The Producers and the Parasites

Addison Wiggin – January 18, 2012

  • Wikipedia, 7,000 other sites go dark in a showdown between Washington, D.C., and the only major industry it hasn’t managed to kill off
  • Debt ceiling theater tries for a revival, while consumer indebtedness proves a sleeper hit
  • Prices jump as demand falls: What the heck’s going on with oil? Rick Rule spies a factor few are talking about
  • Byron King’s 2012 rare-earth outlook, plus the sector he says could prove as lucrative as rare earths in 2009-10
  • Patrick Cox’s 3-D observations from the Consumer Electronics Show… a reader inquiry about gold stocks… and more!

   It’s hard to crawl the Internet today without running across something like this…

Wikipedia and several other sites are “blacked out” to protest the Stop Online Piracy Act, or SOPA — an odious piece of legislation that would allow domain names to be erased from the web without due process of law.

Accidentally run afoul of the bill’s copyright provisions — an incredibly easy thing to do — and the home page of your website might look something like this:

Not that this is deterring members of Congress determined to get the bill passed.

“Due to the Republican and Democratic retreats taking place over the next two weeks,” says its sponsor, Rep. Lamar Smith (R-Tex.), “markup of the Stop Online Piracy Act is expected to resume in February.”

   “It’s D.C. versus Silicon Valley in the SOPA fight,” observes colleague Greg Grillot. “You have Google, Mozila, Wikipedia, Reddit, Firefox and Boing Boing against it. And how many D.C. shills for it?”

“It’s a true war: the last bastion of creative/productive ingenuity in America versus the swamp of D.C.’s parasitic, industry-conflicted bureaucracy.”

Is D.C. winning?

Last year, Census data revealed Washington moved past San Jose as the wealthiest U.S. metropolitan area.

   Meanwhile, we see the House will likely vote today against raising the debt ceiling, which Uncle Sam is once again hitting.

It’s purely symbolic: Under the debt-ceiling deal reached last August, the president need merely notify Congress that he’s going to raise it; it’s up to both houses to vote against it. With the Senate under the control of the Democrats, that won’t happen.

The $1.2 trillion increase coming soon should be enough to tide over Uncle Sam until… oh, right around Election Day. And that increase would have to be passed the old-fashioned way.

Next crisis, please…

   “While Washington has spent the last year (and much of the last quarter-century) fighting about the national debt, most of our leaders have blithely ignored America’s staggering level of household debt,” writes American University history professor Andrew Yarrow.

Time was Americans observed National Thrift Week along with Ben Franklin’s birthday, which was yesterday. Now Americans are once again raiding their savings to get by.

“In an ominous sign for America’s economic growth prospects,” Reuters reported yesterday, with no reference to Ben Franklin, “workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts.”

Indeed, the savings rate has fallen back to December 2007 levels — right when the official “recession” began.

   The oil price is doing some very strange things lately… including today.

A barrel of West Texas Intermediate is up half a percent today, to $101.16, despite some hypothetically bearish news…

   Oil demand worldwide fell between the fourth quarter of 2010 and the fourth quarter of 2011, the International Energy Agency announced overnight.

Outside of the 2008-09 panic, this has not happened in the past decade.

True, last winter was a lot more harsh, in North America and elsewhere, than has proven the case this winter. But still… at a time of reduced demand, prices rose by more than one-third during the fourth quarter.

OK, so some of that you can credit to the “spread” between WTI and Brent crude narrowing in November. That’s when the owners of the Seaway pipeline announced they were reversing its flow — allowing oil bottled up at the terminal in Cushing, Okla., to reach Gulf Coast refineries.

Thus did WTI start to come back in line with Brent prices — which are a better reflection of what the rest of the world pays for oil.

But Brent jumped more than 10% during the same period…

“Even in the 2008-9 crisis, we only had a couple of quarters of absolute contraction, so it is quite rare,” says the IEA’s David Fyfe. “We’re flagging that there are clearly downside risks to the global economy and to oil demand.”

“The agency,” reports the Financial Times, “characterized the oil market as finely balanced between fears of supply disruptions due to the coming Iranian embargo and concerns about an economic slowdown that will weaken demand for oil.”

   “It’s fascinating that the Saudis are now interested in establishing a floor price for oil in the triple digits,” says resource guru and Vancouver stalwart Rick Rule — identifying a factor glaringly absent from the IEA report.

“Our wish and hope,” Saudi Arabian oil minister Ali al-Naimi told CNN Monday, “is we can stabilize this oil price and keep it at a level around $100.”

The last time anyone in the country’s power structure made a pronouncement like that was November 2008… when King Abdullah said $70-80 would be a “fair” price.

“It’s also important to note,” Rick Rule adds, “the Saudis may be able to get what they want, in the sense they are the only flex producer left in the world. Worldwide oil supply and worldwide oil demand are in fairly tight balance. You can see this every time there is a disruption in supply.”

[Breaking News: By the time you read this, the government will be announcing another game-changer in the energy market. Word from Washington is that the White House will reject plans for the Keystone XL pipeline from Alberta’s oil sands to the U.S. Gulf Coast.

“However,” The Washington Post reports, “the administration will allow TransCanada to reapply after it develops an alternate route through the sensitive habitat of Nebraska’s Sandhills.” Much more on this tomorrow…]

   Stocks are drifting higher today, the S&P on the cusp of 1,300.

Among the numbers traders are chewing on today…

  • Goldman Sachs’ fourth-quarter profits fell 58% from a year earlier… but that beat the average analyst’s estimate
  • Wholesale prices as measured by the Commerce Department’s producer price index fell 0.1% in December; we’ll see what happened at the consumer level tomorrow
  • Industrial production as measured by the Fed rose 0.4% in December.

   “The first couple of trading weeks of 2012 have already outpaced the performance of the last whole year,” says Greg Guenthner of our small-cap desk.

“But those couple of percentage points squeezed out by the S&P 500 are looking like just the first indication that we’re setting up for a stronger environment for stocks in the year ahead.”

“Right now, we’re looking at a number of important technical and fundamental reasons why 2012 is shaping up to be a positive year for the broad market. While that outlook is certainly contingent on a number of factors, we feel cautiously optimistic about what the coming year has in store for investors.”

Emphasis on the word “cautiously.” Greg unearths some market action that looks bullish but could skin you alive if you’re not careful in today’s Penny Sleuth.

   Precious metals sit about where they did 24 hours earlier: gold at $1,656, silver at $30.48.

   “In 2012, we’ll see a lot of wheat get separated from the chaff,” says Byron King of the rare-earth sector.

The stocks sold off hard at year-end, thanks-to tax loss selling. “Right now is buying season for the RE guys, in my view. We’re already seeing some life in RE shares that were beaten into the dirt.”

But you still have to be choosy. “The only way that most small RE players can stay in business,” Byron cautions, “is to achieve the credibility they need from making some sort of deal with larger players.”

What kind of larger player? “The downstream RE refiners and users — everybody from light bulb makers to magnet makers to electronics makers to battery makers and much more.”

And these little companies need to know who’s going to be using their goods. If you’re a rare-earth miner, “the end use will determine how you crush the RE ore — so as to separate certain RE minerals in certain quantities and sizes — early on.”

That is, it makes a difference whether your product will be used in a windmill or a mobile phone. Even the brand of mobile phone could make a difference.

“This RE mining-refining-production cycle is all super-complex chemistry and engineering,” Byron says. “Which is why any RE company that’s worth its salt had better be making deals with the downstream refiners and users.”

While the rare-earth sector won’t be as hot as it was in 2009-10 — when Byron’s readers collected 178% on Molycorp in four months — there’s still big money to be made in the right names. He’s sniffed out a couple of them here.

   “I believe that 2012 will be the year for graphite,” Byron King says. “That is, I think that we’ll see a boom in graphite plays similar to what happened with RE starting in 2009 or so.”

Graphite, as we discussed it when it first crossed Byron’s radar last year, is another variant on carbon — like coal or diamonds. Yes, it’s used in the “lead” of a pencil… but it has a host of other uses, many of them high-tech… like the heat sinks in an Apple iPad.

Now an additional source of high-tech demand is coming online: “There’s an entire new, fast-growing market with lithium-ion battery demand,” Byron says. Indeed, “they ought to call them ‘graphite-lithium ion batteries.’”

Much of the demand is coming from the fast-growing electric and hybrid car market. “Just this alone could add a million tons of new demand to the graphite market over the next decade.”

Byron recently recommended a company set to collect a stream of profits from this trend. It’s in the current issue of Outstanding Investments. Access here.

   “‘Smart televisions’ are finally becoming truly user-friendly,” says Patrick Cox, back home from the Consumer Electronics Show in Las Vegas.

“Moreover, the various online sources of content are being knit together by Google and hardware manufacturers. This convergence of all content on the wirelessly connected family screen presents an enormous challenge to traditional broadcast and cable networks. Games, educational materials, entertainment, telephony and home electronics management are coming together.”

Plasma TV with a touch pen: Even bigger breakthroughs are around the corner

Meanwhile, “I was astonished by the clarity of next-generation screens,” Patrick reports. “The Korean manufacturers, in particular, can make screens with clarity that is getting very close to actual vision. This is particularly true in regard to 3-D screen technology.”

Thousands of attendees saw state-of-the-art 3-D. But Patrick and Ray Blanco were among a handful who got a look inside the semi-trailers outside the convention hall where the 3-D broadcasts originated, run by a firm called Cameron Pace. As in James Cameron, the movie director.

Patrick has believed for years that entertainment would change forever when 3-D screens reached an acceptable level. “That point will not come at once, because individuals have different preferences, but for many, it has already arrived, even though the highest-quality screens still require glasses. That will change within a few years.”

In the meantime, “Ray Blanco and I were able to talk to scientists and engineers at a couple of the companies that most impress us. Ironically, these are companies that make nearly no physical products themselves. They sell, in the words of one of the people we spoke to, mathematics. However, it is the mathematics that makes the incredibly complicated new world of interconnected computer devices possible.”

While Patrick dives into researching the best investing opportunities to come out of the show, you might want to examine this breakthrough in biotech that he’s already dug out.

   “Gold goes up over $20,” writes a reader about yesterday’s market action, “while gold stocks go down.”

“Who is playing games? The banks, the IMF, the Mafia, who? Please tell me, I can’t recall gold stocks going down when gold is up over $20!!!”

“I learned the other day that the Mafia is richer than all the banks in Italy — their turnover amounts to about $185 BILLION a year — and just think, they have been in existence for umpteen centuries.”

The 5: According to the Italian trade group Confesercenti, the mob has larger reserves than any Italian bank.

As for gold stocks, the explanation appears a bit more prosaic: Kinross announced that production would be nearly flat this year while costs would rise as much as 19%.

KGC is a major component in any index of large-cap gold stocks… and it tumbled 17% yesterday.

   “As an ink-stained wretch who left the now-dying daily paper to open my own weekly in 1996,” writes a reader about foreclosure mills buying small-town newspapers, “we are, in fact, profitable,” writes an editor in Rhode Island.

“And we don’t get any foreclosure ads. By and large, (EXTRA!, EXTRA!) weekly community newspapers are doing fine, thank you.”

“Best to The 5.”

   “At this point,” writes a reader about whether Fed policy is merely stupid or outright evil, “there is so much documentation on the nature of the Federal Reserve and its monopoly over our money supply that to think those that are perpetuating this crime are stupid rather than just actors in this scheme is naive.”

“Perhaps you do not want to call them out, but it is well past the time we call a spade a spade and stop the outright theft of our wealth by these people. Most of us weren’t born yesterday, though it seems like many are still acting as if they were by not paying attention to the fraud against them.”

The 5: What, it’s not enough that we endorse — and sell copies of — End the Fed?

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. We’re days away from announcing a first-of-its-kind conference… one that you don’t want to miss if you’re interested in parking some of your wealth outside the United States.

The inspiration came to us as we hosted our Chill Weekends last year for Reserve members at Rancho Santana in Nicaragua. Sure, they’re interested in the wealth-building potential of overseas real estate. But time and again, another issue came up: How to put IRA money, 401(k) money, or for that matter personal funds, in a whole host of offshore investments.

So we’ve designed an entire conference built around answering those questions: All the logistics, the legal details, the estate-planning implications. It’s a comprehensive how-to… for an exclusive group of 30 people… in the stunning setting of Nicaragua’s Pacific coast.

The dates are March 21-25. We’ll reveal more details — including the expert speaker lineup — later this week. But if you want to be considered for attendance, call Kristen Palmer today at 1-800-708-1020. She’ll add you to the list.

rspertzel

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