Thursday, August 31, 2006

On stress and relaxation

A few health tips from Janice Dorn, MD, whose goal is to help traders attain a healthier lifestyle. In this Financial Sense Online article, Dr. Dorn discusses the ways in which stress effects us negatively and what we can do to reconnect with body and mind. Enjoy!

Wednesday, August 30, 2006

The new North America

Ron Paul's latest essay, entitled, "A North American United Nations?".

Discuss.

Tuesday, August 29, 2006

Beware booming asset markets!

A recent article from Dr. Marc Faber, who cautions investors of an impending slowdown in the economy and the effect it will have on the stock market and bonds.

Having noted last month that Two-Year Treasury notes offered an attracted alternative to equities, Faber returns in this latest column to warn about the potential ceiling hanging over the market as represented by the S&P 500. He is particularly bearish on the brokerage and financial sector in this environment:

I think brokerage stocks could decline by as much as the homebuilders did over the last 12 months. Please note that homebuilding stocks are down more than the housing index because the housing index also includes other building related companies. Brokerage stocks seem to have completed a similar decline as homebuilders did between July and October 2005.

But why should brokers decline much more? On the first sign of economic weakness, the Fed will cut again interest rates, which will in the long term be even more inflationary. The point is that while the Fed has increased short-term interest rates since June 2004 and again on June 29, no real tightening has yet occurred, because if money was really tight, the dollar would have rallied and asset markets would have declined much more.

Read the whole piece, "Beware Booming Asset Markets!".

Monday, August 28, 2006

The New Art Sharks

A recent article from BusinessWeek tells us about the current state of the contemporary art market.

"The New Art Sharks" hones in on the new breed of buyers in the market, who are bidding up prices well beyond reason. Chief among them: newly rich members of the "financial engineering" economy. Also known by their other moniker, "hedge fund types".

I think that what you will read in this article is an excellent illustration of what was discussed in Friday's post, "Tangible Investments". At one end of the market, you have a group of very wealthy people throwing huge amounts of money at a select group of artists, while vying for the title of "ultimate collector". This is just where the silliness begins, as wealthy collectors battle each other for the latest and greatest (read: fashionable) works.

Here's one of my favorite segments of the article:

ROTTING INSTALLATION
Cohen is snatching up some of the best contemporary pieces. Last year he paid London ad mogul Charles Saatchi $12 million for a 1991 installation by Britain's Damien Hirst that consists of a 14-foot shark pickled in formaldehyde, believed to be the highest price ever paid for a work by a living artist. Trouble is, the shark has deteriorated, so Cohen is getting Hirst to refurbish the piece. Paying millions for a rotting shark may seem wacky, but the purchase played in the art world as a major victory for New York's Museum of Modern Art over London's Tate, the thinking being that Cohen will give the shark to MOMA. Heller calls the work "a masterpiece" and says MOMA is one of several institutions Cohen would consider if he decided to give it away.

Will a mania in the art market be followed by buying panics in other segments of the collectibles arena? While some of the recent action in the art market seems to be fueled by a competitive spirit among collectors, rather than a sense of inflationary psychology, the more accessible areas of the collectibles market may see some frenzy of their own in the not-too-distant future.

I remember the stories of people forming lines around the block for gold coins back in 1979-80 at the height of the gold price surge and the craze for Chinese ceramics that took hold around that same time period. What will it be like next time around?

Friday, August 25, 2006

Tangible investments

Over the past few years, we've seen the beginning of a move away from paper assets and towards tangible investments and stores of value.

Check the news and you'll see the trend is clear. Wealthy investors, wary of the stock market and the machinations of Wall Street salesmen, are embracing "alternative investments" such as hedge-funds, commodities and commodity-related investments, and art. Economic growth in Asia is leading to increased demand for time honored stores of wealth. In India and China, the burgeoning middle classes will step up their purchases of precious metals and increasingly, diamonds. Global investment demand for gold has grown and this, as a result, is leading to a revived interest in silver's monetary value.

Private investors are not the only ones getting in on the act. Central banks across the globe are now diversifying out of some of their dollar holdings and heading back into gold. Pension and endowment funds are moving some of their assets into precious metals and commodity futures. Meanwhile, other institutional and retail investors are gaining exposure to the commodities market through various ETFs and ETNs.

So what is driving this move into tangible assets? As mentioned earlier, investors souring on financial products and services offered by brokerages and banks might partly explain the shift. Another factor may be a growing sense of distrust of fiat currencies. Sophisticated investors and ordinary savers alike are once again waking up to the fact that official inflation statistics often fail to accurately reflect their rising cost of living. They see their purchasing power evaporating before their eyes and will naturally want to mitigate that loss with some tangible store of value.

This phenomenon may be playing itself out again here in the U.S. as a sort of throwback to the 1970s era of inflation. The difference between the 1970s and the present is that we now have a large group of moneyed Russian, Chinese, and Indian buyers vying for the same assets. Be it gold bullion, contemporary art, or antiquities, the market for these tangibles is no longer limited to rich Westerners. For more on this, see the December 2004 article, "Art as Investment, Inflation Hedge".

For all these reasons and more, the pendulum has started to shift towards a preference for tangible assets. In fact, research by Barry Bannister puts this shift into perspective by categorizing the present period as an inflation cycle in which commodities and tangibles tend to outperform paper assets.

Investors and analysts such as Jim Rogers, Marc Faber, Richard Russell, and Jim Puplava have echoed this theme and expanded on it. Anyone seeking to better understand the current economic and investment environment would do well to seek out their writings.

And for those who would like an added look at how this trend is shaping current events, the Financial Times Wealth section covers us nicely.

To find out how investors and speculators are gaining exposure to commodity returns through exchange-traded notes (ETNs), have a look at John Authers' article, "A new and less expensive way to bet on oil".

On tracking art returns, see Deborah Brewster's, "Buying painting by numbers".

For a current look at the demand for rare objects, see Kathryn Tully's article, "Antiquities weather the market".

And last but not least, John Dizard's piece entitled, "Every cloud for the stock market has a golden lining".

Thursday, August 24, 2006

Russian oil production tops Saudi Arabia

We're no longer getting the larger portion of our oil from places like Texas and Saudi Arabia. Crude oil is increasingly coming to the market from places like Venezuela, Central Africa, and Russia. Now a report from The New Zealand Herald confirms this trend.

From, "Russia oil production overtakes Saudi Arabia":

Russia is extracting more oil than Saudi Arabia, making it the biggest producer of "black gold" in the world, figures show.

The statistics, from the oil cartel Opec, reflect a trend that has seen the Russians periodically surpass the Saudis as the world's biggest oil producers on and off since 2002.

These latest figures are being hailed in Russia as evidence that such periodic production spikes are not one-offs though and that Moscow really does have a right to lay claim to the No 1 spot.

According to Opec, Russia extracted 9.236 million barrels of oil a day in June, 46,000 more than Saudi Arabia.

The article goes on to note that, "money from oil & gas accounts for 52.2 percent of all revenues to the state treasury". I guess that's why they were recently able to pay off $22 billion in debt owed to the Paris Club. Reports from Sydney Morning Herald and The Australian on Russia's debt repayments seem to concur.

How high could silver go?

How high can silver go? That is the question posed by Chris Weber in this Howestreet.com article.

Weber notes that he has a large position in silver himself, so he wants to make a careful examination of the unfolding bull move in silver and the best way to (hopefully) profit from it.

Lots to read here, and I see that Weber's price forecasts are influenced by the readings of the "50% principle", a measure also utilized by Richard Russell of the Dow Theory Letters.

Interestingly enough, I've just been listening to a fairly recent interview with metals watcher and trader, Jim Sinclair at Goldseek Radio.

At about 17 minutes in to the clip, Sinclair made some very interesting comments about silver while responding to Chris Waltzek's questions about the silver market of the 1970s and early '80s during the time of the Hunt Brothers' famous corner.

Here is a bit of what Sinclair said when asked about the role the Hunts played in silver's move towards $50 back in 1980:

"[It] never would have happened without them. In order for it to happen again, you would have to reincarnate them; but in fact they have been reincarnated, in terms of exchange traded funds. Reincarnation of the Hunt brothers is the advent of the exchange traded funds".

Click the link above to hear the whole interview.

How to brew great coffee

Not a coffee drinker myself, but I thought some people might like this information. Learn how to make Turkish coffee, brew a single cup of Vietnamese coffee, or find the equipment you'll need for grinding and roasting your own at Howtobrewcoffee.com.

Speaking of coffee, we've had some notable news this week in the futures markets, with Robusta coffee hitting a seven-year high. See more on this story at Bloomberg.com.

Wednesday, August 23, 2006

Homeowners desperate to sell

Building on yesterday's theme of the housing boom and its aftermath: the tactics some homeowners and agents are resorting to in order to get their listing sold.

MSN Moneycentral gives us a state-of-the-nation look at the real estate market in "When homeowners are desperate to sell".

As you'll come to find out, some of these sales may require a little saintly intervention. Enjoy!

Tuesday, August 22, 2006

Lessons from Australian housing boom?

Not the first article we've seen drawing parallels between the property booms in Australia and America, but Reuters serves up some interesting points in this piece, entitled "Australia's housing tale holds lessons for US".

Key points from the article:

1) While similarities exist among these property booms, it's likely that eventual outcomes will be influenced by differences between the two.

2) Goldman Sachs economists studying the issue felt a housing slump would have a more pronounced effect on the American economy.

"They argued that a downturn in housing would have a far greater impact on U.S. consumption than in Australia since American consumers had largely used equity withdrawn from their homes to fund spending.

While Australians had withdrawn just as much equity as Americans -- equal to about 10 percent of disposable income -- they spent far less of it."


3) Differences in the national economies. Australia is being kept afloat thanks in part to its strategic role in resource market. A bull market in commodities and natural resources is enriching the country and floating its share market higher. This has helped smooth over any losses suffered in the housing market.

"The global commodity boom came just as the housing market was tipping over and saved Australia from a likely recession," said Su-Lin Ong, senior economist at RBC Capital Markets.

"What will save the U.S. as their housing market turns? Consumers are in debt up to their eyeballs and fiscal policy is maxed out," she warned.

Interesting reading for anyone who has been following the "real-estate bubble" debate.

Quantitative modeling & investing

James Montier, author of Behavioral Finance - Insights into Irrational Minds and Markets, gives us as overview of quantitative modeling exercises and their success rate over predictions made by human experts.

Montier feels that there is a clear body of knowledge that suggests statistical modeling can consistently match or beat the success rate of experienced actors. His article, "Painting by Numbers: An Ode to Quant" is the subject of John Mauldin's latest "Outside the Box" column.

Mauldin describes Montier's article as an important point of reflection for investors on the results of quantitative versus qualitative decision making. See the link for the full article.

Saturday, August 19, 2006

What's the real federal deficit?

We kind of hinted at this subject with the comments in the last post. The question being: is the government giving citizens an accurate picture of our country's financial condition?

USA Today recently ran an article entitled, "What's the real federal deficit?", that tackles this question. Here's an excerpt:

The federal government keeps two sets of books.

The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005.

The set the government doesn't talk about is the audited financial statement produced by the government's accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.

Congress has written its own accounting rules — which would be illegal for a corporation to use because they ignore important costs such as the growing expense of retirement benefits for civil servants and military personnel.

Last year, the audited statement produced by the accountants said the government ran a deficit equal to $6,700 for every American household. The number given to the public put the deficit at $2,800 per household.

Good reading.

Thursday, August 17, 2006

Speaking of the dollar...

Talking about the strength of the dollar in the last post, I'm reminded of frequent comments made by Richard Russell (of the Dow Theory Letters) regarding the strength of the US economy and our currency.

Russell is an old hand in the markets, but has been around long enough to know that his ideas about what might happen are no match for the signaling power of the markets themselves.

With that in mind, here is a recent article on Russell's view of the economy, courtesy of Reuters. I stumbled across this piece while looking at Reuters' report on the dollar today. Staying with that subject, I'll include a short section from the article here:

the United States faces huge deficits in its budget and current account, which will put pressure on the dollar. So far this year, the greenback's nominal value against a basket of certain major currencies is down 7 percent.

"No country can keep running up debts and deficits the way we are doing and still be a strong reserve currency," said Russell. For that reason, "we are going to have a panic for gold as the dollar runs into major trouble. This country is not addressing the deficits and debt situation at all."

Be sure to read the full article!

Dollar declines. Forecast: end to rate raising cycle

From Bloomberg's report, "Dollar Declines as Expectations of Fed Rate Increases Recede":

The dollar dropped to the lowest in a week against the euro and the yen as reports this week showing slowing inflation eased expectations for further interest-rate increases this year by the Federal Reserve.

The South Korean won, Brazilian real, Swiss franc and South African rand also strengthened versus the U.S. currency. The yield advantage of dollar-denominated assets over those in 12- nation euro region has narrowed to the smallest in a year as speculation increases the Fed is done boosting borrowing costs.

``The dollar is losing interest-rate support,'' said Christian Dupont, a senior currency trader at Societe Generale SA in Montreal. ``There is a bigger sense that the Fed is coming to the end of its rate hike cycle. I think they are done. This weighs on the dollar.''

The dollar declined for a third day to 115.50 yen at 10:26 a.m. in New York from 115.86 late yesterday. It also weakened to $1.2865 per euro from $1.2839. Euro fell to 148.58 yen today after hitting 148.90 yen yesterday, the strongest since the currency shared by 12 European nations debuted in Jan. 1999 at about 133.49 yen.

The U.S. currency will slide to $1.30 per euro and 113 yen in a month, said Dupont.

The key concept in this article is the comment about the dollar losing interest-rate support. This suggests people are not willing to hold dollars or dollar denominated debt without the incentive of a significant interest rate.

Investors and central banks might be thinking, "why should we hold so many dollar denominated assets when we can diversify into stronger currencies or higher-yielding currencies".

Here's how Reuters summed it up in their report on the dollar: "With signs that the Fed may keep rates steady amid indications that other central banks such as the European Central Bank may continue raising rates, the dollar has lost some of its luster."

Tuesday, August 15, 2006

$1 million: What's the infatuation?

So you want to be a millionaire. Guess what, America? There is a big business in feeding and catering to that dream.

A recent USA Today article takes a look at this latest incarnation of the American Dream and concludes, "Millionaire madness fills our popular culture, literature and business lore."

In an article entitled, "$1 million: What's our infatuation with this number?", Edward Iwata examines the trend behind America's burning desire to be rich. Books, seminars, and gambling casinos thrive off of our collective get-rich-quick mentality, but what can a million dollars do for you?

Most of us have heard the saying, "easy come, easy go", and can relate offhand one or more stories of money easily made and easily lost. The USA Today article does seem to focus on the fact that small fortunes are more likely to be kept and enjoyed by self-driven entrepreneurs.

It also hones in on the fact that $1 million doesn't represent as much as it used to. From the section entitled, "Not peanuts, but...":

The big irony? Today, the millionaire club isn't as exclusive as in years past. It's almost pocket change for some Wall Street bankers, Hollywood stars and Fortune 500 executives.

Nor does it go nearly as far as it used to for middle- and upper-middle-class wage slaves, given inflation, the roller-coaster economy and the higher costs of living and retirement. For house hunters in pricey markets from San Francisco to Manhattan, it'll barely get you a two-bedroom home.

"Way back in Rockefeller's era, a million dollars was serious money," says Jacob Needleman, a philosophy professor at San Francisco State University and author of Money and the Meaning of Life. "It was a symbol of a new nation's optimism and capitalism."

What kind of lifestyle does a million dollars represent now? For a historical look at the purchasing power of $1 million dollars and the number of millionaire estates, please see the post, "Tallying up the Millionaires". Be sure to see the comments section for the Oregon State research on Summary of US Millionaire Data.

Monday, August 14, 2006

Why markets trend

Came across an interesting review of a book called Taming the Lion by Richard Farleigh. This title was included in a recent Telegraph "summer reading" column by Tom Stevenson, and a detailed review of the book is available in an earlier Investment column.

While Stevenson notes that book is subtitled "100 Secret Strategies for Investing", he has focused on Farleigh's ideas about the nature of price trends in financial markets. In Farleigh's estimation, markets not only exibit trending behavior (thereby refuting efficient markets theory), the trends are driven by fundamental and psychological factors that are unlikely to change.

For more on Farleigh's book, and others in Stevenson's recent reading list, see the links above.

Oil and gasoline futures fall.

Bloomberg reports that futures prices of crude oil and gasoline are falling today as an improved picture for crude oil production in Alaska and Nigeria has emerged, along with a cease fire in the Middle East.

From Bloomberg: Crude oil fell and gasoline dropped to a two-month low after BP Plc said it will keep half of the output flowing at the largest U.S. oil field, and a cease-fire began in Lebanon.

BP plans to pump about 200,000 barrels a day from Prudhoe Bay in Alaska while it replaces corroded pipelines, rather than shutting the entire field as initially intended. Middle East supply concern also eased as the cease-fire began early today. Royal Dutch Shell Plc's Nigeria venture last week began pumping oil through a pipeline that was damaged in July.

``The cessation of hostilities in Lebanon, the improved outlook for Prudhoe Bay and the return of the Shell output in Nigeria have combined to move us lower,'' said Michael Fitzpatrick, vice president of energy risk management at Fimat USA in New York. ``You are seeing some of the speculators leave the market but this move could be short lived.''

Crude oil for September delivery fell $1.35, or 1.8 percent, to $73 a barrel at 10:04 a.m. on the New York Mercantile Exchange. Futures touched $72.90, the lowest since July 31. Prices are up 9.4 percent from a year ago.

Gasoline for September delivery declined 7.13 cents, or 3.5 percent, to $1.993 a gallon in New York. Futures touched $1.9674 during the session, the lowest since June 19. Prices are little changed from a year ago.

The Bloomberg report is accompanied by video of analysts weighing in on oil prices, but I found the video slow to load.

I've copied a shortcut link to the Donald Coxe interview and pasted it in Window's Media Player to play. By pressing play and allowing it to buffer it's way through the interview, the entire clip will play back smoothly if played again.

Incidentally, all three video interviews seem to put forth the notion that oil prices should fall or at least "pause" in the near term. Watch out for the consensus!

Friday, August 11, 2006

Reading

Haven't had much time to post lately, but I wanted to drop a quick note and tell everyone to check out Financialsense.com for some interesting articles that have recently been posted.

Be sure to check out Martin Goldberg's wrap-up for Thursday, August 10. An interesting overview of value (or lack thereof) in the stock market. Also seeing some interesting notes on gold/mining from Julian Philips and an article called "Nuclear Energy & the Environment" from Elliot Gue.

Interesting stuff. I see that they've also scheduled an interview with Steven Drobny, author of Inside the House of Money, for this weekend's Newshour broadcast. You can access the site quickly by clicking on the Financial Sense bookmark in my link list.

Thursday, August 10, 2006

British CPI, or the "Chav Price Index"

A recent article in the Sunday Times suggests that Britain's inflation is low, but only when measured in the prices of goods favored by the nation's lower classes.

The basket of goods used to assess the increase in cost of living is weighted towards bargain items, says the Times. Data compiled by the Office for National Statistics suggest that the government's Consumer Price Inflation basket has been piled high with cheap goods. This led one observer to refer to the CPI as a "Chav Inflation Index".

For more on Britain's inflation measure, see the article entitled, "Inflation is low...but only on the Chav Price Index".

Tuesday, August 08, 2006

Post-Castro Capitalism?

Well, the word is that Cuban leader Fidel Castro will recover from his recent surgery and be back to run the country in a matter of weeks. In the meantime, power has been transferred to brother Raul and this has the world media wondering about an eventual shift towards normalized US-Cuban relations.

According to a BBC report, this is the first time in 47 years that Fidel Castro has ceded power. While the official line out of Cuba and supporting countries suggests a quick return to power for Castro and business-as-usual, many Cuban exiles and people in the business community are looking forward to a more open, capitalist Cuba.

One has to wonder how the growing support for left-wing politics in South America and Mexico might influence future events in this Caribbean island nation. For more on the fate of Cuba, see this August 4 BBC article, as well as Forbes' "Post-Castro Capitalism?".

Friday, August 04, 2006

An Interview with Bill Powers

Today we’ll be talking with energy analyst and hedge fund manager Bill Powers, of Powers Asset Management. Bill has published two successful energy investment newsletters, Canadian Energy Viewpoint and US Energy Investor, and has been a contributor and guest to Financial Sense Online and the Financial Sense Newshour.

In 2005, he decided to focus his full attention and energy to running his investment fund, Powers Asset Management.

Mr. Powers originally came from a background in technology, and had thoughts of becoming a tech analyst. After working in the securities business and technology related work, he set his sights on finding a field that was inversely correlated to the overcrowded tech sector of the late 1990s. His growing involvement in the energy sector showed him that oil and gas fit that description.


A magazine cover supplied the contrary indicator that signaled an end to the downtrend in oil prices. The appearance of The Economist’s now famous “Drowning in Oil” issue was something that told him the timing was “absolutely right”. During our discussion, Powers compared The Economist’s March ’99 cover story to BusinessWeek's infamous “Death of Equities” cover which preceded the bull market in stocks beginning in 1982.

Powers saw the need for an energy-focused investment newsletter and decided to press forth with the idea, unpopular though it may have seemed at the time. He began writing articles on Canadian oil and gas companies and launched his own publication, Canadian Energy Viewpoint, in 2002. His hedge fund, Powers Asset Management, was launched in early 2005.

Bill, let’s begin by talking about some of the supply and demand fundamentals that are shaping your overall view of the oil and gas story that’s unfolding. Give us an overview, if you will.

Basically, supply and demand continues to tighten for both world oil and North America natural gas. We’re at a time of no spare capacity for either. This is unprecedented. Not only are we at a tight spot for supply & demand, very few large projects are going to come online to replace maturing production from existing fields. This is unlike the 1970s where we had two oil shocks, but yet we had Samotlar in Russia coming online - which is a very large field, the North Sea, Gulf of Mexico, all were in their infancy at that time, as well as Prudhoe Bay.

We’ve heard references to the last oil crisis of the 70s as being political in nature, a political shock due to Opec cutting off supplies to the West. Does the information we have suggest that the next shock will be driven by a lack of supply?

This is going to be a geological shock. By that I mean, sure, there will be production that will come in from offshore Brazil and out of West Africa. But the fact of the matter is that the largest producers in the world, such as Saudi Arabia, has probably had peak production. I very much agree with Matt Simmons’ book, Twilight in the Desert. Venezuela is in decline, Mexico is about to go into a steep decline, and Russia will decline. Indonesia, which is a member of Opec, last year became a net oil importer. Not only that, we’re seeing largest oil fields in China, Daqing, in decline.

While China has made monumental efforts to replace its production, it’s struggling to do so. They have made some good discoveries in the South China Sea, but that will barely keep production flat. As their economy grows, there will be more demand for oil imports from the rest of the world.

In India, their biggest field is Bombay High, which was developed by the British before WWII. That field and the rest of their biggest oil fields are in decline. That is a very rapidly growing country that will have needs for additional imports. What we're really seeing at this time is declining production from mature basins and increasing demand from majority of developing and the developed world. Demand continues to increase even here in the US, despite high prices. I think that what will surprise people is that prices will stay high. Will prices move higher in the immediate future? Maybe, maybe not, but I think the long-term trend is very well established and it is up.

As far as North American natural gas goes, we do have somewhat of a similar situation in that there is somewhat of a supply overhang right now due to the very warm winter we have had. However, we are at 100 percent utilization for natural gas land drilling rigs, as well as rigs in the Gulf of Mexico. We have a declining rig count in the Gulf of Mexico because rigs are being shipped overseas which is somewhat of a new phenomenon. The rig count has dropped from about 150 to 90 right now in the Gulf of Mexico and this is because the rig companies are signing higher day rates for overseas. That will affect shelf production for natural gas on the continental shelf.

Is the "rig count" a metric used mostly to describe natural gas production or is offshore oil included in that as well?

Mostly natural gas. About 90 percent of the rigs drilling in the US are directed towards drilling natural gas. That’s both onshore and offshore, but the rig count deals largely with natural gas, especially as it involves land rigs.

But really what we’re seeing are smaller reservoirs of natural gas being discovered. Due to technology, we've had a very steep decline curve in natural gas. We’re seeing what Matt Simmons has referred to as the natural gas treadmill, which means it requires more and more wells to be drilled every year to keep production flat. So any let up in drilling will have a major decline in production.

So we are seeing despite the high prices we’ve had over the past few years, production has declined in North America, and I believe it will continue to do so. While there are fields in Wyoming and the Barnett Shale, that will probably continue to increase but the rate of increase will not make up for the maturing fields elsewhere. We will see a much bigger move towards unconventional natural gas, but I don’t think it will compensate for the decline in conventional production from mature fields.

And then the big question mark for North American natural gas is LNG, Liquefied Natural Gas which gets talked about a lot.

Does that fall under the category of unconventional gas?

It would be considered an unconventional source in the sense that it comes from overseas. Places such as Algeria, Trinidad, Egypt, Qatar. Those are major exporters, especially Algeria and Trinidad.

It has to be shipped by tanker, then reliquefied…

They have to ship it and reliquefy, yes. They are building new import facilities to take in natural gas. However, the big problem with that is there are other countries that are doing the same thing. Asia is the largest consumer of natural gas, Japan has long been the largest consumer of natural gas and they have already tied up supply for quite some time. So what we’re seeing is while there is potential to import it, that lack of aggressiveness by import facility operators is going to severely limit the amount of gas that comes into this country for the next decade.

They can’t get permits to build enough facilities?

Well, the facilities are actually underutilized right now, so it’s not a problem of facilities. What it is, it’s tying up long-term contracts. That is very, very competitive.

So the Japanese and the other countries of Asia are giving them longer-term contracts and more fruitful terms so the supply is going to Asia?

Yes, correct. And so is Great Britian, who is now becoming an importer of natural gas, Spain has built LNG. A lot of Europe is now looking for alternatives to gas coming out of Russia. So Europe is becoming very dependant on Middle Eastern natural gas and they are becoming a force in the LNG trade.

Does it seem to you that all the infrastructure that’s been built up around natural gas (power plants, industrial use) is a very big bet on the reliance of natural gas supply?


Yes, well that’s a good point. Actually there was a law that was passed in 1978 or 1979 that limited what natural gas could be used for, and it outlawed using natural gas for power plants, as there was a big natural gas crisis back then. Then that law eventually was repealed in the 1990s, and what happened was, from about 2000-2005 there were a huge amount of gas fired power plants built. That was because the National Petroleum Council, which is the research division of the US Department of Energy, predicted that natural gas would stay at $3 for the first two decades of this century. Almost immediately after they wrote that, gas started its climb up to where it is now.

So there have really been some errors in judgement as far as building a lot of power plants that may have difficulty in getting supply in the future. There has been a lot of industrial demand that has been destroyed along the Gulf coast. The fertilizer industry, the chemical industry: a lot of those plants have moved overseas. The smelting industry in the Pacific Northwest for aluminum and other industries, a lot of major heavy industrial users of natural gas have had to move overseas in order to secure cheap supplies.

Do you have any thoughts on Uranium and nuclear energy?

Well I’m a big believer in nuclear energy. I believe there will be more plants built here in the states. Overseas, there’s a big commitment to nuclear – France gets almost 78% of its electricity from nuclear energy. Over in the developing world, such as India and China, there’s a number of plants built or being built. They are going to have no other choice than to commit to that. So I think that nuclear energy has, until renewables become more competitive, the advantage. There’s no real choice but for nuclear energy, because I think hydrocarbons will become prohibitively expensive to generate electricity from in the very near future.

Do you see that happening in the next 15-20 years?

I think it’s a process that’s already started happening. If oil continues to rise, natural gas will probably go up along with it, so the time frame is unclear but I think it’s in the process of already happening.

Do you think we’ll be able to use less uranium because of newer plant designs?

As far as that goes, I know there’s been an increase in demand for uranium because they’ve done up rates for existing power plants. I think there will probably be more efficient use of uranium due to new reactor types, but there’s still going to be, I think, a net overall increase in uranium demand due to the reemergence of the nuclear power industry in the United States and its continued prominence overseas.

The idea that we have no real alternative outside of nuclear energy may come as a shock for many of us. Environmentalists seem to be split on the issue of nuclear or even whether or not to build windmills offshore. But we will need energy from some source.

What do you think about alternative energy? How much electricity can we get from solar and wind?

I think clearly, that solar and wind are the two that are furthest along. I am not an expert on alternative energy, but I think that there will be tremendous advantages in both solar and wind over the next decade. They will become a larger portion of the power supply, both here and overseas.

As far from an investment perspective, I think there are going to be fortunes made in the alternative energy industry over the coming years, because there are technologies that are making it competitive with production of electricity from hydrocarbons. There are a lot of startup companies out there that are going to do fantastically well.

Let’s talk about some of your previous energy price forecasts. The case for $50 oil, which you made in February 2004, has obviously been proved despite earlier skepticism. You then made a forecast in November 2004 that called for $80 oil within 24 months. We’ve come quite close to that mark and we still have a few months to reach your target.

Well, when I predicted $50 oil in February ’04, I believe that oil was near $35 and that was viewed as somewhat of an unsustainable price. Really, the same reasons behind my thesis on $50 oil were true for $80 oil. Supply is becoming increasingly difficult to grow, demand is continuing to increase, and also I think what the general public is now starting to understand is that higher oil prices do not necessarily destroy the economy.

There was a fantastic article that was written by Andrew McKillop, “Price Signals or Cheap Oil Noise?”, that refers to this fact. In 1984, which was Reagan’s reelection year, the economy grew at 7.5%. In 2003 dollars, adjusted for inflation, the oil price range for daily crude was $57 -$65. So high oil prices do not necessarily quash economic growth.

I think that while there are definitely strains that are put on, especially, lower-income members of society and certain industries feel the pinch of higher oil prices more than others, but overall the economy does adjust. And I believe that even higher oil prices, while they will likely slow economic growth, there are other headwinds that will slow economic growth such as the decline in housing. This will probably damper demand for energy as much as high energy prices themselves.

So we are seeing that the economy is adjusting to higher oil prices. I think that as long as prices do not spike, and they move up gradually, we will see higher highs and higher lows as far as the price of oil goes.

[As far as the forecasts go] I felt that it was somewhat of a stroke of luck to have given the times and prices, but I think the trend that started all the way back four years ago, we’re clearly seeing it play out. And there’s going to be lots of ups and downs.

What do you make of the argument that higher oil prices will bring on more supply?

Right now, that’s one of the big conundrums that a lot of economists are struggling with.

Higher oil prices- what’s somewhat different from the traditional economic thinking, as far as this bull market goes- no matter how high prices go it’s not going to bring on a significant amount of production. That’s because we are at, or very close to, peak oil. We may have already passed it, or it may still be in front of us, but to meaningfully grow oil supplies from here will be extremely difficult and extremely expensive.

So we’re in a situation where, no matter how high prices go supply will not be increased significantly. The same is somewhat true of natural gas. When the industry worldwide is working flat out, there’s not much more that can be done that’s not already being done.

I’m kind of amazed to see so many people applying this textbook economic principle to something in the ground that is an exhaustible resource. It’s almost as though they are thinking the resource won’t run out or will quickly replenish itself.

But you also have to remember that for a period of 24 years, from ’78 –2002, when oil prices went up, supply did come on. Basically that type of thinking is similar to the generals who are fighting the last war. It really is. When Churchill went on the offensive in WWII, he fired all of the generals and put young twenty-something lieutenants in charge.

So who has the power to put these kind of influential thinkers in policy positions?

Well, there are some people who are clearly out front on this issue. Colin Campbell, Ken Deffayes, Jim Rogers has been out front on this issue, Matt Simmons, Julian Darley.

People like these and many others who have been sounding the alarms that this situation is happening and that it does deserve attention.

So basically we’re looking at private individuals and industry veterans who have done their own thinking on the issue and are able to come out and stir the pot.

Yes, and unfortunately that’s the way society works.

Matthew Simmons isn’t afraid that he’s going to get fired from his job for speaking out…

Right, and he has committed a lot of resources and a staggering amount of time to writing this book (Twilight in the Desert).

What are you seeing as far as energy investing goes? Do you still find energy companies to be a compelling area for investment?

Right now we’ve found that, despite record high prices, there is a great deal of negative sentiment in the energy investment arena. We’re seeing companies trade at very low multiples of cash flow, reserves in the ground, net asset value, and of earnings.

We think that a lot of the reason for this is the belief that these prices are unsustainable and that a slowdown in the economy will drop oil prices. I disagree with that. I think that while the economy may possibly slow and affect demand growth in the developed world, there is still a developing world that will continue to increase its consumption.

To think that because the US is having an economic slowdown that oil prices will come down is, I think, incorrect. There are a lot of consuming countries out there that spend a high percentage of their GDP, where high oil prices mean a lot to those countries. There will be other countries that will increase consumption due to high oil prices.

Who would you cite as an example?

The exporters. Canada is a good example. Their economy continues to grow and they’re an oil exporting country.

What should investors look at in energy investing and what do they have to know to invest in the energy sector successfully?

Really, what we look for are companies that can grow reserves per share, production per share, cash flow per share, and earnings per share without having to access outside capital in the form of equity or debt.

When we find companies that can do that, there is a very good chance their stock price will go up. We are firm believers – we invest in smaller oil & gas companies – that it is very important when you deal with smaller companies, to get to know management. This helps us to understand the companies much more deeply than you would when analyzing larger companies.

And what’s a good source of public information that investors can look to in order to better understand the energy industry and the individual companies?

There’s a lot of information out there for U.S. and Canadian companies. In the US, you can go to the SEC web site. In Canada, you can go to SEDAR. Or, a great publication is Oil & Gas Investor. That has a lot of North American oil & gas companies in it, and it’s an excellent publication.

Thanks, Bill.



Contact:
Bill Powers
Powers Asset Management
bill@powersassetmanagement.com

Tuesday, August 01, 2006

Oil prices climb higher

Oil climbed higher today, while natural gas declined after surging 14% higher on Monday's session. From CBSnews.com:

Oil prices climbed Tuesday as energy traders kept an eye on supply threats ranging from a tropical storm in the Caribbean to fighting in the Middle East.Natural gas futures plunged 7.5 percent, giving up more than half of the gains from a Monday rally fueled by a heat-induced surge in electricity demand.

Light sweet crude for September delivery rose 55 cents to $74.95 a barrel on the New York Mercantile Exchange, where gasoline futures jumped by more than 5 cents to $2.27 a gallon.

In London, September Brent crude rose 32 cents on the ICE Futures exchange, to $75.47 a barrel.

The strength in gasoline came as refiner Valero Energy Corp. said during a conference call that units at two of its plants _ one in Louisiana, the other in Texas _ would be shut for the next week for repairs, according to Dow Jones Newswires.

"We're moving into a very strong seasonal trend" for energy prices to move higher, said Societe Generale commodities analyst Mike Guido.

We'll have more on oil and gas later in the week. Stay tuned for an interview with energy investor Bill Powers, of Powers Asset Management. We discuss his forecast for $80 oil and the future of natural gas, uranium, and alternative energy.

Energy watchers and investors: I highly recommend that you read this!