Dave Gonigam – July 3, 2012
- “Sowing the seeds of its own demise”… Chris Mayer on the breaking point for oil prices, and how to play the trend now
- Where venture capital meets up with reliable income: Jim Nelson on a unique way to snag a high single-digit yield
- A cancer treatment whose developer Patrick Cox believes is “at least five times undervalued”
- Recovery from “Dububble”: Dubai gets a new shopping center and the world’s most-expensive cupcake
- Reader zings fellow reader’s “zombie logic”… A 1971 dollar that’s even cheaper than 18 cents… the price of oil in a way you’re not accustomed to seeing it… and more!
“Never bet against human ingenuity and creativity,” says Chris Mayer.
Ordinarily, we say this in The 5 to point out an opportunity — like tiny biotechs of the sort Patrick Cox follows. Today, Chris invokes this timeless wisdom to help you steer clear of a potential drag on your portfolio.
First, we survey the landscape: Oil is up more than 2% this morning, to $85.70 a barrel.
That’s up 10.3% from its year-to-date low only last week. It’s also down 19.2% from its year-to-date high only two months ago.
“The high oil price of recent times sowed the seeds of its own demise,” Chris goes on.
“People figure out ways. They figure out ways to save oil, yes. But they also figure out new and better ways to get at the stuff. The carrot of $100-plus oil was too sweet to ignore.”
“I think the oil price will suffer from the oil shale boom. (It already has.) I also think the oil price will suffer from lousy demand. This will be very obvious in retrospect, but how can anyone maintain a bullish thesis on oil given the slowdown in China and recessions in Europe? These are giant consumers of oil.”
Yes, this is something of a reversal on Chris’ part. Here’s why.
“In the past,” he says, “I’ve rooted my bullish stance on oil in the costs of getting the stuff out of the ground.”
“If the cost of producing a barrel of oil is $90 a barrel, that is often a good long-term floor. If the price goes below that, people start cutting back on production. If it goes above that, new supply comes on. The yank and tug of market forces tend to drive prices toward that cost.”
A long-term chart of production costs tracks pretty neatly with a chart of Brent crude.
“Of all the ways to think about commodity pricing, this is the only one I’m willing to lay money on.”
“But new supply and new technologies can crack open spots in the middle of the curve. Costs of production can drop even if demand goes nowhere.” Chris points to new research from the Belfer Center revealing that new oil fields coming online between now and 2020 will be profitable at only $70 a barrel.
“Timing is the great unknown,” Chris cautions. “But I would be wary of owning any oil producers. Those who assume crude oil prices are just going to continue to float upward are in for a rude awakening — or, should I say, a crude awakening.”
“I think it’s OK to stay in oil field services and in the periphery of the oil business, because there is still a lot of investment flowing to finding and producing oil.”
“But an investor in oil will no longer have the wind at his back in the form of steadily rising oil prices year after year.”
A falling energy price is good for manufacturers, transporters, airlines… but here’s one beneficiary that might not come to mind right away.
“Mining gold takes a tremendous amount of energy,” says Chris. “Oil prices are one of the largest cost inputs.”
“So with oil prices dropping and gold hanging in there, it looks great for gold miners’ profit margins. The price of gold fell about 5% since the end of March. That was its worst quarter in eight years.”
“That won’t last, in my view, and we can expect a rebound. Even so, gold miners’ costs are dropping much faster than the price of gold.”
Precious metals prices are firming up in light of pre-holiday trading. Gold started drifting steadily upward overnight and at last check. It’s at a two-week high of $1,616.
Silver, as usual, is moving up even stronger. It’s above $28 now.
U.S. stocks are opening the day flat. Which is how they ended yesterday, recovering the losses incurred after the rotten ISM manufacturing number.
Lacking any cogent explanation, the financial media latched on to “revived expectations for QE3.”
Uh-huh… We see how well that worked out when the Fed met last month. Don’t be surprised to see more of that chatter if the jobs number this Friday is lousy, too.
Our team — fundamentalists and technicians alike — remains skeptical in advance of the Fed’s next meeting July 31-Aug. 1. But much can happen between now and then: Stay tuned…
“Raising money in the equity markets is always tough for small-to-medium-sized companies,” says our income specialist Jim Nelson. Bad for those companies… but good for you.
Private equity firms are no longer willing to take ownership stakes in up-and-coming firms. “The numbers just don’t work out anymore,” Jim explains. “Facebook is a rare exception.”
“That just leaves debt. And in today’s strange debt market, no one is banking on risky companies. So there is a huge credit gap globally for small businesses.”
Enter the Small Business Investment Co. That’s not the name of a firm — it’s a class of firms that have access to cheap, guaranteed federal loans. “The SBIC program,” Jim explains, “is not an appropriated program. Meaning it doesn’t cost the federal government, or taxpayers, a single dime” — not even during the Panic of 2008.
Here’s how it works if you’re an SBIC: You borrow from the feds at 4.7%. You lend to promising businesses at 12-14%. “So right there,” says Jim, “if everything works out, you are making an income spread of at least 7.3% (12% minus your own 4.7% interest charges).”
“In the unlikely event the business you lend to fails, the program still turns a profit,” Jim explains, “even though the government occasionally eats a loss on certain investments.”
Best of all, the tax structure of SBICs is such that nearly all the money made is returned to shareholders.
There are currently 299 SBICs. Jim has pinpointed his favorite — nearly all its loans are backed by real assets and inventories, and it delivers a fat 8.4% yield — for readers of Lifetime Income Report.
One of the most promising cancer treatments Patrick Cox is following will likely begin clinical safety trials this year.
The drug “has been shown to re-activate the protein p53,” Patrick explains, “which has been called the ‘guardian angel gene.’ This is because the p53 gene plays a central role in the regulation of cell cycles. Its job is to monitor the genome for damage and, when it is found, to attempt repair or cell suicide — apoptosis.”
“The action of p53 is blocked in nearly 100% of cancers, as cancers need to rewrite cells’ genetic code to propagate.”
“In the laboratory, this drug has been shown to be effective against cells typical in every tumor type it has been tested against. This includes breast, head and neck, prostate, colon, leukemia and squamous cell carcinomas. Most startling, recent in vitro testing demonstrated efficacy against malignant glioma or brain cancer.”
Other companies at a similar stage of cancer-drug development fetch prices between $2.60-$10.30 a share. The one Patrick’s looking at in Breakthrough Technology Alert? 50 cents. “It would seem apparent that this firm is at least five times undervalued to its senior exchange-listed peers.”
For the next three days, you have an unparalleled opportunity to secure access to Patrick’s research… and Jim Nelson’s… and Chris Mayer’s. Plus, Byron King’s picks in the natural resource space, Greg Guenthner and Jonas Elmerraji’s penny stock picks and Addison’s Apogee Advisory.
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Looks as if the credit/property crisis is long forgotten in Dubai.
The place that brought us the world’s tallest skyscraper and an indoor ski resort was hit hard in 2008.
But this week brings word of a signed contract for the first new shopping center since the crisis — a $7.5 million deal for a complex serving “a planned community of three-five bedroom villas that was left half-built in the property crash a little over three years ago,” as described by our friends at ArabianMoney.net.
“This demand,” the article goes on, “is coming from an influx of new residents from the countries affected by the Arab Spring as well as the expansion of local hub businesses like Emirates Airline and tourism. Population growth is a primary driver for any real estate market.”
And in another sign from Dubai that les bon temps are roulez…
The world’s most-expensive cupcake is now on sale at Bloomsbury’s — a chain that opened a new location a few days ago at the Dubai Mall.
The Golden Phoenix, as it’s called, is made with organic flour and butter from the U.K…. chocolate from Italy… and vanilla beans from Uganda.
“For added decadence,” reports The National newspaper, “the costly cupcake is presented on a 24-karat gold stand, alongside a golden spoon, topped with chocolate icing, strawberries dipped in edible gold, and various other adornments.”
Yours for $1,007.
“We have seen people attempt expensive cupcakes before,” says the general manager of Bloomsbury’s parent company. “However, those are not edible as they are encrusted with diamonds and other components.”
Edible gold? You really gotta have money to burn if you’re willing to eat the stuff….
“I’m a veteran too,” writes a reader in reply to a letter yesterday, “not a disabled veteran, just a plain garden-variety veteran.”
“I Googled ‘VA dental’ and followed the top result to a page that tells of the VA’s great dental services and how to get them. That’s just the first point of the rant that doesn’t add up.
“About 10 years ago, I had to rely on the VA for medical needs and went to an inpatient VA substance abuse treatment program for five months. Ultimately cost me about $2,000. So if you really are a disabled vet with limited resources, why haven’t you discovered the VA medical and dental benefits over the last nine years?”
“There are some clues in your text to explain this. Let’s see: You burned through $500,000 in seven years ($71,000 a year) while obsessing on getting disability and incurring dental problems. Sounds like a full-on meth addiction to me. I met a few of them in that treatment program.”
“What’s worse is that after paying the federal government $39,000 in income tax last year for your zombie needs, I’m having to point out the benefits to you! Then you want to call The 5 and readers like me ‘angry bigots’ — what nerve. I’ll take being called an angry anti-zombie bigot as a badge of honor. Double that, coming from you.”
“One last thing: In what part of seven years of whining to get those disability checks were you ‘trying to get out of this mess’? Must be zombie logic, I just don’t get it.”
“I think you overestimate drastically the value of the dollar at 18 cents,” says a reader who caught our passing mention of 1971 versus today.
“According to The Wall Street Journal in June 2006, on the day the Fed stopped publishing M3, it was reported that we needed $13 for every one in 1970. Which agreed with my experience then and since.”
“Given the erosion since ’06, it would seem we’re more in the 16-20-to-1 range than less. This would make the USD worth between 5-6.25 cents today, which also agrees with my experience. Virtually all of which is cooked by me.”
“And thanks for The 5 — always a good read.”
The 5: We like your cookin’!
We drew on the heavily skewed consumer price index to come up with the 18-cent figure — which, when you think about it, is like giving a proven cheater a head start in a foot race.
Drawing on the tireless research of John Williams at ShadowStats.com, we see that if CPI were still calculated the way it was during the Carter administration, $1 in 1971 buys 4.83 cents worth of goods today.
“My memory,” writes another reader, “is a little foggy (only because the fact was unimportant to me at the time… Dad paid for the gas), but a dollar in the late ’60s/early ’70s bought two or three gallons of gas depending on whether in the U.S. or Canada (different gallon!), and now one dollar buys you, what… a third of a U.S. gallon?
“That serious decline reflects not just the decline of the U.S. dollar, but also the long-term real increase in cost for depleting natural resources, taxes, etc.”
“Most importantly, though, one ounce of gold then could buy +/-100 gallons of gas back then, and now one ounce will buy you +/-400 gallons? (Having left North America — OK, Canada — 15 years ago, you may be able to correct my figures for me, but the point is… keep the gold/dump the dollar.)”
The 5: Here’s one way to look at it: After the Panic of 2008, oil priced in dollars bottomed in early 2009 at $33 and peaked 14 months ago at $115. Volatile, right?
But look at the volatility of oil priced in grams of gold, courtesy of the ever-helpful pricedingold.com…
Stable money, stable prices — what a concept!
But we’d be fools to think any government will return to stable money. Not until they’re forced to, of course.
That’s why we’ve been pounding the table on Addison’s 47 ways to protect your wealth (and even profit!) from a shrinking dollar.
If you haven’t made any moves to protect the value of the savings you’ve worked so hard to earn, you’re making a big mistake.
Think of it this way…
If $1 in 1971 buys 4.83 cents worth of goods today, what does $1 buy another 40 years from now?
Your guess is as good as ours. But let’s say it’s in the ½ cent range.
What does your heating bill look like then?
How about your weekly grocery bill?
Or what’s the value of your estate’s purchasing power when it comes time to pass your hard work on to your children?
Seriously. Think about it. And then ask yourself this question…
If you haven’t made moves to combat the shrinking dollar, what are you waiting for?
This book shows you many, many ways simple ways to protect the value of your dollars. But it’s up to you to take action. No one is going to do it for you.
I suggest you get to movin’…
Click here to begin the first step in profiting as the dollar continues to fall to its knees.
Cheers,
Dave Gonigam
The 5 Min. Forecast
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