In 1912, 21-year-old Williams gained fame as a survivor of the sinking of the RMS Titanic.

Later that year, he went on to earn his first U.S. mixed tennis championship.

Now a member of the International Tennis Hall of Fame, there wasn’t much Williams didn’t win.

He was a 1924 Olympic gold medalist, Wimbledon champion and a five-time U.S. tennis champion.

On top of all his accomplishments, he was also a highly successful investment broker. Unfortunately for Williams, that was also his unraveling.

He became a partner in an investment firm called C. Clothier Jones & Co. in 1929. His business partners in the small $5 million firm ($61.5 million today) were some of the brightest, most successful investors in the world.

Of course, after the stock market hit the skids in 1929, the company took a hit. But thanks to the rally in first half of 1930, C. Clothier Jones & Co. was in better shape than ever.

He was on top of the world in the spring of 1930. But just like the year before, market speculators pushed stocks higher than they were worth. By late summer, the rally turned into another massive sell-off.

When October came around, Williams and his partners were doing everything they could to stay in business. Their investments turned to dust, and they were so incredibly overleveraged the only course for them was to fudge some numbers and blatantly lie to shareholders.

Williams left the country in mid-October to get married in Europe. By the time he returned, he was a wanted man, for market manipulation. Four of his colleagues and large investors in the company had ended their own lives in that single week.

We are facing another summer of 1930. The rally that started in March of this year is eerily similar to what made Williams and his partners look like kings of investing.

Luckily, you don’t have to end up like them when the house of cards falls again…

Take Advantage of the Global Edge

We’re fortunate to have history lessons when trying to figure out the market. But there are certain aspects of today’s market that just weren’t there in 1930.

Some, like trade imbalances and foreign lending, make today’s global economy a scarier environment. Others, like emerging economies, give us a serious advantage over our forefathers.

Even if the average investor of 1930 were aware of a possible second downturn, his options would be incredibly limited. Only a millionaire in 1930 could invest in other, safer economies. Of course, even that would’ve been difficult, since those were so few and far between.

Today, it’s as effortless as buying an ADR through your online broker. But as last time, figuring out which ones to buy is no easy task.

I ramped up my Lifetime Income Report portfolio to reflect my favorites: Asia, Africa and Latin America. Every single one is showing strong double-digit gains and safe, growing dividends. And I expect them all to thrive even if this is another 1930…

I just added another international giant in my absolute favorite country, and it’s set to do even better. To learn more, just click here…

Sincerely,
Jim Nelson

November 19, 2009

A Lesson from 1930: Avoid the Second Collapse with This 6.9% Brazilian Yield was originally featured in the Penny Sleuth.

What’s he talking about? Today, we take a look and invest right alongside his idea. And it should start to pay off with the arrival of the first swallows of spring in 2010. It’s also timely now — in this weak-kneed economy — because it has traditionally held up well even in when the economy is on the ropes. Even the Great Depression couldn’t put this thing down.

We start with simple truths. The world’s population has more than doubled since 1950 — from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will come from undeveloped markets such as China and India. And they will all be doing one thing, for sure — eating.

Now, hang on. I know that is a banal insight by itself, but this story has layers like a tiramisu. The second layer is the mix of food eaten, which is important. These undeveloped economies are getting richer. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?

They buy more meat, more fruits and more vegetables. Their calorie intake rises. That’s why the U.N. says we’ll need to boost food production by 70% by 2050 — a big task, given increasing restraints on water and quality arable land.

How do we meet that demand? Here the plotlines start to thicken and things get interesting…

Let’s look at soybeans specifically. China is the largest importer of soybeans and has been since 2000. China was once the largest exporter of soybeans, but flipped to a net importer in 1995. It may well be impossible for China to meet its demands for soybeans by producing more of its own. Passport Capital, an astute hedge fund, estimates that in order to grow enough soybeans to become self-sufficient, China would need to cultivate an area about the size of Nebraska.

That looks impossible against China’s arable land base, which has been in decline since 1988 — this despite the fact that China’s subsidizes agriculture. Another reason is the low level of water resources in China. Soybeans require a lot of water — 1,500 tonnes of water for one tonne of soybeans.

Who has lots of water? Brazil. So it is no surprise to discover that the increase in demand for soybeans from China has largely been met by increasing soybean acreage planted in Brazil. (Brazil is the second largest exporter of soybeans in the world, behind the U.S. and ahead of Argentina and Paraguay.)

The easiest way for China to get around its water shortage is to import soybeans. By importing soybeans, Passport calculates that China is effectively importing 14% of its water needs.

It looks likes this trend will continue for quite some time. When you look across the world, arable land per person is in decline. (Arable land simply means land that can be used for farming; it doesn’t mean that it is currently used for farming.) But one nation has more potential for converting arable land into producing farmland than anybody else by a country mile. It’s Brazil again.

Brazil has a large tropical savanna known as the cerrado. You can think of it as the world’s arable land bank. It’s an area of about 250 million acres — about as big an area as all of the arable land in the U.S. It gets plenty of rainfall and sunshine. The soil is very old and runs deep. But there is a problem: The soil is nutrient poor. You need to add a lot of potash and phosphate — two key nutrients — to grow soybeans there.

According to estimates by SLC Agricola and Morgan Stanley, the average new acre of farmland in the cerrado requires 14 times the amount of phosphate and three times the amount of potash of a typical American acre. This means that it is expensive to grow grains here. You need a high soybean price to make it worth the effort — and there is more to it than just adding the nutrients. There is road and rail access, for instance. Someone would have to build all that out, too.

Connecting the Dots — Grains Are Cheap

So now we are in a position to connect some dots. China’s increasing population and affluence will drive its soybean imports. These imports will come mainly from Brazil. And Brazil, as it converts more arable land to producing farmland, will need a lot of potash and phosphate.

What is true of soybeans is also true of wheat and corn and rice and other agricultural commodities. We’ll need more of all of them. And all of them face the same challenges for water and land. All of them require lots of fertilizer.

I’ve not mentioned the biofuel component. But this is another big pull on demand for grains. The U.S. alone aims to produce 15 billion gallons of ethanol by 2015. All over the world, food crops now compete with energy needs.

This is not a gloom-and-doom scenario. It simply means that there is a lot of support for higher prices for agricultural commodities. Inventory levels still remain low worldwide. Grain prices are all well off their highs. After adjusting for inflation, many of them are as cheap as they’ve been in decades.

This is why Jim Rogers said he likes the agricultural commodities. That’s what he was talking about in the quote up top. I couldn’t agree more.

I also mentioned how this idea was hard to kill. In the Great Depression, purchases for jewelry and clothing and the like fell by 50%. But purchases for food — even for meat — held steady. We’ve seen similar patterns in recent busts. In the Asian Crisis of 1998–2001, the demand for food held steady even while other markets collapsed.

Put it all together and you have a great case for higher grain prices. You also have an environment that is very good for fertilizers — in particular, potash and phosphate. An investment in the fertilizer stocks is an investment right alongside the grains.

I’ve just alerted my Capital & Crisis readers to two fertilizer stocks that I believe are best positioned to profit from the coming agricultural commodity boom, but there are a number of fertilizer plays out there that are also ripe for the picking.

A couple worth taking a look at include Agrium (NYSE: AGU) and Western Potash (TSE: WPX). Naturally, I’m partial to the ones that I’ve recommended to my C&C readers – and they’ve got pages of research to back up why that is – but these two tiny stocks could make interesting moves nonetheless.

Sincerely,
Chris Mayer

November 10, 2009

Jim Rogers: Time to Buy Agricultural Commodities was originally featured in the Penny Sleuth.

But you’re not out of luck just yet…

Many countries around the world will be able to steer around this extended recession. Some are even in prime position to explode.

And it’s not as difficult to invest abroad as it may seem. Today, it’s as effortless as buying an American Depositary Receipt — same thing as a stock — through your online broker. Figuring out which ones to buy is the hard part.

In Lifetime Income Report, we’ve ramped up our portfolio to reflect our favorites: Asia, Africa and Latin America. Today I’m letting Penny Sleuth readers in on two south-of-the-border plays you can play immediately…

Escape the Second Downturn on Lula’s Coattails

Our favorite international plays come from Brazil. This probably doesn’t come as a surprise. We’ve been bullish on Brazil for over a year now.

The Brazilian economy has never looked better. For starters, the democratic government of President Luiz Lula da Silva is both popular and smart. Instead of leading the Brazilian people down the same road they always seem to end up on — collapsing currency and enormous income disparity — Lula re-cemented the federal and state budgets, brokered trade deals across the globe, and brought the country’s economy into top-ten status.

This success helped him win a landslide reelection in 2006. Even his political opponents can’t discount the success he’s had in making sure Brazil didn’t fall into the same recession that’s now captured the rest of the globe.

Sure, smaller export numbers and commodity prices have put a small hold on Brazil’s growth. But by this time next year, the country’s GDP should be back up to a 3.5-4% growth rate.

Lula has been able to do this by placing a little fiscal responsibility into a system that’s rarely had it. It’s been just 11 years since Brazil suffered from its last currency crash. Thankfully, the country adjusted its currency after that fiasco, completely taking the real off the U.S. dollar peg.

This is probably the most important reason Brazil is now starting to garner some recognition as a safe haven for growth investing.

The federal deficit and spending habits here in the U.S. can only hold for so long. Even China — the country holding more U.S. Treasury Notes than any other — recently remarked that it would like to drop the dollar as the world reserve currency.

Having a currency that’s not pegged to the dollar is a huge benefit in today’s inflationary world.

But besides a superior currency, Brazil investments come with many other perks that interest smart investors.

The Brazilian Advantage

Take tax rates for instance. It’s easy to find foreign plays that pay large dividends. It’s difficult to find ones that don’t have a cut taken off the top just because you’re a foreign investor.

Canada is the most common example. Until very recently, Canada had some of the best royalty plays in the world. The vast resources of our neighbor to the north translated into large income distributions for investors.

That all changed in 2006, when the Canadian Finance Minister Jim Flaherty decided to take advantage of all the rich American investors coming across the border for those large yields. Now, if you are an American, you have to pay his government 15% on all Canadian income trust distributions you receive.

This is a new trend developing throughout the investing world. Fortunately, there are a few safe income havens left. Brazil, Great Britain, Indonesia, Hong Kong, and Mexico are the five zero-tax-withholding countries that we are focused on.

Another perk Brazil has to offer is its rapid acceleration on the world stage. Lula’s popularity and successful reforms have helped put a spotlight on South America’s largest country.

Not only is Lula’s voice highly anticipated in any international gathering, his ability to highlight his country’s tourism-friendly assets helped Brazil lock in the 2014 World Cup and 2016 Summer Olympics.

Of course, just having a great investment location isn’t enough. You need to have the perfect investment to take advantage of it. And we have two of them…

Grab Green Income with the World-Leading Hydro Generator

When most people think of renewable energy, they think of wind farms and solar plants. But one of the most widely used forms of renewable energy is hydroelectric. And no country knows more about hydropower than Brazil.

The Itaipu hydroelectric dam, located on the Panara River between Brazil and Paraguay, is currently the largest in both capacity and annual generation in the world. The site generates nearly 100 billion kilowatthours (Bkwh). That would be enough to power 11.2 million U.S. homes. That might be why the American Society of Civil Engineers picked it as one of the Seven Wonders of the Modern World.

Brazil entered into an agreement with Paraguay in 1973 to build and share the electricity produced from Itaipu. Currently, Paraguay uses it to power more than three quarters of its electricity needs, selling the rest of its share to Brazil.

It was during that 1973 treaty signing that Brazil decided to go headlong into the hydropower business.

The South American leader now generates more than 372 Bkwh per year from hydroelectricity — 85% of total generation.

Brazil is also expanding its capacity at a rapid rate. Over the next 20 years, only China will be generating more electricity from hydropower plants.

Lula’s government has spent plenty to back hydropower expansion. Most of the $221 billion earmarked for infrastructure, transport and energy in Brazil’s stimulus plan is slated for hydro capacity increases.

To take advantage of Lula’s hydropower initiatives, and reap the rewards of Brazil’s fast-growing economy, you should take a serious look at these two hydro giants:

• Companhia Paranaense de Energia (NYSE: ELP) is a major player in the Brazilian hydro market. The company owns 17 different hydro plants, most of which are located on the Panara River. The stock is in position for an easy double from here.

• Enersis (NYSE: ENI) owns and operates 53 power plants — most of which are hydroelectricity plants — that have an installed capacity of more than 14,000 MW. We could see units of ENI continue to climb over the next year. Meanwhile, you’ll be able to collect large dividend yields for as long as you hold it.

While they’re bigger than most of the opportunities that we talk about in the Sleuth, they offer the some of the best exposure to the burgeoning utility sector in Brazil. I expect them — and other Brazilian ADRs — to do well in the coming months regardless of where the market heads here at home.

Sincerely,
Jim Nelson

November 6, 2009

Two Brazilian Plays to Beat the Market was originally featured in the Penny Sleuth.

Regular investors can actually take a cut of every single bill payment you and your neighbors make. Today, we’ll show you how…and give you three small-cap plays you need to get into right now…

When embattled in a game of Monopoly, the three sets of properties we typically shoot for are Boardwalk and Park Place, the railroads and the utilities. Why would Parker Bros. make such a fuss over these three assets?

Well, luxury real estate like the dark blues is typically lucrative. In today’s world, however, that probably isn’t your best bet.

How bout the railroads? Owning transportation and shipping systems is always a profitable venture. But with competition from cheap air cargo and trucking, railroads just don’t have the appeal they once did.

That leaves the utility companies. If you can own the transfer of water or electricity, chances are you’ll make a pretty penny. That’s why we’re big proponents of utilities.

These companies can pay such high dividends because they make so much money off the growing demand for natural gas, electricity and even water.

Buy why is now the best time to load up on utilities? Because they are as recession proof as it gets.

Time to Take a Trip on the Electric Avenue

Josh Peters of Morningstar writes, “Even during recessions, people have to heat their homes, take showers and keep that TV set aglow.” Even if television doesn’t sound like a necessity, try telling that to the majority of Americans. While ad revenue has crashed in the last 12–18 months, TV viewership is as steady as before…if not better.

While we think natural gas is the investment you need to make right now, electricity is the easiest and most lucrative. You see, the average American will actually use more electricity during recessions…a lot more time spent in their living rooms watching TV and surfing the Web.

Sure, industry has slumped a considerable amount. But electricity companies have seen only a nominal drop in revenue, most of which is already factored in. Meanwhile, they are paying larger and larger dividends.

When looking for an electric utility, the No. 1 characteristic to seek out is cash flow. The more cash running through a company, the better. You also have to consider whether the company is taking steps to curb spending. Today’s we have three small-cap utilities that have done expert jobs of both.

Buy These Three to Shore Up Your Income Portfolio

First up is UIL Holdings Corp (NYSE: UIL). UIL is an electric utility in New Haven, Connecticut. The company has a solid customer base of nearly 325,000. Only 5.6% of its revenue comes from industrial businesses, which helped the company escape the last market collapse relatively unscathed.

But the best part about UIL is its dividend. The company has paid out its income to shareholders dating back to 1977. Over that period, its dividend grew considerably. Now you can get a solid, consistent 6.3% dividend yield, without worrying about where the stock goes. You can’t get that with a savings account.

Next is NorthWestern Corp (NYSE: NWE). With both electricity and natural gas operations, the company has over 650,000 customers in South Dakota, Montana and Nebraska. NorthWestern has little-to-no competition in its operating region, which makes it a true semi-monopoly.

While it’s only been paying dividends for a little over a year, the company has already raised its payments to 34 cents per quarter. That works out to a solid 5.4% yield. Now is the time to lock in this growing income.

Finally, we found Empire District Electric Co (NYSE: EDE). Empire generates, transmits, and distributes electricity in Kansas, Oklahoma, Arkansas, and its home state of Missouri. While the company’s stock is a bit more volatile than others, it does offer another upside most don’t.

Empire also has water operations in various places in Missouri. This could become a lucrative business, as the cost of water continues to skyrocket.

Empire’s 7% dividend yield is enough to give it a serious look. High yielders like this don’t come along too often. We suggest you jump on it.

All three of these should be consistent income generators for years to come. If you are worried about a second market drop, or you just want to get your share of your neighbor’s energy bills, these are your best bets.

After all, where else can you get safe income in this market?

Sincerely,
Jim Nelson

October 27, 2009

Get Paid When Your Neighbor Turns on His Kitchen Light was originally featured in the Penny Sleuth.

Here’s everything you need to know to profit from the best metal ETF on the market.

Forget gold and platinum -– and even exotics like palladium -– the only precious metal that you need to own right now is silver. That may come as some surprise given the rally that gold has had this year, and given the analyst sentiment that has pushed the SPDR Gold Trust ETF (NYSE: GLD) to the world’s sixth-largest holder of gold bullion -– ahead of Switzerland and China.

But from a valuation standpoint, there’s no question that silver is the best metal to buy right now.

Making a value case for a commodity –- like gold, silver, or oil –- isn’t quite as simple as it is with a stock. That’s because while stocks have easily defined assets, the value of a commodity is simply whatever people are willing to pay for it. It all comes down to scarcity, or how much of a given commodity is out there.

In the case of precious metals like gold or silver, the metal is worth something because there isn’t a lot of it out there. Likewise, nonrenewable energy sources like oil are valuable because it’s in limited supply.

Traditionally, investors have looked at the relationship between gold and silver’s prices to determine whether one of the metals presented a good value play. At present, the gold-to-silver price ratio sits at approximately 59:1, which while high recently is nothing compared to its peak of 98:1 back in 1991.

But the fact of the matter is that the gold-to-silver price ratio is a worthless measure of the two metals’ value. To get a more meaningful indicator, let’s take a look at each metal’s “market capitalization” -– the value of all of “above ground” gold or silver multiplied by its price.

The results are startling…

You see, unlike gold, which has limited industrial uses, silver is used in a number of manufacturing processes. Some of these processes, known as non-recoverable industrial consumption (NRIC), result in the destruction of the metal and lower the amount of above ground silver. According to silver analyst Theodore Butler, in the last six decades NRIC has resulted in more silver being consumed than mined – from 10 billion ounces above ground in 1950 to just 1 billion today.

Compare that to gold, which has seen its above ground supply increase 150% to 5 billion ounces during that period.

As recently as 1975, the value of the world’s gold was 23 times higher than silver’s. Today, with depletion taken into account, gold is currently priced 250 times higher than silver. That’s a shocking difference.

And it’s one that suggests silver is grossly undervalued as an investment right now.

The Best of the Silver ETFs

The best way to play silver right now is clearly exchange-traded funds (ETFs).

While buying bullion direct is a good option for silver investors, the premium you’ll pay suppliers — often in excess of 5% — and the costs and risks associated with storage make it a poor choice for the vast majority of investors.

Investing in silver companies also adds a lot of risk over ETF plays. That’s because while precious metals are a point of refuge for investors when stocks are flailing, companies that mine the metals aren’t immune to the market’s overall trend –- they might do “better” than the rest of the market, but in a bear run that has most equities down double digits, “less worse performance” is little consolation for losses.

Not only do ETFs offer pure commodity exposure that’s nearly free of market irrationality, the best funds physically hold the silver bullion that your shares represent.

A vault filled with silver bars is a big draw for investors who are nervous about a fund failing to meet its investment objectives.

Though silver’s ETF offerings aren’t as varied as gold’s right now, there are several funds worth looking at right now. The biggest of the silver funds is the iShares Silver Trust ETF (NYSE: SLV), which has a market cap of $4.97 billion, and is one of the largest owners of silver bullion in the world. Other smaller funds include the PowerShares DB Silver Fund ETF (NYSE: DBS) and newly formed ETFS Silver Trust (NYSE: SIVR).

But in truth, the only silver ETF worth trading right now is the stalwart SLV. That’s because the other two funds lack the liquidity, cost-effectiveness, and options that SLV offers. And right now, SLV is on the verge of a technical breakout that could equal double-digit gains in days…

Taking a look at the chart above, the first thing that becomes clear is the uptrend that this fund has been on for the last year. And year-to-date, SLV has been constrained within a tight trading channel, which it’s currently right at the top of.

While nearing the top of a channel would normally signal a bounce back down, in this case, with SLV currently at a 52-week high and little risk of profit taking, the potential for a breakout above the trading channel is very real. If shares break through the top of the channel at the $17.70 mark, the breakout is underway and it’s time to consider grabbing onto shares.

Supercharging Your Silver Play

As usual, options are the best way to supercharge this silver play. With a move imminent, a shorter-term out of the money call option on SLV packs the highest profit potential. That could mean as much as triple-digit gains by the end of the month…

That said, if your risk tolerance is lower, the fundamental potential of silver easily justifies going with a more conservative option trade for this fund. You can take a look at all of SLV’s available option at Yahoo Finance.

Cheers,
Jonas Elmerraji

October 9, 2009

This Precious Metals ETF Could be Gold’s “Silver Bullet” was originally featured in the Penny Sleuth.

Here’s why the only way to make money in this market is to turn conventional investing strategy on its head…

As cool weather descends upon the Northeast U.S., risk appetites start to wane. Last week, traders and investors finally sobered up. Are they second-guessing whether government spending can actually kick-start a sustainable recovery? Both stocks and corporate bonds sold off sharply.

The big questions of the moment: What kind of economic environment do we face? And more important, what’s already priced into the stock market? Here’s my view on these themes: As we see with “cash for clunkers,” government stimuli simply steal demand from the future.

But more importantly — because this is not yet a mainstream view — the real job creators in the U.S. economy, small businesses, will not expand hiring as expected. There are many reasons for subdued hiring plans; an emerging reason to avoid expansion and hiring will be heightened expectations that tax rates will soar in the future to pay for out-of-control government spending.

So I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows. As we “lap” the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I’m amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality.

Another big question is how will policymakers respond to a sluggish-to-nonexistent rebound in hiring? The economically illiterate, and those with preconceived “big government” agendas, will use any crisis as an excuse to expand government. You’ll be ahead of the game if you realize — as many in the media and academia clearly do not — that the government has no resources. It’ll take money out of one of your pockets, skim some off for its cronies, and expect you to be grateful when they put some of it — debased by the Fed’s inflation, of course — back into your other pocket.

The labor market is dealing with a structural imbalance fueled by government-sponsored housing and credit bubbles. Many will call for the government to “solve” this labor market problem, which will cause a new type of market dislocation. By early 2010, some will push for the federal government to start hiring the chronically unemployed in “New Deal” type of programs.

Where you stand on this question will determine your expectations for the future performance of most stocks (ignoring special situations). I certainly don’t enjoy having such a bearish outlook on the economy, but it’s the conclusion I reach after weighing all the evidence about the real economy; the credit markets; and policymakers’ damaging, distorting influence.

Some pundits point to corporate mergers and acquisitions as reasons to be bullish, ignoring that fact that most deals occur closer to the peak of markets, and most deals destroy shareholder value, because the buyer overpays. The 2000 AOL-Time Warner merger is a case in point.

Recently announced deals in pursuit of tech service companies are not a sign of strength; they’re defensive moves to counteract declining hardware sales and profit margins. Cisco is constantly adding to its extensive list of acquired technology companies partly to divert the Street’s attention away from the poor growth prospects and rising competition in its core businesses. Dell’s and Xerox’s recently announced acquisitions are defensive because the computer hardware business stinks.

Corporate CFOs and Treasurers are happy about the recent bull market in risk. They know much more about their prospects than outside investors, so their balance sheet management is telling. In a word, the approach toward capital structure is “defensive.”

Heavily indebted companies are flooding the market with follow-on stock offerings to pay down debts. They’re also taking advantage of the Pollyannaish mood of the corporate bond market to issue risky bonds at attractive rates, as default risk seems to be a distant memory of bond buyers. Many corporate bond investors have taken the Fed’s bait to reach for yield, regardless of credit risk.

This isn’t the “buyer’s market” that most of Wall Street would have you believe we’re in.

That doesn’t mean that there isn’t a colossal amount of money to be had in stocks right now – if you’re betting against them. That’s exactly what I’m advising my Strategic Short Report readers to do on a daily basis.

It’s time to turn around your investment analysis and look for companies that are poised to crash, not the ones that could rally in the coming months. Once investor sentiment turns back around, you wont want to be on the long side of most stocks.

Regards,
Dan Amoss

October 8, 2009

The Cold Hard Truth About Economic Recovery was originally featured in the Penny Sleuth.

Silver is the most flexible metal on earth. We’re not talking about its malleability. We’re talking about how it is used.

Let’s take the point of view of those expecting a quick, painless recovery. In that case, silver is a great investment. It has many industrial uses other precious metals don’t. As the global economy kicks back into gear, we’ll see more demand from electronics manufacturers, battery makers and solar cell producers — all of which use silver in their products.

There are thousands of uses for silver in industry. It is used in water purification, medical machinery and, of course, jewelry. All of these industries will begin to pump out products again, which will put a strain on our limited aboveground silver reserves.

Now take a look at the world through the eyes of those thinking we are going to see a second collapse. The best place to store wealth is in precious metals. Of course, gold is the most common place to store cash, but silver is no slouch.

From 2006 until now, the physical holdings of silver funds have jumped 11-fold. That’s because more people than ever are interested in holding silver — or at least a fund that holds silver.

Silver is both a way to safely store your wealth and to spend it. Over the past several centuries, silver has been used as currency. In fact, our own U.S. dollar was once backed by silver. For those expecting the worst, silver is a must-own. These ETF holdings don’t even take into account how many people are stocking up on personal physical holdings.

There’s no shortage of demand. Everything is in place for another massive run-up. Gold already broke the $1,000 per ounce threshold last month. And it busted through its 2006 highs this week. Even so, silver is still lagging around $16.50.

David Morgan from Silver-Investor.com notes that when gold breaks through $1,000 and stays there for a length of time, silver will shoot up. He even went as far as to say silver will break through last year’s $21 high and hit $25 per ounce sometime in 2010.

Are we suggesting you buy silver? Well, yes. But we have a much better way for you to make money off this rise…

Buying shares of a major primary silver miner like Silver Wheaton (NYSE: SLW) would do the trick. It’ll certainly leverage its massive reserves and production against silver’s rise and return larger profits to shareholders than simply buying silver will. But even these gains will be miniscule compared with what you could see with small-caps.

We have an opportunity to get option-sized gains on silver’s rally without the downside or expiration hassles of actually buying options. By buying shares in a junior silver miner, like Hecla Mining (NYSE: HL) or Mag Silver (AMEX: MVG), we can take advantage of huge price swings without worrying about it expiring worthless, as options often do.

In just the last week, Hecla is up 15%, and Mag is up another 5%. As I write, these stocks are continually pushing into new 2009 highs ever day. When the silver boom gets traction in the market, expect small players like these to rocket as a result.

Sincerely,
Jim Nelson

October 7, 2009

Finding Option-Sized Gains from $25 Silver was originally featured in the Penny Sleuth.

As recently as September 2008, realtors could claim that no one had lost money in the Dubai property market. That’s no longer true. In fact, now the market has too much of just about every property type. One headline story noted how 32,000 homes are about to come on the market next year, which is a big number to choke down in any city. Dubai had a huge property boom and now must suffer the flip side.

The hotels, too, are pretty empty. I’m staying at the new Address Hotel downtown, which has been open for only 25 days, we are told. I’m the first person to stay in my room. It still has that new carpet smell.

I wandered down for breakfast and was alone in a cavernous dining room. The hotel is brand-spanking new and everything looks wonderful. It’s just mostly empty. I think there are more hotel workers than there are guests.

In Dubai, revenue per room is down 35% from a year ago. Yet there is still an expansion going on. Next year, estimates call for a 15% increase in the number of rooms. This would mean a 40% increase in two years.

Over breakfast, I perused my complimentary copy of The National. One of the things I like to do in a foreign city is to read the local newspapers. I’m kind of a newspaper junkie anyway — I get three dailies delivered to my doorstep at home. In any event, I always find interesting nuggets from a perspective you might not get if all you read is The Wall Street Journal or Financial Times.

Today’s business page carried an array of tales… There was the arrival in Doha of a new LNG tanker, fresh from Seoul’s shipbuilding docks. There was a story about how UAE consumer confidence is up. Also, notes on bond issues in the Gulf, the latest figures on money supply in Kuwait (it’s rising at a frighteningly quick pace of 18.7%), the price of villas in Dubai and more. All sorts of little odds and ends that help paint the picture.

There was also a lot of chatter about infrastructure, which I found particularly interesting. Abu Dhabi, the capital of the UAE, which I will visit on this trip, is looking to raise $100 billion for infrastructure projects. From The National: “The emirate needs to fund new transport, electricity and telecommunications schemes…”

Dubai itself also has ambitious infrastructure spending plans. Last night, as we made our way to our hotel, we could see the new Dubai Metro stops along the way, which, lit up as they were in soft blue and white twinkling lights, looked like something out of the future.

Incredibly, the Dubai government last year spent about 45% of its budget on infrastructure projects — mostly on the roads and ports. But there is a lot more on tap, as The National reports:

“Dubai could invest as much as $20 billion in desalination projects in the next decade alone as it increases its water output by 2.72 billion liters a day… [There are also] plans to add 14,405 megawatts by 2017… Construction costs for those new plants amount to $11.6 billion, while infrastructure costs, including substations and transmission lines, will be about $11.6 billion.”

Sincerely,
Chris Mayer

October 6, 2009

Dubai’s Infrastructure Opportunity was originally featured in the Penny Sleuth.

I was in Manhattan last week attending Grant’s Fall Investment Conference. The U.N. General Assembly is meeting there, and the streets were blocked off in places. The NYPD was out in full force. I heard one passerby complain about the inconvenience of it all to one police officer. He responded, “Don’t blame the NYPD, blame the General Assembly.”

With the General Assembly in Manhattan and the G-20 in Pittsburgh, government has taken over the headlines this week. It seems half the world is mostly preoccupied with telling the other half what to do. No doubt, bossiness is in a bull market.

At Grant’s conference, I heard presentations on gold, the dollar, oil, real estate and more by a slate of luminaries, including John Paulson. Paulson is one of the best hedge fund managers in the world. There were many others, including Grant himself, who has created something of a stir lately.

Jim Grant, the host and editor of Grant’s Interest Rate Observer, has turned bullish on the recovery. In a Wall Street Journal piece on Saturday, the great bear turned in his claws and picked up the horns of a bull.

In a phrase, Grant’s thesis runs this way: The sharper the decline, the stronger the rebound. For this, he finds ample evidence in the historical record. The economy bounced back strongly after each sharp contraction — such as those in 1893-94, 1907-08, 1920-21 and 1929-31.

In the current recession, GDP (a rough measure of economic activity) contracted nearly 4% from peak to trough, which is a sharp recession as these things go. So, Grant reasons, the rebound will follow the historical pattern.

Grant loves to challenge the consensus. And the consensus this time around is that the recovery will be weak. I loved the quote he pulled from economist A.C. Pigou: “The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.”

Grant makes an eloquent and thoughtful case, as he always does. He goes on to conclude in his editorial: “The world is positioned for disappointment. But in economic and financial matters, the world rarely gets what it expects. Pigou had humanity’s number.”

I hope Grant is right. It is an appealing case, but I don’t buy it. Too many of the problems of the prior boom remain unresolved. There is still too much leverage and debt in the system. And on a more basic level, business is not good across a spectrum of sectors. The contraction is still ongoing. I’m inclined to remember the old bearish refrain that things are never so bad that they can’t get worse.

It’s All About Markets

It’s true we’ve had a sharp contraction, but there is no rule that says we can’t contract more. A nearly 4% decline in GDP could turn into an 8% contraction when all is said and done. The move from 4% to 8% would be painful, indeed. Even then, we would be a far cry from the dark woods of the Great Depression.

In some ways, the whole discussion is irrelevant anyway. As investors, we care about markets, and not GDP growth. There is a great fallacy out there that if the economy does well, stocks should do well (or if the economy does poorly, stocks should do poorly). Hence, too many so-called investors waste an inordinate amount of time talking about recovery, or lack thereof.

It’s possible that Grant is right: GDP does expand strongly. But investors could still lose. We have one glaring historical example: From 1964-1981, GDP grew 370%. And the sales of the Fortune 500 more than sextupled. Yet the Dow Jones industrial average went from 874 on Dec. 31, 1964 to 875 on Dec. 31, 1981.

As Warren Buffett once wrote: “Now, I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.”

For investors, it is all about the price paid. The really relevant question is not one of whether or not the economic recovery is real. The question is: are stocks cheap enough? To answer that, you have to look at stocks and compare them with the alternatives.

My answer is some stocks are cheap and some are not. It is hard to generalize. In my view, investing is a craft of the specific. It is in the picking of the trees in which investing skills pay off the most, not in assessing the forest. There are, undoubtedly, specific stocks that will prove nice investments over the next few years. Finding them is what we are all about.

Sincerely,
Chris Mayer

September 30, 2009

Are the Bears Turning Bullish? was originally featured in the Penny Sleuth.

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

September 23, 2009

Natural Gas’ Triple Could Give Us a 416% Gain By Year-End was originally featured in the Penny Sleuth.