No Rerun of 2008

by Addison Wiggin – February 28, 2011

  • The important event that should have happened as oil rallied last week… but didn’t

  • A sector so beaten down, it still looks like early 2009… and a resulting opportunity

  • Byron King on a natural resource controlled by China that’s not a rare earth element

  • How to lose your life savings when you’ve put them in precious metals

  • Readers try to define the “American Dream,” explain the appeal of Atlas Shrugged

Oil begins the new week off slightly from last week’s levels. WTI is at $97.64, while Brent trades a penny above $112. While oil’s gotten much of the attention in the last week, it has been easy to overlook something else equally important.

“The dollar didn’t rally,” observes Chris Mayer.

“You might recall that in 2008, when the world looked like it was going to end, the dollar rallied. Seeking a safe haven, many looked to the U.S. dollar. Not so this time around.

“As oil prices surged and the Middle East pot boiled over, investors fled to the Japanese yen and the Swiss franc, both of which rallied against the dollar. In fact, the dollar fell close to a record low against the Swiss franc.”

“Other than the British pound,” adds John Williams of, “the U.S. currency has been losing exchange-rate value against the other major currencies (Australian dollar, Canadian dollar, Japanese yen and even the euro) during this period of mounting political instabilities.

“Gold has neared its all-time high, while silver recently has set a multidecade high.”

“For U.S.-based investors,” Chris Mayer concludes, “a commodity collapse like that of 2008 seems unlikely. What’s more likely is 1970s-style inflation, with the dollar’s value eroding like the walls of a sand castle against a rising tide.”

Indeed, gold is up ever so slightly this morning, to $1,413. Silver is up more strongly, to $33.86.

Stocks are starting the new week with a healthy boost, the major indexes rising about 0.6%. The Dow just pushed back above 12,200.

“This past week,” says Options Hotline editor Steve Sarnoff, “indexes found support around their 50-day moving averages and may make a run at recent highs. “Success or failure of such a move would provide powerful information about who has control of the market” — bulls or bears.

In the meantime, Mr. Mayer has his eye on an oft-ignored sector in the global market.” It would be hard to find a group of stocks more battered,” Chris points out, “than the lot of dry bulk shippers, which mainly haul iron ore, coal and grain.

“The stock of DryShips, an industry bellwether, is down 95% from its 2007 peak.

“This reflects the decimation in shipping rates, as captured in the Baltic Dry Index. Take a look at the butt-kicking this thing has taken.

“The reason is simply that there are too many ships. In fact, new rates on so-called capesize vessels are below the costs to run the ships. Yet pathetically, new ships continue to hit the market. Last year was the biggest year of new ship deliveries in history. This year should see another slug of additions, expanding the world fleet by 15%!

“So it’s bad, which means ships are cheap.” And a handful of smart investors are starting to jump in.

One of Chris’ private equity contacts is buying ships right now “The play,” he explains, “is to buy ships today, charter them out for three-five years through the soft market and flip them when it turns.” The day rate, or spot rate, is what you can get for a ship today. Charter rates are negotiated longer-term contracts.

In other words, ships won’t always be cheap. Chris recently recommended a shipping firm that’s locked in hefty long-term contracts to weather the downturn… and its operating costs are one-third less than the industry average.

It fits the perfect definition of a “special situation.” For Chris’ favorite such play right now, check out this one-of-a-kind way to “steal” oil from right underneath the mullahs in Iran. Membership in Mayer’s Special Situations is available for half off… but only through this Thursday.

Americans’ incomes grew 1% in January — the most in 18 months, according to the Commerce Department. Which sounds really good except for the fact most of that increase was driven by the one-year cut in FICA taxes Congress passed just before Christmas.

As a result, most Americans — those not among the 15 million looking for work right now — are paying 4% of their wages for Social Security, instead of 6%.

Spending, meanwhile, didn’t keep up with that pace, growing just 0.2%, the lowest since June, and likely the result of rising food and fuel prices. Expect that trend to continue as well. The big increase in gasoline prices didn’t even hit till mid-February, so they’re not reflected in these numbers.

“How do you make money with graphite?” asks Byron King, apparently in the mood this week to ask rhetorical questions. “Really, isn’t graphite just squished-up coal that’s been turned into really slick carbon?

“Can’t you just buy graphite down at the hardware store and squirt it into the lock on a door when the key sticks?”

Indeed, you can make money off the stuff that makes up the core of pencil. Because it’s used for so much more.

“Graphite burns at a very high temperature (3,000 degrees or so), and is therefore useful in numerous electrical and thermo-chemical applications, from arc-lamp electrodes to thin-film heat sinks — such as are contained within your Apple iPad. Quite a bit of natural graphite is consumed in refractory processes, electric arc steel making, brake linings, foundry facings and lubricants.”

“Graphite prices have more than doubled in recent years,” Byron continues. “Based on recent quotes, a ton of 97% pure graphite goes for over $2,000. A ton of ultra-pure 99.99% graphite will set you back over $20,000.

“China controls 80% of the global graphite market — just like China runs 97% of the world supply of rare earths. But the Chinese are running low on graphite reserves. Same story as with rare earths. So graphite prices are going up and Chinese quality is going down.”

Byron has been on the rare earth story for nearly three years now, and it’s turned some mighty fine profits for readers of his premium service Energy & Scarcity Investor… closed positions for 109% and 178%, and a position still open at 147% and counting.

His latest recommendation is a tiny exploration outfit that’s hit on a massive graphite find in North America — 8 million tons. It can produce graphite for $400 a ton and sell it for $2,000. That’s $12.8 billion in pure profit… for a company with a market cap of $77 million.

For just a few more hours, you can secure membership in Energy & Scarcity Investor… plus Alan Knuckman’s commodity options service, Resource Trader Alert… plus annual admission to our annual symposium in Vancouver… for life. And you’ll pay less than you’d pay to buy each of those items separately in just one year.

Oh, and we don’t want to forget our flagship resource publication, Outstanding Investments — just named the No. 1 performing newsletter over the last 10 years by Hulbert Financial Digest. It’s all part of a package deal we call the Resource Reserve. We’ve mentioned it the last several days. Today will be the last — we close the doors at 5:00 p.m. To learn about all the privileges and benefits of membership, here’s your final chance.

From Canada comes an abject lesson in the dangers of storing large quantities of precious metals at home.

Robbers disguised as police convinced a man in Chilliwack, B.C., to let them into his home. As soon as they were inside, they threatened him with a knife, tied him up and forced him to give up the combination to his home vault.

They made off with his life savings — $750,000 in silver bars.

Now the victim is left to wonder how the robbers knew what he had. Did he let something slip to a friend or relative? He stored the silver at home because his local bank didn’t have room for 20,000-plus ounces. And he decided to forego insurance because the premiums got too high.

For a convenient and ingenious method of offsite gold and silver storage, look here.

”I am a Wisconsinite who works in the private sector,” writes a reader. “I’ve had benefit reductions, wage increase caps and wage or bonus freezes for several years now… and I’m working for a great company that does not have debt and has remained profitable throughout the economic downturn.

“The union workers affected by the [budget] bill will have to make a small sacrifice, just as we the taxpayers who pay their salary, benefits and retirement have had to sacrifice.

“I believe the bill is absolutely on the right track and these steps need to be taken nationwide, especially by the Fed.”

“I agree,” says another reader, but “I am also of the belief that ‘political freedom’ and the ‘right to a good job’ go hand in hand and should not be separated as an either/or proposition on the American Dream.

“I hope that our political leaders in both parties will find a way to improve a political atmosphere that respects the political right of those who wish to peacefully assemble and organize. The opportunities to obtain a good education or an affordable home are trampled upon by individuals who seek to exploit or undermine the rights of others by limiting their access to financial and political capital so one may, through self-determination, improve one’s lot in this American Life.”

The 5: Even if we had a civil discourse going on… “government” can’t afford the promises that are already on the books. Politicians promise all kinds of things to get elected… good jobs… health care… leisure retirements. The strife comes when those promises get broken. Expect a lot more strife. Plan for it.

“When I was in high school,” writes a third, as we wind down our book club discussion of the Ayn Rand and her tomes, ”I read Atlas Shrugged and thought it was the greatest book ever. Since then, I have come to realize that the world is a lot more complex than the one painted in the book.

“Working people are very often extremely productive, and the ‘movers and shakers’ sometimes are often bigger leeches than poor people (see bank bailouts, corporate handouts). I’m not saying that some of what she writes does not have a ring of truth to it, such as people being allowed to work in their own self-interest, and in so doing, creating wonderful things that benefit society.

“But in many cases — take Wall Street, for instance — what they do in their self-interest hurts Main Street and society in general.

“The quote from Atlas Shrugged that states ‘Money is the root of all evil’ is a misunderstanding of the Bible, either accidentally or intentionally. The correct quote is ‘The love of money is the root of all evil.’

“Given what we are going through today, can you really argue with that?”

The 5: Exactly. That is why Rand makes a distinction between “producers” and “leeches”… not “rich” and “poor.”

“I’d like to help the reader who professes not to understand the popularity of Ayn Rand and Atlas Shrugged,” offers a fourth. “I’m not blind to the weaknesses in Rand’s writing, or the thinness of many of her characterizations. And I take strong exception to some of the criticisms she makes of Christianity.

“Still, it seems to me the book has the great merit of illustrating the essential role played by reason and liberty in the satisfaction of basic human needs. We do not find ourselves on Earth with a big pile of stuff to distribute; we find ourselves here under circumstances that require us to work at the physical transformation of the natural world in order to feed, shelter and clothe ourselves and those we love.

“Without reason, we die. Without liberty, we live only at another’s sufferance.

“The ideas themselves are not, of course, original to her. One can get all this from nonfiction writers in the classical liberal tradition, which I assume is where Ms. Rand got it all. But many people don’t read nonfiction and still more eschew anything that can be described either as classical or liberal, let alone both.

“If you think of the book less like a novel and more like a really long parable, it is well worth the investment. I rank it among the great books I have ever read, even as I concede that, stylistically, it is among the worst written of those great books.”

“It’s been a long time since I read the ‘money speech,’” a fifth offers with some finality, “I had forgotten about it, but as you said, its impact now is even greater than when I first read Atlas Shrugged. I love getting little tidbits like this — it one of the reasons I so enjoy reading The 5.”


Addison Wiggin

The 5 Min. Forecast

P.S.: Our intrepid resource man Byron King is back from a heavy-duty road trip — checking out a potash mine in New Mexico, and state-of-the-art oil drilling techniques that prove Texas is still a critical oil province.

On a whim, Byron tallied up his travel schedule and figured he’d logged 188,000 air miles last year in search of investing opportunities. Luckily for us, the payoff has been huge. Outstanding Investments was just named the best-performing newsletter of the last 10 years by Hulbert Financial Digest. And readers of his premium service Energy & Scarcity Investor are about to collect up to 723% gains on a tiny oil explorer that just got bought out.

For just a few more hours, you can get both of those services, along with Alan Knuckman’s Resource Trader Alert and his own astounding 2010 track record, as part of our Resource Reserve. It’s a package deal we haven’t offered in four years… and we may not offer it for another four. The doors close today at 5:00 p.m. Don’t miss out.


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