to share with you. But for now, I have to sign off. The giant metropolis of Sao Paulo is up next…

Sincerely,
Chris Mayer
Penny Sleuth

September 27, 2010

Profit From Brazil’s New Middle Class Consumers was originally featured in the Penny Sleuth.

Grain prices soon hit 125-year highs in Chicago. In a 10-month span, soybeans went from $3.31 to $12.90 a bushel. Food prices around the world rose 50% in 1973.

Some of the old traders are wondering if it’s happening all over again.

On Thursday, wheat prices hit $7.25 a bushel, a 71% increase since the June low. It’s the biggest one-month jump in three decades. The last time prices got this high was during the food crisis in 2008. (Wheat prices topped out at $13 then.) You may recall the ensuing food riots across the globe from Haiti to Egypt to Bangladesh.

Russia is again the center of attention. The worst heat wave and drought in a century has baked crops to a crisp in Russia, Ukraine and Kazakhstan. These three are among the biggest exporters of wheat in the world. They provide critical food supplies to the largest importing regions in the world — the Middle East and North Africa.

In some areas of Russia, the heat and lack of rain killed half the crop. Withered wheat stalks litter the usually fertile fields along the Volga River. This is one of the world’s breadbaskets. Russia and the Ukraine alone were supposed to supply 18% of the world’s wheat. Now it looks like Russia’s exports could drop to zero.

Originally, forecasts called for 81-85 million metric tons of wheat, rye, barley and other crops. Now the Russian Grain Union says 72-78 million. Skeptics abound on that number, which looks too optimistic. The head of Glencore, the giant grain-trading house, thinks the real number will be closer to 65 million tonnes.

Holy smokes, I hear you say. Yes, it is bad. But it gets worse.

It’s so bad that Glencore begged Moscow to ban the export of grain — as it did in the food crisis of 2007-2008. That’s because Glencore thinks that trading houses around the world won’t be able to fulfill their contracts to deliver grains. When Moscow bans exports, then trading houses can declare force majeure, a clause that allows them to escape these deals. On Thursday afternoon, Russia did just that.

Russia’s crop failure comes at a bad time. Most of the world’s wheat exporters are having problems. The Aussies battle locusts. The Canadians suffer from too much rain. Even European farmers struggle with drought. The Italians’ beloved tomato crop will come up 10-15% short this year. Belgian potato farmers say drought will nick their yields. Polish fruit orchards will be down by a fifth. The French wheat farmers curse the skies as their wheat fields shrivel in the sun. The English sheep farmers, short on hay and grass, have sold their flocks early. Even the Dutch expect 10% fewer tulip bulbs this year.

The market is tightening and there are ripple effects across the globe. Over the weekend, Egypt bought 180,000 metric tons of wheat — its second purchase in two weeks and more than expected. Egypt is the world’s largest importer.

One key difference this time around compared to 2007-08 is that inventories are in better shape — at least on paper. But I have to wonder. In India, government officials have let their once-plentiful grain stockpiles rot in the fields. India thinks food is too important to leave to the private sector. The government is in charge of food stockpiles. In a common display of government folly, bureaucrats, apparently, threw thin plastic sheets over these supplies and let them sit in the fields to rot and wash away in the rains.

The savior in all this looks like it will be the U.S. Stockpiles here should be healthy, at almost 30 million tons.

It seems like only yesterday the market took a cheerful look at the grain markets and said all was well. Global harvests looked like they were going to put in another record. I warned that nothing counts until the crops hit the bin.

Now that record harvest is gone, kaput, in just a month’s time.

So what are the effects of all this? Expect ripples across the food chain. Prices for everything will rise. Prices for cocoa, coffee and pork bellies have already gone up. Beer brewers will pay more for barley, as the barley crop will be down by 20%. All flour-related products — breads, biscuits and the like — will be more costly. As the Financial Times reported, “Food executives are also warning about surging prices for feeding and malting barley, which could push higher the retail cost of products from poultry to beer.”

How will this go over with the already rattled consumer in a fragile recovery? Many companies seem reluctant to raise prices. As Domino’s CEO said, “Consumers are still hurting out there.” Many companies hedge their exposure to food commodities, but if these prices continue to climb, it could crimp their bottom lines.

[Ed. Note: If you want to make a direct bet on rising grain prices, there are plenty of options available to you. Some of the easiest plays can be found in grain ETFs, which track baskets of grains that trade on commodities exchanges. A couple of options include the iPath Dow Jones UBS Grains Total Return Sub-Index ETN (NYSE: JJG) and the PowerShares DB Agriculture Fund (NYSE: DBA).]

Sincerely,
Chris Mayer
Penny Sleuth

August 6, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

How to Bet on the Next Grain Shortage was originally featured in the Penny Sleuth.

This is why things like auditors and listing requirements and boards of directors are so important. This is why due diligence is important: asking questions, talking to people on the ground. They give some assurance to investors that what they see is real and not a fraud.

Sometimes the lines can be very fuzzy. And sometimes the taint of fraud dogs a market, making all the stocks of that market cheap, whether they are fraudulent or not. Such a market is also very susceptible to rumor.

I think the market for the U.S.-listed China-based companies has that taint. That explains the very cheap multiples that many such companies trade for. I’m talking about price-to-earnings ratios of 5–8 times for companies growing 20–30% a year.

But investors will have to be careful, as there seem to be a lot of questionable apples in the bin. And they will have to do quality due diligence to stand up to rumor and extreme price volatility.

There have been several cases of fudged numbers. Take Fuqi International (NASDAQ: FUQI), for example. It is a China-based jeweler whose stock trades on the NASDAQ. The stock dropped 37% one day in March after the company announced it would have to restate past results. The stock has continued to drop since. The stock was $30 per share and is about $6 today.

There have been other grim casualties. But the pace of digging up scams seems to have quickened. I’ve been trading e-mails with my Beijing contacts for weeks. One veteran hedge fund manager, who would like to remain anonymous, told me how he was “very worried.” There are too many scams, which is not good for the market. And the increasing number of negative research reports aren’t helping things…

A company called China Marine Food (AMEX: CMFO) has recently been fending off challenges to its accounting. A website called Chinese Company Analyst performs detailed financial analysis of Chinese companies. In a highly detailed report, it contends that China Marine Food is a fraud. I can’t do justice to the report here, but here is a damning snippet:

“I question how [the company] could generate $7.6 million of revenue, $1.7 million of net income and $1.2 million of operating cash flow in its first five months of operations with (i) $44,000 of startup capital it received from its original founder, [and] (ii) $414 of capex…”

China Marine Food dropped more than 20% on the day these allegations came to light. The stock has continued to fall. The company has defended its accounting. It may or may not be a fraud, though the evidence seems to suggest that there’s more to the story.

But the point of this piece is really to show you how tricky the market for U.S.-listed China-based stocks is right now. It also helps explain the low valuations we see. Don’t just assume that a China-based stock is a bargain because it trades for 6 times earnings and is growing 30% a year. It may not be quite what it seems.

Nonetheless, I fear the taint of the scandal in the China market helps tamp down the stock prices of these stocks, along with worries about a China slowdown. These ought to resolve themselves over time. Ultimately, good results will drive fundamentally sound stocks higher. And since we are starting at such a low multiples, the returns could be substantial.

Chinese stocks are speculative, but good speculations on the old truism that value and price ultimately meet. Tread carefully on these plays.

Sincerely,
Chris Mayer
Penny Sleuth

July 16, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

The Dangers of Investing in China was originally featured in the Penny Sleuth.

This is O’Malley’s playground. He has probably bought and sold more refineries than any man alive. He knows them like an old chef knows the inside of his kitchen.

O’Malley got rich by following a reliable formula. He bought refineries when they were cheap — castoffs, unloved by Big Oil — trading for less than the cost to build them. Later, he sold them for billions.

For example, in the aftermath of the 1987 crash, he picked up a 26% stake in Tosco, then a tiny refinery. O’Malley eventually turned Tosco into the largest independent refiner in America. He sold it to Phillips Petroleum — now ConocoPhillips (NYSE: COP) — for $7 billion.

Two weeks after he closed that deal in 2002, he took over Premcor, becoming its top executive. He did it all over again, using Premcor as a vehicle to buy refineries on the cheap. Four years later, he sold Premcor to Valero (NYSE: VLO) for $6.9 billion.

His is the Midas touch in the refinery space. And he’s mostly laid low since 2007. But now he is back again, buying a Delaware refinery he once owned and sold to Valero. The deal is worth $220 million and is the first purchase of a new $2 billion fund created to buy U.S. refineries. O’Malley says he’ll look at any U.S. refinery on the market.

In other words, it looks like O’Malley is going for the hat trick — trying to get rich three times in the same game.

It’s a contrarian bet, as most people think ill of the refining industry. It’s plagued by costly regulations, weak profit margins and lower demand for motor fuel. But you don’t get to buy stuff below replacement value when times are rosy. As David Foley, an investor with O’Malley put it, “Last time we did it, we made six times our money.”

Based on his track record, I would not ignore O’Malley’s play here. Clearly, he thinks the industry has hit bottom. And there are good reasons to think so, as we’ll see.

One reason comes from Barry Bannister, an analyst at Stifel Nicolaus. He shows how peaking oil prices on a year-over-year basis are usually a catalyst for better refining margins. (See chart below. “WTI” is “West Texas intermediate,” a common benchmark for crude oil.)

Higher refining margins means more profits for refiners. Higher profits usually mean higher stock prices follow. Valero, the bellwether refinery stock, is down about 75% from its all-time high in 2008, which reflects the collapse of refining margins. So an uptick in refining margins will likely work wonders for Valero’s stock price, like rains greening a desert.

Expect other refiners to gain in kind…

[Ed. Note: Naturally, there are a slew of small-cap refining plays that you can get into right now. Among them are Tesoro Corp. (NYSE: TSO), Holly Corp. (NYSE: HOC), and Frontier Oil (NYSE: FTO) – all of which own independent refining operations. Buyer beware, though, the current oil climate has left these refiners burning cash lately. This is a speculative investment…]

Sincerely,
Chris Mayer
Penny Sleuth

July 7, 2010

How to Invest in Oil Refineries was originally featured in the Penny Sleuth.

Already, we hear the “B” word being tossed around. A San Diego County panel — faced with $2.2 billion in unfunded pension liabilities and $1.3 billion in unfunded health care liabilities — recommended, among a number of other possible actions, filing for bankruptcy.

According to Grant’s Interest Rate Observer, four major American cities (Miami, Detroit, Los Angeles and Harrisburg) have all hinted at the same this year.

The big states are even worse. The Economist reports on Illinois: “By 2018, Illinois will be paying $14 billion a year in benefits, equal to more than a third of the state’s revenue, compared with $6.5 billion now.”

Plugging those kinds of gaps means getting creative with new forms of skullduggery. For instance, the State of New York, with its $9 billion budget deficit, is looking at a proposal to borrow $6 billion from its state pension fund in order to make a $6 billion payment due to that same pension fund. Yeah, you read that right.

The trials of Illinois and New York are not isolated incidences, either. Grant’s quotes from the Center on Budget and Policy Priorities: “At least 46 states face or have faced shortfalls for the upcoming fiscal year (FY 2011, which will begin on July 1 in most states). These come on top of the large shortfalls that 48 states faced in their current budgets (FY 2010).”

Yet incredibly — or maybe not — Moody’s maintains that “the credit profile of the U.S. state and local government is very strong.” Huh? What are they looking at? That’s ridiculous. Why anyone should take what these ratings agencies say seriously is beyond me.

In any event, what I see happening is a great big bailout from Uncle Sam, which itself is broke — bleeding astronomical deficits and in hock for record amounts.

In order to do that, the government will simply print what money it needs. We all know what happens then. The value of the dollar goes south.

To protect your wealth, stay with things, as opposed to paper, like bonds. Own hard assets, things like gold and oil. Own the stocks of companies growing fast enough to beat inflation. Own companies that earn their money in a stronger currency (like China’s renminbi). Don’t be afraid to put your money outside of the U.S.

[Ed. Note: Or, you could always take a more aggressive approach to betting on mass defaults at the state and local government levels. Options are still somewhat scarce, but bearish dollar plays like the ProShares UltraShort 20+ Year Treasury ETF (NYSE: TBT), which provides double short exposure to U.S. treasuries, are viable choices.]

Sincerely,
Chris Mayer
Penny Sleuth

June 30, 2010

How to Protect Your Investments When the States Go Bankrupt was originally featured in the Penny Sleuth.