Search results matching tag 'Energy'

Peak Oil or Peak Energy? – A Happy Solution

JohnMauldin — Mon, 10 Dec 2012 23:42:00 GMT

Looking Over My Shoulder
It Takes an Entrepreneur
The Line of Death
Get a Job
Not Everyone Can Run a Surplus
Peak Oil or Peak Energy? – A Happy Solution
New York, Cleveland, and Europe

A consistent theme in this letter has been the connections between items that may seem to be far removed from each other but are actually linked at the very core. If you push on one end you get a reaction in what would seem to be the most unlikely spots. Today we explore the connection between the fiscal deficit and energy policy. Everyone in Washington is starting to “get religion” about wanting to fix the deficit, with serious thinkers on all sides acknowledging that there must be reform and a path to a balanced budget. Burgeoning healthcare and Social Security costs are rightly pointed to as the problem, and entitlement reform will soon be front and center.

But the fiscal (government) deficit in the US cannot go away unless we also deal with the trade deficit. As we will see, it is a simple accounting issue, and one based on 400 years of accepted accounting principles. And dealing with the trade deficit in the US means working with our energy policy.

The trade imbalances among the partners in the eurozone are at the heart of the problems there as well. And while we will get back to Europe in a few weeks (remember when we seemed to be focused on Europe and Greece for months on end?), today we will explore the trade problem from a US perspective. Happily, this problem, while serious, does have a workable solution. And it might even happen in spite of government policy, though if a proactive energy policy were developed, it could ignite a true economic renaissance.

I have been wanting to explore the implications of the shale oil revolution. Old oil fields are wearing out, as peak oil advocates point out. Where can we find the huge and cheap-to-exploit oil fields to replace them? Hasn’t all the easy oil already been found? We will start in the Texas of my youth, journey to North Dakota where I was last week, and then think about the implications of that journey. There are many connections and interesting paths to explore. The letter will print a little long, as there are a lot of charts.

Looking Over My Shoulder

But first, this is the month when economists and investment analysts trot out their annual forecasts. I traditionally make mine the first week in January, after I read scores of other forecast the last three weeks of the year. It’s just something I have done for many years. I make a point of reading those I suspect I might disagree with to help me with my own thinking. It helps keep me in the middle of the road.

This year you can share in that experience with me, if you like. I publish a service called Over My Shoulder, in which I highlight 5-10 items a week (out of the hundred or more that I read) that I think are worthy of your attention. My reading is quite eclectic and broad, which is reflected in my choices for posting. The subscribers to Over My Shoulder have given me very positive feedback, for which I am grateful.

In essence, I act as your personal filter for news that is important to your investments and money management, generally from sources you won’t encounter in your own regular reading. This year in OMS I will highlight what I think are some of the better and more well-reasoned annual forecasts. I think you will find it quite useful. You can subscribe by going here. I am often told I should charge more for the service, but I think it is a reasonable price. I certainly charge less than I would if I were paying someone else to round up these pieces, and you get access to all my sources, some of which are quite pricey. You can subscribe risk-free and read and think along with me about the coming year. And now, come along with me to the Bakken.

It Takes an Entrepreneur

First though, I have to take you back to Wise County, Texas, about 60 miles west of Fort Worth. A Greek goat herder named Savas Paraskivoupolis (who changed his name to Mitchell) came to Galveston in 1905. His son George Mitchell worked his way through Texas A&M and got a degree in petroleum engineering. After the war, George teamed up with his brother Johnnie and Merlyn Christie. They drilled their first well in 1952, in what became known as the Boonesville Field in Wise County, near Bridgeport where I grew up. They went on to drill hundreds of gas wells but had to shut them down because they had no way to deliver the natural gas they found in abundance. The work was done at serious financial risk, but they just kept drilling and plugging those wells. Finally a contract for a pipeline was financed by an Illinois utility, and those wells went into production.

What started as Christie, Mitchell and Mitchell soon became a major employer in my little hometown and a powerful spur to the local economy. The future father-in-law of my childhood best friend was first permanent North Texas employee, back in the early 1950s, and he was eventually joined by the fathers of many of my friends.

Over the coming years Mitchell would drill over 10,000 wells, with over 1000 of them being wildcat or exploratory wells. He is a legend. His story is reminiscent of that of Walt Disney, who also lived constantly on the edge of crisis in the early days of his business. In the late ’80s and early ’90s Mitchell pioneered a new drilling method called horizontal drilling. It is still hard for me to imagine, that there is a small amount of flexibility in what seems like rigid steel pipe. Over hundreds of feet of drilling, they can turn a pipe inch by inch until it describes a 90° arc.

Everyone knew there was more gas deeper in the ground, but it was trapped in very tight shale formations. Mitchell and his engineers figured out how to put water under pressure back into the earth to create very minute fractures that allowed the gas and oil to be freed. This is the process known as hydraulic fracturing, or fracking. In the ’90s and especially the last decade, there has once again been an oil and gas boom in Wise county, in what is called the Barnett Shale. Except, the Barnett Shale is a far more massive formation than the original Boonesville field. Once again Texas was at the center of US energy production. The new technology opened up vast new reserves that were impossible to get to just a few years ago.

And then it turned out there were potentially even larger shale oil fields scattered throughout the United States – and, as we are learning, seemingly everywhere in the world. The first modern oil wells were drilled in Poland in 1854 at around 100 feet in depth, and now exploratory wells show that 11,000 to 13,000 feet below the surface there is considerably more oil and gas in Poland and the surrounding region.

In contrast to today’s deep wells, the legendary Drake Well was drilled in Titusville, Pennsylvania, in 1859 at a depth of 69 feet. And there is evidence of ancient oil drilling using bamboo pipes in China. Marco Polo remarked on bubbling springs of oil in what is now Azerbaijan.

And that brings us to the Bakken shale oil and gas fields. I was invited to speak to the customers of BNC Bank in North Dakota by its president and CEO, Greg Cleveland, last week. He graciously offered to take me on a helicopter tour of the Bakken Field if I would come a day early, which I of course agreed to do. As a special bonus, he arranged for Loren Kopseng to be our tour guide. Loren didn’t drill the first well in the Bakken, but he was there by the time the third well went in, and he now owns a piece of about 20% of all the wells drilled in the region. (There are over 7,000 wells in the region and counting.)

Today the Bakken overshadows the Barnett. Notice in the graph below how rapid the growth has been. More recently, permits were granted for 904 wells in August, September, and October 2012, with October being the record with 370 wells.

We flew the 50-odd miles from Bismarck to the edge of the Bakken, over the famous Badlands (which I found quietly beautiful) to what Loren called the line of death. On one side of the line, if you drilled you would get a dry hole. On the other side there is an amazing reported 99% success rate. The field stretches from western North Dakota and eastern Montana up into Saskatchewan, Canada.

The Line of Death

Easy money, right? Just punch a hole in the ground and count your money. Today, perhaps, but not in the beginning. As we were flying, Loren asked me what I knew about oil drilling. I had to admit I didn’t know much, except that my best friend Randy Scroggins from elementary school wouldn’t let me invest in his oil company in 1981.

Loren laughed and said Randy was a very good friend indeed – and added that “1981 was the first time I went bankrupt.” While Loren grew up in Bismarck, he would have been at home in Texas. He is the quintessential wildcatter, straight out of central casting. There is a certain infectious enthusiasm that seems to emanate from that special breed of entrepreneur called an oil man. Not only do you have to put up with the potential for drilling a dry hole, whereupon you lose all your money, you have to contend with the ups and downs in oil prices. While the major oil companies have become more conservative players, the real cutting edge is among smaller independents. And Loren is at the knife point of the cutting edge.

Flying into the heart of the field reminded me of my roots in Bridgeport. Drilling for oil is not pretty. It is actually fairly messy, although I must say there is seemingly much greater care taken to keep things neater than what I remember as a kid. Flying over completed wells, when it was just the pump and storage containers, showed a relatively small footprint, with the land being farmed right to the edge of the pad.

In my experience, oil wells were drilled pretty densely across the land, as you could only drill straight down. You basically got only the oil that was right underneath your well. In fracking shale oil, there is less need to put wells so close together. There is typically only one drilling pad for one section of land, that is, 640 acres or one square mile. Current technology is improving even on that, as a well can go down two miles and then turn horizontally another two miles.

I took the picture below my with my iPad as we were flying into this well for a tour. That drilling pad will be cleaned up and once again become part of the farmland that surrounds it today. That is a pretty massive rig, but it can be torn down, moved, and set back up in seven days.

A quick tutorial on shale oil: Global shale oil reserves are currently estimated at over three trillion barrels recoverable under current technology. The US has well over two trillion of those barrels. (Average estimates from numerous sources.)

The illustration below shows the typical construction of a shale oil or gas well. Note that the drill holes are “cemented” in around the pipes so that nothing can leak into the surrounding earth. Shale oil and gas lie very deep under very nonporous layers of rock. There are very serious environmental rules about drilling and fracking (as there should be). A large portion of the drilling rig is containment for the water and other fluids that come from the drilling. The waste fluids are not dumped onto the local ground.

No serious person would allow fracking near the water table. That does not mean there is not oil and gas in the water table already. Stockton, California lighted its county courthouse in 1854 with natural gas from a local water well. California has thousands of naturally occurring seeps. In the Gulf of Mexico, there are more than 600 natural oil seeps that leak between five hundred thousand and one million barrels of oil per year. When a petroleum seep develops underwater it may form a peculiar type of volcano known as an asphalt volcano. The ecological system has evolved certain bacteria that thrive on the oil seeps. One of the interesting things about the British Petroleum oil-spill disaster in the Gulf of Mexico was the disappearance of the oil over a few years. While it was a true disaster, it is theorized that the bacteria multiplied to deal with the crisis. But it took a long time. There is no excuse for what BP did.

As far as I can research from true experts, properly done, horizontal drilling and fracking pose no danger to the environment. (That is different from saying that burning gas in our cars has no impact. Different topic. I’m all for my electric car powered by nuclear energy.)

Notice in the illustration above the small gray areas in the horizontal pipe. Loren took me to a pile of what he called “jewelry.” These are about four-foot-long marvels of technology encased in beautiful stainless steel, looking like shiny gems along the dark string of iron pipe. The first wells drilled in the Bakken had just one “jewel.” While there is some debate about how many jewels to use to maximize fracking effectiveness in a two-mile pipe, I think I remember Loren saying that they are using up to 37. (It might have been 23, but oddly, I do remember it was definitely a prime number.)

Loren simply went into raptures describing the technology in each of those jewels. Since it was 9° out, with the wind chill taking it down to about -15° and I was not appropriately dressed, I might have missed a point or two.

The US Energy Information Administration (EIA) reports that over 750 trillion cubic feet of technically recoverable shale gas and 24 billion barrels of technically recoverable shale oil have been discovered in shale plays. Except that they are reportedly having to update their update. Just five days ago they announced new projections that suggest US energy imports (as a share of production) will fall in half in the next 30 years. (This does not include any new sources of non-carbon-based energy – new technology can make estimates turn out quite wrong.)

Harold Hamm and Continental Resources drilled the first horizontal well to use fracking in the Bakken in 2004. He knows something about the region. He is now telling us that there may be four more layers (which are called benches) of shale oil and gas below the Upper Bakken formation, including the promising Three Forks stratum. Just a week ago (onDecember 3), Continental announced they had completed a well in the “third bench.” The Three Forks could be a bigger story than the Upper Bakken formation, as it is much thicker. Hamm is projecting almost a trillion barrels of reserves in the area.

What Loren thinks will happen is that the new drilling rigs that can move themselves will soon drill as many as 16 holes from one pad, into all the various levels and in different directions. Punch a hole in the ground, complete the well, move the rig over a bit and start the process again. That really helps keep down the cost of drilling, as does each bit of new technology.

Get a Job

North Dakota is the third most productive energy state, on its way to being number two, behind Texas. And that is creating jobs. Lots of jobs. Unemployment in the Bakken region is 1%. $10-15 an hour for working in a fast food restaurant, if you can even find someone to work for so little.

Let me give you a rundown on what I found. When we went into the “office” of the rig there was a young man who looked to be in his early 30s. He was a “tool-pusher,” which means he ran the rig. Clearly very smart and trustworthy, but he didn’t have a college degree, just lots of oil-field experience. He works 28 days, 12 hours a day straight and then takes two weeks off to go see his wife and kids. When working he lives in a small room at the rig. He makes $350,000 a year. The kid is one of those millionaires and billionaires that Obama wants to tax.

A starting salary on the rig is $120,000 a year, with no experience. But you work your tail off for very long hours. The consultant who oversaw the rig operation for the investors made around $250,000. (By the way, he could tell me to the dollar what his costs were for the well during the hour we were there. There were very sophisticated cost controls.)

An oil-truck driver makes $150-175,000 a year. All that oil has to be taken by truck to a railroad terminal and loaded onto railcars, to form 100-car trains that take the oil to refineries around the country. Loren took us to his new train terminal, where the trucks were lined up to empty their tanks and go back to another well for a load. All up and down the line, there are jobs that are begging to be filled.

But working in the oil field is hard work and a difficult life. That starter oil-rig job? It looked quite dangerous to me. Campgrounds packed with small trailers are everywhere. There are “man camps,” which are glorified dormitories that can cost as much as $3,000 a month for room and board. Construction? If you can swing a hammer in the cold, you can have a job. Most people seemed to work for 14 or 28 days (12 hours) and then take a week or two off.

Within a few hours of being in Bismarck, my son Chad was offered a job at about 50% more than he could make here in Dallas. (The local bank president took him and another man on a tour of Bismarck while I was in the air, so Chad did have some job-hunting help.)

I went to a Christmas party that night for the customers of the bank – as nice a group of people as you could want to meet, many of them local farmers who drove in for the conference. If you own a farm with mineral rights, your life has changed in recent years.

As a side note, Loren pointedly told me that Greg Cleveland (founder and chairman of BNC Bank) had loaned him $1 million to get his current business started back in 1985 when no one else would. The level of trust between these two was obvious. That night, bank customers came up and literally kissed Greg on the cheeks, while telling me how he had loaned them the money to start their businesses “back in the day.” Not just in the oil business, either. That type of banking relationship is hard to find these days. Lloyd Blankfein (Goldman Sachs CEO and chairman), eat your heart out. This is small-town banking as it’s supposed to be (we had that once in Texas).

As I noted a few weeks ago, shale gas will add about 0.5% to the growth of US GDP next year, in a year when we will be lucky to get 2%. This is a huge driver of jobs and growth. And it is not just in North Dakota; there are shale gas plays all over the US and Canada. Continental Resources announced a major new shale gas field in Oklahoma in October, comparing its geology to that of the Bakken.

The US will be exporting natural gas within 3-4 years from McAllen, Texas, and other LNG ports are in various stages of permitting. Natural gas in Japan is over $15, compared to $3.78 this morning in the US. Europe is in double digits ($11.83). There is an arbitrage available here. Even an economist can do the math.

But our real advantage may not come in exporting raw gas but rather in the chemical products you need gas to make. Not just fertilizers but feedstocks for plastics and other organic chemicals.

The Financial Times wrote last Saturday, "Europeans are already complaining that cheap US gas is encouraging a flight of energy intensive businesses [to the US]. How can, say Europe's chemical producers – buying expensive Russian gas – compete with US rivals guaranteed access to cut-price feedstock?” (Hat tip Vincent Farrell.)

One way for them to compete is, perhaps, to develop their own (seemingly considerable) shale oil and gas fields. But there seems to be a great deal of resistance to that. And that reluctance will help the US close its trade deficit.

Not Everyone Can Run a Surplus

The chart below shows that we are spending more for energy even as we use less of it, and that drives up our trade deficit. Let’s see why this matters. As long-time readers know, I have often written about how you cannot balance private and government deficits without a positive trade balance. Let me quickly review.

It is the desire of every country to somehow grow its way out of the current mess. And indeed that is the time-honored way for a country to heal itself. But let's look at an equation that shows why that might not be possible this time. We have here another case of people wanting to believe six impossible things before breakfast.

Let's divide a country's economy into three sectors: private, government, and exports. If you play with the variables a little bit, you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong.

Domestic Private Sector Financial Balance + Governmental Fiscal Balance - the Current Account Balance (or Trade Deficit/Surplus) = 0

By Domestic Private Sector Financial Balance we mean the net balance of businesses and consumers. Are they borrowing money, or paying down debt? Government Fiscal Balance is the same: is the government borrowing, or paying down debt? And the Current Account Balance is the trade deficit or surplus.

The implications are simple: the three items have to add up to zero. That means you cannot have surpluses in both the private and government sectors and run a trade deficit; you have to have a trade surplus.

Let's make this simple. Let's say that the private sector runs a $100 surplus (they pay down debt), as does the government. Now, we subtract the trade balance. To make the equation come to zero there must be a $200 trade surplus:

$100 (private debt reduction) + $100 (government debt reduction) - $200 (trade surplus) = 0.

But what if the country wanted to run a $100 trade deficit? Then either private or public debt would have to increase by $100. The numbers have to add up to zero. One way for that to happen would be:

$50 (private debt reduction) + (-$150) (government deficit) - (-$100) (trade deficit) = 0. (Note that we are adding a negative number and then subtracting a negative number.)

Bottom line: you can run a trade deficit, reduce government debt, or reduce private debt, but not all three at the same time. Choose two. Choose carefully.

Peak Oil or Peak Energy? – A Happy Solution

The US is lucky; there is plenty of oil and gas below our borders, with much of it in private hands. There are estimates the US could be energy independent within 7-10 years. But it will not be easy. Skeptic Arthur Berman recently presented Oil-Prone Shale Plays: The Illusion of Energy Independence. He estimates that it will take 1,488 new wells a year in the Bakken just to replace the oil currently produced there, as wells deplete over time. He argues (quite well) that the US will not become energy independent. You can read his report at http://www.sipeshouston.org/Presentations.sh.sem.10.2012/8%20Oil%20Shale.pdf

His analysis suggests that oil prices will have to remain high or go even higher for shale oil to be profitable. I think he is right on that. I have always maintained that we are not likely to run out of oil for a very long time; we will just run out of cheap oil. Thankfully, there are alternatives being developed over time. The cost of producing solar energy has dropped about 50% per decade for a long time. In another few decades solar will be quite competitive with carbon-based energy. Nuclear remains my favourite shorter-term source, but it confronts considerable political opposition in many countries.

But in the meantime, we should open up public lands for commercial drilling. And we should do it for a price. Texas finances a great deal of its higher education from oil and gas royalties for wells on state land. US government land should be used to produce revenue as well. New technologies allow for environmentally sensitive use of land. Not only will increased drilling produce needed revenue from royalties and taxes, it will create jobs and allow the possibility of eliminating the trade deficit. What a happy solution! And compared to healthcare, this should be easy!

And why do I think all this can happen? Because of the cast of characters who will keep raising money and drilling for oil and gas. Guys like Loren Kopseng and Harold Hamm, who are just a force of nature and will get it done. These are the true entrepreneurs, who are the main source of our new jobs. If we can keep them from being saddled with too-high taxes and too many rules, they will build that future for us.

There are scores if not hundreds of these larger-than-life characters, with a few good bankers like Greg Cleveland to back them. Let’s turn them loose!

New York, Cleveland, and Europe

I will leave Tuesday for a trip to NYC to meet with my partners in Mauldin Economics to do our own annual planning and forecast work. The recent webinar was well-received and -reviewed (start here). The next week I jump to LA/San Diego for a planning session with Jon Sundt and my partners at Altegris. I can honestly say I have never been as excited about the prospects for a coming year. There are so many great new things we will be doing. But as with Christmas presents, I can’t tell you – it would spoil the surprise.

I will be on Tom Keene at 6 AM Eastern on Wednesday, so no late night for me. Thursday I go to Cleveland to stay with Dr. Mike Roizen for a night and then have some doctors poke and prod me on Friday, before heading back home.

As a side note, I have run across an odd statistic. Long-time readers know that I have recommended a face cream with stem cells in it. It really does rejuvenate the skin. It turns out that over 50% of the customers are men. That was a surprise. I hear great reviews and receive thanks from all over from people who use it. It makes a great Christmas present. Go to https://www.lifelineskincare.com/content/ahead-curve-december-2012 to get yours at a very special price for the season. You will be glad you did!

Today we had a birthday party for my granddaughter Lively, who turned three this week. There were 16 people at the brunch table at Del Frisco’s Grille (my new favourite Sunday brunch place – awesome food!). All seven kids once again, along with significant others, grandkids, et al.

It is very interesting to watch your kids grow up, have their own successes, and deal with their problems. I remember struggling as a young man and watching my dad struggle as well. Those days back in Bridgeport? He owned a very nice gravel trucking business but went bankrupt in the late ’50s and had to start over. It was tough on him at 50 years of age to start again, and we struggled to make ends meet. I had to go to work very early. It was good for me, as I look back, but I have tried to help my kids not to have to deal with some of the same concerns. And I will admit I would not have minded a little help with college.

I think Chad is going to move to Bismarck after the holidays. Abbi is getting married in the spring and will stay in Tulsa. Amanda will bring another granddaughter into my life in the spring, too. She just took it upon herself to decorate my house for Christmas, and it looks the best it ever has. And the tree, for whatever reason, is especially fragrant this year. Changes are everywhere and yet some things stay the same. And that’s the way I like it.

I was reminded of that last week, when I spent the day with Newt Gingrich in DC. Of course we talked about the current political scene and the fiscal problems. He always seems to have a particular story from history to illustrate his views. But what we talked about the most was not the past or the present but the future. And not the political future but our shared enthusiasm for the accelerating pace of technological change. There is just so much to be optimistic about, even as we worry over the current economic issues.

I am working with Bill Dunkelberg on our book on the future of employment, and I will then turn to writing my book on where the world will be in 20 years. This one has been in the planning stages for far too long. No one in 20 years will want to go back to the good old days of 2012. I know people sometimes think (wrongly) that I am of a bearish disposition, but that is just not true. I am just bearish on governments.

Europe will be a whirlwind. Norway, Copenhagen, Sweden for the Skagen Funds, and then on to Dublin for the weekend. And then to London for an evening meeting, followed by meetings in Greece. I have my travel plans laid out except for Europe, January 16-20. If you have a suggestion or a media contact, let me know. And on the 20th I go to Geneva before heading back to Dallas on the 22nd. Quite the trip.

Have a great week, and hopefully you’ll be home for the season. All the best.

Your strangely wishing he had more time in Bismarck,

John Mauldin

subscribers@mauldineconomics.com

The Race for Energy Resources Just Got Hotter

DougCasey — Wed, 11 Jul 2012 14:28:00 GMT

By Marin Katusa, Casey Research

Malaysia's state-owned oil and gas company just made a multibillion-dollar bet that Canada will choose to export its shale gas riches. Even though the odds of securing permission to export liquefied natural gas (LNG) from the Canadian west coast are still pretty poor, the costs of such an endeavor immense, and the timeline in question very long, Petronas is putting $5.5 billion on the table – far more than it has ever spent on an acquisition before – to secure a large foothold in the British Columbia shale gas scene.

It's yet another sign that things are getting serious in the global race for resources.

The race for resources drives much of our thinking within the Casey Research energy group. It's more than a common theme – we believe that it is one of the strongest forces at work in our world today, and that it plays a role in determining the tone of many international relationships and domestic policies. Countries that have resources, from Russia to Australia, are altering fiscal structures and ownership rules so as to glean as much benefit as possible from their riches, while still reserving sufficient supplies to fuel their futures. Countries that lack natural-resource wealth, such as Japan and South Korea, are racing to lock up projects and partnerships abroad that can supply their future resource needs.

And a race it is, because they are not alone. There are few countries in this world with natural supplies of all the energy commodities they need – Australia, Russia, and Canada are among the few that do – and everyone else has to constantly wheel and deal to secure imports. Now the easy deposits of many energy resources are disappearing, but global demand continues to rise. The result: stiffer competition.

Petronas' deal is a perfect example. Petronas is buying Calgary-based Progress Energy Resources (T.PRQ) for C$4.8 billion in cash. Including convertible debt the deal is valued at about C$5.5 billion. In announcing the deal, Petronas also said it has chosen Prince Rupert, BC, as the home of its planned LNG export terminal.

So the company is spending billions of dollars to acquire 1.9 trillion cubic feet of proven and probable gas reserves… but there is no guarantee that they will be able to export any of that gas in the foreseeable future.

Pipelines have become a highly contentious issue in North America – just as US citizens are embroiled in a debate over the Keystone XL pipeline which would transport oil sands crude south, Canadians are arguing the merits and liabilities of the Northern Gateway pipeline, which would move oil sands crude to the west coast for transport to Asia. One of the big arguments against Northern Gateway is the danger of sending tanker traffic through the coastal waters of northern BC, where an oil spill would be near impossible to clean and would irreparably damage a pristine ecosystem.

The same arguments will surface with natural gas. The LNG terminal that Petronas envisions in Prince Rupert would send loaded tankers through those same sensitive waters, an idea that is far from accepted in the region at this point. The pipelines ferrying natural gas to that terminal would cross mountainous terrain burdened with heavy winter snowpack and dramatic summer melts that regularly cause hillsides to slide and rivers to swell their banks and take out bridges – all points that opponents will use to argue that the potential risks outweigh the benefits.

In short: Petronas and its peers face a steep, uphill battle in their quest to permit pipelines and LNG terminals on the west coast. But as we wrote last week, the potential for big profits will also play a role.

Remember, natural gas in its gaseous state is a landlocked commodity. Its low energy-to-volume ratio renders it uneconomic to ship, which means pipelines are the only option. To move natural gas over oceans it has to be condensed into LNG, increasing the energy-to-volume ratio dramatically and making it economic to load onto tankers and send around the world.

Many major global economies rely on LNG to meet their natural gas needs; and demand is on the rise. In 2011, global LNG trade grew by 9.4% compared to 2010, with Asia generating most of the demand increase. Japan is the world's top LNG importer, having bought 79.1 million tonnes in 2011; South Korea is in second place with imports near 36 million tonnes. India, China, and Taiwan are all also major LNG buyers, helping to lift Asia into top spot as a regional LNG import market: Asian LNG buyers accounted for 63.6% of the global market in 2011.

That level of demand from a part of the world fairly short on supply means high prices. LNG in Asia is currently worth between $17 and $18 per million British Thermal Units (MMBtu) – six to seven times the price of natural gas in North America.

That price difference is precisely why Petronas is maneuvering to buy reserves in North America. The gamble is simply worth its while – if Petronas is able to build pipelines and an LNG terminal on the west coast, the company will be able to take a commodity worth a few dollars here and sell it for many times more in Asia.

The lure of that payout has drawn many players to this expensive, drawn out, and highly uncertain game. With this deal, Petronas joins a growing list of international energy companies including PetroChina, Mitsubishi, and CNOOC that are spending billions on remote natural gas plays in Alberta and BC, all of which share the same dream of selling the gas in Asian markets.

While these Asian energy giants take on the risk, Canadian gas explorers pretty much get to just enjoy the benefits. Depressed North American gas prices have brought most gas explorers to a standstill – investors and banks alike are not interested in funding projects where the cost of production is almost the same as the value of the product. But being bought out or finding a partner with deep pockets is a perfect solution. As Progress' CEO said, "Our asset base requires extensive capital to develop its large potential and ultimately access international LNG markets. Petronas offers the size and scale that will enable our company to continue to grow and not be limited by the same cash flow challenges faced by many producers in the North American natural gas market today."

Since Canada's gas explorers are stuck in neutral, you might think that Asian energy firms would be making minimal offers, trying to acquire these resources on the cheap. Instead, Petronas offered C$22.45 a share for Progress, 77% more than Progress' closing price the previous day. Are they trying to earn goodwill with Canadians? Perhaps, but there's a more likely explanation for their generosity: pressure from behind. If they made a stink bid and Progress voiced displeasure, the dispute could draw attention from Petronas' peers, which are also on the lookout for good natural gas deals. One of these peers might then swoop in and make a better offer, leaving Petronas empty-handed.

This is the impact of the race for resources. These Asian energy giants are racing with each other to secure resources for the future. The constant pressure to stay ahead in the race means companies will offer whatever it takes to secure a deal quickly, before anyone else trips up their efforts.

Shale gas riches have positioned North Americans as beneficiaries in the global race to secure natural gas supplies. However, complacency is a dangerous thing. Just because North America has gas doesn't mean it has all of the energy resources it needs for the future. President Obama's recent executive order on Russian uranium was a reminder that the US relies on imports to feed its nuclear reactors, and with the Megatons deal coming to an end, the United States is being thrust into the global race for uranium just as that race is heating up.

Scarcity is a powerful force and it leaves those in control of limited resources wielding great power. We think a scarcity of uranium will increase Russia's power; control over some of the last big, easy oil deposits has earned Saudi Arabia great global influence. Petronas' deal with Progress is a sign that shale gas could generate similar prowess for North America, and is a strong reminder that the global race for resources will provide some with money and power while leaving others in the dust.

North American energy resources don't guarantee the US a comfortable position in the gas and oil sectors. Pipeline politics and eager Asian bidders may leave the United States literally out in the cold.

How Much Higher Can The Bull Go? - The AIA Advocate Newsletter

AIAAdvocate — Wed, 04 Apr 2012 02:38:00 GMT

In This Issue:

How Much Higher Can The Bull Go?

Predictions About The Economy Are All Over The Map

Several Threats To Growth Are Worrisome

Food And Energy Are Good Bets Now

The Bottom Line

Since our last newsletter in February, the stock market continued to rise. During the first part of the month it looked as if the rally was stalling because stocks remained fairly flat. Then on March 13, the market found its second wind and got back on the escalator. By the time the clock ran out for the period, the Dow and the Nasdaq were up 1.6% and 5.5% respectively.

The latest spurt added to a rally that had already delivered impressive gains. From its beginning on October 3, 2011, the two indices rose 23.9% and 33.6%. The current leg up that began on December 20, accounted for 9.0% and 19.8% of the move.

How Much Higher Can The Bull Go?

The big question now, of course, is how much life does the bull have left? The short answer is, nobody can know for sure. However, stock fundamentals suggest that the market could rise another 10%.

After such a long advance, we think stocks are overdue for a correction. After any run-up, many investors will usually decide to take some of their profits off the table. Once the decline begins, other investors who were thinking about doing the same thing will join the crowd, and the correction will feed on itself.

In addition, if anything happens that makes investors think they were too optimistic about the economy and corporate earnings, stocks will move back down until their prices reflect the revised outlook. Unlike the more sedate move up, a corrective decline can be quite rapid.

Predictions About The Economy Are All Over The Map

Right now, the outlook for the economy and earnings is mixed. Mr. Bernanke at the Fed has been warning that growth may slow down in the coming months. He believes the spurt that we are seeing now is due to companies rebuilding their inventories, and is not the result of a significant increase in consumer spending. The Fed chief is worried enough about the economy that he said he would start another round of monetary easing if it seems necessary.

Many corporations are also flashing caution lights. Earnings have been strong in recent months, but company spokesmen are projecting lower returns as the year progresses. They point to the impact of the recession in Europe, slowing growth in China, and some weakness in the global economy. Higher energy prices are also a concern.

On the other side of the picture we have former U.S. Treasury secretary, Lawrence Summers. In a March 26 op-ed article in the Financial Times, he argued that job growth is now staying ahead of population growth, which means the unemployment rate should ease down. He also noted that consumers are starting to buy the cars and durable goods that they put off during the recession.

In addition, Mr. Summers pointed to strong growth in mobile information technology, social networking, and the domestic oil and natural gas industries. He also believes (as we do) that the housing market seems to be stabilizing.

From our perspective, we think Mr. Summers is more likely than Mr. Bernanke to be correct about the economy. In our travels around the country we are finding an improving mood among most Americans. People are not buying many homes but they are renovating and expanding the houses they already own. Most people are also dressing better, which indicates they must be spending more at the mall than the Fed's numbers (that are always about 3 months behind) indicate. All in all, we think the US economy will do better this year than many people expect.

Several Threats To Growth Are Worrisome

Nevertheless, there are some serious problems in the world that could end the economic upturn.

The biggest threat is higher oil prices. As you may painfully recall, in 2007-2008 when oil rose from about $100 a barrel to $147, it sucked so much money out of the economy that the economic downturn turned into the Great Recession. To be sure, there were other factors that contributed to the severe decline, but expensive energy was the trigger.

Today, oil is already $125 a barrel so it would not take a very big shock to push the price into the danger zone. An attack on Iran would almost certainly do the trick. If Iran retaliates by shutting the Strait of Hormuz where 20% of the world’s oil supply travels, the price could go to $200, and perhaps a lot more.

The sovereign debt crisis in Europe could also spin out of control. If Greece can’t be saved, most analysts think that Portugal, and perhaps Spain, could be next. In that case, the European economy would almost certainly plummet. Since Europe buys about 20% of America's exports, our economy would also suffer a blow.

Fortunately, the Europeans have been building financial firewalls around Greece, so the risk of a domino effect is lower than it was a few months ago.

On the positive side, if the threats to growth can be eliminated, or at least reduced, stock prices will probably shoot up. A diplomatic solution to the Iranian nuclear controversy, or encouraging news about the sovereign crisis in Europe, could easily fuel another strong upturn for the bull.

Food And Energy Are Good Bets Now

Whenever the outlook is uncertain, smart investors look for stocks that can do well even if the economy doesn’t. Two sectors that fit the bill are food and energy.

Bunge Ltd. (BG) looks especially attractive to us. http://finance.yahoo.com/q/bc?s=BG+Basic+Chart The company is a global food processor with a particular emphasis on soybeans, for which the company has become the world’s largest dealer. The company also deals in grains, sugar, bioenergy, and fertilizer. The mix of businesses owned by Bunge is an excellent match for the rising agricultural and energy demands we expect to see over the next few years.

We think the company’s soybean business is especially promising. Soy is a high protein product used to raise meat and poultry for people in developing countries who can afford better diets. Soy is also the main ingredient in many food products that provide protein more directly to the table. In addition, soybeans provide oils for commercial customers in dozens of industries.

Soy oil is also the main ingredient of the most efficient biofuel. In fact, Rudolf Diesel developed his namesake engine in 1893 to run on soy oil that farmers could produce themselves. Bunge is also the third largest producer of fuel-grade ethanol in Brazil. As petroleum products become more expensive, the demand for biofuels should increase significantly.

Not surprisingly, the world’s most populous nations are becoming major soybean users. China now relies on imports for 80% of its soy products and expects to increase its purchases by more than 50% by 2020. India is also starting to use more soy products.

The demand for soybeans is expanding so rapidly, last year Bunge joined forces with SEACOR Holdings (CKH) to construct a large export terminal on the Mississippi River in Illinois. The new terminal will give Bunge low-cost access to the largest soybean customers in the world.

Bunge appears to be a timely acquisition. Rising costs cut into fourth quarter earnings but the company’s profit topped forecasts, and revenue soared on strong grain and other volume. Although the stock is up from its recent lows, we think it has further to go.

Sasol (SSL) also appears very attractive to us now. http://finance.yahoo.com/q/bc?s=SSL+Basic+Chart The company is the world's largest and most advanced producer of synthetic gasoline, diesel, and jet fuel that it produces from low grade coal and natural gas.

Sasol’s natural gas-to-liquids business is especially promising. Because large new shale gas deposits have been made recently, the resource is very cheap. At the same time, oil is becoming more expensive.

At current prices, one unit of energy from natural gas costs 38% less than the same amount of energy from oil. Even with the cost of converting natural gas to a liquid fuel, there is still a big margin for Sasol. Natural gas prices could go up considerably, or oil prices could drop sharply, and Sasol should still see attractive profits.

As it turns out, Sasol has a hedge against a rise in natural gas prices: the company is buying its own suppliers. Sasol invested $2 billion in two major shale gas fields in Canada, and is investigating similar opportunities elsewhere in the world.

Sasol announced excellent fourth quarter results. Operating profit rose 70% from the same period last year. Despite its success, we think the stock is still very attractive for long-term accounts.

The Bottom Line

There is a lot of uncertainty about which way the economy will go this year. Good arguments exist for both outlooks. However, we think the optimists are more likely to be correct.

Since the amount of economic growth is in question, we think the safest strategy for investors is to emphasize food and energy stocks. Bunge looks very good for its soybean, grain, and biofuels business. Sasol seems to be in the right place at the right time with its synthetic fuel operations.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time...

Natgas Down, Opportunity Up

DougCasey — Mon, 05 Mar 2012 16:50:00 GMT

By Marin Katusa, Chief Energy Investment Strategist

The energy market is a complex beast, its many parts interconnected through a multitude of linkages. When one part fails, the entire system reacts: certain linkages are burdened with extra stress, while other components sit idle. Only by studying the entire machine can one understand the rippling effects that stem from one change.

With the energy market, the system is made up of various sectors - oil, natural gas, uranium, coal, and alternative energies - and the countries that have each of those energy resources. The components are then linked through a long line of forces, including the geographic distributions of supply and demand, international allegiances and trade deals, global markets and commodity prices, and the ever-evolving field of international relations. A change in any country, sector, or linkage resonates through the entire system.

From this perspective, North America's shale gas revolution truly earns its accolade as a "game changer." As many people now understand, the boom in natural gas reserves and production in the United States and Canada is changing the way North America will power itself in the future.

What a lot of people do not understand is how to profit from this shift.

Natural gas prices are depressed and expected to remain so for the short to medium term, so investing in natural gas options or a natural gas exchange-traded fund is not likely to bring home the big bucks anytime soon. Domestic natural gas equities are an even riskier idea - most producers are scaling back production and selling assets as they hunker down in preparation for a tough few years.

In this case, the way to profit is by understanding how natural gas' changing role is impacting North America's energy machine as a whole. Cheap natural gas is prompting utilities to switch from coal to gas where possible. The confluence of cheap natural gas and a risky global economy has droves of investors turning their backs on green energy, the sector that was such a market darling only a few years ago. Farther down the road, North Americans are debating - and in places implementing - a range of strategies to take advantage of the continent's newfound abundance of natural gas, from natural-gas-powered transport trucks to exportation of liquefied natural gas (LNG).

Isaac Newton showed us that for every action there is an equal and opposite reaction. That is why every downside force in the energy sector creates upside opportunities elsewhere. The challenge is finding them. It takes an understanding of the entire global energy machine to figure out what areas are benefitting from the changing landscape.

For Every Down, There's an Up

Natural gas seems to know that it is heading for several years in the doldrums and, in fighting spirit, it is trying to take a couple of other energy sectors down with it.

With coal, it is succeeding, but there are still lots of coal opportunities outside of the United States. With uranium, the global supply-demand scenario and America's position within it is in such flux right now that cheap natural gas is doing little to reduce America's need for U₃O₈. Then there's the well-field services sector, where the successes born from horizontal drilling and fracturing created the gas supply glut that is forcing production cuts. Far from slowing down, however, well-field service companies are busier than ever as the oil industry adopts fracking to access shale oil, and the deepwater Gulf of Mexico continues to test the limits of drilling technology.

Coal

The sector feeling the worst impacts from gas' downturn is thermal coal. Demand for the coal burned to generate power in the US is plummeting as utilities take advantage of the cheapest natural gas in ten years. Consumption of coal to produce electricity is expected to fall 2% this year to its lowest level since 1992, while gas-fired consumption rises 5.6%. Making matters worse, winter heating demand is falling in the face of mild weather: through January, this has been the warmest winter since 2006 and the fourth-warmest on record. With natural gas and warm weather conspiring against it, coal demand is decidedly down - in the second week of February, coal consumption was 4.3% lower than it was a year ago.

Exports are not going to provide any help. Last year, Europe bought 50% of America's thermal coal exports, but demand from the EU is shrinking as the region struggles to stave off a recession. The economies of the EU shrank 0.3% in the fourth quarter of 2011 compared to the previous quarter, the first contraction since mid-2009.

In response, US thermal coal prices are deteriorating. Appalachian coal, the US thermal-coal benchmark, fell 15% in January alone to sit near US$60 per tonne and has moved little since (by comparison, Australian thermal coal is currently fetching almost US$120 per tonne). Mining costs to dig thermal coal out of the ground range from $60 to $75 per tonne for Central Appalachian producers, which means margins are already razor thin or nonexistent. Several major US thermal coal producers are reducing output and in some cases closing mines, including Arch Coal (NYSE.ACI), Patriot Coal (NYSE.PCX), and Alpha Natural Resources (NYSE.ANR).

Now for some good news. Thermal coal prices in the United States may be faltering, but that doesn't mean that coal is in the doldrums across the globe. In fact, quite the contrary: global thermal-coal demand is expected to increase by 50% from 2008 to 2035, with the vast majority of increased demand coming from the developing world. That equates to a demand increase of 1.5% each year, and production is not quite expected to keep up to that pace. Rising demand plus not-quite-enough supply equals investment opportunities - maybe not in the US, but elsewhere.

That's just thermal coal. There's another component to the coal world: metallurgical coal, the higher-carbon coal used to make steel. Supplies are even tighter with metallurgical coal, which is why our subscribers have exposure to "met coal" through either equities or a fund. More recommendations are on the horizon: the upcoming edition of the Casey Energy Report will be all about coal. We will provide the background, supply and demand projections, and the best ways to profit from the global coal sector.

Uranium

The abundance of cheap gas has utilities looking to build more gas-fired power plants. Some observers have suggested that this will be to the detriment of the nuclear sector in the US. But that perspective is pretty shortsighted.

It is true that some utilities have delayed plans for new nuclear plants by a few years, primarily in response to the Fukushima nuclear disaster in Japan and the ensuing public backlash against uranium. But that backlash is already fading; and those delays will have only a minimal impact on the nuclear sector in the US. Five new generators are on track for completion this decade, including two reactors approved just a few weeks ago (the first new reactor approvals in the US in over 30 years). Those will add to the 104 reactors that are already in operation around the country and already produce 20% of the nation's power.

Those reactors will eat up 19,724 tonnes of U₃O₈ this year, which represents 29% of global uranium demand. If that seems like a large amount, it is! The US produces more nuclear power than any other country on earth, which means it consumes more uranium that any other nation. However, decades of declining domestic production have left the US producing only 4% of the world's uranium.

With so little homegrown uranium, the United States has to import more than 80% of the uranium it needs to fuel its reactors. Thankfully, for 18 years a deal with Russia has filled that gap. The "Megatons to Megawatts" agreement, whereby Russia downblends highly enriched uranium from nuclear warheads to create reactor fuel, has provided the US with a steady, inexpensive source of uranium since 1993. The problem is that the program is coming to an end next year.

At present the world is producing just enough uranium to meet global demand, but this precarious balance is already tipping. There are dozens of new reactors under construction in China, India, South Korea, and Russia that will need fuel. Production increases from new mines and mine expansions are not expected to keep pace. The race to secure uranium resources is on, and for the first time the US has to compete.

The answer is domestic production. The rocks underneath the United States hold lots of uranium, enough to make a significant contribution to the country's uranium needs. The biggest impediment to mining this resource is public opposition to the nebulous dangers of uranium mining, but as the Megatons program ends Americans will start to see that the alternatives to domestic production are decidedly worse: competing against China, India, and the like for uranium is an expensive and unstable way to acquire a desperately needed energy resource. In fact, we have been vocal in predicting a demand-driven boom in US uranium production. We even expect to see "Made in America" uranium garnering a premium over imported yellowcake, in the same way that in-demand Brent crude oil earns a premium above oversupplied West Texas Intermediate crude.

We have already recommended a range of investments to our subscribers to gain exposure to the coming uranium resurgence and, as with coal, there is more to come: the next edition of the Casey Energy Opportunities newsletter will focus on uranium, with recommendations to boot.

Well-Field Services

The techniques used to unlock natural gas from shale reservoirs - horizontal drilling and well fracturing - worked so well that they created a supply glut that is altering the global energy scene. That supply glut is now prompting natural gas producers to cut back on output, which you might think would be bad news for the well-field service companies that complete those tasks.

Not to worry: North America is also in the midst of a crude-oil production boom, and the common theme linking most of the continent's new wells is highly technical drilling and production methods. The purveyors of those techniques are the continent's well-field service companies, and their services are very much in demand.

Well-field service companies have been able to compensate for lost gas fracking business by shifting to oil, as the oil industry has adopted fracking to unlock its shale deposits. If you've read about the oil production boom that is keeping North Dakota's economy hopping, you read about the Bakken shale formation. In the Bakken, wells are drilled horizontally to follow along the oil-bearing layer, and then high-pressure fluids are forced down the well to fracture the shale and release the oil.

Meanwhile, the challenges of producing oil in the deepwater Gulf of Mexico continue to test the limits of drilling technology. Pushing through kilometers of water before drilling through just as much rock and then extracting and transporting oil from a platform rocked by waves and threatened by hurricanes demands a wealth of specialized equipment and operators.

Most oil and gas companies do not own drill rigs, nor do they actually drill or fracture their own wells. They contract those jobs out to companies that drill and frac for a living, known as well-field service companies. And with wells in America's booming oil and gas fields requiring more complicated and more technical services with each passing year, the services these companies provide are essential to North America's oil and gas producers.

The Casey energy team is all over the well-field services sector. Subscribers to the Casey Energy Report newsletter and the Casey Energy Confidential alert service were alerted to our latest recommendation in the sector in mid-November. Three months later, our investment is already up roughly 50% and we suggested that subscribers take a "Casey Free Ride," which means selling enough shares to recoup one's initial investment and retaining the remaining "free" shares for continued, risk-free upside exposure.

The Take-Home

When a machine is as interconnected as the global energy trade, no part can change without impacting the rest. The dramatic debut of shale gas in North America has done far more than just depress domestic natural-gas prices - a shift of this magnitude has impacts that reach far beyond one commodity or one country. Some of those impacts are negative, but hidden in the doom and gloom lie opportunities to profit. The key is to open your horizons and embrace the complexity and interconnectedness of the global energy machine... either that, or find a good mechanic who can do the job for you.

[One of the best opportunities we've seen in years involves leveraging a touchy situation that OPEC doesn't want you to know about.

India: Land of Energy Opportunity

DougCasey — Wed, 11 Jan 2012 21:44:00 GMT

By Marin Katusa

Quick, what country is the economic engine that will power world growth? If you answered "China," you're far from alone. But there's another country that deserves as much attention and better yet, is much friendlier to investment: India, home to 1.2 billion people. To electrify all those houses, power the industries that keep all those people employed, and fuel the vehicles that more and more Indians own, India's energy needs are shooting skyward.

First question to consider: what kind of energy does India need? Just about every kind, really. India encompasses significant reserves of coal, oil, and gas, but each year it has to import more and more to meet its rapidly rising demand. Domestic production increases have been hampered by land disputes, interminably slow permitting, and government-regulated pricing mechanisms that discourage development.

That's got to change if India wants to keep up, and its government knows it. Domestic supplies always come with better reliability, better prices, and other benefits that we can shorten into two words: energy security.

So India is reaching out to foreign oil majors, quietly setting up deals to exchange stakes in giant, underexplored oil and gas fields for the technical expertise it needs to best develop these resources. These partnerships are working into place slowly. However, they show Delhi is serious about the welcome mat it rolled out in 2000, when it passed a policy that allows foreign companies to own 100% of any oil and gas assets they may want to acquire for exploration and development.

And what we really like is that explorers are welcome in a democratic and reasonably friendly country that harbors none of the risk of asset nationalization that clings to other underexplored locales, like Venezuela.

Oil demand in India is set to rise some 4% annually for the next decade; natural gas requirements are expected to climb 10% per year for the next five years. Put together, India is a place that desperately needs more energy, has resources and reserves to exploit, and is working to encourage foreign investment in them.

We're ready to take India up on the offer, so let's learn a little more about its circumstances and potential.

Setting up Shop

In the 1990s, as India's growth was beginning to snowball, Delhi realized the country needed to look abroad for expertise to shorten its learning curve and for capital to fuel it. Accordingly, the government wrote policies to attract foreign investment. The one we mentioned above is called NELP, for New Exploration Licensing Policy, designed to even out the playing field between national and private companies. India's oil and gas industry has traditionally been dominated by state-owned companies.

With NELP enabling foreign companies to own oil and gas assets, Delhi next needed to develop a fiscal structure. What they chose is a PSC (production-sharing contract) system, and it's not a bad one – not as favorable as the UK North Sea, but not Iraq either. (Governments set up different ways to collect what they consider their share of income from the development of their resources. In India, companies that find oil or gas – and are not state-owned – have to negotiate production-sharing contracts, or PSCs, with the government. PSCs designate a portion of production for companies that they hope will offset their expenses. Beyond this "cost oil, " any "profit oil" is split between government and company, according to the terms of the all-important contract.)

India and Oil

India is the world's fourth-largest oil consumer, trailing only the United States, China, and Japan. The country has 5.6 billion barrels of proven oil reserves, but production averages just 761,800 barrels per day (bbl/d), about the same that it did 25 years ago.

In contrast, the country's consumption has more than tripled in the same period. It currently consumes about 3.1 million bbl/d, and it relies on imports for 70% of that. No government in its right mind would like this trend.

India's oil sector is dominated by state-owned enterprises. The largest oil company is the state-owned Oil and Natural Gas Corporation (ONGC), followed by state-owned Oil India Limited (OIL). The NELP system has opened up opportunities for other companies, however, and India will need that foreign investment and exploration to boost domestic production.

The country is working the other side of the street as well to meet its energy needs. Indian national oil companies have bought stakes in international projects in recent years, aiming to gain control over some non-domestic supplies. For example, the international arm of ONGC has oil and gas operations in 13 countries including Vietnam, Russia, Iran, Iraq, Sudan, and Brazil.

Indian companies are also opening up to the notion of partnering with global firms, as we mentioned earlier. While no state-owned companies have inked major partnerships as yet, privately owned Reliance Industries Ltd signed a US$7.2 billion deal with BP (NYSE.BP, L.BP) in August. Reliance sold BP a 30% stake in 21 exploration blocks and is now using the British energy giant's expertise in deepwater drilling to revamp its plans around exploration and boosting production from its operational fields.

This first major deal could well act as a model for future exploration partnerships in India. Companies know that international partners can bring valuable expertise, especially with respect to increasing output from mature fields.

One aspect of India's oil sector that needs adjustment is its subsidy system. The government subsidizes prices of domestic oil products to help disadvantaged Indian consumers. But requiring its national companies to sell their products at reduced prices regularly forces them into major financial losses – more than US$23 billion in fiscal 2010-2011 alone, according to the International Energy Agency.

And the subsidy situation only gets worse as the rupee depreciates. Global oil costs have eased some 8% this year, but the rupee's 9% slide against the dollar has wiped out any cost savings. The oil minister said recently that every one-rupee decline in the Indian currency against the dollar increases annual revenue loss for the three state-owned refiners by 80 billion rupees, or US$1.6 billion.

No easy solution for this issue, unfortunately. Clearly, raising prices for Indian consumers would carry a heavy political price. But just as clearly, the Indian government cannot continue subsidizing oil prices at this level for long.

India and Natural Gas

When it comes to India and natural gas, the question is really one of keeping pace with electricity demand. The country was gas self-sufficient for years, but economic growth turned it into a net importer in 2004 despite steady increases in production.

Even imports are not enough: According to the World Bank, roughly 40% of residences in India are without electricity, and blackouts are still common in main cities. Import needs have climbed by an average of 35% annually.

Natural-gas demand in India is projected to grow 10% annually for the next five years as the country works to diversify away from a reliance on coal, which currently generates 70% of India's power.

Several large natural-gas deposits have been discovered in India over the last few years, primarily offshore in the Bay of Bengal. But demand will continue to outpace production for the next several years at least. For one thing, Reliance's huge KG-D6 field – its first offshore field – is producing 20% to 40% less gas than expected, a problem that will take even its new partner BP at least three years to reverse.

Then there's the subsidy issue again. Some gas finds are being left undeveloped because the regulated price of natural gas is simply too low to justify the cost of developing the field. The price more than doubled in May 2010, but US$4.20 per MMBtu is still only one-third that of the open market in Asia.

The country is trying to add infrastructure to help meet its growing import needs, but it's running into hurdles here, too. A variety of economic and political issues keep delaying the Iran-Pakistan-India pipeline, under discussion since 1994. Similarly, India is the planned endpoint for the Trans-Afghan pipeline from Turkmenistan, but work is yet to begin due to concerns about route security and the adequacy of Turkmen supplies.

A liquefied natural gas (LNG) terminal has made it to construction phase, adding a third to two already in operation in India. Long-term growth demand for LNG in India remains unclear, however, because… you guessed it… that gas subsidy means domestic gas is notably cheaper than imported LNG.

[Whether India attains greater energy independence or not, the US is facing a dire energy situation – one that will be challenging for energy consumers and profitable for savvy investors. Learn how you can be one of them.]

Chavez's Health and Implications for Chinese Investment

JohnMauldin — Thu, 30 Jun 2011 17:43:00 GMT

For those of you keeping up with the much-discussed energy deal between China and Russia, you know the many reasons, both geographic and political, why it's unlikely to pan out. The geopolitically savvy folks over at STRATFOR told us about it a couple of weeks ago, and have moved their forecasting on to an existing energy relationship, between China and Venezuela—now potentially uncertain due to Hugo Chavez's precarious position in a Cuban hospital.

Whether Chavez gets better or not, a political transition is down the line somewhere, and China could lose its current preferential treatment as primary investor in Venezuelan oil. This is the kind of thing we have to know about as investors. Yes, we all know that Chavez is ill. But what, if anything, does that mean for the South American energy sector? What about the future of oil, China, the U.S., and so on? This is the kind of forward-looking analysis you get from a news publication like STRATFOR. It doesn't get any better than these guys.

Enjoy this complimentary piece from them. If you're interested in more, watch their video on the <<Venezuelan oil industry here>>, and then take advantage of their special discount for OTB readers. I read them every day, and highly recommend you check out their subscription offer.

John Mauldin, Editor
Outside the Box

Chavez's Health and Implications for Chinese Investment

June 29, 2011 | 1904 GMT

MINORU IWASAKI-Pool/Getty Images
Venezuelan President Hugo Chavez (L) and Chinese President Hu Jintao

Summary

The absence of Venezuelan President Hugo Chavez due to health reasons has caused uncertainty about Venezuela’s future, and this is cause for concern in China. China has made significant financial investments in and commitments to Venezuela, from which Venezuela has benefited greatly. China risks losing billions of dollars if Venezuela destabilizes, and in the long term, it fears losing the standing preferential relationship with Caracas if the government changes and Venezuela begins to look elsewhere for technical expertise to accompany investment.

Analysis

Venezuelan President Hugo Chavez appeared on Venezuelan television June 29 in a recording that was reportedly made the morning of June 28. It is unclear from the video exactly how healthy the South American leader is after he was hospitalized in Cuba on June 10, undergoing abdominal surgery apparently related to prostate cancer. Though he reportedly intends to return to Caracas by July 5 for the country’s independence day and bicentennial celebration, it is not yet clear that he will be well enough to do so. With Chavez having been in a Cuban hospital for nearly three weeks, Venezuela has been rife with rumors about his sickness, and a power struggle among his inner circle has been under way.

There are many players with a stake in the Venezuelan regime, but one of the most important in the past several years has been China, which could be affected greatly by a transition in Venezuela’s government. China does not stand to lose much in the short term and hopes to continue investing in Venezuela, but a transition away from Chavez and Caracas’ need for technical expertise to accompany investment could threaten China’s preferential standing with Venezuela.

Chinese Interests in Venezuela

China has not commented officially on Chavez’s illness, but China has become increasingly invested in Venezuela and has built a unique relationship with the Venezuelan government. Although the exact numbers have been difficult to confirm, since 2005, China has made hard asset investments and loans as well as commitments for further loan and investments to Venezuela worth about $49.5 billion. Some of the loans have reportedly been paid back in oil, and about $10 billion worth of loans will reportedly be delivered in yuan, which China can print at will and is only accepted as currency by the Chinese government and firms. The terms on the financing vary, but China has been careful to ensure that it has taken a strong role in how the money is spent, with joint decision-making on the projects and a commitment to hiring Chinese firms written into the agreements. Of the total amount that has been invested and discussed, we estimate conservatively that China could be exposed to losses of around $14 billion if Venezuela reneged on its commitments.

China’s interest in Venezuela is multifaceted. In the first place, Venezuela has one of the largest energy reserves in the world, with proven oil reserves of 211 billion barrels and 179 trillion cubic feet of proven natural gas reserves. Much of this oil is so thick it requires special processing before it can be shipped to a refinery. By establishing a relationship with Venezuela, China not only has a chance to learn some of the processing techniques for heavy, sour crude oil, which is an increasing portion of the global oil mix, but it also is able to actually invest in oil production that supplies its own consumption market. Both of these interests are being addressed in a pending deal to build a refinery with a capacity of 400,000 barrels per day in China’s Guangdong province.

(click here to enlarge image)

Second, China has a global outward investment strategy that has targeted Venezuela, among others, for its natural resources and opportunities for Chinese business. This strategy allows China to invest its massive cash surpluses in hard assets worldwide and helps it handle domestic money growth. It also expands markets for Chinese exporters and state infrastructure and industry. China has long invested in several extremely risky countries and governments at variance with the United States or the West, or otherwise viewed as at high risk of instability, including North Korea, Myanmar, Iran, Sudan, Angola and Venezuela. Having arrived late in the global race for resources and markets, China has seized opportunities shunned by the West, and with its large cash reserves and willingness to offer financing without political requirements, it has attracted interest from these regimes.

Investment in Unstable Countries

China generally believes it can secure its investments by cultivating relations across these countries’ regimes and political elite, though it is well aware that losses could result when it chooses to invest in unstable countries. Outside of Venezuela, China has a number of investments worth hundreds of billions of dollars in unstable countries. STRATFOR sources suggest that China may have more than $30 billion at risk in Libya, where it has recently begun negotiating with the rebels to try to ensure that interests established under the regime of leader Moammar Gadhafi will be protected under any potential Libyan government ruled by the rebels. Chavez’s illness and the instability in Libya (as well as the broader Middle East and Africa) reveal a certain degree of strategic weakness inherent in investing in potentially volatile emerging markets, especially where China’s main advantage is the regime’s estrangement from China’s competitors in the West. The potential loss of tens of billions of dollars worth of investment into these economies has prompted a reconsideration of such risks, but STRATFOR sources suggest that Chinese bank regulators’ latest attempts to pull back on foreign investments and loans have been rebuffed by the Chinese national banks.

For Venezuela, the relationship with China has been important for both financial and political reasons. Since the 2002 coup attempt against Chavez — during which the United States was quick to acknowledge the military leaders that briefly took power — Venezuela has been working to isolate itself from the United States by seeking alternative allies and diversifying its oil export markets. As the most aggressive global lender, particularly in the wake of the financial crisis when lending was nearly nonexistent, and a huge consumer of oil, China has become a natural partner for Venezuela. Presiding over an increasingly unstable economy, Chavez has needed to increase borrowing to cover expenditures and debts on a number of fronts. From a severe national housing shortage to a deteriorating electricity system and an oil sector suffering from severe mismanagement and underinvestment, Chavez has needed the Chinese as a political backer, but most important, as a financial backer. This need has meant that China has enjoyed a great deal of leverage over Venezuela and made it easy for China to get the terms it wanted on the loans and investments it made.

Implications of Chavez’s Illness

The Venezuelan government is highly personalized, and a great deal in Venezuelan politics relies on the personal preferences of Chavez. There are no other leaders who are positioned to take control in a scenario where Chavez is incapacitated or a change in government becomes a necessity. China worries that if something were to happen to Chavez, their preferential treatment and access to investments and financing could dissipate. This concern to extend the relationship beyond the confines of a personal relationship with Chavez can be seen in the successful push that got the terms of Chinese loans written into Venezuelan law. The Chinese could still make deals with a new Venezuelan government, but it would require forming relationships with a whole new ruling elite.

In the short term, the risk posed by Chavez’s current illness is that there could be a destabilization of the government if he is not able to return to power in the near future. This could directly threaten China’s in-country assets. However, unless the country dissolves into civil war and outright destroys Chinese direct investments, it is unlikely that a successor government would walk away from its debts to the world’s biggest lender. And, for China, this is a relatively small amount of money, as its annual external investment totaled around $59 billion in 2010 alone.

The longer-term reality is that China will lose its preferential access to Venezuelan resources. Even if Chavez’s current illness does not bring about a change in government, a transition is in the cards at some point, and a change in the Venezuelan government may shift the incentives that make the current partnership with China so important. It is Chavez’s policy of isolation from the United States combined with China’s “no strings attached” lending policy that makes China a perfect partner for the moment.

However, there are opportunity costs accruing to Venezuela as a result of its commitments to China. Venezuela’s oil industry is suffering from a profound lack of technical expertise to accompany investments, and the Chinese simply do not have the technical ability to help revive dwindling production.

The pressing need for Venezuela to resuscitate its oil industry with foreign expertise will eventually necessitate a reconsideration of its isolationist policies — and a leadership change will make this more of a political possibility than it currently is under the Chavez administration, as it will require a more conciliatory posture toward the United States. For China, this will mean higher competition for access to Venezuelan energy resources, and although no one can compete with China’s quantity of cash, it does not have the expertise Venezuela needs.

The Fear of Default Contagion is Rage'n – The AIA Advocate Newsletter

AIAAdvocate — Thu, 30 Jun 2011 16:08:00 GMT

In This Issue:

The Fear Of Default Contagion Is Rage’n

The Debt Ceiling Deadline Also Worries Investors

Growth Is Weak, But The Second Half Should Be Stronger

Energy Stocks Should Lead A Market Rebound

Blue Chip Tech Stocks Should Also Do Well

The Bottom Line This Month

Stocks continued the slide they began in late April. For all the wailing and gnashing of teeth by investors we might think the market is in freefall. In fact, the Dow and the Nasdaq are only down 4.3% and 4.6% respectively for the two months. Such modest declines don’t even qualify as a correction, much less a bout with the bear.

The stock market numbers for the past 30 days are even less alarming: the two indices eased back 1.1% and 1.5%. The slowdown in the slowdown suggests to us that the slide may be running out of steam.

The Fear Of Default Contagion Is Rage’n

The biggest problem that’s bothering investors is the financial version of a Greek tragedy. This time around, the drama isn’t nearly as interesting as those penned by Homer and Sophocles, but the final has more punch.

The plot of the story revolves around the inability of the Greek government to pay its considerable bills. When Greece dropped the drachma and adopted the much richer euro, the country went on a spending spree. Unfortunately, the money wasn’t used to increase the country’s output of goods and services. Instead, the public sector ranks swelled, wages and pensions were plumped up, and welfare programs went viral. Now the bills are coming due, and Athens doesn’t have the money.

If Greece defaults on a batch of bonds that will mature in mid July, the banks that issued them will be in serious trouble. Since the European banks are all linked together in a giant debt furball, the pain will be spread widely. A series of bank failures could occur.

But that’s not the worst of it. If Greece skips out on its debt it is likely that Portugal and Ireland will do the same. In that case, the toxic relay could spread to Spain whose debts are even larger. Such a chain reaction meltdown would have global repercussions.

Because the stakes are so high, we think Greece will get the loans it needs to get through the next few months. Of course, that won’t do more than kick the can down the road. In theory at least, putting the judgment day off will give Europe time to come up with a more permanent solution to the debt problem. We shall see.

The Debt Ceiling Deadline Also Worries Investors

Never one to be outdone, especially by the Greeks, the U.S. created debt problems of its own, and they are positively Herculean. The most immediate concern is Congress’ failure to raise the government’s debt ceiling which must be done by August 2. If not, federal checks may start to bounce.

Failing to get its financial house in order by the deadline would also bring into question the near sanctity of U.S. Treasury bonds. Currently Uncle Sam’s bonds carry the highest AAA rating, which is one of the reasons they can pay such little interest. If the rating should fall even a smidgeon to AA+, the bonds would no longer look attractive to many buyers until yields go up. Of course, high rates would retard economic growth, which would be bad for stocks.

As with the Greek problem, however, the outcome of a U.S. spending freeze would be so catastrophic, we are confident it won’t be allowed to happen.

Growth Is Weak, But The Second Half Should Be Stronger

The last big item in the worry department is U.S. economic growth, or more specifically the lack of it. The first quarter tally was an abysmal 1.8% (or 1.9% as revised), which is a lot closer to zero than is comfortable.

Second quarter growth was expected to be close to 3%, but it now looks as if the number could be as low as 2.1%. If so, some stock prices may be too high, which is why investors are allowing them to slide.

Unlike the situation with debt that can be put off, a slow economy isn’t quite so easy to fix. Just ask Mr. Bernanke at the Fed who has been trying to goose the economy for three years and doesn’t quite seem to have the hang of it. Nevertheless, hope springs eternal on Wall Street as everywhere else. Several respected economists think the economy will start to pick up in the third quarter. We think they are correct although we don’t expect to see a barnburner.

Energy Stocks Should Lead A Market Rebound

Putting it all together makes us think the stock market is likely to have a rebound within a few months. Besides improving the debt problems and seeing the economy tick up a bit, many stocks are just plain too cheap. In fact, many of the world’s leading blue chips are back to levels last seen 20 years ago.

The leading energy stocks look especially attractive to us because oil prices have dropped in recent weeks. Part of the decline is due to the government’s decision to open the Strategic Petroleum Reserve (SPR) to help bring gasoline prices down for the summer driving season, not to mention the start of the federal election season.

However, oil seems likely to recover once the SPR boost ends. Ditto if we are correct about having better economic growth this fall. The world’s appetite for energy is also in a long term upswing. All in all, we think energy stocks will be excellent performers once they get through this soft patch.

Our top energy recommendation remains ExxonMobil (XOM), the world’s largest and best managed energy company. http://finance.yahoo.com/q/bc?s=XOM&t=1y The stock dropped from $87.98 on April 29 to just $80.25 on June 29, an 8.8% decline. That put the forward P/E at just 8.7, which looks cheap to us.

The stock’s 2.4% yield isn’t earthshaking, but it’s better than 3-year CDs are paying. Exxon’s dividend has also been paid every year since 1911, a century record that few stocks can match. Moreover, on a split-adjusted scale, the company has not decreased its dividend since 1956.

If you are looking for reliable income plus the prospect of good capital gains, we think ExxonMobil is a stock to have.

We also like the outlook for Arch Coal (ACI) America's second largest coal producer with about 15% of the total supply. http://finance.yahoo.com/q/bc?s=ACI The company specializes in low-sulfur coal that creates less pollution and lowers clean-up costs. As a result, the company’s coal sells for a premium.

We also like the outlook for Arch because its main competitor, the shale gas industry, is under fire for creating water pollution problems that are almost impossible to clean up. Natural gas prices are also expected to rise and reduce the advantage it currently has over coal.

Also in Arch’s favor is the nuclear disaster in Japan that has turned the public in many countries against that power source. The result can only be more coal-fired electric plants. U.S. electrical companies plan to increase their coal-fired capacity by 30% over the next five to eight years.

The fundamentals for Arch are also favorable. The price fell from $34.17 on April 29 to just $25.81 yesterday, a 24.5% drop. Investors are nervous about the slow economy having an impact on volatile coal prices and about the company’s decision to buy International Coal Group (ICO) for $3.4 billion. As a result, the forward P/E is a low 6.5. The yield is only 1.70% but Arch Coal is primarily a capital gains play.

Blue Chip Tech Stocks Should Also Do Well

Tech stocks also look very good to us. Not only is the low dollar boosting exports, many businesses are upgrading their IT networks this year. Nevertheless, the broad sell off on Wall Street brought already-cheap tech giants even lower.

We continue to think that Intel (INTC) is the leader of the pack because its proprietary chips power so many devices. http://finance.yahoo.com/q/pr?s=INTC

Throughout most of the 1980s and 1990s Intel was priced out of reach. Now it is back down to earth at $21.39, a 6.9% decline from $22.97 on April 29. The forward P/E is only 9, vs a five year average of 17.8. That’s remarkable since earnings have been growing 11.1% of late, vs a 5 year average of 7.5%. The yield is 3.40%. The company has a strong balance sheet.

Intel even has a good track record during poor economic times. During the tough 2008-2009 period, the company had an impressive $10 billion in positive cash from operations. If you have been looking for an opportunity to add this blue chip tech giant to your portfolio, we think this is it.

The Bottom Line This Month

Stock prices continued to slide last month, although the pace of the decline slowed. We think the trend will reverse once the European debt crisis has been put on hold and the U.S. government’s debt ceiling has been raised.

Dozens of excellent stocks look very attractive to us. Our favorites continue to be the multinational blue chips that help create, not just participate in, the global economy.

Looking especially good right now are ExxonMobil and Arch Coal that have been hit by falling energy prices in addition to the declining stock market. Tech giant Intel also looks attractive and should perform well in long-term portfolios.

Until Next Month

The AIA "Advocate For Absolute Returns," a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time...

The Best Strategy For Investors - The AIA Advocate Newsletter

AIAAdvocate — Thu, 28 Apr 2011 17:59:00 GMT

In This Issue:

All Eyes Are On The Fed

Ben Bernanke’s Dilemma

The Best Strategy For Investors

Energy Still Looks Like A Long Term Slam Dunk

Technology Stocks Are Bouncing Back

The Bottom Line This Month

Over the past month, the stock market shrugged off some of the most troubling news we’ve seen in years. We had increasing political turmoil in the Middle East and North Africa. At the same time the Japan nuclear emergency worsened. To cap it all off, Standard & Poor’s cut Uncle Sam’s credit outlook from “stable” to “negative”.

Meanwhile, Congress is deadlocked on raising the federal debt ceiling, a task that must be done by July. Coming up even sooner is the end of the Fed’s QE2 stimulus program – as we will discuss next.

All in all, there has been a lot for investors to worry about. Nevertheless, the Dow and the Nasdaq managed to rise a healthy 2.6% and 3.4% respectively for the month.

All Eyes Are On The Fed

In our last issue we wrote that the economy and the stock market are being fueled by the billions of stimulus dollars the Fed has been spending to chase the Great Recession away. The Fed’s decision to keep interest rates very low is also a plus for growth.

The Fed’s current program to boost the economy is Quantitative Easing 2, or simply QE2. The plan is scheduled to expire in June, an event that many analysts think will be like taking the punch bowl away from a party just when it is starting to pick up. The most pessimistic among them think the economy will fall back into recession, unemployment will start to creep up again, and the bull market in stocks will end.

Other analysts dismiss the dire scenario as unthinkable. They believe that no matter what Fed chairman Bernanke is saying now about pulling the plug on QE2, if the economy is weakening when June arrives he will extend the program for several more months.

However, keeping QE2 in place would cause problems that are just as troublesome as those we can expect if the program is allowed to expire.

Ben Bernanke’s Dilemma

The dilemma that Fed chairman Bernanke faces is QE2 is running up the federal debt, which is already beyond alarming. The additional stimulus money is also pushing the value of the dollar down, which is fueling inflation and is upsetting our trading partners. Those problems, in turn, are reducing the appeal of Treasury bonds that Washington needs to sell every month to service its obligations.

Because QE2 seems to be more of a liability than an asset now, we think Mr. Bernanke will carry out his plan to nail the coffin shut on the long quantitative easing program. Any nudges to the economy from then on is likely to be done by raising interest rates, which we don’t expect until much later in the year.

The Best Strategy For Investors

Since the end of QE2 is a potential threat to the stock market, we think the only prudent course of action is to prepare for a correction. That’s especially true since a fallback seems overdue no matter what the Fed does two months from now.

For many investors the best strategy will be to take some profits off the table. That’s especially true for anyone who is likely to need their cash within a year or so. After such a bountiful bull market, protecting your gains seems a better plan than reaching for more and risking a loss.

We think any stocks you intend to keep should be protected with stop loss orders. Dr. Steve Sjuggerud at Daily Wealth (www.dailywealth.com) recently reported that Stansberry & Associates commissioned a study to see how trailing stops would have affected the performance of his stock portfolio.

The study found that trailing stops set 16% below the purchase prices of his stocks increased portfolio performance. That was also true for stops set as far as 34% below their starting points. Even with such a wide range of stop-loss protection, the returns increased.

We continue to recommend trailing stops that are set 25% below their current levels. That’s tight enough to protect against a major downturn, but wide enough to avoid being triggered by the larger than usual price swings that often occur in the market today.

Energy Still Looks Like A Long Term Slam Dunk

At this point we don’t think there is any question that the era of cheap energy is over. Unless the space aliens drop by with a miracle generator, there appears to be nothing to stop the long term rise of fossil fuel prices. That’s especially true now that nuclear power is in the doghouse.

In addition to the energy stocks we recommended in our last issue, we also think PetroChina (PTR) looks very attractive:

PetroChina supplies two thirds of China's energy. http://finance.yahoo.com/q/pr?s=PTR. From its modest roots dating to the communist revolution, the company has become a major oil and natural gas producer with a worldwide reach. The company is profitable and boasts an attractive 12.9 P/E, vs 16.1 for the S&P 500.

PetroChina is a vertically integrated firm that does everything from finding energy to extracting, transporting, refining and selling it to customers both large and small. The company is the most profitable of its type in Asia, and also outshines many Western rivals.

Although there is little opportunity for finding additional petroleum within China, the company is obtaining it elsewhere. China has a $200 billion deal with Iran to acquire much of that country's oil over an extended period. More recently - and right under our noses - China signed similar agreements with Canada to buy as much as half of that country's energy exports within ten years. China also negotiated a new energy deal with Nigeria, its sixth such move in Africa.

PetroChina will benefit from the prodigious growth of China's economy. With over a billion people to serve, China also has the world's largest internal market. We think the Chinese juggernaut will keep PetroChina on a roll for as far ahead as anyone can see.

Technology Stocks Are Bouncing Back

Last week Intel (INTC) and IBM (IBM) reported much stronger than expected earnings. The two leading tech firms said that businesses throughout the world have finally decided it’s time to upgrade their office and production equipment. Typically, a new tech adoption cycle lasts about 18 months, so the suppliers should have a nice run of rising profits.

At the same time, many new tech companies are being formed. The start-ups are reviving the venture capital business that is once again investing hundreds of millions of dollars to bring new ideas to the market.

All the new activity in technology signals that a turnaround is in progress for the long-suffering sector. Fortunately, there is nothing on the horizon that resembles the late dot-com boom that became a disaster.

Technology companies are in an even better position this time around thanks to the cheap dollar. For foreign buyers, the best technology in the world is now less expensive than it has been in many years.

Because semiconductors are at the heart of countless tech products, we continue to think Intel (INTC) should be in most long-term portfolios. http://finance.yahoo.com/q/pr?s=INTC The company is best known for its central processors which power most of the world's personal computers. Intel also supplies logic chips for a wide variety of applications ranging from cellular telephones to the space shuttle. Increasingly, the company is becoming a leading supplier of communication processors. Intel rightly bills itself, "The preeminent building block supplier to the worldwide digital industry."

Also looking very attractive is Taiwan Semiconductor (TSM), the world's largest dedicated chip foundry. http://finance.yahoo.com/q/pr?s=TSM The company produces chips designed by clients that include many of the world’s largest corporations. The firm is prospering because it offers advanced wafer production and exceptional manufacturing efficiencies at low costs. The company is also able to create large quantities of advanced chips very quickly.

The Bottom Line This Month

The stock market is having an extraordinary run, and a correction seems overdue. The trigger could be the end of the Fed’s QE2 stimulus program in June.

Meanwhile, many U.S. companies are having a very good year. Multinational tech companies are leading the pack. Intel and Taiwan Semiconductor look especially promising for several years of rising profits.

The same should be true for PetroChina that is emerging as one of the world’s leading energy companies with operations in several continents. We think the company has a very bright future.

Until Next Month

Japan, the Persian Gulf and Energy

JohnMauldin — Thu, 17 Mar 2011 22:39:00 GMT

The Prime Minister of Japan recently stated that his nation was facing its worst crisis since World War II. While most of the world is focused on tragic images of floodwater and rubble, and fixated on radiation levels, there is a bigger picture to be examined – one that also includes energy, coal and the Strait of Hormuz.

Human nature draws our focus to the present. We look for immediate repercussions to a devastating world event. But the real advantage lies in understanding the broader perspective. In order to get this deeper understanding, you could choose to spend endless hours scouring global new sources day and night, constantly questioning their legitimacy and bias. Or you could take a better approach and hire a team of geopolitical experts and uber-intelligent analysts.

I use STRATFOR, a geopolitical intelligence firm, to keep me aware of the why and what comes next of situations I know will, in some form or fashion, affect me and my investments. For those of you currently experiencing full STRATFOR access via their 3-month free trial earlier this year (exclusively for Outside the Box readers), you know what I mean. For those new to this e-newsletter or if you've been hesitant to take the plunge into the thought-changing world of geopolitics - these guys are hard to beat.

In today's Outside the Box I'm including this week's edition of their Geopolitical Weekly report, which fully explains the Japanese PM's concerns and puts the recent major world events, from the Middle East to the Far East, in a context we all can understand. Give it a read, and if you like what you see, <<join their mailing list>> to receive free reports like this directly to your inbox every week.

John Mauldin, Editor
Outside the Box

Japan, the Persian Gulf and Energy

Created Mar 15 2011 - 14:05

The Geography of Oil

There are multiple sources for many of the metals Japan imports, so that if supplies stop flowing from one place it can get them from other places. The geography of oil is more limited. In order to access the amount of oil Japan needs, the only place to get it is the Persian Gulf. There are other places to get some of what Japan needs, but it cannot do without the Persian Gulf for its oil.

This past week, we saw that this was a potentially vulnerable source. The unrest that swept the western littoral of the Arabian Peninsula and the ongoing tension between the Saudis and Iranians, as well as the tension between Iran and the United States, raised the possibility of disruptions. The geography of the Persian Gulf is extraordinary. It is a narrow body of water opening into a narrow channel through the Strait of Hormuz. Any diminution of the flow from any source in the region, let alone the complete closure of the Strait of Hormuz, would have profound implications for the global economy.

For Japan it could mean more than higher prices. It could mean being unable to secure the amount of oil needed at any price. The movement of tankers, the limits on port facilities and long-term contracts that commit oil to other places could make it impossible for Japan to physically secure the oil it needs to run its industrial plant. On an extended basis, this would draw down reserves and constrain Japan’s economy dramatically. And, obviously, when the world’s third-largest industrial plant drastically slows, the impact on the global supply chain is both dramatic and complex.

In 1973, the Arab countries imposed an oil embargo on the world. Japan, entirely dependent on imported oil, was hit not only by high prices but also by the fact that it could not obtain enough fuel to keep going. While the embargo lasted only five months, the oil shock, as the Japanese called it, threatened Japan’s industrial capability and shocked it into remembering its vulnerability. Japan relied on the United States to guarantee its oil supplies. The realization that the United States couldn’t guarantee those supplies created a political crisis parallel to the economic one. It is one reason the Japanese are hypersensitive to events in the Persian Gulf and to the security of the supply lines running out of the region.

Regardless of other supplies, Japan will always import nearly 100 percent of its oil from other countries. If it cuts its consumption by 90 percent, it still imports nearly 100 percent of its oil. And to the extent that the Japanese economy requires oil — which it does — it is highly vulnerable to events in the Persian Gulf.

It is to mitigate the risk of oil dependency — which cannot be eliminated altogether by any means — that Japan employs two alternative fuels: It is the world’s largest importer of seaborne coal, and it has become the third-largest producer of electricity from nuclear reactors, ranking after the United States and France in total amount produced. One-third of its electricity production comes from nuclear power plants. Nuclear power was critical to both Japan’s industrial and national security strategy. It did not make Japan self-sufficient, since it needed to import coal and nuclear fuel, but access to these resources made it dependent on countries like Australia, which does not have choke points like Hormuz.

It is in this context that we need to understand the Japanese prime minister’s statement that Japan was facing its worst crisis since World War II. First, the earthquake and the resulting damage to several of Japan’s nuclear reactors created a long-term regional energy shortage in Japan that, along with the other damage caused by the earthquake, would certainly affect the economy. But the events in the Persian Gulf also raised the 1973 nightmare scenario for the Japanese. Depending how events evolved, the Japanese pipeline from the Persian Gulf could be threatened in a way that it had not been since 1973. Combined with the failure of several nuclear reactors, the Japanese economy is at risk.

The comparison with World War II was apt since it also began, in a way, with an energy crisis. The Japanese had invaded China, and after the fall of the Netherlands (which controlled today’s Indonesia) and France (which controlled Indochina), Japan was concerned about agreements with France and the Netherlands continuing to be honored. Indochina supplied Japan with tin and rubber, among other raw materials. The Netherlands East Indies supplied oil. When the Japanese invaded Indochina, the United States both cut off oil shipments from the United States and started buying up oil from the Netherlands East Indies to keep Japan from getting it. The Japanese were faced with the collapse of their economy or war with the United States. They chose Pearl Harbor.

Today’s situation is in no way comparable to what happened in 1941 except for the core geopolitical reality. Japan is dependent on imports of raw materials and particularly oil. Anything that interferes with the flow of oil creates a crisis in Japan. Anything that risks a cutoff makes Japan uneasy. Add an earthquake destroying part of its energy-producing plant and you force Japan into a profound internal crisis. However, it is essential to understand what energy has meant to Japan historically — miscalculation about it led to national disaster and access to it remains Japan’s psychological as well as physical pivot.

Japan’s Nuclear Safety Net

Japan is still struggling with the consequences of its economic meltdown in the early 1990s. Rapid growth with low rates of return on capital created a massive financial crisis. Rather than allow a recession to force a wave of bankruptcies and unemployment, the Japanese sought to maintain their tradition of lifetime employment. To do that Japan had to keep interest rates extremely low and accept little or no economic growth. It achieved its goal, relatively low unemployment, but at the cost of a large debt burden and a long-term sluggish economy.

The Japanese were beginning to struggle with the question of what would come after a generation of economic stagnation and full employment. They had clearly not yet defined a path, although there was some recognition that a generation’s economic reality could not sustain itself. The changes that Japan would face were going to be wrenching, and even under the best of circumstances, they would be politically difficult to manage. Suddenly, Japan is not facing the best of circumstances.

It is not yet clear how devastating the nuclear-reactor damage will prove to be, but the situation appears to be worsening. What is clear is that the potential crisis in the Persian Gulf, the loss of nuclear reactors and the rising radiation levels will undermine the confidence of the Japanese. Beyond the human toll, these reactors were Japan’s hedge against an unpredictable world. They gave it control of a substantial amount of its energy production. Even if the Japanese still had to import coal and oil, there at least a part of their energy structure was largely under their own control and secure. Japan’s nuclear power sector seemed invulnerable, which no other part of its energy infrastructure was. For Japan, a country that went to war with the United States over energy in 1941 and was devastated as a result, this was no small thing. Japan had a safety net.

The safety net was psychological as much as anything. The destruction of a series of nuclear reactors not only creates energy shortages and fear of radiation; it also drives home the profound and very real vulnerability underlying all of Japan’s success. Japan does not control the source of its oil, it does not control the sea lanes over which coal and other minerals travel, and it cannot be certain that its nuclear reactors will not suddenly be destroyed. To the extent that economics and politics are psychological, this is a huge blow. Japan lives in constant danger, both from nature and from geopolitics. What the earthquake drove home was just how profound and how dangerous Japan’s world is. It is difficult to imagine another industrial economy as inherently insecure as Japan’s. The earthquake will impose many economic constraints on Japan that will significantly complicate its emergence from its post-boom economy, but one important question is the impact on the political system. Since World War II, Japan has coped with its vulnerability by avoiding international entanglements and relying on its relationship with the United States. It sometimes wondered whether the United States, with its sometimes-unpredictable military operations, was more of a danger than a guarantor, but its policy remained intact.

It is not the loss of the reactors that will shake Japan the most but the loss of the certainty that the reactors were their path to some degree of safety, along with the added burden on the economy. The question is how the political system will respond. In dealing with the Persian Gulf, will Japan continue to follow the American lead or will it decide to take a greater degree of control and follow its own path? The likelihood is that a shaken self-confidence will make Japan more cautious and even more vulnerable. But it is interesting to look at Japanese history and realize that sometimes, and not always predictably, Japan takes insecurity as a goad to self-assertion.

This was no ordinary earthquake in magnitude or in the potential impact on Japan’s view of the world. The earthquake shook a lot of pieces loose, not the least of which were in the Japanese psyche. Japan has tried to convince itself that it had provided a measure of security with nuclear plants and an alliance with the United States. Given the earthquake and situation in the Persian Gulf, recalculation is in order. But Japan is a country that has avoided recalculation for a long time. The question now is whether the extraordinary vulnerability exposed by the quake will be powerful enough to shake Japan into recalculating its long-standing political system.

The Morality of Chinese Growth

JohnMauldin — Sat, 02 Oct 2010 01:35:00 GMT

Oil at $125 a Barrel, Gasoline at $5
David Rosenberg and Capacity Utilization
Gary Shilling: Commercial Real Estate and Employment
The Morality of Chinese Growth
Another Birthday? What Happened to My Year?
Athens and the Barefoot Ranch

This week I am at a conference in Houston. I must confess that I don't attend many of the sessions at most conferences where I speak. But today, the guys at Streettalk Advisors have such a great lineup that I am there for every session. But it's Friday and I need to write. The solution? This week you get a "best of" letter. The best ideas I've heard and the best charts I've seen at this conference. Then we close with two short but very thoughtful essays from Charles Gave and Arthur Kroeber of GaveKal on "The Morality of Chinese Growth." Lots of charts and something to make you think. Should be a good letter.

Oil at $125 a Barrel, Gasoline at $5

John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark (even bleak, as he gets further into the speech) picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It is his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won't even be new rules until the end of 2011, and then the lawsuits start.

Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.

He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we are not updating it fast enough.

He argues that the fight between the right and the left has given us 37 years without a realistic energy policy, as policy gets driven by two-year political cycles but good energy planning takes decades. There are 13 government agencies that regulate the energy industry, with conflicting mandates that change very two years. There are 22 congressional committees that have some level of involvement and oversight of the energy industry.

The following table is from data provided by Triple Double Advisors LLC, an energy specialty investment firm in Houston, Texas. John White was sitting next to me and showed me this table, pointing out the poor performance in terms of investor returns from renewable energy sources and the larger returns from Master Limited Partnerships where investors are seeking yield. It seems the market is voting that it doesn't have much confidence in the renewable energy world. Hofmeister suggests that government subsidies for renewable energy will go away under the pressure to get the fiscal deficit under control. Maybe the market senses that. He says we need to create a 50-year plan for our energy policy that transcends the political cycle. (I am going to get this speech transcribed and will post it so you can read it. This guy talks sense.)

David Rosenberg and Capacity Utilization

I am a big fan of David Rosenberg (former chief economist at Merrill and now with Gluskin Sheff in Toronto), and have really enjoyed getting to know him the last few years. He is a fun guy, even if his data is not exactly bullish. It was hard to pull out the best of his charts for this letter, because he had so many.

The first chart shows that real final sales are the lowest, four quarters after the end of a recession, that they have ever been. Average growth is 4%, but we're up less than 1% in the current recovery. The second chart (side by side with the first, below) shows the contribution of various sectors to real GDP growth. You find that of the 3% average growth over the last four quarters, 1.8% was inventory rebuilding. His point (and one I have made as well) is that this is not sustainable. At some point rebuilding will no longer be as big a factor, as inventories will get closer to equilibrium. And the consumer does not look like he is going to ride to the rescue.

Rosie thinks we could slip into negative growth by the end of the year.

This next chart shows U-6 unemployment compared to manufacturing capacity utilization rates. Unemployment will have difficulty getting better as long as capacity utilization rates are at what is typically thought of as recession levels.

The next and last chart from Rosie is on housing, showing us the large number of vacant homes and the vacancy rate. Home values are not likely to rise nationwide (there will be some good local pockets) until the vacancy rates come down. Ditto for new home construction and the jobs from that sector. Gary Shilling (see next section) says he thinks home prices could drop another 20%.

Gary Shilling: Commercial Real Estate and Employment

The next two charts are from good friend Gary Shilling (selected out of about 50 he had). The first shows us that the commercial real estate price index is down almost 40% from its peak. Judging from the graph, it looks like the freefall may be over for now, assuming we do not get into another recession too soon. Is it any wonder that bank lending is down, since so much lending was in commercial real estate and CRE construction?

The last chart shows us the trend line for the relationship between employment growth and GDP. It turns out that you need at least 3% GDP growth to get meaningful employment growth. If growth is slowing down to less than 2%, it is going to be very difficult to really address the unemployment problems.

And now, let's turn to GaveKal and China.

The Morality of Chinese Growth

We (GaveKal) spend quite a bit of time trying to understand the drivers and fundamentals of Chinese growth. And while we have seen some recent signs of a policy-driven cyclical slowdown (see The Wen Jiabao Put and our latest Quarterly Strategy Chart Book), we remain very optimistic about the Mainland's structural potential. But up until know, we have not really touched on the more philosophical implications of the Chinese growth story. In that respect, a recent client comment triggered a couple responses we modestly believe could interest the broader readership.

Client Comment: GaveKal's writings on economics are unmistakably filled with fundamental beliefs regarding human potential, advancement, creativity and the pursuit of knowledge. And even if I did not know your backgrounds, these views appear decidedly French in nature: deeply held beliefs on the rights and dignity of man.

So how does a group of economists focused on the mind and the soul as well as the pocketbook reconcile the sociological challenges presented by modern China? It is undeniable that a country that pulls half a billion people out of subsistence farming in two decades is doing a lot for human decency, no matter how they accomplish it. So maybe I need to throw away my Western lenses when thinking about this. But I really wonder sometimes how you view the authoritarian qualities of 21st century China as it relates to treatment of political rivals, the autonomy of the courts, religious freedoms, control of all forms of media, etc. Should we bend with the breeze and accept that this is the new world?

Charles answers: As I have tried to highlight in a couple of recent documents (see The Way the World Works and Ricardo, Schumpeter & the Cost of Capital), I firmly believe that an overly powerful and extended government is very dangerous. Having said that, I also believe that a total absence of the State is even worse. And since you mention my intrinsic Gallicness, I will turn to the philosophers of the Enlightenment, who happened to often be French, and who showed quite conclusively that human freedom can be exercised in three areas:

1. Political freedom (voting the incompetents out, separation of powers)

2. Social freedom (freedom of worship, sending one's children to the school of one's choice, creating a union, etc.)

3. Economic freedom (the ability to create a business, hire or fire employees, etc., regulated by contract law between acting parties).

What the philosophers of the 18th century argued was that the Church had to move out of the political sphere, and the State out of the other two. In Hong Kong, which GaveKal calls home, we enjoy one of the freest societies in the World: we have total social freedom, total economic freedom but yet very little political freedom. Still, I believe this compares extremely well with what we have in France, where the church of Marxism has invaded the State and the educational system, destroying both, while the obese State has invaded the social and economic sphere, leaving entrepreneurs without oxygen. As Tocqueville expected, we have moved towards a strange and benign "molle dictature".

This brings us to China and your questions. Today, the Chinese government is prepared to increase the population's economic freedom (far from complete), as well as the social freedom (courts of justice gaining grounds on political cronies, some social rights). But as for political freedom - see you in 20 years. In essence, this is the same deal offered to Singaporeans 30 years ago by Lee Kwan Yew, who now effectively vote for Lee Kwan Yew & sons every time they get a chance!

As a result, and to use Hanna Arendt's terminology, China is gradually moving from a totalitarian state to an authoritarian state, with a technocratic bias (à la Singapore). To a certain extent, the Chinese government discharges some of its responsibilities pretty well, with some gaping and horrible holes. So while the immediate picture may look ugly, the movement is in the right direction.

Arthur Kroeber answers: Basically I think you need to clarify your questions. Are you surprised that China has been able to deliver high-speed growth while remaining an authoritarian state? If so, there is nothing odd about this. South Korea and Taiwan both achieved their highest sustained growth under brutal dictatorships; Japan achieved its first growth spurt (in the Meiji era) under a benign despotism and its second (post-war) under a one-party state. And of course, most of the modern Western democracies were not really democracies in any modern sense (only landowners could vote, women did not vote…) while they were industrializing. The idea that countries must be liberal democracies in order to achieve high-speed early-stage economic growth is a strange fantasy with no empirical support.

Or is the question that you are worried that China's path to success means that other countries will follow the same route? Again, the evidence at hand shows that each successful economy, like Tolstoy's unhappy family, is successful in its own way and that outside models are of limited use (see Dani Rodrik's One Economics, Many Recipes).

The China model could work in China because of a specific set of historical and institutional factors that are not replicable elsewhere.

These include a 1,500-year history of centralized bureaucratic rule, which set the template for the current governance system of bureaucratic authoritarianism; an almost equally long history of active commerce and preindustrial capitalism which set the template for private sector activity once the state decided to get out of the way; and the presence of Hong Kong, which meant that China could make full use of modern Western institutions (such as a reliable legal system, property rights, efficient services, etc) without having to go through the cumbersome decades-long political hassle of building these at home. (On this latter very important point see the opening chapter of Yasheng Huang's Capitalism with Chinese Characteristics).

Or is your concern that China has been able to have a dynamic economy while doing nothing to reform its political system, and will continue to be able to do so ad infinitum? Here the perception that China has made no political reform is specious. There is a gigantic difference between China in the 1970s and China today in terms of freedom of expression, breadth of political discourse, personal liberty and property rights.

Through the end of Mao's rule, China was a totalitarian dictatorship ruled by individual caprice, with generally disastrous results (30-40mn deaths in the 59-62 famine, 10s of millions more in the Cultural Revolution, etc.). Since then it has transformed itself into a bureaucratic authoritarian state with very imperfect but generally increasing accountability of government. This is a massive political transformation. (And Huang, cited above, makes the important point that this "directional liberalism" -- this confidence that things were getting durably better -- was very important in encouraging China's entrepreneurs to start work in the 1980s, despite the absence of what we would consider clear property rights).

If we judge China not by how far it has to go but by how far it has come, the change has been dramatic, and we can reasonably expect the political system to continue to evolve in the coming decades, though not necessarily in linear or predictable ways.

Or is your concern that we in the West somehow have to render moral judgment on China, which requires some calculus along the lines of X amount of economic progress is worth Y amount of political repression, so if repression = y-1 then China is "good" and if y+1 then China is "bad"? Here I will wax philosophical and distinguish myself from Charles somewhat. Unlike him (and strangely, since I am generally considered the house Communist), I am not a Marxist, as I strongly believe that it is a society's underlying political bargains that tend to shape economic activity, not the other way round.

As Isaiah Berlin pointed out, societies grapple with the problem that there are lots of good things - justice, wealth, individual liberty, social stability, security, equity - and we cannot maximize all of them at once. Trade-offs among these ultimate values must be made and that is what politics is about. Societies create a set of trade-offs by negotiation (and by the way democratic elections are not in themselves a mechanism for making these trade-offs; they are simply a mechanism for transmitting information to the agents who are negotiating the trade-offs; so it is a fallacy to presume as many do that only via democratic elections can a society achieve a "true" bargain) and the ultimate bargain configures the playing field on which economic actors operate.

Among the societies we describe as democratic capitalist there are vast differences in the bargains and hence in the nature of economic activity. America tolerates levels of instability, crime, inequality and pernicious religious zealotry that Europeans and Japanese consider absurd, but it gets in return a much more dynamic entrepreneurial system of wealth creation. Japanese willingly accept levels of social conformity that Westerners consider bizarre, but achieves a high level of social stability and tremendous success in economic areas (such as high precision manufacturing), where self-disciplined social cohesion is a plus.

China, like all societies, is working out its bargain. It is still very much a work in progress but the process is dynamic, not static.

We Americans have a strange utopian tendency to assume that among all possible social bargains there is one perfect bargain out there (probably ours) and that it is our job to judge how well other people are keeping on the path to that bargain, any straying from which necessitates perdition for them and gnashing of teeth for us. But maybe we should just stop worrying about it. China will become what it will become and hopefully whatever it becomes will produce good results both materially and spiritually for most Chinese. As long as our society continues to do the same for us, it does not much matter whether the two societies wind up looking a lot or a little like each other. Chacun son gout!

Another Birthday? What Happened to My Year?
Athens and the Barefoot Ranch

I turn 61 next Monday. All the kids are coming into town to celebrate with Dad. I am really looking forward to it. But I really have a hard time believing that it's time for yet another birthday. I am sure it was just last month we celebrated my 60th. Thankfully I don't feel like I am 61.

It has been a great year on both a personal and business level. Italy with the family was a highlight, and not just of the last year. We are going back to Tuscany next year. I am so grateful that my business is growing and that we are finding new opportunities. Thank you for your support this last year.

And yes, I am going to Athens next week. Athens, Texas, that is. There is a rather large ranch/lodge called the Barefoot Ranch near Athens, where Kyle Bass of Hayman Advisors has invited some 50 people to gather and discuss the markets and the world at large for three days. Fund managers, writers, politicians, historians, and a fairly wide variety of interesting people. That is in the mornings and evenings. In the afternoon we relax. There are lots of things to do. One of the more interesting things will be to shoot sniper rifles under the tutelage of a fairly famous Navy Seal (I understand you are never an ex-Seal).

While I will be presenting, I expect that I will learn a lot more than I impart. It should make for a very interesting letter next week.

And speaking of Athens, I got a text from good friend Prieur du Plessis. Greece, he says, from the island beaches, is clearly not in crisis. But more close observation is needed. As I get on my plane I will pull out my latest International Living and dream about a little R&R.

And it is time to hit the send button. The conference is almost over and I will need to run to the airport and catch a plane back to Dallas and see my kids. It is going to be a good weekend. I see movies and Mimosas and grandkids in my future. I think brunch is set for 14. Have a great week!

Your still feeling like a kid analyst,

John Mauldin

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