The Mighty Consumer, Feeding the BRICs, The Future of Oil Discovery and More!

by Addison Wiggin & Ian Mathias

  • Is the consumer really in crisis? Surprising stats on American reliance on retail spending
  • The bear market rally roars on… Dan Amoss with a sector of “junk stocks” worth shorting
  • Byron King shares the news that “electrified” America’s Peak Oil conference
  • Arab consortium starts investing in food… Chris Mayer on their struggle to (literally) feed growth

 

  Pop quiz: Has the credit crisis decreased or increased the U.S. economy’s reliance on consumer spending?

The logical person would say consumption is a smaller part of our economy now. After all, savings rates are up, unemployment is way up, incomes are down and we’ve chronicled the fall of American consumption attitudes and spending many, many times.

Heh, but since when is anything involving consumerism logical? Personal spending now accounts for 71% of U.S. GDP, the Bureau of Economic Analysis speculates today. That’s UP from 65% last year and the highest in the post WWII era.

Personal spending in the second quarter (the most recent data) actually fell $195 billion from last year, but its greater share of U.S. GDP speaks volumes on just how bad other sectors were hit by the credit crunch. In percentage terms, that’s a mere 1.9% decline… pretty resilient for a crisis of such superlatives.

Still, how long can the American shopper hold on? For stocks, wages and the value of the dollar, this decade has been a bust… and it shows:

We learned a long time ago not to bet against American consumption, but we’ll be watching holiday shopping stats very closely this year. Almost three-quarters of the American economy might depend on ‘em.

  The U.S. dollar — the vehicle of American consumption — is at its weakest point of 2009. The dollar index is at 76 this morning, just a hair above the 52-week low set last Thursday.

  But if you own some gold, rest easy. The spot price, at $1,058 as we write, is just a few bucks off its record high.

  The great bear market rally of 2009 roars on today. Traders are still pumped about the surprisingly sweet start of earnings season last week. And with no economic data to speak of and a continually falling dollar, we can hardly blame them for “letting it ride” another day in stocks. The Dow opened up about 0.5% this morning with the S&P close behind. In fact, the Dow reached a fresh 2009 intraday high this morning and is steadily approaching every newspaper’s favorite “Dow 10,000!” Heh, though “Dow 10,000 Again!” just isn’t as exciting for some reason.

At the risk of raining on this parade, we add that this incredible rally over the last six months still pales in magnitude to the bust that preceded it. Just two years ago last week, the Dow hit its record high of 14,164. Caveat emptor.

  “’Junk stocks’ have dramatically outperformed the broad market since the bottom in March,” notes Dan Amoss. “There’s a reason that junk stocks — stocks in which total debt is three, four or five times the value of equity — have rallied so sharply. Written off as imminent bankruptcy risks, the market left these types of stocks for dead, assuming that equity value would be wiped out in any balance sheet restructuring scenario. But the credit markets have thawed enough to allow most of these stocks to hang on a little longer in exchange for refinancing debt at much higher interest rates.

“Car rental stocks are classic junk stocks — especially in protracted periods of depressed consumer and business travel. These companies operate with massive debt loads in a brutally competitive, commodity business. They’ve all been cutting employee headcount and car fleets at incredible rates in order to stem losses.

“Now the car rental companies are adding mostly ’risk cars’ to their fleet. These cars are bought without the security of repurchase agreements, so they will be sold in the future into an uncertain used car market. This gives car rental companies more control over the length of time they own the vehicles, but it’s also transforming their balance sheets into speculations on the health of the used car market. If used car market values soften, then the car rental companies have to either accelerate their depreciation expenses or risk taking capital losses upon disposal.

“All of the car rental stocks were left for dead in early 2009, because it was doubtful whether they could renew the billions in financing commitments for their gargantuan fleets. The car rental business, in my view, is a dinosaur left over from the era of cheap credit and steadily growing business and leisure travel. In the future, we can expect to see an overlevered, capital-intensive set of competitors battling it out for scarce business. This may be good for consumers, but it’s terrible for owners of car rental stocks.”

Dan just recommended his Strategic Short Report readers buy puts on one specific rental car company… get the details by subscribing here.

  The weak dollar and continued economic optimism is helping oil to a 2.5% gain today. Now up to $73 a barrel, light sweet crude is just a few bucks from a new 2009 high.

  “On Sunday night, Marcio Mello electrified the Denver meeting of the Association for the Study of Peak Oil & Gas,” reports Byron King from Colorado.

 

“Marcio — the former explorationist from Petrobras and now an independent petroleum consultant — detailed the immense petroleum potential of offshore Brazil, as well as the Amazon Basin. If Marcio’s estimates are correct, Brazil may be the location of nearly 200 billion barrels of additional petroleum resources. That’s well within the range of current resource estimates for Saudi Arabia.

 

“For good measure, Marcio described the petroleum potential of offshore West Africa — another 130 billion barrels — as well as the Congo region, with 50 billion barrels or more.

 

“Finally, he described the ’unknown potential of the U.S. backyard, the Gulf of Mexico (GOM).’  Marcio offered remarkable insight into the deep regions of the GOM, 100 miles and more offshore Texas and Louisiana. He showed early work he performed on a number of GOM areas, including the site of BP’s recent billion-plus barrel find at the Tiber site.

 

“It was clear from the reaction of many in the ASPO audience that Marcio hit nerves. If his analyses of the South American, African and GOM petroleum systems are right, then the world has access to much more conventional oil in the future than people previously believed. But it’s not the same as saying  nothing has to change in modern habits of energy use. Getting this oil will require a trillion-dollar level of offshore, deepwater investment. It’s a 50- to 100-year project.

“Marcio worked a full career for Petrobras, and then retired. In the past few years, Marcio has worked under contract with the likes of Exxon Mobil, Chevron, BP, Shell and Hess. Marcio’s work has changed quite a few attitudes in the exploration offices of major oil companies worldwide.”

 

Marcio Mello no longer works for world-famous Petrobras. He’s on his own, consulting little-known companies he thinks will be the next oil majors… one of which is in Byron’s Energy & Scarcity portfolio. Details here.

  A consortium of Arab nations are pooling $2 billion for securing future food supplies. The yet-to-be-named holding company will take funds from Arab government donations and “buy listed and unlisted food companies in the Middle East and Africa,” the fund’s overseer — Arab Authority for Agricultural Investment and Development –– told Reuters over the weekend. Thumbing through the details, it seems like a complicated system of money exchange and investment, but you get the idea… the Middle East is beginning to acknowledge that it can’t feed it’s booming growth – literally.

“We’ve eaten very well on this trip — plenty of fresh fruits and meats and cuisine from all over the world,” says Chris Mayer, who spent all of last week touring the United Arab Emirates for investment opportunities. “In fact, the UAE imports 85% of its food. It will need a lot more food to meet demand over time. Rising populations and increasing per capita consumption guarantee it. As net importers of food — and having scarce water and agricultural resources — this is particularly important to the Middle East.

“A similar story exists in India and China, also big markets with many mouths to feed. For these reasons, it’s hard not to like the fertilizer companies long term. In particular, the potash producers are in the catbird seat. Quality potash mines are hard-to-produce and hard-to-find assets.

“It’s telling that Mosaic, the No. 2 potash producer, reported a 91% drop in earnings last week and widely missed Wall Street’s expectations, but the stock barely moved. The worst news is baked in the prices of the fertilizer stocks… they should be a good place to be for the next several years.”

If you seek more sober analysis from Chris Mayer, stay tuned… we’re about to unveil a very special offer on his high-end advice.

  Indian industrial output shot up in August by the most in almost two years, its government announced today. Factories and mines pumped out 10.4% more year over year during the month, India’s best since 2007.

  “There is a crazy, night-and-day difference between Dubai and Mumbai,” Addison Wiggin wrote us in a quick note this morning. He and Chris, having just departed the UAE, are now in Mumbai working with our partners at equitymaster.com on the BRIC by BRIC letter. (They are staying in the Taj Mahal Palace and Tower, the most notable target of terrorist attacks this time last year. Much to their delight, the mastermind of those bombings — Hafiz Mohammad Saeed — was released to house arrest this morning after an odd trial in Pakistan.)

“What strikes me first is demographics,” Addison continues. “Dubai’s indigenous culture is small and practically invisible to the casual tourist. In Dubai, the ambient noise you hear is construction equipment. Almost no smells stand out. Everything is modern, new and arid.

“In India, ooh la la, there are people everywhere… living everywhere… sidewalks, river banks, parks, monuments. There are shanties built on any available spot. You hear the sound of people… murmur of voices, bicycles, car horns. The air is tropical, dank and full of all manner of indescribable odors even today, when the weather is a beautiful 30 or so and the breeze steady.”

Addison and Chris will be reporting their Indian discoveries all week… stay tuned. For the most up-to-date and actionable advice, check out BRIC by BRIC — our just-launched newsletter that exclusively focuses on opportunities in these regions.

  “Good stuff on the FHA,” a reader writes of Friday’s 5, “and the continued strategy of just pushing our problems off till tomorrow and hoping it gets better by then (doubtful).

“I am not sure I would agree, though, that ’the FHA has managed to paint itself into the exact same corner’ [as Fannie and Freddie]. This is obviously a concerted government effort to bail out and prop up the residential real estate market as much possible, and FHA probably had no say in the matter. Nor did the FHLBs, who also stepped into the FNM/FRE breach and issued all the mortgages they could till they were tapped out, too. They are also most likely insolvent on any real mark-to-market basis.”

The 5: We meant that only in a financial sense. The hows and whys matter, but at the end of the day, they all seem awfully similar to us — undercapitalized and overleveraged.

But the really crazy part is that your “concerted government effort” idea isn’t even close to an extremist, conspiracy theorist view. “I don’t think it’s a bad thing that the bad loans occurred," Barney Frank said last week, perfectly aware of the FHA’s skyrocketing default rate. "It was an effort to keep prices from falling too fast. That’s a policy."

Heh, feel better yet?

Best,

Ian Mathias

The 5 Min. Forecast

P.S. A big thanks to Peter Cooper for playing host to Addison and Chris in the UAE all last week. For some rare perspective — what another investor thinks of us — check out Peter’s blog on our trip right here.

rspertzel

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