In the last year, my Resource Trader Alert readers have already had the chance to book 143%, 148%, even 200% gains thanks to the commodities market. And in the current economic climate, as commodity prices start to heat up once again, the profit potential is amazing.

Here are the resource plays that I see rocketing right now…

Gold and Silver are leading the markets higher with the decline in the U.S. Dollar.  The greenback is at its lowest levels in since September 2008.  Gold is solidly above $1000 an ounce and looks positioned to easily make new all time highs on a course to $1200, from my projections.

Silver has made an impressive rally as well – one that I see continuing into the upper teens.

Recently I’ve been concerned about the lack of recent strength in Crude compared to new highs in stocks and metals.  Last week, that disconnect was repaired with a 5% move in prices putting oil solidly above $70 a barrel again. And it looks like oil hasn’t stopped its ascent either…

More Fuel for Higher Market Prices

The Organization of the Petroleum Exporting Countries (OPEC) did a good job of pushing oil prices up this summer. While OPEC managed to boost oil prices in the last six months, at current levels black gold is still a far cry from where it was a year ago – and where it could be again soon. This from Bloomberg:

“OPEC’s success in more than doubling oil prices since a five-year low in December will probably persuade ministers to maintain production quotas after this week’s meeting.

“Reducing shipments beyond record cutbacks last year would endanger the global economic recovery, the Organization of Petroleum Exporting Countries’ president said last week. Oil rose to $75 a barrel on Aug. 25, the price Saudi Arabian King Abdullah says is fair for consumers and producers.”

A major flaw in the governments’ unfair obsession with speculators is the failure to acknowledge the role of OPEC in energy prices.  They are a cartel!  Traders can buy and sell but only OPEC colludes to determine price levels.  Until hybrid cars, solar and geothermal technology, and algae fuel replace black gold we can fight the battle for financial gains.

We’ll continue to do just that.

It ALL comes back to commodities,
Alan Knuckman

September 14, 2009

What You Need to Know About the Future of Silver, Gold and Oil was originally featured in the Penny Sleuth.

In the spring of 1969, the Dow Jones industrial average stood at 969. By 1982, the Dow hit 1,071. That’s thirteen years of going nowhere. (We’ve had 10 years or so of going nowhere, though the ride between the poles has been anything but boring).

The problem is inflation makes that performance look better than it really was, like when a crooked judge makes a fight look close with a split decision even when the one fighter can barely walk to his corner and everybody in the building knows it was a rout.

Adjusted for inflation, or the weak dollar, the Dow was really more like 400. That makes it one of the worst stretches for the market since the 1930s.

The consumer price index, that flawed measure of inflation, doubled from 1960 to 1982. This is why a generation of people grew to believe that the best way to buy a house was to borrow all you could afford. And for a time, that looked brilliant. As Robert Sobel relates in a history of the period, a modest suburban home going for $30,000 in 1969 sold for $300,000 13 years later. With a lot of debt, your returns were much greater.

Of course, that kind of thinking eventually got us into a heap of trouble, as we now know.

But that period of time also had an effect on Corporate America’s balance sheets. When a company buys an asset, say a factory, it records its cost on its books. It will then depreciate this asset over time. So the value of the factory on its books will decline over time.

In a period of high inflation, its book value will be understated. The cost of a similar factory will be a lot higher in dollar terms, though the company will still show the old figure.

In other words, during periods of inflation, book values understate the true value of corporate assets. This happened in the 1960-82 period. Combine that with the stagnant market and you get many stocks trading for super cheap by 1982, when the great bull market began.

In fact, in July 1984, S&P reported that 30% of the stocks on the NYSE traded below net tangible book value. The old value mavens like Ben Graham would have had a field day.

What happened next, though, is what interests us especially. The low stock prices kicked off a takeover boom. The 1980s takeover mania was the busiest since the “age of Morgan at the turn of the century,” Sobel reports in his The Age of Giant Corporations. The 1980s was the age of the LBO, Barbarians at the Gate, Michael Milken and the corporate raider.

The oil industry also had its takeover boom. In fact, the outlines of the 1980s oil and gas industry look similar to today’s. In 1970s, there was a drilling boom as people thought that oil and gas prices would rise indefinitely. That collapsed and then you had oil and gas companies sitting on huge reserves they built up during the boom.

So in a time when it cost $15 a barrel to get oil out the ground, many oil companies traded for $5 a barrel in proven reserves. Getty Oil traded for $72 per share, with assets of $250 per share. Marathon’s stock went for $68, though each share had $210 in assets backing it up. And on and on it went.

Enter T. Boone Pickens. An Oklahoma-born geologist, Pickens was well aware of the value of these companies. He started going after them and making millions of dollars as bidding wars ensued. He lost several of these, but still cleared millions in profits.

There was a roll call of takeovers in the industry during this time — Shell bought Belridge Oil for $3.6 billion, DuPont bought Conoco for $7.4 billion and U.S. Steel took out Marathon for $6.5 billion. (Yes, U.S. Steel thought it would be smart to diversify). These were some of the bigger deals.

I won’t go too much into the history of this period, and perhaps I’ve already gone into too much detail. But I think something similar may be unfolding in today’s market.

We have the potential for high inflation thanks to the government’s monetary and fiscal stimulus. We also have a weak economy. In oil and gas, we have many companies trading cheaply in the wake of a drilling boom gone bust. What we need now is a T. Boone Pickens to shake things up.

Sincerely,
Chris Mayer

September 3, 2009

A New Age of Corporate Takeovers Could Soon Emerge was originally featured in the Penny Sleuth.

On Wednesday, I told you how out of control breakeven prices for oil producers were a sign that oil prices were due to push back into the triple digits. I also told you that one ETF was the best way to make a play for black gold right now.

That’s because only oil ETFs let you take advantage of oil’s moves just as easily as you’d invest in a regular stock…

There are a large number of oil and oil-related ETFs trading on the market right now –including funds that invest in oil futures and those that hold shares of oilfield service companies. But investing in oil through companies that service oil producers is a risky play; as the Exxons of the world continue to see their margins evaporate, they’ll be unlikely to enter into many major development obligations that these companies live on.

Right now, there are only three oil futures ETFs trading on the market: the U.S. Oil Fund ETF (NYSE: USO), the PowerShares DB Oil Fund ETF (NYSE: DBO) and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL).

But of the three, only one stands out as a good investment right now…

For starters, the iPath fund isn’t actually an ETF at all – it’s an exchange-traded note (ETN) — a debt security that’s linked to changes in the crude oil commodity markets. Instead of directly investing in oil futures (like the two ETFs do), this ETN is basically a promise from the issuer that they’ll track the performance of oil. That fact adds a lot of risk to OIL – to be precise, it’s known as counterparty risk – because the investment’s performance isn’t just tied to oil, it’s also tied to the financial health of the issuer. We’ll pass on this one…

Commodity ETFs have taken a lot of heat recently because they don’t perfectly track their underlying commodities. In the last 4 months, for example, the spot price of crude oil has risen 36%, while USO has only rallied 28%. One of the biggest reasons for the huge tracking error is what’s known as “roll yield”. Because futures have expiration dates, USO’s administrators have to constantly trade in their old futures for new ones. Unfortunately, because of the way future prices change over time, they often post a small loss on each position as they roll into the next futures contract.

As time goes by, this roll yield adds up to a big discrepancy between the performance of oil and the performance of USO.

But negative roll yields aren’t a problem for DBO. This ETF, which is based on the Deutsche Bank’s Optimum Yield Oil Index, uses the an optimum yield formula to replace expiring futures contracts with contracts that have the highest possible positive roll yield. And even with the added yield advantage, DBO’s expenses are 37% cheaper than USO’s.

While even DBO can’t track the spot price of oil perfectly, the ETF is the only fund worth considering if you want to invest in oil. And the technicals suggest that right now is the time to open a position …

Maximize Your Oil Profits with Smart Timing

For the past five months, DBO has been in a sustained uptrend from its March lows. Currently, there are several very bullish indicators that suggest DBO is going to keep up – or accelerate – its rally. First, onto the chart:

DBO has been trading in a fairly well-defined channel since March, and while this ETF’s current share price is sitting toward the midpoint, a recent bounce off of its 50-day moving average (DBO’s average price over the trailing 50 days) means that the price has a safety net to keep it from tracking back down to the lower bound of the channel.

Translation: DBO will continue to push higher…

Another bullish signal right now is the crossover of the 50-day moving average over the 200-day moving average. That intersection is a leading signal that means a large positive change is underway in this ETF. Given that this is taking place during a big bullish move, it’s a very strong positive signal for traders.

DBO’s Fibonacci retracements are also looking very solid right now…

Fibonacci retracements are a tool used by technical analysts to determine key points of support and resistance using mathematically significant numbers. DBO has bumped off the vertical blue Fibonacci lines six times in its latest rally – which tells me that this ETF is highly influenced by these levels. Right now, it has just broken out above its most recent high (and the 0% retracement level on the graph above). That’s a significant development because it means that there aren’t any obvious stumbling blocks left for DBO to hit.

All of that said, I’d like to see a healthy pullback to either the lower bound of the price channel or either the 50 or 200-day moving averages before taking a position in this ETF.

As usual, the options on this ETF have a much higher profit potential than buying the ETF itself can provide. If your risk tolerance is higher, there are a number of DBO options with a decent trading volume right now.

Cheers,
Jonas Elmerraji

August 7, 2009

The Only Oil ETF Worth Investing In was originally featured in the Penny Sleuth.

Over the course of the next six months, major changes are going to shape our economy… The only one you should care about is the price of oil. Turn on CNN, Fox News, or CNBC, and you’re all but guaranteed to see a panel of “experts” who are betting on cheap oil. They’re making a huge mistake.

Now more than ever oil is poised to rocket back up to triple-digit prices – and the investors who make smart bets now are going to make a fortune in the process.

Americans are getting misled about the oil crisis that we’re really facing. Despite media contortions that suggest speculators in the futures market are responsible for the monumental price swings in oil that we’ve seen in the last two years, the price of oil isn’t in line with where it should be right now. It’s absolutely true that oil speculation fueled oil’s run-up to $147 last summer, but what the pundits leave out is the fact that oil’s intrinsic price is on the rise regardless of supply and demand.

Prices that aren’t based on supply and demand… What kind of market is this?

The Real Reason for Rising Oil Prices

One of the reasons is the fact that the cost of extracting and processing oil has been rising over the course of the last few years. Peak oil is a frequently mentioned justification for the growing cost of oil extraction. Under the peak oil theory, as we pump the good, easy to find oil out of the ground, we’re left with lesser quality oil that’s deeper in the earth and more difficult (and expensive) to extract.

But peak oil isn’t just a theory; it’s a certainty.

Some oil experts even believe that oil may have peaked back in 2005. If that’s true, it means that as time goes on the price of oil will continue to climb very quickly. That said, the evidence that worldwide oil production has already peaked is anecdotal at best.

The chart above shows worldwide oil production from 1960 to 2005. While crude oil production reached new highs in 2005, we’re currently in a place similar to the late 1970s where oil saw a short-term “false peak” then continued to climb. And for every expert that says we’ve already hit oil’s production peak, there are two that say we have reserves to last us decades more, and that the peak is a long way off.

But that doesn’t change the fact that the cost of oil is rising for producers.  Could it just be a case of poor budgeting?

Right now, a handful of Middle Eastern nations are in a tight spot. Despite access to one of the most precious commodities in the world, places like Saudi Arabia, Dubai, Qatar, and Oman are at serious risk of posting big budget deficits for 2009. For some, like Saudi Arabia, it would be the first deficit posted in almost a decade… For others, like Qatar, this would be the first budget deficit in the country’s history.

And over spending isn’t relegated to the oil producing nations… oil producing companies are feeling the hurt as well right now:

In the last nine months, oil giant ExxonMobil (NYSE: XOM) saw its profits drop 73% to $0.92 per share. That’s a colossal tumble for a company that just a few months before announced the he largest annual profit of any company in U.S. history.

Before the oil boom took off, the operating cost for extracting a barrel of oil was $38. In the last several years, the bottom line break-even price for a barrel of oil has averaged $87.24 – that means that in order for companies like Exxon and Chevron to report a profit from their oil production divisions, they need to see oil prices 22% higher than they are now.

But it gets worse…

Between 2002 and 2008, oil prices rose steadily – at a rate of nearly 18% every year. With projections of $100 oil in the late 2000s (like we saw last year), oil companies and producing nations grew their obligations, building new facilities and spending nearly 60% more on exploration of new oilfields. Those huge expenses are going to have to be priced into each barrel of oil going forward, raising breakeven costs even more.

Why High Oil Costs Mean High Oil Profits for Investors

Even though the cost of oil (and its intrinsic price) has little to do with supply and demand, those two market forces are more or less what drive the market price of oil. In the past year, we saw oil prices fall as far down as $33.87, a painful spot for the oil companies and producing nations that I mentioned earlier.

As long as making a profit on oil continues to be difficult for companies, we’re going to see the playing field contract. Middle Eastern countries will have two choices: tighten their belts and cut spending, or pressure OPEC to cut production and increase their margins.

Make no mistake – high oil prices aren’t going to throw our country into anarchy. We’re not facing disaster at the return of $150 oil. But oil prices must go up, and many investors are just starting to realize it. Those who do are going to find their portfolio values go up as well.

I’ve found an ETF play that is poised to capitalize on the rising cost of oil. In fact it’s set to take off in the next week. That said, it’s not quite time yet – I’m hoping for a healthy dip before we go in for a buy. I’ll be back Friday with the ticker and the reason why it’s the only oil ETF you should bother with.

Remember, I’m releasing this recommendation exclusively to Penny Sleuth readers this Friday…

Cheers,
Jonas Elmerraji

August 5, 2009

Profit from the End of Cheap Oil with This ETF was originally featured in the Penny Sleuth.

Part of the reason for the rise is weakness in the dollar. People often say that oil is denominated in dollars. But maybe it is the other way around; dollars are denominated in oil. A dollar is worth how much oil it can buy. Part of oil’s rise is simply marking down the value of the dollar. Weak dollar means higher oil prices.

People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for moly. It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.

So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead.

For instance, over the weekend, South Korea reported numbers that show signs of a recovery in that country. Industrial output fell less than expected, and trade volume surged to $60 billion. That was its best showing since last October. Also, South Korean companies have been reporting better-than-expected results.

The biggest buyer of South Korean goods is China. Still, it’s a confusing time because of all the stimulus money that governments around the world have been spending. So it’s hard to say what’s real and what’s just an illusion created by a temporary spending binge.

Another piece of the puzzle from last week: Spot iron prices in China (meaning iron ore for immediate delivery) topped $100 per ton. That’s the highest level since October 2008. The other breakthrough in iron ore last week came when BHP Billiton, the world’s largest miner, announced that a third of its customers were moving to prices linked to the spot market.

This is big news for the industry. The old way was to have annual contracts with a negotiated price. This was bad for iron ore companies because the contracted price lagged the increase in iron ore prices. And when iron ore prices fell, steelmakers just reneged on their contracts. As the iron companies found out, having contracts was a great way for iron ore producers to cap their upside and leave them with all the downside. Not so good.

The industry now looks like it is moving toward more spot pricing, which is a good thing for the producers. Iron ore prices have rallied too, along with crude oil and moly.

Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view. Intelligent small-cap investors would be wise to pick up shares of their favorite companies in these sectors.

Sincerely,
Chris Mayer

August 4, 2009

Oil and Molybdenum Are Poised for Future Gains was originally featured in the Penny Sleuth.

Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when… oil prices rise again.

The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened… not what is going to happen.

The stock and credit markets most times have discounted and factored in the dire information that we are getting every day. Markets are forward looking, and higher crude oil prices are a sign that the worst is over and a recovery is under way.

A temporary no-lose situation has taken place with the oversupply of oil in the spot market. Inventories are significantly built up and storage has become nearly impossible to find. In fact, tankers are now being used just to store millions of gallons of crude — and they aren’t set to move an inch.

Nowhere for the oil to go has presented a unique situation in which traders can guarantee a profit by storing now and selling in future months. But as you know, there is no such thing as free money, and this to me is just another sign of an extreme that market forces will correct.

Technically, we are at the third attempt to push through the $50 per barrel level.

Jan. 20 marked new multiyear lows, but many indicators showed divergence and renewed strength to the upside. Since then, crude has rallied over 10% in a week as the stock market oscillated around the Dow at 8,000. Higher oil prices are the sign that consumers and the markets can handle it.

Commodity Investing in 2009…

Some commodities have actually done very — very well — in the past couple of months. Cocoa has reached the highest levels since 1985 with the decline of the pound sterling currency in which it is denominated.

The British pound made new 23-year lows against the dollar last month with the damage in the United Kingdom financial system. According to the Financial Times , a full-scale nationalization of the banking industry is “very close.” When the pound is weak, worldwide traders have more buying power for the commodity when they convert their currency to purchase cocoa.

The central banks around the world have had a contest to see which could cut rates to zero the fastest (Japan doesn’t count; it has been a mess for over a decade). The goal in times of global slowdown is to devalue your currency to aid exports and jump-start the economy with cheaper relative prices and more money to spend in the system.

The dollar is not strong!! It’s just not as weak as some other currencies of economies that are also in serious trouble. The currency fun and profits are about to begin.

Back to Commodities…

I was looking up a recipe and uncovered some interesting facts about meals from the Great Depression. Just to let you know, cooking is research for this job. “A chicken in every pot” was not just a political slogan, but what every city dweller aspired to before factory farming methods made it so cheap.

According to the U.S. Dept. of Agriculture, the average American ate 10 pounds of chicken per year, compared with over 60 pounds today. Chicken is just corn inside another package, and high grain prices have a huge impact on profitability for producers. What caught my attention was the recipe for mock chicken legs. It was cheaper to make fake chicken out of veal before giant corporate plants met consumer needs.

Enough about history; it’s time to address the present. Super Bowl Sunday had its own set of problems. A shortage of chicken wings doubled prices in some areas. It is widely disputed, but the Anchor Bar of Buffalo, N.Y., is credited with starting the delicacy in the 1960s to use the wasted wing parts that couldn’t be given away.

It’s not that there is a chicken shortage. There are plenty of breasts and legs to go around, but wing demand has reached new heights. The cause is the bankruptcy of poultry giant Pilgrim’s Pride and the entrance of KFC and Pizza Hut mass marketing the tasty boney treats.

I like to be optimistic, but I want to let my concerned friends know that this may be only the beginning of the problem. As the dollar goes down, commodities rise, pushing up corn and oil prices once again. And the savvy investor stands to benefit from this move.

Regards,
Alan Knuckman

February 5, 2009

The Economic Stimulus Plan, Commodity Investing, and Oil Prices in 2009 was originally featured in the Penny Sleuth.

A few hundred? Maybe fifty? Twenty?

Nope, only one mutual fund focused on U.S. stocks registered a gain in 2008… just one!

The tiny Forester Value Fund, with only $50 million in assets, recorded a 0.4% gain last year. And while that may not sound terribly impressive, it is when you consider the fact that the Dow and S&P 500 both lost more than 30% during that same period.

Tom Forester, manager of the fund, doesn’t see its small size as a negative. “I’ve been reminded,” Forester said in a recent Wall Street Journal article, “that when your assets aren’t enormous, you can get in and out of stocks in a day — or even an hour — that a larger fund might struggle to do in a month.”

Forester picked up shares of Bank of America (NSYE: BAC) back in July when they were near $18. He then sold those shares when they reached $30 in September. His timing couldn’t have been better.  Had he waited much longer, he would’ve been caught up the October collapse that decimated Bank of America’s shares (B of A stock now sits at $6).

Forester attributes the nimble nature of his fund as a big positive in this case, “If I’d had to pace my sale [of Bank of America shares] over a couple of days, even, I wouldn’t have captured that profit,” he said to the WSJ. Instead, Forester was able to sell his entire B of A position in one day.

After buying up shares of the natural-gas producer EOG Resources Inc. (NYSE: EOG), he did it again. Forester managed to sell most of his shares after the stock doubled, and before EOG started to fall once again.

So, what is Tom Forester buying now?

Well, Forester told CNNMoney that he’s recently been buying shares of Valero Energy (NYSE: VLO) and Andarko Petroleum (NYSE: APC).

“Nobody can really tell what’s going to happen exactly with price of oil,” Forester said. “But as oil got closer to $35, many of the stocks seemed more reasonable than they were when oil was closer to $150. Plus, for the longer term, companies are not finding as much oil as they used to, so prices could go back up. Commodities were oversold.”

Forester obviously feels that now is a great time to get into oil stocks. And since he outperformed the market by over 30% last year, perhaps he’s worth listening to.

Here are five small-cap oil stocks with a share price under $10 and a market cap under $400 million. They’re certainly worth checking out because oil stocks could see a big bounce if Forester’s hunch turns out to be right:

• Berry Petroleum (NYSE: BRY) – Independent oil and natural gas E&P with producing operations in California, Utah and Colorado.
• BMB Munai (AMEX: KAZ) – Independent oil and natural gas E&P with a heavy interest in Kazakhstan.
• Gulfport Energy (NASDAQ: GPOR) – A small E&P specializing in offshore drilling in the Gulf Coast.
• Pyramid Oil (AMEX: PDO) – Domestic E&P with interests in California, New York and Wyoming.
• Vaalco Energy (NYSE: EGY) – International oil E&P based in Houston with interests in the North Sea and across Africa.

Best Regards,
John Schuler

January 22, 2009

Top Mutual Fund Manager of 2008 is Buying Oil Stocks was originally featured in the Penny Sleuth.

One acre of corn can yield about 28 gallons of oil in one year. In more tropical regions, an acre of palms can yield about 6,700 gallons of oil per year. But algae are in a class all their own. An acre of algae can yield anywhere between 20,000-100,000 gallons of oil per year.

This is possible because algae really do grow like weeds. An alga plant can completely reproduce up to six times per day. Try doing that with corn, which takes an entire season to grow.

The sad thing is that the powers-that-be used to have a true interest in algae’s potential. The Dept. of Energy researched its viability for almost 20 years before canning the program in 1996. They were certain algae couldn’t compete with oil at $20 per barrel.

But now public sentiment is shifting in alternatives’ favor. Never mind oil’s recent plunge — businesses and the public are craving better ways to power their buildings and vehicles.

More Potential Than Pipe Dream

We’ve noticed that algae oil has received some press recently — in the most unlikely of places. The December issue of Esquire actually ran an informative two-page spread on algae oil and its potential.

Algae oil is becoming a more viable energy option every day as additional money is pushed in its direction. In fact, venture capital money is finding its way to algae oil technology developers at a rapid pace.

The private startup Sapphire Energy, which is perfecting synthetic algae technology, has scored more than $100 million in private financing. This even includes money from Cascade Investment, an investment holding company owned by Bill Gates.

Even with oil’s recent dip below $40, work on algae fuel continues at breakneck speeds.  Several small companies are vying for the lion’s share of the algae fuel business.  The winners stand to make their early investors very wealthy.

Best,
Greg Guenthner

December 26, 2008

The Alternative Fuel That’s Growing Exponentially was originally featured in the Penny Sleuth.

Global oil demand is not going to “plummet.” And for the FT to say so is just plain silly, if not irresponsible. OK, I know. There’s an old saying that they teach in journalism schools. “You have to sell newspapers.” But this declaration by the FT highlights the perils of letting a headline-writer do your thinking for you. It’s what I call “arguing a screaming conclusion.” And a wrong conclusion at that.

Oil Demand – Down, Then Up

But let’s move past the headlines. The Financial Times article explains that the World Bank has just issued a new study. The World Bank believes that the world is entering into the toughest economic times “since the Great Depression.” Thus overall world oil demand may fall by about half a million barrels per day in 2009. That’s what the World Bank states in its report.

Only half a million barrels? Heck, the total world demand for oil in the past year was about 87 million barrels per day (a fact that the FT article fails to note). By comparison, the Saudi oil tanker that recently was hijacked off the coast of Somalia held two million barrels of crude oil. And despite this act of piracy oil prices still fell over the next couple of weeks, even without that tanker plying its route across the deep blue seas.

So if the world experiences the next “Great Depression” (Release 2.0, I guess), a reduction in overall oil demand of half a million barrels per day is down in the statistical noise. And what the World Bank is saying about the grim future of the world economy is not the equivalent of “plummeting” demand. At least, not half a million barrels of lower usage.

Built-In Oil Demand

In both the developed and developing worlds, there’s a lot of oil demand built into the economic and social energy system. That’s what modern development is all about. That’s how the system was built over the past 100 years or so. Yes, you can wish that the system were different. You can even try to change the system – and risk collapsing it in the process.

Whatever you do, you can’t change the system very fast. To paraphrase a former Secretary of Defense, “You live in the world with the energy system you have. Not the energy system you might wish you had.” 

So at best, if you want to change things you are looking at a generational shift. If you have a generation. Do we have a generation?

What Will OPEC Do?

Let’s try looking at some different numbers. How about 7 million barrels of oil per day? That’s the amount of output that OPEC might have to shut-in if it wants to get prices headed back upwards in to the range of $75 per barrel or so. At least, that’s according to Philip Verleger, a long-time industry player as quoted recently in Platt’s industry newsletter The Barrel.

Current daily oil output from OPEC is about 32 million barrels per day. Verleger thinks that OPEC’s output ought to be more like 25 million barrels per day. There’s the 7 million barrel shift. Easy, right? It would be as if Iran, Iraq and Qatar simply stopped exporting oil. How likely is that to happen? Umm… yes. Clearly, Verleger has a radical take on things.

One way or another, can OPEC cut production significantly? Does OPEC have the discipline to manage its own affairs to cut 2 million barrels, or 4 million, let alone 7 million barrels per day? The issue is that numerous OPEC nations cheat on their production quotas. Hey, they need the money. Thus they lift the oil and sell it. Really, cheating on OPEC quotas is not a problem. It’s a tradition.

What of the Future?

Looking ahead by more than about two years, world oil demand is certainly going to grow. It almost does not matter what we do in the U.S. or Europe. When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there. Many of these young people already have a cell phone and a laptop computer. When they finish school, they will want an apartment and a car.

And at the rate things are going, the energy industry is still under-investing in the necessary systems of the future. Depletion is still ongoing. It gets back to the very basic point that every barrel you lift from the ground leaves one less barrel down there. And the overall global depletion rate is 6% at best. Maybe it’s 8%. It might be 10%. To replace that depletion, the general trend is for the energy industry to go further away, to deeper waters or more remote sites, to drill deeper wells, with hotter temperatures and higher pressures. Those little hydrocarbon molecules are just plain tough to catch.

And keep in mind that nobody can produce oil that has not been discovered. Or developed. Or for which there are no handling facilities. That takes investment, and lots of it. Which requires money and finance, which is in rather short supply just now. So there are just a few years in which the world can reorder the way it does oil, let alone the big picture on energy. 

So unless a lot of things happen – pretty soon and in the right sequence, and competently – we’re going to be faced with the prospect that there’s not going to be enough oil to go around. So oil prices are going to head back up. People and governments are going to get desperate over supplies. And much of the usual and predictable bad stuff that you’ve heard before is going to happen. Which gets back to that Financial Times headline. “Plummeting” demand? Really.

Until we meet again,
Byron King

December 16, 2008

Oil Demand And Prices Will Rise Despite Recession was originally featured in the Penny Sleuth.

*** As your devoted Penny Sleuth, it’s my life’s work to uncover the best small-cap data — those valuable nuggets that make the difference between a shrewd investment and a speculative gamble. One of my favorite (and least-known) indicators is aptly called Reuters’ Lesser Known Stocks screen, which has flattened the blue-chip S&P 500.

Rueters’ Lesser Known Stocks screen uses filters such as trading volume of at least 20,000 shares over the most recent 10 days, coverage by no more than five analysts, and institutional ownership of no more than 50% of the outstanding float.

But get this…of the screen’s 57 “noteworthy” stocks, 41 (71.9%) of them have a market cap of under $1 billion, qualifying them as small caps. According to its latest monthly update, Reuters’ Lesser Known Stocks screen outperformed the S&P 500 by a whopping 311.64% from Jan. 28, 2000, to Feb. 25, 2005.

Of the screen’s top three stocks, two of them are small caps. They are LaBarge, Inc., a maker of electronics systems that is trading at $12.45 (as of 10:28 a.m.), near the top of its 52-week range of $13.50; and Collegiate Pacific, Inc., a manufacturer and distributor of sporting goods. Collegiate Pacific is currently at $11.12 — down 25.95% from its 52-
week high of $15, yet up 34.8% from its 52-week low of $8.25.

Remember, the hottest small-cap companies are often the least known. So get out there and dig…

*** And in the spirit of research, you should go back and reread our story from Feb. 11 2005 called “Small-Cap Software Meets the Crusher” (http://www.pennysleuth.com/alertholder/02.11.05). Because today’s CNN/Money confirmed that small-cap software vendors are finding it harder and harder to compete against the big boys — but at the same time, their innovative products and customer base are proving increasingly valuable to the likes of IBM, Oracle and SAP.

The CNN/Money story indicated that we could be seeing the beginning of a “feeding frenzy” in small software providers — and this is great news for us. It means that companies that have languished with low P/Es, ROIs and ROAs may now realize their full potential as takeover targets.

While we advised against buying into small-cap software providers based on their fundamentals, those very same numbers are proving irresistible to industry behemoths looking to trounce competitors with low-hanging goodies. And as I mention below, this buying spree is also weeding out potential IPOs that have good products but mediocre numbers.

If you feel compelled to acquire shares in underperforming small-cap software companies, buy shares in so-called infrastructure companies — exactly the kind of opportunities we had identified. But only get into them if you think that they’re ripe for acquisition…otherwise, you’ll end up overpaying for a dud.

*** We’ve been telling you that the IPO market has been superheated — swelling the small-cap ranks with overhyped stinkers. Well, now that the first quarter of 2005 is nearly closed, the strain is expected to show.

Mid-March to mid-April could be sluggish. Skyrocketing oil prices, market instability and a glut of deals have dampened investors’ enthusiasm. Consequently, many IPO candidates are instead getting themselves acquired — making it easier for us to spot new small-cap stars in an overcrowded field.

According to Dealogic, there have been 44 IPOs so far this year, and their average percentage gain is 4.6%. While that’s better than a poke in the eye with a sharp stick, it’s underwhelming compared with last year’s first-month gain of 11.7% (for 36 IPOs) during the same period. The slip in 2005 supports a basic tenet of capitalism called supply and demand…and if you want to add the ideal of high quality for good measure, that would also be appropriate in explaining last year’s superior results.

Based on available data, we’re sticking to our guns. Let an IPO cool down at least 30 days, then watch it like a hawk before you spend a single penny. And if you sit out the rest of this year’s IPOs, that may not be so bad either.

*** Here’s the latest on Chris Mayer’s new CrisisPoint Trader service. Based on the classic Dow Theory, CrisisPoint Trader has been pulling in amazing profits.

In the meantime, watch your inboxes, because Chris is preparing a new report that will blow your mind…

*** Finally, Bruce Foerster of Aurora Capital shares his secret for determining how good a CEO really is (before you sink money into his company)…

Listen Up

I dare you to guess the biggest challenge for a CEO. Revenue growth? Strategic partnerships? Unwavering leadership? Not exactly. In fact, the answer is so simple that you’ll wonder why you’ve never heard it before…and how you can use it to find the best small-cap opportunities in the future.

Chances are the reason you never heard about it before is that you’ve never met Bruce Foerster, CFO of Aurora Capital. I found out about it by attending Foerster’s presentation for small-cap CEOs at the ValueRich Small-Cap Financial Expo, held March 9-12 in West Palm Beach, Fla. And if anyone should know the secret to being a great small-cap CEO, it’s definitely Foerster.

After nearly 30 years as an investment banker, Foerster has come upon the best and the worst of CEOs. He’s encountered their tantrums, arrogance and stubbornness. But at the same time, he has worked with wonderful CEOs who have managed to stuff the pockets of shareholders and executives with wads of money…and then have gone on to do it again and again.

Foerster’s insight into what makes a great CEO was also developed through his experience as a naval officer who spent 12 years at sea, as an expert witness for securities cases and as a lecturer at the Wharton School and the University of Miami. So when Forrester stood at the lectern in the conference room of the ValueRich expo, his insight about this secret CEO quality truly resonated.

Before he revealed his secret challenge, though, Foerster set the stage…

“Most CEOs are Type A and are used to getting what they want,” he said. “It’s up to the board to keep CEOs in line.”

That’s especially relevant with small companies, he observed, where “CEOs often don’t have formal training.”

So what is the biggest challenge facing a small-cap CEO? According to Foerster, it’s “listening.”

He cautioned investors that “The biggest risk is when a CEO stops listening to the board of directors, the market and other advisers.”

We agree. Here at Penny Sleuth, one reliable way for us to measure a CEO’s capacity to listen is through a company’s ROI.

A smart CEO who listens to customers will maximize shareholders’ investment by plowing it back into things that customers want. And the only way a CEO will know what a customer wants is by listening to them. Taking that into consideration, for us the benchmark ROI is 20% over two consecutive positive years.

Surprisingly, it’s not too difficult to find that kind of ROI in a small-cap company. Of the 6,703 small-cap companies, 2,873 (42.8%) boast a five-year average ROI of 20% or more — so that’s relatively easy to locate.

But drilling down, only 291 of those filtered companies showed a five-year average ROI of greater than 100%. Pulling out all the stops, three companies emerged as having the best quarterly ROI of the entire small-cap bunch. They were Northern European Oil Trust whose five-year ROI was 36,526.49% and quarterly ROI was 20,252.99%; Permian Basin Royalty Trust that posted a five year ROI of 1,210.47% and a quarterly ROI of 2,464.34%; and Tel Offshore Trust whose five-year ROI came in at 1,500.01% paired up with a quarterly ROI of 9,742.37%.

The three of them hold gas, oil and mineral rights in trust funds, and license those rights to the world’s biggest energy and mining companies through a trustee, which is often a bank. Hmmm…successfully negotiating rights with the toughest executives on the planet and scoring a quarterly ROI of 36,526.49%? That sure sounds like a pretty good listener to me.

Happy investing,

Irwin Greenstein

March 22, 2005

Listen Up was originally featured in the Penny Sleuth.