- A boring (but profitable) outlook for oil
- The Saudi princes’ sweet spot for crude prices… and your cue to act
- Fed follies propel stocks and gold
- The double-whammy that’s sent coal down for the count
- New/old Apollo pictures remind us
- What we know about the TPP and what you can do about it
By day’s end, oil prices might well notch their biggest weekly gain since 2009. Brent crude, the global benchmark, sits at $53.80 a barrel — up 12% from where it began the week. West Texas Intermediate, meanwhile, has crested the $50 level for the first time in two months.
So where from here? “Oil forecasts are all over the map these days,” says Greg Guenthner of our trading desk. “You’ve got the legendary T. Boone Pickens, who thinks oil’s going to $70 before the end of the year. Then you’ve got the infamous vampire squids at Goldman Sachs telling everyone to get ready for an oil bear that’ll last for 15 years — and send crude down as low as $20 per barrel.”
This morning, we gently suggest the truth lies in the middle.
Yes, we know — boring. The reasons, however, are anything but boring. And those reasons have the potential to triple your money if you play them right…
“Remember $100 per barrel oil?” asks Jim Rickards. “It wasn’t that long ago. As recently as July 25, 2014, less than 15 months ago, oil was $102.09 per barrel.”
Here’s a chart of oil going back two years. You might find it handy to refer to as we traipse through today’s episode of The 5…
“What kind of behavior did this high price produce?” Jim muses. “Many oil producers assumed the $100 per barrel level was a permanently high plateau.
“The fracking industry assumed oil would remain in a range of $70-130 per barrel. Over $5 trillion was spent on exploration and development, much of it in Canada and the U.S. This led to a flood of new oil, which reduced the market share of OPEC producers. Saudi Arabia was losing ground both to OPEC competitors and the frackers.
“In mid-2014, Saudi Arabia developed a plan to destroy the fracking industry and regain its lost market share,” says Jim.
No one has publicly acknowledged the details of these plans. But Jim knows the plans’ existence as a fact, drawing on his extensive contacts in business and government — in this case “a trusted source operating at the pinnacle of the global energy industry.”
The Saudi princes’ objective — drive down the price low enough to wreck the frackers but not so low as to wreck the revenue Saudi Arabia’s government needs to buy off the restive masses.
“It turned out that the optimal solution for the Saudi problem was $60 per barrel,” Jim explains. “A price in the range of $50-60 per barrel would suit the Saudis just fine. That was a price range that would eliminate frackers over time but would not unduly strain Saudi finances.”
True, Saudi Arabia can’t control everything about the oil price. But that’s not the point: “Having intelligence on the target price is a huge advantage in analyzing market dynamics,” says Jim. “In particular, it helps us to approach the problem rationally and avoid the emotional biases of other analysts and investors.
“For example, the price of oil hit the Saudi target price of $60 per barrel by the end of 2014. But it kept going down. The price hit $45 per barrel in January 2015 and $40 per barrel by this past summer. That was due to normal market overshooting and momentum trading. It was also due to the fact that desperate frackers actually increased production to meet the interest payments on their debt even though they were in the process of going broke.
“The Saudis knew this was a temporary overshoot. The frackers could not get financing to drill new wells. Also, overpumping the existing wells would just make them disappear faster.
“Using our market intelligence, we could see that when oil hit the $60 per barrel level (as it did in early May), it would soon head down again. When oil got too low (as it did in late August at $38 per barrel), it would soon head up. This analytical frame based on our intelligence sources has proved to be a highly accurate short-term predictive tool.
“Absent a geopolitical shock in the Persian Gulf, oil will remain in a range of $50-60 per barrel (with occasional overshoots for technical reasons) until 2017,” Jim concludes. “That’s how long it will take to destroy the frackers.”
Now that you’re privy to this intelligence, what can you do with it?
We’ve been striving to answer questions like these for nine months now. During that time, a select group of our readers has been laying on experimental trades based on the “indications and warnings” that come to Jim’s attention — just like the ones we’ve been describing today.
The results include…
- 41% gains in 3 months from XRT…
- 102% gains in 4 months from CNW…
- 150% in less than 30 days from CAR…
- 162% in less than 6 months from URI…
Now after nine months, we’re ready to open this new service to a wider audience. We call it Rickards’ Intelligence Triggers — the newest entrant in our suite of Jim Rickards services. On Tuesday of this week, readers were clued into an oil-themed trade with the potential to triple their money over the next year. It’s not too late to lay on this trade yourself. To learn more, simply follow this link.
[Ed. note: For reasons that will become apparent when you click, we must restrict access to Rickards’ Intelligence Triggers. It is capped at 1% of our readership.]
To the markets — where stocks are adding to their Fed-fueled gains.
After we went to virtual press yesterday, the Federal Reserve released the minutes of its September meeting. At the risk of repeating ourselves, Fed “minutes” are not like the minutes of your local sewer commission, where you know who said what. Instead, it’s a document carefully crafted for public consumption, released three weeks after the meeting proper.
In any event, there were no surprises. Here’s our 5-style summary: “We were *this* close to pulling the trigger on raising the fed funds rate, but doggone it, there was that slowing global growth thing. Not that we think it’ll upset the apple cart long term, no siree. It just seemed prudent to hold off a while longer, that’s all. But we’ll get around to pulling the trigger, you just watch!”
And with that, the Dow easily crested 17,000 — a level last seen in August. This morning, it’s up to 17,076 as we write.
Gold was slower to react to the Fed minutes… but at last check, the bid was up to $1,158. That too is a level last seen in August.
The dollar, perhaps not surprisingly, is taking a hit. The euro has rallied to $1.137.
[Comic relief: New York Fed chief Bill Dudley — B-Dud, as David Stockman calls him — just gave an interview on CNBC. On the question of raising the fed funds rate before year-end, he said, “We’re going to get a lot of data between now and December, so it’s not a commitment.”
Heh… Only 11 days ago, he exuded more confidence, telling The Wall Street Journal, “My expectation is that we will raise interest rates later this year.”]
“Coal is so far down the pits that it is hard to imagine the sector seeing daylight,” says our Byron King in an interview with MarketWatch.
Four months ago, Byron told us about the “coal cave-in” — anticipating bankruptcies and restructuring before the sector would be worth buying. In August, No. 2 producer Alpha Natural Resources filed for Chapter 11.
The blame lies with what Byron calls two “coups de grace,” First is low natural gas prices, “meaning that it is possible to fuel-switch to pipelines and gas turbines to generate electric power.”
Too, there are falling prices for renewables like solar power — or as we took to calling it last summer, “Apollo’s energy,” in a nod to NASA’s pioneering use of photovoltaic cells to produce electricity in space.
Apropos of nothing, the Apollo moon missions burst back into the headlines this week. A space enthusiast named Kipp Teague created a Flickr account loaded with more than 11,000 high-definition unprocessed photos.
Sure, they’ve been in the public domain for decades, but they’ve been hard to find in one place. And often they were cropped or compressed or color-corrected. Now they’re all together in their original glory…
Harrison Schmitt during Apollo 17 in 1972, the final mission of the Apollo program
Then again, “It was such a powerful propaganda tool at the time,” says Rage Against the Machine bass man Tim Commerford.
Commerford spoke with Rolling Stone a few days ago about his new band Wakrat… and the discussion took a conspiratorial left turn.
“I got into it with Buzz Aldrin five years ago at a John Cusack movie premiere,” he said. “There were a bunch of people gathered around, and I said, ‘I have a question: You have all these missions to the moon. How come there’s no pictures of the flags on the moon?’ He said, ‘Well, those are highly degraded by radiation by now.’ I said, ‘You left a lot of stuff on the moon. It seems that somebody with a telescope or satellite would snap a picture of that so we could see it. It’d be on the cover of every newspaper…
“I asked him why he put a metal rod on top of the flag instead of just letting the flag out and do its thing. He gets all frustrated and says, ‘I’m just trying to remember what they told me to say.’ That’s what he said! Those were his exact words!’”
We know we’re going rather far afield today, even by 5 standards. But the photos and Mr. Commerford’s remarks reminded us of one of our more buzzworthy links all this year…
More to the point, it reminded us that we’re only three weeks away from a major profit catalyst for “Apollo’s energy.” If you want a piece of a $3.7 trillion profit bonanza, you’ll want to check out this briefing from our Matt Insley right away.
“Is there nothing we can do to stop the Trans-Pacific Partnership?” a reader inquires after Tuesday’s episode. “I thought we were supposed to be able to see what was in it before it was approved.”
The 5: In theory, we’ll see the text before Congress votes on it — although as we said, exactly when is, to say the least, murky.
“We have no reason to believe that the TPP has improved much at all from the last leaked version released in August, and we won’t know until the U.S. Trade Representative releases the text,” writes Maira Sutton from the Electronic Frontier Foundation. “So as long as it contains a retroactive 20-year copyright term extension, bans on circumventing DRM [digital rights management], massively disproportionate punishments for copyright infringement and rules that criminalize investigative journalists and whistleblowers, we have to do everything we can to stop this agreement from getting signed, ratified and put into force.”
How to stop it ? This might be one of the few instances when calling your congressman is your only shot… and one of the fewer instances it might make a difference. When the House voted last summer to give the president “fast-track” authority to negotiate the agreement, it passed by only 10 votes.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. As we noted yesterday, there are people in powerful places who’d rather you not have access to the information you’ll find in our newest trading advisory, Rickards’ Intelligence Triggers.
In the recent past, government agencies have tried to outlaw information about the “secret key” to generate gains of up to 1,616%. That’s why we’re compelled to limit access to only 1% of our readership — we’d rather keep our efforts “under the radar.”
But we promise to keep the link up and running as long as we can. Here it is.
You might already be familiar with Jim Rickards’ IMPACT strategy, which he uses to profit from currency wars. So it’s natural to wonder how his new “Secret Key” strategy is different.
Jim laid it all out in yesterday’s Daily Reckoning. In case you missed it, we figured it was worth bringing to your attention. Jim, take it away…
How to Use “Indications and Warnings” for Profit
By Jim Rickards
Yesterday, we unveiled a new tool you can use to time markets and make sound investment decisions.
I’m not talking about my IMPACT System… or complexity theory.
Instead, it’s called “indications and warnings.” Let me explain them to you…
When the intelligence community gets a problem, invariably, it’s what’s called “underdetermined.”
That’s just a fancy way of saying you don’t have enough information.
In my counterterrorism work for the CIA, we were constantly confronted with problems that could not be solved with the information available. That’s the nature of intelligence work — you never have enough information.
After all, if you had all the information, you wouldn’t need an intelligence service; a smart college kid could do the job. The reason you have an intelligence community is because it’s a very hard problem and you don’t have enough information. That’s why you have intelligence analysts filling in the blanks and trying to make sense of the puzzle, even when a number of the pieces are missing.
The CIA is divided into two main branches — the clandestine service and the analytical branch. The clandestine service is the “collectors.” They recruit spies and gather information from hard-to-get places.
The analytical branch takes the information provided by the collectors and tries to connect the dots and draw actionable conclusions to deliver to policymakers up to and including the president.
The same is true in financial analysis. You may have a lot of information, but you always need more. Some of the most important information is buried inside company management or the Federal Reserve boardroom and not easy to get to.
So what do you do when you don’t have enough information?
You can throw up your hands. That’s not a good approach…
You can guess — also not a good approach…
Or you can start to fill in the blanks and connect the dots.
To do that, you need an analytical method — and I recommend using the same one we use at the CIA. We’re not sure how events are going to turn out, but we can come up with three or four different scenarios.
In all probability, for example, the market will see one of several outcomes.
One of them may be deflation. Another may be inflation. There could be a market crash. And maybe there’s a positive outcome, too, on the off chance that tough policy choices are made and crisis is averted.
Then you take those outcomes and model them to determine the possibilities.
A lot of analysts don’t get that far. They put a stake a ground and say: “This this is what’s going to happen.”
I don’t do that, and I don’t recommend you do either. I remain open to the possibility that three or four things that can happen.
But even if some analysts get that far, they start tagging probabilities on the potential outcomes. They might say, for example, “There’s a 30% chance of deflation”… “There’s 40% chance of inflation,” etc.
I don’t do that either, and I recommend you follow suit.
Here’s the way I think about probabilities: There’s a 100% chance of one outcome happening and there’s a 0% chance of all the other outcomes occurring. It’s just that you don’t know in advance which one it’s going to be.
So what do you do?
Well, in intelligence work, we come up with what we call indications and warnings, or “I&W.” These are like signposts, or milestones on the path to one of those outcomes.
Say I’ve identified four possible outcomes, or four paths. If I start down a path but don’t know which one I’m on exactly… and I don’t know what the outcome will be… my best bet is to seek out the indications, warnings and signposts that will help me determine where I’m headed.
When I make out the signposts, then I can begin to know which way I’m going.
Here’s another way I explain it to people…
I’ve lived in the New York area. It just so happens that if you drive to Boston, all the roadside restaurants are McDonald’s. If you drive the other way, to Philadelphia, all the roadside restaurants are Burger Kings.
So if you blindfold me, put me in a car and don’t tell me which way we’re going, I’ll have no way of knowing where I’ll end up.
But say we take the same trip and I am blindfolded… but this time you tell me, “We’re stopping at Burger King.” I know I’m not going to Boston. I wouldn’t have to see where I was going to know where I’d end up.
The Burger Kings and the McDonald’s in this example are the signposts. They’re the indications and warnings.
The art of this technique is to first map out the possible events so you can get the possible outcomes correct. Then instead of just assigning arbitrary numbers to them, you watch for the indications and warnings to tell you which one you’re headed for at any given time.
You have to watch the data, the geopolitical developments and the strategic developments. When you see a particular signpost, you know where you’re going. Then you can take action in advance.
That’s why we take what I’ve learned working for the national security and intelligence community. And today, I’m inviting you to apply that learning to Wall Street and financial markets along with me. When you click here, you’ll see the brand-new service where we’re applying these intelligence techniques to understanding capital markets.
One of the most powerful tools we use in the intelligence community goes by technical-sounding names like “causal inference” or “inverse probability.” These are methods based on a mathematical equation that’s two centuries old.
The idea behind it is basic, though. You form a hypothesis based on experience, common sense and whatever data are available. Then you test the hypothesis not by what has happened before, but by what comes after.
Instead of reasoning from cause to effect, you reverse the process. You watch the effects to determine the cause. This will validate or invalidate the “cause” you have hypothesized.
Other times, the effects contradict the hypothesis, in which case you modify or abandon it and adopt another. Often, the effects confirm the hypothesis, in which case you know you’re on the right track and keep going.
Right now, my favorite hypothesis is that the world is facing a $9 trillion tsunami of bad debt coming from oil drilling, emerging markets and corporate junk bonds. I’ve made this case to you before. But I have not explained how I arrived at that conclusion.
I did so using indications and warnings.
This debt will not go bad until early 2016 and thereafter.
Even money-losing operations can keep up debt service for a while by using working capital and cash flow — at least until the cash runs out. Banks that hold some of the debt can also cover up the losses for a while with accounting games such as fiddling with what are called their loan loss reserves. If I’m right, bank stocks may take a hit by early 2016 as these losses come home to roost.
Using the language of “indications and warnings,” bad debts will be the “cause” of a decline in financial stocks. What “effects” did I look at to test the validity of my hypothesis?
There are many…
For energy junk debt, we looked at rig counts in the oil patch and layoffs among energy exploration companies. For emerging-market debt, we looked at the strong dollar and dwindling hard currency reserves in countries like Russia, Turkey, Mexico and Brazil.
In short, we worked backward from these visible causes to test the validity of the original hypothesis.
Right now, the idea that financial stocks will suffer due to write-offs over the next year looks like a good one. The inverse probability methods we use at the CIA are doing a good job of spotting this actionable financial play.
These are national security, intelligence community, techniques that we’ve brought over to capital markets. Believe me, they work. I have years of experience using them, and I believe they’re very accurate.
I urge you to put them to work with your own investments. One of our researchers explains how you can get started. Please click here now and read his letter. There’s no long-winded video to watch.
Regards,
Jim Rickards
for The Daily Reckoning
P.S. I did not authorize this investigation.
But after looking at it, I fully endorse the contents of this Web page. In this age of extreme market volatility, the contents of this investigation couldn’t be more timely.
I encourage you to visit this Web page right now and decide for yourself.
