It frees up massive amounts of crude oil from deposits on dry land once thought to be inaccessible. While most investors don’t know anything about this extraordinary phenomenon, it’s filling the coffers of some little-known American oil companies with tons of cash.

It’s a big breakthrough for the nation’s oil industry.

As the Natural Resources Defense Council points out, it, “would give America access to large, domestic oil resources — potentially more than four times the proven U.S. reserves, or up to 10 full years of our total national consumption.” That’s a quadrupling of U.S. oil reserves.

Now here’s where the action is the hottest: The Bakken trend. This U.S. region lies in the giant Williston Basin and stretches across parts of the Dakotas, Montana, Manitoba and Saskatchewan…

In the 1990s, geochemist L.C. Price, working for the U.S. Geological Survey (USGS), compiled a stunning report on the Bakken trend. He concluded that it contained 200–500 billion barrels of oil. In 1999, he turned in his report to the USGS, but nothing happened. In 2000, Price died, but the USGS still had the report. The USGS refused to release it. Price’s story of Bakken was the province of oilmen telling stories in bars… until today.

It took the force of a North Dakota senator to press the USGS to take up where Price left off. But finally, the Bakken has the world’s attention. New work on the area confirms the essence of Price’s research, if not his 200–500 billion barrel estimate. Some 2006 estimates place 300 billion in North Dakota and Montana alone.

Also, geologist Julie LeFever, who worked with L.C. Price on his initial report, published a paper adding that additional barrels lie in various layers of the Bakken.

What does this mean for the smart oil and gas investor? Prospects of returns far better than anything you’ve ever heard of from the Canadian oil sands or Colorado’s shale.

“The Bakken formation estimate is larger than all other current USGS oil assessments of the lower 48 states,” the report says “and is the largest ‘continuous’ oil accumulation ever assessed by the USGS.”

Who knows exactly how much oil lies beneath the Bakken? On April 10, 2008, the USGS issued a shot heard round the Bakken. Its newest estimation reveals a 25-fold increase in the amount of oil that can be recovered from the Bakken formation. North Dakota and Montana’s Bakken alone have an estimated 3–4.3 billion barrels of oil that could be recoverable with today’s “magic drug” technology. The Bakken has suddenly become one of the hottest crude oil plays in North America. Already, investors from Norway, the United Kingdom, France and Italy are in on the game. Private equity predicts Asian investors will be next…

Bakken, you see, is just that big. Predictions for peak daily production range from a healthy 300,000 barrels per day (bpd) to a whopping 700,000 bpd. That kind of production could last 10–15 years. Meanwhile, the Gulf of Mexico produces half what it did 10 years ago. The Bakken is the future of U.S. energy.

And there’s even bigger news… a new formation under the Bakken shale. Three Forks-Sanish could prove just as good as the Bakken. This is just what geologist Julie LeFever suggested back in ‘06. Three Forks’ sand and porous rock could offer up 1.9 billion barrels of oil using current technology. At least that’s the latest number I have from North Dakota’s Industrial Commission. But Harold Hamm, CEO of Continental Resources (a key player in the Three Forks) claims there could be as much as 8 billion barrels.

Getting oil and gas out of the Bakken has never been easier. Since just 2008, Bakken’s experienced drill teams have whittled down the time it takes to drill over two miles down into the shale. What once took 45 days now takes only 19.

Right now, the Bakken has put a record number of rigs to work. Things haven’t been this busy since 1981. About 6,000 wells produce in just the North Dakota Bakken alone. The region added over 1,000 new wells since 2008, when I first started covering this resource bonanza.

Early investors in shale oil and gas have made fortunes.

Take Range Resources, for instance, a company that locked down a lot of shale acreage early in the other big shale finds — the Barnett and Marcellus. It’s up 2,294% in the last 10 years.

Specifically in the Bakken formation, my readers cashed out on shale player Kodiak Oil & Gas for 113% gains.

So there is a ton of money to be made from this new technique. And if you take advantage of this tidal wave, it could make you wealthier than you’ve ever thought possible…

Sincerely,

Chris Mayer
for The Penny Sleuth

You Could Make You 3,800% Gains from This Technology Breakthrough was originally featured in the Penny Sleuth.

The firms in my portfolios have not only great assets, but also great management and excellent business plans. These companies are building themselves over time and creating new wealth. Over the long haul, I’m not overly concerned about the companies on my list. When the smoke clears, they’ll be standing tall.

The End of Big Finance and Big Welfare-Warfare State

Let’s distill the problem. We live in an era — and I believe it’s the END of an era — when the West’s so-called “finance industry” grew far too large and is now collapsing. Same thing with the so-called “welfare state” and its companion “warfare state.” Big Finance is dying, as is Big Welfare.

Back in the 1960s, something like 15% of overall U.S. corporate profits came from the banking and finance side of the economy. By the early 2000s, something near 50% of corporate profits came from running money. That was, quite simply, too much of the economy devoted to finance.

Occupy the Resource Space

This issue of the collapsing “finance industry” gets back to a point I’ve made before, that finance — running money — isn’t what creates wealth.

You create wealth by digging or pumping something out of the ground. Then you refine it and process it, adding value along the way. Then you turn the product into a finished good that somebody else needs or wants. The idea of “finance” is OK to facilitate the foregoing, but not as an end in and of itself.

This line of thinking gets back to why I like the resource space. It’s why I pound the drum so hard for you to “occupy” the resource space, so to speak. Banks come and go — although many of them don’t go fast enough, in my view. But a good oil field or ore deposit is forever — well, almost forever, or at least until someone comes along to pump it or dig it out. Occupy that.

I’m inclined to think that the next financial revolution will bring competition to government-issued currencies. The next useful currencies will be backed by real assets — gold, silver, energy and more. So owning an interest in oil, uranium, precious metals and more will be like owning the “banks” of the future.

Sincerely,

Byron King
for The Penny Sleuth

The Sector That Will Grow Your Wealth… In Any Market was originally featured in the Penny Sleuth.

Until now, its importance to national defense has not been well understood, except to military professionals across the world that follow these kind of developments. Well that’s about to change…

Because one little-known company has discovered a revolutionary new proprietary technology that makes important use of “The Fourth Element”… A “super metal” that could help save countless soldiers lives with its unique properties…

The Department of Defense calls this rare metal “essential for important defense systems” and says that it “… possesses unique properties that make it indispensable in many of today’s critical U.S. defense systems, including sensors, missiles and satellites, avionics, and nuclear weapons.”

In fact, this “super metal” technology can be used in an incredible array of different areas… including nuclear, aerospace, defense, telecom, computing, electronics, medical, automotive, oil & gas, and many more…

Already, this tiny company holds several high-end patents and trade secrets for manufacturing this revolutionary product. Not to mention this savvy company has also acquired the rights to mineralized properties in two Western U.S. states and Brazil… so they can provide their own “fourth element” metal to their production line.

This is an under-the-radar company like no other — and today’s your chance to cash in.

Simply put, once the news leaks out about this tiny company’s revolutionary “super metal” breakthrough, you could see this company’s stock price soar 10-fold or more…

The “Super Metal”…a Miracle Metal

The angle is beryllium, the magic metal. I’ve been following beryllium since February 2008.

Beryllium is a silvery white metal, No. 4 on the periodic table of elements — hence all the “fourth element” talk. Beryllium is one of the lowest-density metals there is. It is very lightweight. Yet beryllium has six times the specific stiffness of steel.

In short, beryllium is a miracle metal.

So what does all this mean?

It means that beryllium has an incredible combination of properties that occur in no other metal. And it means that super-smart people have figured out how to use beryllium in all sorts of applications.

I’m serious. Rocket scientists use beryllium — in rockets. Beryllium goes into satellites and space structures, aircraft, optical systems, semiconductors, medical imaging and nuclear systems. And as the story up above demonstrates, there’s beryllium in gun sights, rocket launch rails, camera gimbal systems and more.

Why use beryllium? Because it provides unmatched capabilities for medical, aerospace, defense, information technology, scientific, nuclear and other applications. When designers have to come up with products that work at the extreme edges of performance — from the dirt of a mountainside sniper position to the depths of outer space — they specify beryllium.

Back in 2008 I introduced Energy & Scarcity readers to a beryllium company. The share price took a hit in the market crash of 2008 and 2009, but has since recovered and is up nicely. Business is good, and shares are holding their own. Today, this company has a strong position within the beryllium market.

But… there is a much smaller company those shares hold much more potential upside…

This play is also more of a beryllium pure play. In fact, this company is more like a high-tech play, in that Silicon Valley sort of business model.

Why do I like them? They are coming up with new ways to manufacture and get beryllium products into the marketplace. They are not just trying to sell the same sorts of things.

It’s a different business model, rooted in efficient use of the basic resource with serious upgrades via high-technology…

The business model is an aggressive form of development, prototyping and large-scale production, with sales at high margins.

Later this year, they will begin a drilling assaying program on its Utah mineral property. The idea is to produce their own beryllium, it’s that whole vertical integration idea.

On the manufacturing side, they have facilities that it rolled up in Indiana, Missouri and Pennsylvania. These facilities focus on beryllium-copper alloys, which are super hard and useful in all sorts of industrial applications. The contracts are coming in, and production is ramping up…

And now is the time to buy into this “super metal” while prices are still cheap…

Sincerely,

Byron King
for The Penny sleuth

This “Super Metal” Could Supercharge Your Stock Market Gains was originally featured in the Penny Sleuth.

Luckily, I don’t have to do that very often. Living in a city allows me to walk most places.

But if you commute to work, as many do, one gas tank could be costing you as much as $60. If you are filling up more than once a week…

Lets just say, it adds up.

But what if there was a way to profit from rising price in oil? A way to hedge against the money you are paying at the pump?

A couple of weeks ago, Byron King joined us to tell us about the best way to profit from exploding oil prices.

He said:

With the events we’re seeing in the Middle East I don’t think we’re far from a super spike in the price of oil.

And if that’s the case, you’ll want to take a look at the oil that offer you a chance to profit from a general rise in the price per barrel. Plus, plays that are out of the “danger zone” and won’t be affected by Middle East turmoil. This way you’ll have the opportunity to profit from oils next leap higher.

(If you missed it, you can find the full article here.)

Here at the Sleuth, we provided you with 3 small-cap oil companies that are out of the “danger zone.”

• ATP Oil and Gas Corp. (NASDAQ:ATPG)

• Kodiak Oil and Gas Corp. (NYSE:KOG)

• Vantage Drilling Company (AMEX:VTG)

Today let’s take a closer look at these three companies…

ATP Oil and Gas Corp. — ATP is an international company that works on the acquisition, development and production of oil and natural gas. They create value for their shareholders through the acquisition and development of significant underdeveloped reserves. Their reserves are located in the Gulf of Mexico, the United Kingdom, and the Dutch sectors of the North Sea.

While they are smaller than many of their competitors, they are invested in new technology. Staying on the cutting edge is a great way to end up on top when other companies start to fall behind.

Better yet? There has been a significant amount of insider buying over the past few months…

If you remember awhile ago, I wrote about the importance of insider buying. (If you missed it, click here.) Insiders will sell their company’s shares for any number of reasons—but normally only pick up shares for one.

They think the stock will go up.

Now may be a great chance to pick up shares for cheap.

Kodiak Oil and Gas Corp.— When we first mentioned Kodiak, it was listed on the American Stock Exchange (AMEX). Kodiak recently changed it’s listing to the New York Stock Exchange (NYSE).

Kodiak is an oil company that works on the exploration, acquisition, and productions of oil and natural gas. They have a oil and natural gas portfolio in proven U.S. reserves.

And—they are also working on the speculation of new reserves.

Kodiak is highly competitive with other companies in the industry and with showing substantial revenue growth. This could also be a good addition to your small-cap resource portfolio.

Vantage Drilling Company— Vantage Drilling is a provider of offshore contract drilling services for oil. They are focused on operating a fleet of drilling unit.

While the company is not turning a profit yet, they are showing revenue growth. They are smaller than many of their competitors, but in line with industry standards.

This would probably be the riskiest play of the three, but not necessarily a bad buy. Like ATP, insiders have been buying up shares for the last couple of months.

And the stock is trading at just under $1.50.

As you can see, there is a lot of opportunity in small-cap oil companies right now. But just one reminder: the Sleuth does not keep a model portfolio. We will not be sending out buy or sell alerts on these companies. If you do decide to invest in any of these oil plays, be sure to plan your entry and exit carefully.

And please tell us about it… you can shoot us an email at editor@pennysleuth.com.

Sincerely,

Jessica Comitto
Managing Editor, Penny Sleuth

Sleuth’s Picks: 3 Penny Plays Set to Explode was originally featured in the Penny Sleuth.

A few weeks ago, Chris Mayer joined us to talk about the boom of domestic oil.  He shared with you what he feels is the best way to profit from oil costs— right here at home!

He said:

It’s the beginning of a good old-fashioned Alaskan oil and gas boom. In a world where foreign sources of oil are more frowned upon and uncertain than ever, my guess is that investors will look warmly on the efforts of those in “the last frontier.”

(For the full article click here.)

The Sleuth gave you 3 small companies working on Alaskan oil right now to give you a head start on your research.

Today, lets drill a little deeper into these 3 oil plays:

• Parker Drilling Company (NYSE: PKD)
• Tesoro Corporation (NYSE: TSO)
• Linc Energy LTD (ASX: LNC)

You never want to invest blindly, especially in these market conditions.  It is important when looking at a list of companies to dive a little deeper.  You should compare companies not only to their competitors but the industry standards. (You can do this easily on your own with Yahoo! Finance by selecting competitors on the left hand side.)

Let’s see what these companies have to offer…

Parker Drilling Company— Parker Drilling provides contract drilling as well as other drilling related services. They are an industry leader in safety performance.  Number one goal: to become the leading global provider of premium drilling, project management, and rental tool services.

That being said, they compete with some of the big names in the oil business: BP, Chevron, and Exxon Mobile.  They are much smaller than their competitors and the industry standards.  Over the year, they have also been losing revenue.

This would be a much riskier play to add to your portfolio. If you do decide to invest in this one you will want to be sure to place strict buy and sell target prices.

Tesoro Corporation— Tesoro refines, manufactures and sells transportation fuels. One of its biggest clients is Shell.  While Tesoro is located in the U.S., they are an international supplier.

However, like with Parker Drilling, it should be noted that some of their biggest competitors are some of the biggest names in the business: BP, Chevron, and Exxon Mobile.

Even still, their revenues have grown over the last quarter and are right in line with industry standards. This company would be worth consideration to add to your commodity portfolio.

Linc Energy LTD— Linc Energy works mainly in the exploration of coal energy sources. They take a combination of two technologies to convert coal into clean fuels.

Revenues have been down, however the just acquired 122,000 acres of oil and gas leases in Alaska’s Cook Inlet region. This could be a sign of growth in the future.

One important thing to note is this company is trading on the Austrailian Stock Exchange. Even still, this seems like the best high growth play of the three. And it is trading at around $2 per share.

Just a reminder for those of you who haven’t been with us for awhile…  The Sleuth doesn’t keep a model portfolio. We won’t be sending you buy and sell recommendations.  If you decide to invest in any of these companies, make sure to plan you trade.

And if you do, we would love to hear how you did. Simply send us an email at editor@pennysleuth.com.

Sincerely,

Jessica Comitto
Managing Editor, Penny Sleuth

Sleuth’s Picks: Breeding Millionaires with These 3 Oil Stocks was originally featured in the Penny Sleuth.

But ask the average man on the street why gas prices are on the rise, and you’ll discover that there is very little understanding about how the world works today.

Truly, the world energy market is a complex system. Many things influence the price that we pay at the pump.

So what’s poised to send prices at the pump higher?

A lot of things.

To start with, I could tell you a long story about the depreciating dollar and how inflation is creating higher prices at the pump.  This, as you know, has been true over the past few decades – and looks to continue into the future.  And although inflation will increase the price of commodities like oil, it isn’t something that will spur a rampant rise in the price.

For that to happen we’d have to look directly at supply and demand for oil. Indeed, there are plenty of things that could trigger a price spike like 2008’s high of $147 a barrel.

For instance political events can trigger a rise in the price per barrel. Nationalization or even the idea of an all out “oil war” could catapult prices to well over $220 a barrel, overnight.  Clearly, with any disruption of output in the Middle East prices could skyrocket.

Situations like this can create vast opportunities.

And lead to huge profits for investors…

Today, I’d like to tell you about a sure-fire reason that prices at the pump are expected to go higher. And later on I’ll show you exactly how you can profit from this same event.

Surprisingly the main trigger is just pure and simple science. It’s known as Peak Oil, and it’s the end of cheap oil as we know it…

The Peak Oil theory was pioneered in the 1950s by a geologist named M. King Hubbert (1903–1989), who worked for Shell. He reviewed mountains of data concerning oil discoveries, extraction and production dating back as far as the 1860s.

Hubbert noted the common trend in oil field development for a new field to come online and oil production to increase as the field was drilled and developed. But then, over time, the inevitable effects of depletion would kick in and cause the overall production of the oil field to steadily decline.

The discovery side of the Peak Oil theory holds that mankind has identified and located, if not actually discovered, most of the conventional crude oil that there is to find in the crust of the Earth. The production side of the Peak Oil theory holds that mankind has produced and, of course, consumed something near half of it. In terms of really big Peak Oil numbers, out of a worldwide resource base of conventional oil that is estimated by some knowledgeable commentators at about 2.2 trillion barrels, about 90% has been discovered and about 1 trillion barrels have been extracted and consumed over the past 150 years or so.

So the fact is Peak Oil is an event of profound significance. One commentator on the subject is Ali Samsam Bakhtiari, a retired director of the National Iranian Oil Co. He has been studying the history of petroleum and the oil industry for decades. He has a collection of databases from every major producing region of the world. Dr. Bakhtiari is among the most respected oil analysts anywhere. Bakhtiari has reviewed the available evidence on world oil production and believes that world output peaked absolutely in the summer of 2006.

If Dr. Bakhtiari is correct, then the world is many years passed the “peak” point of Peak Oil. The future of conventional oil extraction is all downhill from here. Which does not mean that we cannot make some money on the phenomenon. And in the post-Peak Oil future, you will definitely want to have some money…

Okay. So we’re past the point of no return with the supply of oil.

Although some oil finds, even big ones, will surface over the coming years they won’t make up for failing production and increased oil demand.

This paints a pretty grim picture when it comes to the price of oil.  Prices are set to rise for all the reasons listed above.

But even past peak oil, inflation and increased demand certain market shock events could drive the price of oil up over $300 per barrel.

The oil market is tight – every year demand stretches the limits of our oil supply and all it would take is one blip on the supply side to throw this delicate equilibrium off.

With the events we’re seeing in the Middle East I don’t think we’re far from a super spike in the price of oil.

And if that’s the case, you’ll want to take a look at the oil that offer you a chance to profit from a general rise in the price per barrel. Plus, plays that are out of the “danger zone” and won’t be affected by Middle East turmoil. This way you’ll have the opportunity to profit from oils next leap higher.

[The Sleuth’s Note: Doing a quick search with Google Finance’s Stock Screener, we were able to find a few small-cap domestic oil companies to get you started. They are: ATP Oil & Gas Corp. (NASDAQ: ATPG), Kodiak Oil & Gas Corp. (AMEX: KOG), and Vantage Drilling Company (AMEX: VTG). As always, this is just a place to start. Before investing in anything, we recommend you do your own research.]

Sincerely,

Byron King,
for Penny Sleuth

How You Can Profit from Exploding Oil Prices was originally featured in the Penny Sleuth.

Commodity contracts actually led the way higher…

Crude, cocoa, sugar and live cattle built on their price base.

The corrections in the overall bullish trends proved to be buying opportunities when prices were down.

Of course, this is easy to see in retrospect. Buying dips has been an easy, but profitable, strategy since the depths of the financial crisis.

Solid overall trends remain intact. What has been going up continues to rebound and rally. Other declining markets in Treasury yields, Natural Gas and the US Dollar are resuming the dominant downswing.

And here lays a big potential mover…

Silver never quite hit the $50 an ounce price at late April highs. The combination of the multi-year trend that doubled prices in 2010 and again in 2011 plus the emotion of a crowded trade led to asset unwinding.

The Silver Springboard

Sideways trading on Silver for the last two months within a range has held the key support…

The $30 level had tempered upside rallies three times!

In addition, the dollar has formed a triple top at 76 to set the tone for lower greenbacks. A similar dollar channel looks to resume the downtrend inversely to the silver uptrend when you look at the six-month charts side by side.

It doesn’t take much expertise to identify the extreme silver highs coincide with the extreme dollar lows.

You should watch this trend. As the dollar continues to fall, silver could rise even higher. Just be sure not to chase the highs…you will want to buy near support to maximize potential profits.

[The Sleuth’s Note: Last month, Alan introduced you to playing silver’s pullback. If you missed it, simply click here. There are many ways you can play silver right now. One way is by taking a look at iShares Silver Trust (ETF) (NYSE:SLV). If ETFs are not for you, you can start by looking at these two companies: Silver Wheaton Corp (NYSE:SLW) and Coeur d’Alene Mines Corporation (NYSE:CDE).

Plan your trade...you could see profits on the next silver rally.

But of course, before buying anything...make sure to do your research.]

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

Springboard Your Way To Silver Profits was originally featured in the Penny Sleuth.

Junior miners are, of course, the tiny companies hard at work finding… exploring… and hopefully mining some type of valuable mineral.

Yes, some of these companies will go bust as they burn through cash…

But find the right junior mining company and your life could change forever. In fact, I know of no other plays that have produced such amazing life-changing profits time and time again. Just look at some of recent gains I found through our friends at Casey Research…

Northern Freegold went up 117% in just one month.

Osisko Mining soared 284% in the matter of 6 months.

Or, International Hill climbed 200% in 7 months.

When it comes to junior miners, most investors search only for companies in the precious metal and oil sectors. But today I’d like to introduce you to another “secret” set of miners that are poised for takeoff.

They’re busy at work mining a breakthrough new mineral.

It’s a material that China already has on lock down. And, no, I’m not talking about rare earths… oil… or anything like that. Let me show you what I mean…

Recently, two scientists won the Nobel Prize for their pioneering discovery of this breakthrough new material.

They call it the “New Silicon.”

It’s billed as the wonder material of the 21st century…

With the power to revolutionize micro-electronics… just like the introduction of the silicon chip nearly 50 years ago.

According to the National Science Foundation, it’s called this material is the “New Silicon” because it’s a leading candidate to replace silicon in applications ranging from high-speed computer chips to biochemical sensors.

This new wonder material could have a major impact on the way we live, work, and play.

Just like the “old silicon” made our lives easier, richer and safer when it was introduced into thousands of products in the 1960s…

According to PC World, the “New Silicon” has transistor speeds up to 10,000 times faster than the “old silicon.” And it’s cheaper to produce.

Incredibly, it’s only one-atom-thick… 100,000 times smaller than a human hair… yet has the strength, flexibility and electrical conductivity to open up new horizons for high-tech applications, military uses, construction — almost anything you can imagine.

In other words, its potential isn’t even fully known or even imagined yet. That’s how new and amazing this is…

So what, exactly, is this “New Silicon?”

It’s simply graphite – and specifically a new substance called “graphene.”

Graphite burns at a very high temperature (3,000 degrees or so), and is therefore useful in numerous electrical and thermo-chemical applications, from arc-lamp electrodes to thin-film heat sinks — such as are contained within your Apple I-Pad.

Quite a bit of natural graphite is consumed in refractory processes, electric arc steelmaking, brake linings, foundry facings and lubricants.

There’s al

“New Silicon”: The Next Junior Mining Sector Poised For Lift-Off was originally featured in the Penny Sleuth.

A perfect example is the effect the news has had on the silver market recently. But, with silver prices dropping, it presents new buying opportunity for long-term commodity investors.

While many good information sources that play it straight do exist, some have an agenda and ideology that almost prohibits an objective view. The hype around short-term events for viewers devalues long-term planning and investments. Unfortunately this transfers fear through osmosis, prohibiting clear, unbiased decision-making— all in an effort to make sure you return for more.

The conversations about a double-dip recession, government default or Dollar demise are economic possibilities, but not probabilities at this time. Fiscal issues must be addressed, but the market action is telling a more optimistic story. In early May the stock and commodities markets were at multiyear recovery highs. When and if the market direction changes will just mean additional opportunity.

Can’t Dive Below 335

Major profit-taking sales in commodities from the May 2 high point has seen asset unwinding back to the January breakout point. The Commodity Research Bureau Index (CRB) of resources as a whole has dropped 10% in the mid May to the key technical 335 area, which was a halfway recovery of the 2008 extreme highs to 2009 extreme lows. As a trader, this news is a potentially bullish buying area for a number of markets that are now near long-term uptrend supports. The reward-to-risk is much more attractive at these levels for continuation of global demand growth.

The overall basket of commodities has been in an overextended, yearlong strong upward trend. One of many major pullbacks, the last few have been bullish buying opportunities, which encouraged top pickers to go short. Timing a major market reversal is nearly impossible and almost always a gambler’s ruin.

Buying against support and trend levels has been successful in the past. A close below the 335 halfway 2008-2009 recovery point on a weekly basis would get attention and renewed evaluation of the trend. It is definitely too soon to make that call.

Silver Sliver

A solid example of retracement to support is in the oft-emotional Silver market. Too far and too fast caught up with long traders who overstayed their welcome when danger signs flashed brightly. The unwinding triggered built-up exit stop losses that were protecting profits for most.

The explosive run to highs near $50 an ounce had begun with a breakout above the key $30 cap on prices in February. Attempts were made in mid- and end of December, with the actual never-look-back bust-out coming a few months later. The uptrend is still intact, and the recoil to the original level needs to be watched for a halt in the current decline.

Now that the luster is diminished in Silver, it becomes an attractive potential play.

[Editor’s Note: There are many ways to play silver right now. One way you can play this pullback is by taking a look at iShares Silver Trust (ETF) (NYSE:SLV)]

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

How You Can Profit from the Silver Pullback was originally featured in the Penny Sleuth.

The speaker was Joshua Friedman, the co-chief at Canyon Partners, which manages $20 billion. He was speaking at Grant’s Spring Investment Conference, which I attended in early April.

Friedman used the imagery of the old bell curves. There is the normal bell curve and the “new normal” curve with fatter tails. In plain terms, it means more crazy things will happen. It means outliers will become more common. It means the unexpected will happen more frequently. Wildness lies in wait, as Chesterton had it.

In many ways, markets have always been this way, as the late Benoit Mandelbrot observed. For instance, financial theory – based on the old bell curve – predicts that a market move of 7% or more in a single day will happen once every 300,000 years. Yet the 20th century alone had 48 such days. “Truly, a calamitous era,” Mandelbrot writes, “that insists on flaunting all predictions.”

What to do?

Michael Harkins, a respected investor at the firm of Levy, Harkins & Co., said to avoid “cash sinkholes.” Exhibit A was Alcoa, a “capitalist catastrophe,” as he put it. Every dime the company earns and more is consumed in costly, capital-intensive projects that generate no free cash.

Harkins likes blue chippy names – Tupperware (NYSE:TUP) (“a cash machine with 85% of sales outside of the U.S.”), McDonald’s (NYSE:MCD) (“a cash machine… competitors are leveraged up”) and American Express (NYSE:AXP) (“a cash machine with pricing power”).

He also pointed out that investors have short memories and that the market is constantly wiping the slate clean, ensuring that cash sinkholes and “capitalist catastrophes” continue to capture the affection of new investors.

The aforementioned Friedman had an idea as well. “Go long optionality,” he said. Invest “not only in cheap assets, but assets where you get optionality cheaply.”

What is optionality?

One way a stock has optionality is if it can deliver big results when certain seemingly unlikely things occur. I think of it as the payoff if that fat part of the tail happens. Think of a publishing company that publishes the next Harry Potter. Or a movie studio that makes the next Avatar.

My best idea on cheap optionality in today’s market is low-cost, pure-play natural gas stocks in North America. Natural gas prices are low, drifting around $4 for last two years. If you buy a natural gas stock that makes sense assuming natural gas prices stay at $4, then you ought to do OK even if natgas continues to drift along at $4.

But the optionality you get is if natural gas prices get to $6, which they must do someday. When is anybody’s guess. But when they do, then the stock doubles. Or if natural gas prices get to $8, then the stock doubles again. You have a stock with a giant free call option on higher natural gas prices.

These are the kinds of stocks you want to buy in this market: Low downside, but huge upside if what seems unlikely or unexpected happens. (Nobody is predicting $6 gas anytime soon.) The promise of small steady gains is not worth the risk in a market with fat tails and that can roll back years of small gains in a few bad months.

Bet on the unexpected, as long as your downside is covered.

Sincerely,

Chris Mayer
Penny Sleuth

Get Big Results with “Optionality” was originally featured in the Penny Sleuth.