Cash, Not Ponzi

August 27, 2014

  • U.S. energy in a “bubble”? Not when cash is flowing at this rate…
  • Monster fall rally? Interesting parallels between S&P 2,000 now and S&P 1,000 then
  • How to invest in an ingenious Silicon Valley player before it goes public
  • A clumsy celebration of a bicentennial… China’s next blowup… doomy reader reflections… and more!

   So much for America’s energy boom turning into “the next subprime crisis.”

Six weeks ago, we spotted an alarming — err, alarmist — column in the London Telegraph by Ambrose Evans-Pritchard. He all but said the shale gale was a Ponzi scheme — needing constant new investment to drill new wells.

“The epicenter of irrational behavior across global markets has moved to the fossil fuel complex,” he warned. Investors “are likely to be left holding a clutch of worthless projects as renewable technology sweeps in below radar.”

   Now comes word that the leading North American energy players are raking in more cash from their operations than they’re pouring into capital spending.

Or so the Financial Times concludes after looking over the balance sheets of 25 leading firms. The last time this happened was 2008. “The independent oil and gas companies at the forefront of the U.S. shale revolution have substantially improved their financial position,” reports the salmon-colored rag — “boosting confidence that the rapid growth in production can continue.”

That’s because many of these companies have shifted focus from natural gas toward oil, which is more lucrative. And even gas is more of a moneymaker than it used to be: The 10-year lows of 2012 are now a memory.

   Oil and gas is where you find it… even if it’s under an international airport.

Consol Energy broke ground Monday on a drilling project just outside the Pittsburgh airport. Horizontal drilling techniques will then burrow under the airport itself — believed to hold enough natural gas to power all of Pennsylvania for 18 months.

The parcel totals some 9,000 acres — “one of the largest continuous pieces of acreage in Allegheny County,” says our resident oil field geologist Byron King, who calls Pittsburgh home. “It’s located on one of the ‘sweet spots’ in the Marcellus Shale. This one will be a serious producer, per a lot of informed opinion. It could be a 50-year play.”

   Just outside Pittsburgh lies another Marcellus opportunity our energy team is watching.

“The sheer amount of gas and ‘wet’ byproducts (like ethane, condensate and other ‘natural gas liquids’) flowing out of the wells north of Pittsburgh is stunning,” says Matt Insley.

Matt is keen on a company that recently acquired “bolt-on acreage” — a term we introduced you to earlier this month.

   A quick refresher: “Bolt-on acreage,” says Matt, “is acreage that an energy producer acquires next to their existing acreage.

“In that sense, you can bolt this acreage right onto an existing land package. Bolt-on means more acreage, more efficiencies and more future production. It also meant double-digit gains for many bolt-on announcements.”

But not for the company working the territory north of Pittsburgh, it turns out. Earlier this month, it announced an acquisition that would double its acreage. Bad timing, Matt says: “In the two weeks prior to this deal, the markets and energy prices were in free fall, so by the time the news hit the street, many investors were already running scared.”

Thus does Matt spot an opportunity for 150% gains over the next seven months: Costs for the project — about $5.5 million per well. The potential payout — $40 million per well. “Those are economics any shale producer would enjoy.”

Matt’s last “bolt-on” play delivered big — 219% gains in just over two months after Whiting Petroleum bought out Kodiak Oil & Gas, creating the biggest player in North Dakota’s Bakken. So he stands a very good chance of meeting his “$1 million challenge” — showing our readers how they can pull down $1 million in profits from America’s energy boom by year-end.

Ready to grab a piece of that? Start here.

   The major U.S. stock indexes are pancake-flat this morning. Not one of them has budged more than five one-hundredths of a percent.

After closing above 2,000 for the first time yesterday — 2,000.02, to be precise — the S&P 500 has fallen back below that round number — 1,999.69 as we write.

“Does it make sense,” muses Josh Brown at his Reformed Broker blog, “for the S&P 500 to have scaled 2,000 so soon after a global crisis — a crisis that by some measures hasn’t even been fully resolved?

“And against this tenuous global economic backdrop? Or the darkening geopolitical situation? Is this justified? Do we deserve it?

“As Clint Eastwood explained in Unforgiven, ‘Deserve’s got nothing to do with it.'”

   Indeed, the market might be setting up for a strong autumn rally.

Greg Guenthner of our trading desk has been studying research from UBS, comparing the present market with 1997-98. Then, the S&P bumped up against 1,000 three times. But once it finally broke through, it was off to the races.

“Once 1,000 fell,” says Greg, “it ignited a furious rally leading to double-digit gains in just two months. Right now, the market could be setting up for a similar run.

“No, the circumstances aren’t identical,” Greg allows. “But you should prepare for the possibility of a big pop in stocks headed into the fall. Most people (including me) were bracing for more downside action as the market began to slip just a few short weeks ago.

“If stocks get going here, it could be the beginning of something big.”

   It’s one of the most promising Silicon Valley companies you can’t own… or can you?

“Typically,” says our penny stock maven Jonas Elmerraji, “companies do technology training in person at a large cost. In-person training requires classrooms, dedicated training employees and hefty travel budgets.”

But Jonas is following the fortunes of a company trying to change all that, putting corporate IT training online. “Its online environments use world-class experts and high-production-value interactive video to deliver training courses at employees’ desks. More importantly, its courses have higher retention rates, at 50% of the cost of classroom training. And users complete the courses with industry-recognized certifications.” Major customers include Cisco, McDonald’s and Phillips.

No, it’s not trading publicly yet… but you can still own a piece of it. As Jonas has long told us, the best time to buy an IPO is before it goes public. And strange as it may sound, there’s a way to do just that. Jonas shows you when you follow this link.

   Now an object lesson in the virtues of small government, via a clumsy tweet from the British Embassy in Washington.

This week marks the 200th anniversary of a supposedly pivotal event in the War of 1812 — the sacking of Washington, D.C. British forces torched both the Capitol and the White House.

To mark the occasion, the British Embassy tweeted a photo of a cake featuring a miniature White House, British and American flags and sparklers.

The Twitterverse was not amused. “Extremely poor taste,” tut-tutted one user.

Meh… The historian Jeffrey Rogers Hummel reminds us even the British commanders didn’t think Washington was strategically important, such a minor force in American life was the federal government. Torching the White House was merely an act of spite by Gen. Robert Ross, who was offended his 4,000 men were taking sniper fire from the good citizens of D.C. (You’d think the Brits would have learned a thing or two about that from the Revolution.)

What was strategically important was the city 30 miles north that Agora Financial calls home today. Baltimore at the time was a thriving center of commerce. (Now? Uh, not so much.) But Ross’ assault here three weeks after the sacking of D.C. failed — the rockets’ red glare and all that — and Ross himself was killed.

Now you know…

   “China and Russia ditch the U.S. dollar?” a skeptical reader inquires about one of our ongoing themes.

“Yea, what will they do when China and Russia inevitably have a falling out? Heh.”

The 5: A valid point. Chinese continue to move in droves into Siberia, altering the ethnic landscape. Can Putin and co. be happy with that?

Assuming the Shanghai Cooperation Organization goes through with expansion next month, talk about scorpions in a bottle. India in the same club with China and Pakistan? Could be interesting…

   “Look at the history of China,” a reader writes after a fellow reader mused last week about the French Revolution, the rich and the poor.

“Each new dynasty in China is started by a peasant with blood on his hands. Things go well for a while, but slowly, the rich gain more influence in government, ultimately placing increasing burdens upon the peasantry while reducing their own.

“When it gets to the point where dying in a revolution beats dying by starvation, the revolution occurs, installing a new emperor. (Political appellations are irrelevant; an emperor is an emperor, so long as he is in charge.)

“Typically, a dynasty might last 200-500 years. We haven’t hit the 250-year mark yet. Do the math.”

   “Oil is falling, maybe breaking an uptrend,” begins a reader with a ‘doomy’ laundry list. Gold may be about to break a 13-year uptrend. The Fed is hesitant about raising interest rates. Wages are barely holding their own. Employment is not increasing enough to cover the population growth, let alone those who have given up looking for work.

“This is not a sign of increasing prosperity. it is behavior that might be expected at the beginning of a new Great Depression. It may be fortunate that Wall Street buildings have few easily opened windows anymore. Who wants to be hit by a falling body when the market collapses?”

   “When I was a young lad growing up in rural northern Minnesota,” writes an expat from Thailand, “we survived life with an outhouse, a party line, one TV station (two if the weather was just right) and walking every morning to the well for a couple pails of water.

“Life was slower and easier then. Andy Taylor was still sheriff, and silver coins were still everywhere.

“Now we have money that isn’t worth a damn buying up as much force as any local police force can stand and a general level of impatience that can never have been known before in the history of the world. We used to wait hours to talk on the phone, and now we can’t wait nanoseconds for a website to load on our computer. We’ve become so dependent on being fed from the outside that should those services fail, like in an electromagnetic pulse (EMP), a large percent of the population will perish.

“Each day I feel a little worse for the masses of humanity that have no idea what is coming. As for me, I’ll be pulling weeds, collecting eggs and milking the cow. Oh, and reading The 5 as long as the holes are moving from electron to electron.”

The 5: Wow, our regulars are really down in the mouth right now.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. If you’re among the (evidently growing) legions who believe the market’s all-time highs aren’t for real, that matters are even more out of whack than they were in 2008 and it’s only a matter of time… well, we have a few thoughts about what to do.


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