Two Charts Every Investor Should See

by Addison Wiggin & Ian Mathias

  • One “secular bull market” still very much alive, despite the global recession

  • Two charts for the ages… a trend so powerful we dare not bet against it

  • Barry Ritholtz and Dan Amoss forecast the future of U.S. housing

  • Plus, an off-the-radar commodity set to soar

  “We are in the midst of a 20-year secular bull market in natural resources,” the inimitable Rick Rule proclaimed yesterday here at our Investment Symposium. That was an easy proclamation to make last decade — which he certainly did — but given all that’s happened in the last few years, we note Mr. Rule sounds bullish as ever.

“The wind is at our backs still,” he said. “On the supply side, natural resources had a 20-year bear market, which restrained supply. Most major discoveries happened in the ’50s-70s… they are depleting assets long in the tooth. We are living on discoveries from 40 years ago.

“On the demand side, the bottom of the pyramid — emerging markets — are becoming slowly more free and rapidly more rich. People here, at the bottom, they buy things that bring them utility, which is different from what brings you utility. You buy iPods, Kindles… and that does little for the resource industry. Poor people buy air conditioners, cars, refrigerators… stuff made of stuff. That has a significant impact on resources, which are increasingly scarce.

“This is the stuff of bull markets… falling supply, rising demand. The price you pay for energy is going to go up. You can either invest along and enjoy it, or not.”

  Et voila: China is now the largest energy user in the world, the International Energy Agency announced this week. The country consumed 2.252 billion tons of “oil equivalent” last year. The U.S. — formerly the largest — managed to burn just 2.17 billion tons.

So it goes… another inevitable milestone of Asian growth and Western decline. Like most facets of this takeover, the changing of the guard has been swift:

  Yet, here is one of the most convincing charts we’ve ever seen… a riff off one Frank Holmes — another Symposium speaker — has been toting around for years:

“40% of the world’s population — China and India — uses two barrels of oil per person per day,” Frank Holmes beamed in his presentation yesterday. “In the U.S., we use 25.”

If you’ll allow us to paraphrase Frank, that appears to be one of the few slam-dunk investment theses of this generation. China and India need only become half the energy consumers we are in the U.S. and explosive gains would follow… if you own the right stocks. Which stocks? We’re including all our presenters’ favorites in the Symposium MP3/CD set. Get yours here.

  One freebie: “I would establish positions in the Canadian oil sands stocks,” we overheard Rick Rule suggest this morning, “simply as a matter of political insurance. I would suggest a bedrock investment in these the same way I would in gold.”

  While we’re at it, one disclaimer: “Secular bull markets can be severely punctuated with cyclical declines that are extremely character building,” Rick Rule added. “This has happened in the past, it will happen again.

“My forecast for the future: Lots of cyclicality, lots of volatility … truly a wild ride. But if you are going to speculate, and you must welcome volatility. If you don’t use it, you will be used by it.”

  Volatility is certainly alive and well in the market this week. After plummeting over 1% right out of the gate yesterday, the S&P 500 shot back up to a 1.1% gain. Today, stocks started higher on good earnings from Apple, and then fell into negative territory within minutes of the opening bell. Heh, this is a market struggling to make up its mind.

  Hence the appeal of gold. It started the July at $1,200. It’s $1,193 as we write.

  “This week's briefing comes to you from the National Chicken Marketing Seminar,” our resource trader Alan Knuckman wrote us this morning, from an investment conference of his own. At the outset, “I remind you that "chicken is just corn in another bag.”

“The industry is getting back to profitability as meat supplies have been cut back with the downturn. The 2010 U.S. per capita chicken consumption is rebounding, and with a two pounds of feed to meat conversion ratio, corn and soybean meal are a major part of most everyone's diet indirectly.

“The 20% jump in the corn price from multiyear lows June 16 at $3.40 a bushel has pushed prices back above $4.00 for the first time since March.

“This quick move is impressive and signals significant upside potential remaining. The variables of uncertain weather with yield impacts combined with slow overall economic recovery continue to provide price support.”

  More ammo from yesterday’s “surprise” fall in housing starts: “It’s not back to the darkest days post-Lehman,” said Toll Brothers VP Fred Cooper, “but the momentum that was starting has stalled a bit.”

  “The housing market explains why the economy is, at best, going to meander for the next couple years,” blog legend Barry Ritholtz forecast in yesterday’s general assembly here at the Symposium. “Housing is going to eventually seek its rational price, and no how matter how much we intervene, all we are doing is delaying the inevitable. We have not found that level yet, but we’re on our way.

“My best guess, at the current rate of agonizingly slow progress, it’ll take 12 years to absorb all the excess home supply from the boom years.”

  “In both residential and commercial real estate,” Dan Amoss adds, “most investors and bank regulators are ignoring the big problem of negative equity — the properties are worth less than their outstanding mortgages.

“Most parties deal with negative equity using a strategy of ‘extend and pretend.’ It goes something like this: Lenders extend the maturities of underwater, yet performing, commercial real estate loans in the hopes that a future rebound in property values will catapult these loans back into solvency.

“In residential real estate, banks have been modifying the mortgages of deeply underwater homeowners, hoping that temporarily lower monthly payments will transform an unviable situation.

“It’s ironic that this very strategy prevents the fall to market-clearing prices. A clearing market, when ownership changes hands, would bring in the fresh equity needed to drive a lasting rebound in values.

“Investors, banks and regulators are defending the bubble-era owners who overextended themselves on credit. These extend-and-pretend strategies did not work for Japan’s banking system, and they won’t work for the United States.”

  Timely proof of Dan’s thesis: Demand for home refinancing loans jumped to a 14-month high last week, the Mortgage Bankers Association said today.

  Three times as many Americans renounced citizenship in 2009 than in 2008, says a recent report from the Financial Times. 743 expats made the big leap last year, still a very low number, all things considered. Why? Because “more expatriates seek to escape paying tax to the U.S. on their worldwide income and gains and shed their ‘non-dom’ status,” the FT claims.

  “It is necessary to set up estate tax planning early,” a reader writes. No matter which side you’re on of this estate tax debate we’ve been hosting, the harsh reality is that if you’ve made enough money, you’ll have to deal with it in some form, some day. So here’s one solution. (Of course, this is all the advice of an apparently knowledgeable reader, and we certainly don’t claim to be tax experts. Caveat emptor.)

“The death tax can be addressed through setting up an irrevocable trust outside the estate, fund the trust through a whole life policy on the breadwinner or his/her spouse and have the client's family members as the beneficiaries of the irrevocable trust. It allows money to be paid directly, and that money can be used to pay the estate tax and avoid liquidating assets in a period of declining prices (aka now).

“Obviously, laws change and you need to consult a lawyer/accountant/insurance agent for details, but early succession planning can be useful. A disadvantage of the irrevocable trust is once you set it up, you cannot change the beneficiaries easily, but it is what it takes to making sure you don’t have to liquidate real estate, businesses, stocks, bonds, etc., to pay the death tax. Basically, you have to be sure you know who you want to pass your $ to.

“Love The 5 Min. Forecast. Keep up the good work.”

  “When you report the number of failed banks over the weekend each week,” a reader writes, “would you please give the names and locations of these banks?”

The 5: Sorry, we have only five minutes. To their credit, the FDIC keeps a nice up-to-date list right here. Of course, they won’t tell you which banks they’re worried about failing next weekend… such knowledge might inspire you to do something rash, like protect your savings.  

  “I have a question regarding the MP3 recordings and presentations at the Symposium,” another begins. “What is the arrangement for the Financial Reserve members, please? Do we get the recordings as part of being a member?”

The 5: But of course! We will email details on how you can access the MP3 recordings online in about a week. Hope you enjoy.

Don’t forget, if you are not a member of the Reserve, you can still get these recordings — and all the stock picks they will bear — on the cheap by pre-ordering this week. Once the Symposium ends, we’ll jack up the price. Details here.

Hope you are enjoying our daily updates from Vancouver,

Ian Mathias

The 5 Min. Forecast

P.S. If you’d like an even closer look at what’s going on here in Vancouver — a well-done wrap up of the first day of the Symposium and the very fine details of what will be on these MP3/CD sets — we’ve put together an online presentation for your enjoyment. Included in the presentation are Rick Rule's simple and actionable "W Rules” for resource investing. It’s worth checking out… right here, at no charge.

rspertzel

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