The Oil Recovery, Indian Brothers, Investing in the Rio Olympics and More!

by Addison Wiggin & Ian Mathias

  • Oil hits new yearly high… Byron King on the re-emergence of energy scarcity
  • Brotherly feud epitomizes India’s Achilles’ heel… Addison Wiggin’s report from abroad
  • Another bank bites the dust, FDIC admits it’ll be out of money… for the next two years!
  • Greg Guenthner’s favorite way to play the coming Rio Olympics boom
  • Plus, readers write on hidden inflation and “shadow inventory” of foreclosed homes

  Has the great oil “re-flation” trade backfired? While we were sleeping this morning, Asian traders (or Western insomniacs) seemed intent on finding out:

No real news snapped crude oil out of its five-month trading range of $65-75 a barrel… just the usual global rebound buzz. You can’t even blame the dollar — at 75.5, the dollar index is still lousy, but a few tenths of a point above last week’s 12-month lows.

So we wonder, at what point will this recovery trade start stifling the recovery? $80? $100? Or will gas have to cost $4 a gallon again before anyone notices? And if demand really is rebounding, can the world supply handle it?

  “It might be a comforting thought to believe that world oil output can increase,” adds Byron King. “Indeed, many policymakers in the U.S. and Europe apparently dream themselves to sleep at night pondering how the current oil volume of about 85 million barrels per day could move upward to, say, 95 million barrels per day – ‘if only the world oil industry were more efficient.’

“Yeah, right. Except the global oil industry is not that model of dreamland efficiency. Sure, there are some bright spots. The big internationals like Exxon Mobil, Chevron, BP, Shell, etc. are good. There are some really good state oil firms like Brazil’s Petrobras and Norway’s StatoilHydro. Saudi Aramco is outstanding. These guys are all doing great work to keep the world’s pipelines and tankers filled.

“But much of the rest of the world’s oil industry lacks the knack for capital discipline and crisp project execution. Venezuela’s oil industry is a basket case, what with the Chavez-led nationalizations and mass firings of recent years. Output is falling in Venezuela, and this from a nation with among the largest hydrocarbon reserves anywhere in the world.

“Mexico’s national firm, Pemex, is nothing but a piggy bank for the politicians, who suck most of the investment capital away from the oil patch and into their own boondoggles. Thus is Pemex walking off a cliff of underinvestment, depletion and decline. According to Matt Simmons, Pemex may not be exporting any oil at all to the U.S. within 18-24 months.

“Iran’s oil industry is in a slow death spiral, despite the occasional report of Chinese assistance with field development… Next door in Iraq, chaos reigns. The Iraqi oil legislation is so burdensome that almost all players within the international energy industry are spurning Iraq, including the Chinese. Wow. When the Chinese won’t invest in your oil fields, there MUST be something wrong.

“And so it goes. The bottom line is that we should expect a global oil shock by 2012, or earlier if global economic activity kicks into high gear. Oh, well. It only means that the deep-water guys will do that much better as things unfold.”

Those “deep-water guys” are just one facet of Byron’s Energy & Scarcity portfolio… check it out right here.

  At least our oil isn’t locked up in a bitter fight between two brothers. That’s the crazy state of affairs in India this morning… the Ambani brothers, the seventh and 34th richest men in the world, are quarreling over the Krishna Godavari basin, India’s biggest source of natural gas.

While they fight each other for the $17 billion chunk of land (with the government’s “help”), India’s having a hard time finding cheap energy and an even harder time convincing anyone in the industry to set up shop in the region. For example, as Addison reported last week during his trip to Mumbai, the government’s latest auction for oil and gas projects didn’t even receive a single bid for 34 of the 70 blocks on offer.

"Indian lawmakers passed a freedom of information act several years ago," Addison adds. "We heard several bussinessmen, brokers and traders mention the new law as the best chance at cleaning up India’s monumental level of corruption. The law requires public officials to reveal how much and from whom they’ve received payments. Even so, feuds like that between the Ambani brothers represent the highest level of coziness between industry and government… and as the failed auction from last week shows… India’s biggest challenge in attracting capital from investors around the world."

Addison and Chris Mayer will end their “New Silk Road Tour” today, in New York City, of all places. They’ll be checking out the Value Investing Congress, where many of the issues we discuss in The 5 are front and center. Stay tuned for highlights.

  Gold’s right where we left it Friday, around $1,055 an ounce.

  Another bank failed over the weekend, bringing the yearly total to 99. The FDIC shut down San Joaquin Bank of California, at a cost of $103 million to the Deposit Insurance Fund. (At least… the FDIC entered a $683 million “loss-share agreement” with Citizens Business Bank, which will take over San Joaquin.)

By the way, the FDIC’s Deposit Insurance Fund will likely run a deficit through 2012, Chairwoman Sheila Bair admitted last week. The fund dipped into the red sometime this summer, and in testimony before Congress last week, Bair said it would be two years at the earliest before there is actual money in the fund that’s supposed to backstop our savings accounts. Heh, very reassuring.

The FDIC estimates bank failures through 2013 will cost the government arm another $100 billion.

  Stocks are off to the races again today. Like oil, no single piece of earth-shattering news has the S&P up over 1% as we write… other than the fact that 79% of S&P companies that have reported third-quarter earnings so far have beaten estimates.

  In fact, market volatility is at a 13-month low. The VIX — a gauge of trader uncertainty — is down to 21, the lowest level since pre-Lehman crisis. It’s actually fallen 11 days in a row, the longest losing streak since 2005. (Contrarian alert!)

  “When the International Olympic Committee announced Beijing would be the venue for the 2008 Summer Games, Chinese investments flourished,” recalls Greg Guenthner.

“A combination of hype and fundamentals drove this spectacular rally. Investors who bought on the news and sold as the hype reached fever pitch only months before the games began were handsomely rewarded.

Now with almost seven years until the 2016 Summer Olympics opening ceremony in Rio, it’s Brazil’s turn to make early investors rich yet again.

“We already have an over-the-counter Brazilian stock in our portfolio — and it’s been on quite a run over the last couple of days. But before we get to the details, it’s important to discuss just how powerful a force an event such as the Olympics can be. Sure, it’s an international spectacle. But it’s also an economic boon to the entire host city and nation.

“Take China, for instance. The city of Beijing spent $40 billion… just on venues and infrastructure. Beijing also released numbers that showed massive GDP expansion during the run-up to the games. Already growing at breakneck pace, the “Olympic factor” added more than 1% to year-over-year GDP growth.

”Many investors are already displaying their exuberance, sending Brazilian names higher after the Olympic committee announcement. We’ll be betting on the hospitality and restaurant industries, which will be in full-on expansion mode in preparation for the 2016 games. Our play in this sector in the Bulletin Board Elite portfolio has showed us a strong bounce in October, rising more than 50%.”

For more from Greg, including how this stock fits into his “30 Day Retirement Plan,” look here.

  “You pointed out that there is a reported year-over-year drop in prices of 1.3%,” a reader writes referring to Thursday’s issue. “This may or may not be true, considering that the government is the reporting source.

“If you believe John Williams at Shadow Statistics that the true rate of inflation is understated by 7% on a continuing basis, that still leaves a ‘real’ inflation rate of 5.7%. Further, if you look at this in a broader context, I would submit that inflation is really a measurement for comparing ‘buying power.’ If a dollar buys, say, a package of corn in August and a dollar will still buy a package in September, the reported rate remains flat. But since that package contains 25% less (7 ounces, instead of 9), then your ‘buying power’ has also been reduced by 25%.

“If only a trickle of the Fed’s liquidity ‘escapes’ the too-big-to-fail banks and gives its usual 10:1 leverage to velocity, then hyperinflation is a looming event, and not a process. The ‘Trade of the Decade,’ gold, may be the best financial advice ever. Apparently, buyers are using their ‘gut’ instincts about inflation instead of ‘reported’ numbers.”

The 5: Just as we hinted then, and as Mr. Williams shows very often, it’s hard to take the government stats too seriously. There are just too many footnotes, margins for error and political agendas knotted up in that mess. You’re observations are as good as any.

Bill and Addison’s “Trade of the Decade” is still on. Why fix what isn’t broken?

  “My wife is one of five employees at a small luxury retailer shop,” another reader writes. “Of those five, two of them (and their spouses) have been living in their $600,000-ish homes for over one year without making a mortgage payment… even though combined they make nearly $200,000 per year. They can easily afford the payments, but calculated they could live free of charge for a couple years before they would be tossed out, at which time both couples intend to buy new homes ‘near the home-market bottom’ (they figure, possibly more or less correctly) by having a relative of theirs buy the house — with the money they saved by not paying mortgage payments for ~two years! Very crafty, no?

“My main point is the folks now entering the ‘foreclosure market’ are much more crafty and calculating on average than subprime folks, who mostly believe what pseudo-authorities say (like banks, RE agents, brokers, appraisers, etc.). Therefore, the next wave may well be dominated by folks who COULD pay their mortgage payments, but instead do whatever generates the best result for them…

“I suggest you factor in the above reality into your estimates of how huge future foreclosures might become… this may add 2-5 percentage points.”

The 5: Funny you mention this… late Friday, your editor and Dave Gonigam traded a few e-mails over this article, one of the few that we’ve seen that has the stones to address this “shadow inventory.” As the author put it, “The cork in the bottle is the different ways banks are processing their distressed properties, with some giving borrowers a three-month reprieve to stay in their homes while others are simply ignoring whole sectors where they have foreclosures to keep the toxic assets off their balance sheets.”

Oy… and how can you, we, the government — anyone — possibly measure such a thing? We have to think it’ll end in tears for someone, but whom?

Good luck out there,

Ian Mathias

The 5 Min. Forecast

P.S. It’s not too late to grab a one-month trial of Mayer’s Special Situations for just $1. Seriously, one dollar — that’s it. Half a cup of coffee or a month’s worth of exclusive alternative investment advice… if it’s as much of a no-brainer to you as it is to us, look here.

P.P.S. Today’s issue marks an unfortunate first for The 5: First issue ever written in bed. Long story short, your editor’s cycling hobby caught up with him (again) at a race outside of Philadelphia yesterday. Concrete, I was reminded, is not an appropriate landing surface, and getting run over by another cyclist is about as pleasant as you’d expect. Nothing permanently damaged except the bike. Thus, The 5 lives on… from a more padded location.


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