The Pentagon’s Most Powerful New Weapon


May 20, 2013

  • One of the most powerful weapons in the Pentagon’s arsenal… and the generals and politicians never even saw it coming
  • Better than Buffett: Neil George highlights the up-and-comers who play the way Warren used to — with handsome dividends, to boot
  • Making sense of miserable sentiment in the gold market… and the extreme hazards of picking a bottom in silver
  • A black market for KFC (who’da guessed?), snappy comebacks for the guy who “lost” money in gold… two more answers to the age-old question of how long 5 Mins. really is… and more!

  “This new energy weapon is a strategic game-changer,” says our Byron King.

Byron is feverishly researching ideas for his new service, Military-Tech Alert. And he’s come across Buck Rogers-like devices like an electromagnetic rail gun that shoots projectiles at Mach 6… and laser beams so powerful they can burn holes in the skin of incoming missiles.

But the energy weapon Byron has in mind this morning is one that dominated his thoughts last week at a conference in London. “I’m talking about the U.S. fracking revolution that has begun to liberate all manner of natural gas and associated oil from shale rock and tight sandstones across the U.S.”

No, the politicians and generals had nothing to do with it. In fact, they never anticipated it. But it’s shifting the geopolitical landscape all the same.

 “All of a sudden,” says Byron, “U.S. foreign policy isn’t so beholden to events in faraway places filled with people we don’t truly understand.”

As Byron explained last week, U.S. oil imports from the likes of Algeria and Angola have collapsed. And even imports from major suppliers like Saudi Arabia, Venezuela and Nigeria are falling. “At the rate things are going, the U.S.-Canada-Mexico block is moving toward a version of North American energy independence from the rest of the world.

“The reversal of decades-old oil trading patterns means a tectonic shift in U.S. strategic outlook, which flows directly into the military requirements for the country. Do we need the same Navy or Air Force or Army? In essence, the U.S. military can back away from its former reflexive process of planning for intensive, long-term, military-based engagement in the Middle East.”

True, the Navy’s Fifth Fleet won’t be pulling out of Bahrain anytime soon. The Army and Marines still have 15,000 troops in Kuwait — in case Iraq starts going to pot again. “But looking ahead,” says Byron, “the U.S. can plan and conduct its global affairs without being plugged into an intravenous line for oil from parts of the world where we’ve had all manner of trouble for many decades. That’s quite a burden lifted off the backs of national planning authorities.”

 Indeed, the ultimate impact of the “shale gale” on the military might be something none of us can foresee now.

“In the 1930s, the U.S. was mired in the Great Depression,” says Byron by way of analogy. “To relieve joblessness and kick-start the economy, President Herbert Hoover commenced, and President Franklin Roosevelt continued, a massive series of ‘energy’ projects such as the hydro dams on the Colorado and Columbia rivers, as well as the Tennessee Valley Authority (TVA).

“Then — and NOT by previous design — in the 1940s, during World War II, these power-generating assets were critical to U.S. industry. One of the most famous energy-using projects was the Manhattan Project, which built the atom bomb. But looking back, it’s not as if anyone built the Hoover or Grand Coulee dams or set up the TVA anticipating that there would be a global war in a few years and U.S. national defense would require all that electricity.

“It’s fair to say,” concludes Byron, “that America’s new growing energy security is the culmination of over a century of research across a spectrum of industries now coming together in the oil biz. The trick is for the nation, the politicians and the generals and admirals to figure out how to use it to good effect.”

 For the record, crude is flat this morning. A barrel of West Texas Intermediate fetches $95.93.

Brent crude, a better gauge of what most of the world pays, sits at $104.51. The spread between WTI and Brent is as narrow as it’s been for nearly 18 months.

 Stocks are likewise treading water this morning. The Dow is retreating a bit from its latest all-time closing high of 15,354. But the S&P is up fractionally to 1,668.

 “It only makes sense that you’d want to sell a stock that’s overbought, right?”

Jonas Elmerraji of our trading desk is all too aware the broad market is overbought right now. “But recent technical studies have shown that stocks that go overbought are actually more likely to keep getting more overbought than they are to reverse lower.”

Bottom line: “The uptrending channel in the S&P 500 remains intact, until it isn’t.

“I think we are due for some consolidation in stocks, but I expect it to resemble the sideways churn from late January.” For access to Jonas’ trading recommendations at an accessible price, look here.
 “It may seem that Mr. Buffett has forgotten how he made his initial fortune and earned the title ‘Sage of Omaha,’” says our income specialist Neil George.

Buffett himself has acknowledged he’s losing his mojo.

At the most recent shareholder’s meeting in Nebraska, he confessed younger investment managers have left him trailing behind.

“His key was to focus on cash,” explains Neil. “He’d grab small firms that produced a small, but steady cash flow that grew over time.

“Unfortunately, his success has proved his undoing. Berkshire Hathaway is a behemoth. The same investments in the kind of high-cash, basic businesses that made his reputation and initial wealth would just be a rounding error in dollar amounts on the company’s books today.”

Berkshire’s stock price confirms Neil’s narrative…the S&P 500 has outperformed Berkshire’s Class A shares by 19.1% over the past three years.

Berkshire

“Make no mistake — he can still buy and sell most investors many times over,” Neil tells us. “But the simple fact is that he can’t invest like he used to… which has opened an opportunity for companies and investors who can.”

Given Buffett’s own admission, Neil thinks it might be time to examine “companies that can still make the kind of fortune-making deals Buffett can’t make anymore… and, as an added bonus, pay out big dividends.”

Which Berkshire does not… heh.

Neil has spotlighted two particular plays for subscribers of Lifetime Income Report. One of them has outperformed Berkshire by nearly 71% since 2006… with ample room for further upside. If the Sage’s reign is on the decline, you’ll want to review these plays before it’s too late. You can join up with other subscribers here.

 Like crude and stocks, gold is holding its own this morning. It “gapped down” last night when electronic trading opened, but has since recovered nearly all those losses — sitting at $1,359.

“Bearish sentiment toward gold is near record highs,” notes our macro strategist Dan Amoss. “Positioning in gold futures reflects traders’ negativity; it’s at extremes typically seen near the end of gold price declines.

“Last week’s data from the Commodity Futures Trading Commission show 74,432 short gold futures contracts outstanding — the highest since the data series began in June 2006. Net long positions dropped to lows last seen in July 2007.

“Being a ‘paper bug’ is the new, cool thing. Paper bugs are those who assume the global paper money system has entered a new, stable, finely tuned state; they believe central bankers, after enough practice, have become maestros, able to keep ‘good’ prices up and ‘bad’ prices down.

“Such beliefs reflect childlike hope; they ignore the history of central banking, which is a tale of boom and bust, brought about by manipulating interest rates — the market price of money.”

 Unlike gold, silver has fallen and can’t get up. The white metal plunged 8% as electronic trading opened last night. At last check, that loss has been trimmed to less than 2.5%.

Result: spot silver at $21.74, a level last seen in the fall of 2010.

But don’t go trying to pick a bottom now, warns technician Greg Guenthner. “Too many factors are holding silver underwater right now,” he writes in today’s Rude Awakening: weakening industrial demand, weakening safe-haven demand, dwindling inventory in silver ETFs and bearish bets by hedge funds.

“Major support levels are not yet visible,” says Greg. “Sunday night’s breakdown to new lows on the year is another warning signal. Don’t ignore it. This price shock is just the latest evidence pointing toward a hard landing for silver between $17.50-18.00”

 Col. Sanders is smirking from up above. The black market is supplying Kentucky Fried Chicken to the Gaza Strip.

According to The Christian Science Monitor, buckets of the fried chicken are some of the stranger items to be trafficked through a series of tunnels spread across the Egyptian border — tunnels set up to evade an Israeli blockade.

The Egyptian KFC “gets tens of orders a week for KFC meals, despite having to triple the price to 100 shekels ($30) to cover transportation and smuggling fees. The deliveries go from the fryers at the Al-Arish KFC joint 35 miles away to customers’ doorsteps in about three hours.”

Underground railroad

Uh… Doesn’t it get cold?

How does the KFC spread its message to the craving Gazan masses? Facebook, of course.

“The company got more than 20 orders a few hours after a short advertisement was posted on their Facebook fan page.”

One Gazan accountant, Rafat Shororo, had tasted KFC while visiting Egypt and wanted to enjoy it back home.

“All you need to have any KFC product is a short phone call and a few hours, then you can enjoy the great taste of fried chickens,” Shororo told the Monitor. “I just want it. It has been a dream, and this company has made my dream come true.”

Whoa… the things people do for those 11 secret herbs and spices…

 “To the reader who is worried about losing his ‘investment’ in gold,” reads the first of several replies we got to an email on Friday, “it appears he/she may have bought for all the wrong reasons and the wrong form.

“Sheesh, if you wanted to invest in gold, you would invest in collectable coins, not bullion. I do not feel his pain.”

 “A couple of years ago,” writes a reader addressing Friday’s correspondent directly, “I could go to a coin store, plunk down my paper money and walk out with gold and silver. Within the last year, the coin stores are empty of inventory and my premium guys went from a couple of days’ wait for my gold and silver to a couple of weeks, and now to over a month.

“I understand your frustration at lower prices, but at least you have the stuff. Hold onto it for a while. You don’t complain about an unused umbrella when the sun is shining.”

 “Apparently, that reader is one of the ‘Buy Monday and hope another moron will pay more on Wednesday,’ etc.

“Gold is an investment to help you pay your nursing home bill when you are whatever-plus in age. My gold still has an increase over purchase price of around 300%-plus. If you want immediate gratification, then become one of those trader-player types who buys and then chews their nails waiting for the instant the price increases. And if gold is still down Monday, I will be checking my records for the phone number of the guys I bought it from way back there.”

On the subject of Venezuela’s toilet paper shortage, the reader adds, “My wife traveled Europe and India back in the 1980-90s and carried extra TP and booze on her trips. Claimed TP in England/Sweden, etc., was about the texture of a magazine cover, and booze was prohibitively priced.”

 “I routinely spend at least 10 minutes reading The 5,” writes a reader, revisiting whether an issue can really be read in 5 Mins.

“And a few more on the PRO. But I can assure you my lips don’t move. It’s well worth my time — always a nugget or two I can use, or at least smile at.”

 “Readers complaining of overlong 5 Min. Forecasts ought to use some rational basis,” suggests another. “Such is not hard to find — for three recent issues, I counted 3,000-plus words.

“Average reading-for-comprehension speed is 200-230 words per minute (wpm), which would be 1,000-1,150 words for five minutes. On the other hand, skimming can be done around 700 wpm, which matches well with the 3,000-plus words actual length.

“Do the authors and editors think their writing is only worth skimming? They should know, so I accept their judgment.”

The 5: Ah, you’re discovering the method to our madness: There’s a reason we highlight key points in boldface!

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. As we said at the start of today’s episode, the Pentagon is rethinking its priorities now that the U.S. is less dependent on Middle Eastern oil than it used to be.

But that’s not all the generals are rethinking. They’re also scouring their “supply chain” for counterfeit parts in everything from airplanes to submarines to missiles.

It’s not a theoretical threat; phony Chinese memory chips nearly ended up in F-16 fighter jets. And that’s one of only 1,800 such incidents in the space of a year.

Thousands of companies that supply the Pentagon are being scrutinized top to bottom… a process that funnels down and ultimately benefits one tiny firm that the brass have all but granted a monopoly.

This subcontractor is still flying below Wall Street’s radar, so it’s still bargain-priced. But not for long — for reasons you’ll see at this link.

rspertzel

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