A Lucrative Play from 1998 — Available Once Again

April 3, 2014

  • The best opportunity to invest in energy since 1998
  • Record natgas production (again)… and the surprising way to play it for maximum gains
  • Crime and no punishment: The book is closed on a too-big-to-fail CEO
  • The “outfit” bigger than McDonald’s… and the peculiar outreach effort of Japan’s organized crime
  • Harvard Business School, as described by a survivor… reader urges us to raise the crash flag… a subversive thought about inherited wealth… and more!

  It was November 1998. Oil was bottoming near $10 a barrel — a level last touched a decade earlier and never to be seen again. Exxon and Mobil were planning their merger.

If you’d bought XOM at the time, you’d be sitting on a gain of 160% by now, not including dividends. An S&P 500 index fund would be up barely 50%, and only after climbing out of the basement since 2009.

No point in kicking yourself… because you have the chance to repeat that performance now. Actually, you have the chance to achieve far bigger gains in much less time…

  “Energy stocks have been shunned by investors and have languished in recent years,” writes our friend Frank Holmes, chief of the U.S. Global mutual-fund family.

Expectations for global growth and oil demand are in the tank. Thus, oil stocks held in the Energy Select SPDR ETF have underperformed the broad market by 32% since 2008, according to Goldman Sachs.

And check out this chart from Frank: It compares the price-to-book valuations of the MSCI World Energy Index with that of the MSCI World Index — basically weighing the global energy sector against the broad stock market worldwide. The ratio sits near a low last reached in… [drum roll, please]… November 1998, when oil bottomed near $10 and Exxon and Mobil were planning their merger.

Frank’s conclusion: “Today, with oil hovering around $100 a barrel and improved economic conditions in the U.S., energy stocks appear to be a tremendous bargain compared to overall stocks.”

 “Be careful what you read,” writes Matt Insley of our resource-investing desk.

He spotted a Bloomberg story that says the rough winter has depleted natural gas storage: “Waves of frigid weather through March pushed stockpiles to the lowest level in 11 years. Almost 3 trillion cubic feet of gas will need to go into storage during the warm-weather months to cover winter demand, something that’s never been done before.”

Well yes, but… “Following Bloomberg’s logic,” says Matt, “you’d wonder how we’d ever dig ourselves out of this hole! We’ve lowered our inventories beyond help! How will we ever produce that much natural gas?”

The answer — easily.

  “U.S. production is at an all-time high,” says Matt. “In the last month on record, for instance, the U.S. produced 2.21 trillion cubic feet of gas.

“That’s the highest single month on record. Ever. We could dig ourselves out of this stockpile hole in quick order.”

Thank you, “shale gale.”

“As shale formations continue to produce natural gas at alarming rates,” Matt adds, “we could continue to see production levels make new all-time highs. The sky is the limit here.”

Just look at the Marcellus Shale in Pennsylvania. It accounts for 18% of U.S. production today. It accounted for almost nothing a mere seven years ago…

“We’ve seen an impressive run-up,” Matt concludes, “and there’s more to come.”

  “Where there’s a growth story, there’s a way to play it!” Matt is keen to remind us.

“Remember, we’ve seen a nice boost in natural gas prices over the past few months — so if drillers were producing record amounts of gas at $3.50, they’ll surely produce it at $4-4.50. And it’s important to note that even if prices pull back below $4, which I think is likely, we’ll continue to see growth in natural gas production. This is one of those unstoppable trends that we love to see as investors!”

The best way to play it? Not the gas producers. Go instead for the energy services companies, Matt advises — especially the “Big Three” of Schlumberger, Halliburton and Baker Hughes.

“These companies,” says Matt, “provide seismic work, well control, drill plans, fracking crews, completion techniques, logging information and more. So as the U.S. oil boom turns into the U.S. gas boom, these companies will continue to have backlogged order books and work as far as the eye can see.”

[Ed. note: Play it conservatively with the Big Three and you’re almost sure to spank Exxon Mobil’s performance since 1998. Play it aggressively and you can turn a small grubstake of a few hundred dollars into more than a million… in mere months.

Yes, the strategy is riskier. No, it’s not for everyone. You won’t know for sure unless you check it out for yourself. Matt walks you through it in detail at this link so you can make an informed decision.]

  Major U.S. stock indexes are in the red this morning. The Dow and the S&P are holding up best; they touched new intraday highs after the open before pulling back a bit. The Nasdaq and the Russell 2000 are off more sharply.

Gold is losing ground again, to $1,288.

  It’s over. Ken Lewis skates.

We long ago lost our capacity for outrage at the risks bankers took with a taxpayer backstop during the previous decade… but today, we’re compelled to mark a historical footnote in the train wreck of Merrill Lynch’s shotgun marriage with Bank of America during the Panic of 2008.

Ken Lewis, BofA’s CEO at the time, called it the “strategic opportunity of a lifetime.” In point of fact, Merrill had been racking up a quarterly loss of $15.8 billion, even as it paid bonuses of $3.6 billion. He left that part out.

“It is a crime,” writes Jesse Eisinger at The New York Times, “to knowingly deceive shareholders about the financial condition of your company. Top officers of Bank of America knew about giant, surprising Merrill losses, but did not disclose them promptly or precisely to the board or shareholders. They took steps to cut out people who advocated disclosing the information.”

Once the losses did become public, Lewis basically threatened to blow up the entire financial system if BofA didn’t get a second bailout from the U.S. Treasury.

The SEC sued for only $150 million – 4.2% of the total in bonus money Merrill execs awarded themselves days before the merger. “Half-baked justice at best,” wrote the federal judge who reluctantly signed off on the settlement four years ago.

  The State of New York brought its own case… which was finally settled last week.

Ken Lewis agreed to pay $10 million — which will be furnished by his former employer. (BofA also settled, for another $15 million.) In essence, Lewis’ sole punishment is that he’s barred from becoming an executive or director of a public company.

Which certainly doesn’t preclude a juicy book deal…

One more thing: Five years ago, Lewis testified to the New York authorities that if he’d disclosed Merrill’s losses, Treasury Secretary Hank Paulson would have had him and the entire BofA board fired — a claim Paulson denies.

As we pointed out at the time, if Lewis was lying, he committed perjury. If Lewis was telling the truth, Paulson essentially ordered him to break the law.

Yet neither man was ever hauled away in leg irons. Imagine that…

And one more more thing: Lewis’ defense attorney was Mary Jo White… who’s now chairwoman of the SEC.

 What’s more profitable than Deutsche Bank and McDonald’s? Italy’s most feared mob syndicate.

Or so we conclude from a study put out by the Demoskopika research institute. Southern Italy’s ‘Ndrangheta mafia pulled down $73 billion in revenue — equal to 3.5% of Italy’s GDP. The report draws on documents from Italy’s interior ministry and police, the parliament’s anti-mafia commission and a national anti-mafia task force.

Drug trafficking was far and away the No. 1 moneymaker, at $33 billion. But a surprising second place goes to illegal garbage disposal — $27 billion. That’s followed by extortion, embezzlement and gambling — none of which brought in more than $4 billion.

The ‘Ndrangheta is based around the southern city of Calabria and, according to Reuters, “is even more feared and secretive than the Sicilian mafia.”

  Meanwhile, Japan’s biggest organized crime outfit has launched its own website.

The Yamaguchi-gumi is suffering from declining membership, the AFP newswire informs us. So its new site has gone live under the name “Banish Drugs and Purify the Nation League.” (Somehow we suspect something was lost in translation…)

Seems all of the yakuza crime syndicates have fallen on hard times: Membership among all of them fell to an all-time low last year — fewer than 60,000, police say.

“An increasingly poor public image and Japan’s flaccid economy have made the lives of the gangsters difficult,” AFP reports, “which has made membership less attractive for potential recruits, experts said.”

Could the Yamaguchi-gumi not afford a Web designer? This site looks like something from 1998…

“By presenting an anti-drugs theme, it shows concern for social welfare; it shows pictures of the group doing emergency relief after the [2011] and Kobe earthquakes,” says Jake Adelstein, an author and journalist who chronicles organized crime in Japan.

True as far as it goes, but “there was a certain amount of self-interest involved,” he says — “getting in with the locals helps them get a share of the reconstruction money.”

Wow, it must be tough in Japan if even the mob is on the dole…

  “Right on!” a reader writes after our musings yesterday about Harvard Business School. And he would know…

“At HBS, I attended the Advanced Management Program (AMP), International Teachers Program (ITP) and one year as a student toward a Doctor of Business Administration.

“I owe a lot to HBS for which I am truly grateful — but unfortunately, in the MBA program, they neither take in nor turn out people of a high ethical standard. I believe that the same applies to the other top business schools.”

  “Spoken like a trader,” a reader writes after Greg Guenthner’s remarks yesterday. “Investors, on the other hand, have usually done better buying at market lows.

“It’s been a while since The 5 waved its crash alert flag — might be time to dust it off again.”

The 5: We hear ya. And we’re the first to acknowledge the Federal Reserve has done much to juice the stock market lo these last five years.

But the rally remains, to borrow the oft-used expression, the most hated rally in history. The point yesterday is that Joe and Jane Average still haven’t bought in yet the way they did in the run-up to 2000 and 2007-08. So the rally might still have a lot of room to run.

That said… we paused this morning when we saw an open letter from Larry Fink, CEO of Blackrock, the world’s biggest money manager. He wrote the CEOs of all the S&P 500 companies: “It concerns us that in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Here’s The 5’s real-world translation: “After five years, you turkeys have cost-cut as much as you possibly can. If you expect to keep growing your earnings, you jolly well better start investing in the future of your businesses to attract more customers. You do think such investments will pay off, right? Don’t you? Anyone? Bueller?”

Hmmm…. We’re still not ready to raise the crash flag yet. But we’re trying to remember where we stashed it. Maybe in the sock drawer?

  “While some like Anderson Cooper may think that having an inheritance is a bad thing, not all of us do,” a reader writes as we (hopefully) wind down the inheritance thread.

“I believe that it is far more important what you’re planning to do with it. If you’re going to lie around all day, spending it on drugs and hookers, then OK, you have a point. But if you’re going to, for example, get a better education for yourself and your loved ones or quit the job that you hate but can’t afford to leave and start your own dream business, or maybe open a shelter to help out abused women, then I dare you to tell me that the money is not important.”

The 5: How dare you suggest such decisions be left that up to the person who earned the money instead of a bureaucrat who knows how the money could be put to best use!


Dave Gonigam
The 5 Min. Forecast

P.S. Ben Bernanke “is like the arsonist who then puts out the fire he caused,” said Jim Rickards this week at the World War D conference in Melbourne.

As we said a few days ago, the setting was Australian, but the topics were global, and the stakes couldn’t be higher — your financial future in the wake of debt, default, deleveraging and devaluation — with a healthy dose of digital warfare thrown in.

Through Sunday only, you can get the best deal on high-quality recordings of each session at this conference — Rickards, Richard Duncan, Satyajit Das, John Robb and our own Byron King. Here’s where to go.


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