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Tuesday
Oct262010

Rick Rule: Courage of Conviction

Source: Karen Roche of The Energy Report 10/26/10
http://www.theenergyreport.com/pub/na/7698

Rick has a few interesting points to make about uranium so dont miss them!

Rick Rule and Sam Kirtley in Auckland recently.JPG

Rick Rule has mastered his fear. A renowned resources investment manager, Rick likes underdog sectors that have fallen out of favor with the wider investment world and has the fortitude to hold those stocks through volatility. In this exclusive interview with The Energy Report, Rick explains why he likes the pummeled natural gas sector and why he hopes he loses money on his sizable bullion holding.

The Energy Report: I attended your speech at the recent Casey Conference, wherein you professed a love of bear markets because everything is cheap. Can you explain further?

Rick Rule: People draw psychological comfort from increasing share prices; but, if trying to increase wealth, they also have to augment their assets. Assets are cheap during bear markets and expensive during bull markets. The virtues of bear markets are fairly obvious—assets are cheap and customers (the consumers of assets and providers of capital, if you will) are afraid. Companies are more willing to offer inducements for you to buy financings, such as long warrants. Another bear-market advantage is that asset markets become more and more constrained, which go to stronger players with established management teams.

TER: Do you think we're in a bear market? Investors have had some pretty nice returns this year.

RR: No. I think we're in a raging bull market in the resource sector. It's arguable that some sectors of the general securities market are in a bear market; but even that market has been very generous relative to what I think the economy would sustain.

TER: If we're in a raging bull market in resources, should investors be buying resources?

RR: There's always a bear market somewhere. The resources sector is a broad one, running the gamut from conventional to alternative energy, agriculture to agricultural minerals and forestry. Under the broad heading of "resources," some sectors are extremely strong, read expensive and are weaker, read cheap. We go to the out-of-favor sectors rather than the in-favor sectors; and we're finding adequate opportunities in certain aspects of the natural resource business.

TER: Can you briefly summarize the in- and out-of-favor resource sectors?

RR: The most in-favor portion of the precious metals sector seems to be large, very low-grade gold deposits that didn't stand a chance when gold was $500—or even $1,000—an ounce. But perhaps they stand a chance now that gold is over $1,300/oz. Those deposits have become extraordinarily popular of late, so we're avoiding them like a plague. That isn't to say that gold won't go to $1,600 or $1,700 an ounce and money won't be made on these; but I think the market capitalization of those opportunities exceeds a risk-adjusted price that I'd be willing to pay.

On the other hand, sectors like alternative energy—hydro and geothermal—continue to be cheap and are selling below risk-adjusted net asset values (NAVs). We're attracted to that. Although early, we're beginning to walk back into the extremely unpopular natural gas sector.

The entire conventional energy sector in Canada in the sub-$300 million market-cap range is very cheap. We're looking at companies in the range of about 2,000 barrels per day (bpd). If we buy some that aren't too highly leveraged in the next two or three years, they will be taken over by their bigger brethren, which is a trend we've played before to good effect.

We're also very interested in the uranium sector. We had extraordinary luck with that sector 15 years ago, before anybody cared about it. When that sector returned to favor, we were very aggressive sellers. The uranium sector went from 5 junior companies to 500 companies, which was problematic because there were roughly 20 competent management teams at the time.

TER: Didn't the commodity price grow dramatically, as well?

RR: That was part of it, but there are some less-rational explanations. I think most of the mania that occurred in the stocks really stemmed from the fact that the first stock to run, Paladin Energy Ltd. (TSX:PDN; ASX:PDN), went from $0.05–$10. Yes, the commodity price ran but it ran from an unsustainably low price to one that was unsustainably high. During the unsustainably high price period, people wanted to believe they had uncovered a perpetual money machine.

The thesis regarding uranium pricing and world energy security is extremely attractive. At the same time, the capital raised by the industry so cheaply from 2003–2007 has been deployed. Paradoxically, the same speculators who put up all the money are now disgusted and selling before they get to recognize the benefit. We're very attracted to that.

TER: To what extent does the uranium market comeback depend on continued electrical demand?

RR: I think that's critical. One thing that protects nuclear power demand is that it's likely the cheapest power to generate in the world.

TER: A lot of uranium companies disappeared when the price went down. Now that the industry has been flushed out, is it safe to say most remaining players will make discoveries?

RR: Most companies won't have a discovery, so the discovery cycle won't pertain to the industry as a whole. I think around 90–100 listed companies worldwide are at least still pretending to be active in the uranium space. I wouldn't expect more than 10 of them to make a discovery. That means 10% or less of the active participants will generate economic value, but some of the value they generate will be spectacular. This is a game that should be played only by people who have the knowledge to play it.

TER: Compared to other energy sources like geothermal and natural gas, where does uranium fit into your out-of-favor sectors?

RR: Currently, I think uranium, natural gas and geothermal are the most out of favor. There's an awful lot of room in the next 18 months to position in uranium stocks that will do extremely well over a three- to five-year timeframe. You have to buy the stock with the view that you're going to get some validation in two years and big validation in three–five years. A lot of speculators don't have sufficient courage of conviction to be in a stock for that long.

TER: You are perpetually early to the market. You're saying three–five years, but are you really looking at a longer timeframe?

RR: No, I don't think so. My clients are frequently bored, and then elated. Most speculators experience trauma holding stock over a long weekend. My way to manage risk is ensuring that I buy assets cheaply. I get into investments before the crowd is interested in them—sometimes a long time before. That technique has worked very well for me. I'd rather be as early as I was in uranium and have to wait two–three years for a 2,000% run-up than be late and endure an 80% decline.

TER: Is the geothermal market large enough to take off or too small to garner much attention?

RR: I don't think it will ever garner widespread investor interest, but it is extremely lucrative. Geothermal is the first resource I've ever been involved with that has widespread social and political acceptance. Political acceptance surrounding the world of "green" energy has led to both political and social acceptance of paying a premium for it.

In Imperial County, California, we modeled the power purchase agreement (PPA) rates that are being offered for "green" energy on geothermal projects. We model 20% unleveraged internal rates of return (ROR)—very high due to high power purchase agreements. At the same time, the industry's cost of capital is being subsidized by the federal government with equity grants of up to 30% of a project's allowable expenditures and a Department of Energy loan of up to 80% of project revenues. The numbers in geothermal are very compelling: 18%–20% internal ROR on a project basis and 5% capital costs. Given the relatively low risks associated with geothermal developments, the guaranteed ROR between the unleveraged project returns on the cost of capital are probably the most attractive risk-adjusted returns I've ever seen in the resource industry.

TER: With such high returns, why isn't there more geothermal development?

RR: The industry is so new that people are just starting to learn about it. I'm on the phone every week with major U.S. utilities or major international power groups. Big power producers are circling the industry. Three weeks ago, a benchmark agreement was reached wherein Enbridge Inc. (NYSE:ENB), a large Canadian power producer and pipeline owner, joint-ventured into a project controlled by a geothermal junior. The pros in the industry are seeing that these assets are worth two–three times as much on a standalone basis as they are in these public vehicles.

TER: There aren't many geothermal producers in the U.S. Is the sector a relatively short-term opportunity if major power producers are circling the industry to make acquisitions?

RR: I think it may be, at least in the U.S. There are five public small-cap geothermal companies, which I expect will attempt to merge with one another or be acquired by major power producers. Perhaps that will open up a second round of more-speculative geothermal activity in which companies actually explore for geothermal rather than resurrecting projects already explored by major oil companies in the 1970s. It will also open up capital markets for geothermal activities outside of the U.S. in Guatemala, Nicaragua, Costa Rica, Panama, Chile, Peru, the Philippines and Indonesia. I think the second round for geothermal, after the U.S. companies get gobbled up, will be the internationalization of the industry as capital markets become familiar with geothermal.

TER: Round one for geothermal is U.S.-based, but round two will be international?

RR: That's correct. A unique set of circumstances exist in the U.S. with a lot of geothermal prospectivity in the western states: U.S. acceptance of geothermal energy,
the desirability of "green" energy manifesting high PPAs and federal incentives leading to low capital costs. Those factors aren't present anywhere else in the world. Other parts of the world are less developed for geothermal energy. They probably represent better exploration terrain than the U.S., particularly places like Indonesia, the Philippines and Chile.

TER: I doubt there's a sector more out of favor than natural gas. Could this sector take off?

RR: I think we're about two years early, which is just about right for me. Technological advances have allowed companies to produce gas out of shales that hadn't been accessible before and unleashed a tremendous supply of natural gas, driving down the price. The big component will be increasing demand. Paradoxically, that can be a function of increasing reliance on alternative energy. Many of the alternative energies that we're using are intermittent producers. Solar, for example, has to deal with a very simple problem called night. The sun doesn't shine at night, but people want power at night. We have to make up the power we don't get from solar with some other energy source. The easiest and cheapest interruptible, intermittent power supply we have is natural gas, which, fortunately, is in abundance.

TER: I'm surprised that's where the demand will come from given T. Boone Pickens is trying to convince the transportation industry, specifically trucking, to convert to natural gas.

RR: Your point is very prescient. Pickens is trying to convince the U.S. government to finance the conversion. I don't think it needs to do that. Gas is enough cheaper than diesel that the market will work the transfers. Using natural gas as a motor fuel is a chicken-and-egg conundrum. It costs money to convert gas stations to sell nat gas. However, until it's available at gas stations, you won't be able to put it in a vehicle.

The savings to the nation's long-haul trucking fleet from converting from diesel to natural gas could be as much as half. I think that you'll start to see real conversion in the U.S. within five years. That'll be the magic moment for natural gas.

TER: Gasoline prices aren't high enough to convince individual drivers to start incurring the conversion costs now?

RR: I suspect the cost of running an automobile on natural gas would generate a 50% fuel savings because it is astonishingly less expensive than gasoline. I suspect natural gas will be a less heavily taxed motor fuel than gasoline. The discount to gasoline and the tax savings could easily generate a market in which natural gas was available at 40% of the price of gasoline. I think that 60% savings on a fuel bill would be sufficient inducement to convince many to change.

TER: So many positives, and yet the media focuses on nat gas' collateral issues—fracking and gas in groundwater. Is that a red herring or just something the industry needs to overcome to achieve widespread use of natural gas?

RR: I think it's both. A lot of the objection to water formation damage from fracking comes from people who don't understand anything about the fracking process. Having said that, fracking uses enormous amounts of water. The oil and gas (O&G) industry has been woefully deficient in recycling treatment water. What they do is take a bunch of this good, clean, cheap water and make it into dirty water and dispose of it. Then they get a bunch of good, cheap, clean water and they wreck it again. The industry will have to do a better job of recycling process water it uses in fracturing.

Ironically, that's less of an issue now than the concern that fracking O&G reservoirs will pollute freshwater aquifers. O&G reservoirs and the freshwater aquifers are typically separated by thousands of feet of rock, so the risk of underground fracture channeling from the O&G reservoir into a freshwater aquifer is extremely slim.

TER: We've discussed how investors must be patient to allow these industries to reward them with returns. What do you suggest investors do in the interim?

RR: In periods when volatility is high, prices across many markets are high and interest rates are very low; so investors have to hold a greater amount of cash than most consider reasonable. Investors tell me they think holding cash is extremely painful due to the low interest rate and the inflation rate. Investors rightly point out that holding cash exposes them to a -3% to -5%/year real ROR. My response to that is that it's likely a crash could happen in the next two–three years. If it doesn't happen, market swings of broad indexes of up to 20%–40% could occur.

Holding large amounts of cash is good for two reasons: 1.) Losing 3% a year is better than losing 40% in a precipitous decline; and 2.) In response either to a crash or volatility, having cash available to pick up bargains when the market becomes attractively priced is something people need to consider. Think of cash the way a hunter thinks of ammunition during hunting season. It does you no good to find a deer if you don't have any cartridges. Cash is your cartridge.

Although gold and silver prices are very high, I believe bullion is an important part of a cash component. This is the most honest advice you can get from a broker because I don't sell gold or silver bullion. Bullion comprises about 25% of my cash holdings and it's going up. I would be delighted if I ended up losing money on my bullion, which is something you own because you're afraid. I'm afraid the U.S. dollar and the other fiat currencies are on the way to some zero-like price. I hope I'm wrong, but the circumstances that would cause gold to go to $2,000—or even $4,000—an ounce, are extremely unpleasant. So, ironically, I suggest people hold relatively large amounts of bullion while praying they don't make money on it.

TER: Is it possible that investors getting into these sectors now could still lose 20%, 30%, even 50% of the value on those investments before it comes back to them?

RR: Absolutely. My experience in uranium stocks was just that. From 1998–2000, I was a big buyer of the uranium stocks. Between 1998 (when I got in) and the bottom in 2001, I suspect I sustained 20%–30% losses. Mercifully, I had the courage of my convictions and bought lots more. I was rewarded with 2,000% and 3,000% gains. If you're not in position once the market starts to move, you can get left behind very easily.

TER: What would you tell investors holding lots of bullion or cash as they reposition their portfolios for what could be a mild upswing, a bigger recession or the complete collapse of fiat currencies?

RR: Be very careful about long-term bonds. Investors are getting pushed further out of the maturity cycle in bonds to try and grab more yield. I think that's suicidal. When interest rates turn around and go up, investors holding long bonds will absolutely get massacred. Sophisticated investors should be participating in private placements rather than secondary market transactions simply to get the warrant, which is the right, but not the obligation, to buy more equity at a fixed price over a fixed period of time.

The next five years will be both wonderfully rewarding and terribly treacherous. I think companies' stocks will go up or down 20%–30% over relatively short periods of time for almost no reason. Investors have to be both financially and temperamentally ready to deal with that volatility; if they're ready to deal with such volatility, it becomes a bonus and benefit for them. Goods go on sale more frequently than occasionally.

In my talk at the Casey Conference in early October, I reminded the attendees that the greatest bull market I've ever experienced was the gold bull market from 1971–1981 when gold ran from $35/oz. to $800/oz. Right in the middle of that spectacular bull market, we had a cyclical decline of 50%. The gold price halved from $200/oz. to $100/oz. Some investors got the cycle right and were long gold; but, because they didn't have the courage of their convictions, they still went broke—a true tragedy. Volatility has been a wonderful tool for me over the last 20 years.

TER: So, investors with speculative money to invest should look at private placements. How do you advise investors find brokers in good private-placement deal flow?

RR: I, of course, would recommend my own firm first, but there are four or five brokers in the U.S. with reasonably consistent access to Canadian, Australian and British private placements. Reasonably sophisticated clients can find the best, unbiased source of access to those brokers by placing a call to the investor relations department of the companies they own and get recommendations from them and see if there's any crossover.

TER: Excellent tip. Thanks so much for your time today, Rick.

Rick Rule is the founder of Global Resource Investments, Ltd., which he recently agreed to sell to Sprott Inc. Rick began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His research and brokerage capabilities are frequently recommended by distinguished financial newsletter writers such as Bob Bishop, Jim Blanchard, Doug Casey, Adrian Day, Richard Maybury, Paul Van Eeden, Mark Skousen, Jack Pugsley and others.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page

DISCLOSURE:
1.) Karen Roche of The Energy Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2.) The following companies mentioned
in the interview are sponsors of The Energy Report: None.
3.) Rick Rule: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

Our premium options trading service, SK OptionTrader, has opened and closed 12 trades in the last 6 weeks, banking an average profit of 70% on these trades.

This brings our total of closed trades to 38, with 36 winners. This means that a subscriber who had invested $1000 in each of our 38 trades would have banked profits of $15,636.00. We have just posted a set of charts demonstrating the importance of timing in any trade on gold-prices, please click here if you are interested.

SK Chart 23 Oct 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

Monday
Oct252010

Uranerz Energy Corporation: Up 9.37% Today

URZ Chart 26 October 2010.JPG

Uranerz Energy Corporation (URZ) continued to make good progress today putting on $0.18 to close at $2.10 for a gain of 9.37%. When we consider that this stock was trading at around $0.90 in July, although for a short time only, it has doubled in price since then.

Taking a quick look at the chart above we can see that a golden crossover is about to take place, whereby the 50dma moves up and crosses through the 200dma, which should be positive for the stock. The technical indicators are high, however, the RSI is standing at 67.66 which is still below the '70' level, which we would consider to be in the overbought zone. However these indicators can remain high if the fundamentals are positive. For instance the spot price for uranium has been improving for the last three months as the chart below indicates.

Uranium Spot Price Chart 26 October 2010.JPG

On the news front URZ recently announced the completion of an independent National Instrument 43-101 technical report for its wholly-owned Reno Creek property in the Powder River Basin of Wyoming, U.S.A. The Technical Report estimates "measured and indicated" mineral resources of around 4,292,948 pounds of uranium (eU3O8) at an average grade of 0.056% and an "inferred" mineral resource of approximately 142,167 pounds at an average grade of 0.039%.



On the companies web site they list their Highlights as follows:

Strong management and technical team with expertise in the in-situ recovery uranium mining method. Team members have years of experience in all phases of uranium exploration and development.

License and Permit applications were submitted to State and Federal regulatory agencies for ISR uranium mine development in 2007 on two projects; the Company expects to receive these licenses during the second half of 2010, with an anticipated production start in late 2011 or 2012.

Long-term contracts have been signed for the sale of uranium with two of the United States' largest nuclear operators, including Exelon (operates the largest nuclear fleet in U.S. and third largest in the world).

The Company controls a large and strategic land position in the Powder River Basin of Wyoming, U.S.A., an area well known for ISR uranium mining.
Small capitalization with only 64,194,887 shares issued and outstanding, with over US$22 million in the Company's treasury.

The Company continues to advance the Permit to Mine (WDEQ) and Source Material License (NRC) applications for the Nichols Ranch ISR Uranium Project, now believed to be in the final stages.

Uranerz has a Market Capitalization of $134.81M, a 52 week price range of $0.87 - $2.24 with average Volume of around 800.000 shares traded, with 64.19 million shares outstanding.


Uranerz Energy Corporation trades on the NYSE Amex: URZ; TSX: URZ and in Frankfurt: U9E.


Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

Our premium options trading service, SK OptionTrader, has opened and closed 12 trades in the last 6 weeks, banking an average profit of 70% on these trades.

This brings our total of closed trades to 38, with 36 winners. This means that a subscriber who had invested $1000 in each of our 38 trades would have banked profits of $15,636.00. We have just posted a set of charts demonstrating the importance of timing in any trade on gold-prices, please click here if you are interested.



The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

SK Chart 23 Oct 2010.JPG
Friday
Oct222010

Depression Within a Depression

three casey 23 Oct 2010.JPG

By James Quinn, Contributor, The Casey Report

Regular Casey Report contributor James Quinn is the head of strategic planning for one of the world's most prestigious business schools and the host of TheBurningPlatform.com blog. In this article, he is presenting historical indicators that may tell us what’s in store for the U.S. economy.

In recent months, worshippers at the altar of Keynes have been hyperventilating over the possibility Congress will run a deficit of “only” $1.5 trillion in 2010. They have issued dire proclamations about a replay of the 1937-1938 Depression within the Great Depression. White House favorite and #1 Keynesian on the planet, Paul Krugman, declared that not borrowing an additional $100 billion to hand out to the unemployed for another 99 weeks would surely plunge the country into recession again:
 
“Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.” – Paul Krugman in NYT


So did Roosevelt’s attempt to balance the budget in 1937 cause the second major downturn in 1938? I’m a trusting soul, but I prefer to verify what is being peddled to me by any economist, especially Paul Krugman. 
 
Ghost of Keynes Past

Today’s Keynesian economists have convinced boobus Americanus that the Great Depression was caused by the Federal Reserve being too tight with monetary policy and the Hoover administration not providing enough fiscal stimulus. Ben Bernanke and Barack Obama used this line of reasoning to ram through an $850 billion pork-laden stimulus package, as well as the purchase of $1.2 trillion of toxic mortgages by the Federal Reserve.
 
The only trouble is that this storyline is a complete sham.
 
The fact that colossal stimulus spending, zero interest rates, the purchase of over a trillion in toxic assets by the Fed, and the loosest monetary policy in history have done absolutely nothing to revitalize the economy, has proven that Keynesian policies have been a wretched failure. This is not a surprise to Austrian school economists.
 
Keynesian policies failed during the Great Depression, and they are failing today. An economic catastrophe caused by loose monetary policies, crushing levels of debt, and appalling lending practices cannot be solved by looser monetary policies, issuance of twice as much debt, and government commanding banks (or, in the case of Fannie and Freddie, “commandeering”)  to make more bad loans.
 
Ludwig von Mises described what happened in the 1920s and 1930s. His explanation accurately illustrates the situation in America today.
 
"There is no means of avoiding the final collapse of a boom brought on by credit and fiat monetary expansion. The only question is whether the crisis should come sooner in the form of a recession or later as a final and total catastrophe of depression as the currency systems crumble.”

The Roaring Twenties

They don’t call the 1920s roaring because money wasn’t flowing freely and consumers were practicing frugality. The newly created Federal Reserve expanded credit by setting below-market interest rates and low reserve requirements that favored the big Wall Street banks. The Federal Reserve increased the money supply by 60% during the period following the recession of 1921. By the latter part of the decade, "buying on margin" entered the American vocabulary as more and more Americans overextended themselves to speculate on the soaring stock market.
 
The 1920s marked the beginning of mass production and the emergence of consumerism in America, with automobiles a prominent symbol of the latter. In 1919, there were just 6.7 million cars on American roads. By 1929, the number had grown to more than 27 million cars, or nearly one car for every household. During this period banks offered the country's first home mortgages and manufacturers of everything – from cars to irons – allowed consumers to pay "on time." Installment credit soared during the 1920s. About 60% of all furniture and 75% of all radios were purchased on installment plans. Thrift and saving were replaced in the new consumer society by spending and borrowing.
 
Encouraging the spending, the three Republican administrations of the 1920s practiced laissez-faire economics, starting by cutting top tax rates from 77% to 25% by 1925. Non-intervention into business and banking became government policy. These policies led to overconfidence on the part of investors and a classic credit-induced speculative boom. Gambling in the markets by the wealthy increased. While the rich got richer, millions of Americans lived below the household poverty line of $2,000 per year. The days of wine and roses came to an abrupt end in October 1929, with the Great Stock Market Crash.
 
Between 1929 and 1932, the market fell 89% from its high. The Keynesian storyline is that Herbert Hoover’s administration did nothing to try and revive the economy. It took Franklin Delano Roosevelt and his New Deal Keynesian policies to save the country. It’s a nice story, but completely false. Between 1929 and 1933, when Roosevelt came to power, the Hoover administration increased real per-capita federal expenditures by 88%, not exactly austere.
 
Excessive Consumer Spending

When examining the BEA chart of GDP from 1929 to 1939, some fascinating similarities with today’s economy leap out. In 1929, consumer expenditures accounted for 72.3% of GDP, confirming that the much-commented-upon American consumerism is not a modern development. In fact, consumer spending peaked at 81% of GDP in 1932 and remained above 70% during the entire depression.
 
By 1950 consumer expenditures had subsided to 64% of GDP. In 1960, they had fallen to 63% and edged up to 64% by 1970, where they remained until 1980. By 1990 they had ticked up to 66% and by 2000 had reached 68%. The modern-day climax appeared to many to have been reached in 2007 at 70% of GDP. But in a replay of the New Deal playbook, where much of the consumerism was funded by make-work projects and federal transfer payments, the federal government has thrown billions of dollars at consumers to buy houses, cars, and appliances. Consumer expenditures as a percentage of GDP actually rose to 71% in 2009. It should be readily apparent that until consumer expenditures are narrowed to a level that leads to a sustainable balanced economy, the current depression will continue indefinitely.


Bureau of Economic Analysis National Income and Product Accounts Table 23 Oct2010.JPG

Bureau of Economic Analysis National Income and Product Accounts Table
Table 1.1.6A. Real Gross Domestic Product, Chained (1937) Dollars [Billions of chained (1937) dollars]


The Depression Within the Depression

The Great Depression lasted from 1929 until 1940. What is not well known is that GDP was at the same level in 1936 as it had been in 1929. In no small part because GDP soared by 37% between 1933 and 1936. The unemployment rate in 1929 was 5%. In 1936, even after GDP had recovered to pre-depression levels, the unemployment rate was still 15%. It spiked back to 18% in 1938 and stayed above 15% until World War II. Tellingly, in 1936, private domestic investment was 21% below the level of 1929.
 
By contrast, government expenditures surged by 46% between 1929 and 1936. With the government creating agencies and hiring people into make-work projects, private industry was crowded out. The extensive governmental economic planning and intervention that began during the Hoover administration was expanded significantly under Roosevelt. The bolstering of wage rates and prices, expansion of credit, propping up of weak firms, and increased government spending on public works prolonged the Great Depression.


two casey 23 Oct 2010.JPG


The evidence strongly contradicts the notion promoted by Krugman and other Keynesian worshippers that the supposed 1937-38 Depression within the Great Depression was caused by Roosevelt becoming a believer in austerity. In fact, GDP only dropped by 3.5% in 1938 and rebounded by 8.1% in 1939. What actually collapsed in 1938 was private investment, which fell 34%. By contrast, government spending declined by only 4.5% in 1938, confirming that Roosevelt did not slash spending. To the extent that he eased up on the accelerator, it was by cutting back on jobs programs like those provided by the Works Progress Administration and the Public Works Administration.
 
The reason private investment collapsed in 1938 was Roosevelt’s anti-business crusade. He denounced big business as the cause of the depression. In March 1938, FDR appointed Yale University law professor Thurman Arnold to head the antitrust division of the Justice Department. Arnold soon hired some 300 lawyers to file antitrust lawsuits against businesses. Arnold launched cases against entire industries, with lawsuits against the milk, oil, tobacco, shoe machinery, tires, fertilizer, railroad, pharmaceuticals, school supplies, billboards, fire insurance, liquor, typewriter, and movie industries.
 
The Greater Depression and Excessive Debt
see the above chart



Some Conclusions

The mainstream media’s popular narrative about the causes and cure for the Great Depression invariably start with the storyline that the stock market crash caused the Great Depression. Herbert Hoover purportedly refused to spend government money in an effort to reinvigorate the economy. Franklin Delano Roosevelt’s New Deal government spending programs allegedly saved America.
 
This storyline is a big lie.
 
The Great Depression was caused by Federal Reserve expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. When the Federal Reserve belatedly tightened in 1928, it was too late to avoid financial collapse. According to Murray Rothbard, in his book America’s Great Depression, the artificial interference in the economy was a disaster prior to the depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. Government intervention delayed the market’s adjustment and made the road to complete recovery more difficult.
 
The parallels with today are uncanny. Alan Greenspan expanded the money supply after the dot-com bust, dropped interest rates to 1%, encouraged a credit-driven boom, and created a gigantic housing bubble. By the time the Fed realized they had created a bubble, it was too late. The government response to the 2008 financial collapse has been to expand the money supply, reduce interest rates to 0%, borrow and spend $850 billion on useless make-work pork projects, encourage spending by consumers on cars and appliances, and artificially prop up housing through tax credits and anti-foreclosure programs. The National Debt has been driven higher by $2.7 trillion in the last 18 months.
 
The government has sustained insolvent Wall Street banks with $700 billion of taxpayer funds and continues to waste taxpayer money on dreadfully run companies like Fannie Mae, Freddie Mac, General Motors, and Chrysler. The government is prolonging the agony by not allowing the real economy to bottom and begin a sound recovery based on savings, investment, and sustainable fiscal policies. President Obama continues to scorn business by creating more burdensome healthcare, financial, and energy regulations.
 
Today’s politicians and monetary authorities have learned the wrong lessons from the Great Depression. The result will be a second, Greater Depression and more pain for the middle class. The investment implications of government stimulus programs are further debasement of the currency and ultimately inflation and surging interest rates. Owning precious metals and mining stocks, and shorting U.S. Treasuries will pay off over the next few years. 
 
Regular Casey Report contributor James Quinn is the head of strategic planning for one of the world's most prestigious business schools and the host of TheBurningPlatform.com blog.
----
Gleaning emerging big-picture trends by putting all the puzzle pieces together is the specialty of The Casey Report. Following the theory that only a prepared and well-educated investor is a successful investor, the team of editors analyze current and historical data – and then recommend the profit opportunities that make the trend your friend. Read more here.







Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

Our premium options trading service, SK OptionTrader, has opened and closed 12 trades in the last 6 weeks, banking an average profit of 70% on these trades.

This brings our total of closed trades to 38, with 35 winners. This means that a subscriber who had invested $1000 in each of our 38 trades would have banked profits of $15636.

With a 6 month subscription costing just $199, and the average return on a trade being 41.15%, one would only need to have invested $1000 in just one average trade to have paid for the cost of subscription more than twice times over!


SK Chart 23 Oct 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



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Thursday
Oct212010

Frank Curzio: Size Matters

Source: Brian Sylvester of The Energy Report 10/21/10
http://www.theenergyreport.com/pub/na/7664

Frank Curzio 22 October 2010.JPG

Frank Curzio may focus on small-cap companies, but the Penny Stock Specialist editor understands the importance of a big-picture view when it comes to investments of any size. In this exclusive interview with The Energy Report, Frank presents some promising oil, natural gas and coal stocks with caveat emptor—"volatile markets demand extra attention."

The Energy Report: Frank, as editor of Penny Stock Specialist, you cover a number of stocks trading under $10. But you recently wrote a report on Exxon Mobil Corp. (NYSE:XOM) and its competitors for Growth Stock Wire. So, tell us what you specialize in.

Frank Curzio: I specialize in small-cap stocks, but it's very important to look at the big picture—the macro view—to get a good read on smaller companies. For example, most analysts are now lowering estimates on Exxon due to lower natural gas prices following its recent acquisition of XTO Energy Inc. (NYSE:XTO). We have an enormous amount of natural gas in the U.S.—enough to supply consumers for more than 100 years. And producers continue to drill. Just knowing that information through looking at some larger-cap companies makes me a little nervous recommending smaller-cap natural gas companies. As for Exxon, it's trading over 10 times next year's earnings—a little more than 2% yield. I'd rather buy Chevron Corporation (NYSE:CVX) or ConocoPhillips (NYSE:COP). They trade at a lower multiple, pay a higher yield and, actually, are growing faster than Exxon.

TER: Speaking of Chevron, its margins are pretty substantial with oil around $80/barrel. It's going to use some money to buy back shares starting in the fourth quarter. Chevron's one of a number of companies that has announced stock-repurchase programs in recent months. Do these buyback programs form an investment thesis among oil companies?

FC: Not for all oil companies. Exxon buys stock back every single quarter. In fact, it bought back $8 billion worth when the stock traded at $95, which was its all-time high in 2008. Some companies announce buybacks and don't follow through on them. Companies also use those buybacks to enhance earnings. For example, Exxon's buybacks last quarter was one reason the company beat analysts' estimates. Chevron is announcing a new buyback. So, I think that's a good thing. I think management has this one right and I think Chevron's cheap. Hopefully, management will buy some of that stock down at these levels.

However, I'd rather see oil companies use cash to raise their dividends, especially if I'm a shareholder because that's what The Street is craving. That's why Microsoft jumped on rumors about its special dividend. The market's really craving yields right now. Instead of buybacks, which can be announced and take place anytime over a two-year span—and sometimes just expire—I'd rather see companies increase the dividend. That has an immediate impact on the stock. As a shareholder, you'll probably see a lot of those energy companies go higher if they raise dividends.

TER: Are there some names out there that recently upped their dividends that you believe are better buys as a result?

FC: They're not necessarily better buys. I think the valuations will stay the same but interest rates are very low right now. It's very difficult to find yield. For retiring people, it's one of the most difficult environments ever. I'm more of a younger guy, so it doesn't really hurt me as much. So, from a stock point of view, it's not necessarily that the fundamentals are going to be that much better; but I think the multiples will go higher. And they'll deserve that higher multiple because there's a lot of cash—particularly in the bond market right now that wants to come into the stock market.

You're going to see dividend yields rise and money will flow into some of these stocks. Again, Microsoft is a good example. A lot of the staples continue to raise their dividends even though their margins aren't as high. You see them raise those dividends, and money is flowing into these stocks. So, from a valuation standpoint, it's not so much that investors are saying: "Hey, I want to invest in that." But you're going to see the stock move higher because people are just craving yields and they're willing to pay up for those yields.

TER: Are there some oil and gas (O&G) names that have started a dividend or upped dividends?

FC: Other than Chevron, we've seen a lot of large-cap oil companies buy back stock for a while now. But you're going to see that from a lot of the large caps. The mid caps are really focused on growth, so they're putting their money into more exploration. So, from a large-cap perspective, it's Chevron, Conoco and Exxon; but again, Exxon's been doing this for a while. And I really wouldn't use that as an indicator to buy Exxon.

TER: Oil's down to $80/barrel today, and $80 oil isn't overly flashy. It is, however, providing healthy margins for low-cost producers and relatively good margins even for mid- to high-cost producers. What sort of general oil investing advice are you giving your readers right now?

FC: Oil provided healthy margins at more than $80/barrel; we'll see if it can resume—and maintain—those levels after China's interest-rate hike yesterday. Again, it's a question of how long we can stay there. Fundamentally, we're seeing drawdowns in inventory based on the latest data. That's a positive. And strong manufacturing data from the U.S. and China—the two biggest oil-consuming nations—is another positive.

High oil prices don't matter if the dollar rises. The USD has been collapsing from quantitative easing 2 (QE2). I think the government's going to come in with more, which is why we were seeing a real surge in commodities. But the USD gained on China's rate move, so we're now seeing an oil price pullback off prior eight-week highs. Investors should definitely pay attention to the dollar.

TER: So, you're saying a high dollar means higher costs.

FC: No, not higher costs. A higher dollar is not good for commodities in terms of price movement. When the dollar rebounds, you see commodities come down, as we've just seen with China's rate hike. Prior to that, commodities were on fire with gold reaching new all-time highs repeatedly over the course of a few weeks, silver hitting a 30-year high and copper really surging. You saw that push oil higher, too. It had really moved up over the last several weeks before China upped interest rates, which drove oil prices down 2% yesterday. So, again, I'd definitely pay attention to the dollar.

TER: Can you give us a few exploration and production (E&P) names you're following in Penny Stock Specialist currently?

FC: Sure. One company, Magellan Petroleum Corp. (NYSE:MPET), is a small oil and gas play with a market cap of about $100 million (M), $33M and no debt. It's nice to see a micro-cap O&G company that has very little debt and a lot of cash.

Bill Hastings is the CEO. He took the job in 2008 and, since then, the stock's been on fire. Bill is a 30-year veteran of the industry who's led oil teams of more than 1,000 people. He can work anywhere he wants and make a ton of money. But he decided to become CEO of this tiny oil company. When I met him at a meeting, I asked him why, because I'm familiar with this company. My late dad followed the company for about 20 years as a portfolio manager. His name was also Frank Curzio. He was on CNBC and quoted often in major financial newspapers. When I asked Bill why he took the company over, he said his dream was to start an oil company from the bottom and build it up into a mid-cap company. It's something I love to hear, because he wasn't just there for the money—he was there for the long term.

As soon as Bill became CEO, he decided to sell non-core assets and put his cash to work buying properties in Montana and the Bakken Shale. Magellan also signed an agreement with the largest methanol producer in the world—Methanex Corp. (NASDAQ:MEOH; TSX:MX; SSE:METHANEX)—to operate an Australian plant to supply China with methanol. So, it's a long-term plan that won't materialize for another two to four years. But I really like the direction in which the company is going. From a fundamental point of view, I believe Magellan is worth more than $4 based on its assets, cash on hand and gas sold to its customers. I would buy it under $2/share; today it's trading around $1.98.

TER: In your newsletter, you likened Bill Hastings taking this position to that of the Yankees' starting shortstop going into the minors.

FC: Yes. Though I've been familiar with Magellan for a long time, it really had been off my radar up until the point I saw Bill come to the company. So, I did a little research and discovered the guy had been in the business for 30 years. When you're in the oil business for 30 years, you can work behind a desk for any oil major you want and make a high, six-figure salary. This guy is getting his hands dirty again going with this small cap. He's a humble guy, a good CEO and he reports news whether it's good or bad. I love that. We have clarity on the company, something we didn't have in the past.

TER: What's the catalyst for growth?

FC: I base its catalyst for growth on the simple fact that it's the Bakken Shale—one of the large shale areas. A lot of the large caps are getting in. Longer term, Magellan plans on selling to China, which is a huge market for methanol. And the plant's Australian location provides a direct route to China, which is great.

TER: What other E&Ps do you like?

FC: Another company, SandRidge Energy, Inc. (NYSE:SD), which has been all over the place, just announced a takeover that pushed the stock down a lot; but the stock's come roaring back. I believe it was trading at $35/share not long ago, and it went all the way down to $4. Now, it's about up to $6. It's a great play due to its Arena Resources Inc. (NYSE:ARD) takeover, which will provide two revenue streams from natural gas and oil. And its high debt position won't be a concern going forward. I like the company and think it can turn around. SandRidge reminds me of Ashland Inc. (NYSE:ASH), a chemical company that really got beat up in late 2008. It went from $50/share to $7, and then $6 after announcing a major acquisition. We were able to pick it up when it went all the way down to $5. It was risky at the time but had no short-term debt concerns. Once the synergies of this deal are realized, the stock is going to take off. Today it's $50.

TER: Something you do that many analysts are hesitant about is cover companies that operate in China, some of which list in the U.S. but are primarily China-based. How do you determine which of these companies to write about?

FC: I just came back from a 10-day trip to China in August where I visited all the usual places—Hong Kong, Shanghai and Beijing; but I wanted to get a better picture of China, so I visited Shenzhen and Xian. I can tell you firsthand that the growth there is absolutely phenomenal. Wages are rising and jobs aren't leaving China—they're moving inland. That's creating a rising middle class and a huge wave of construction wherein builders work around the clock. So, I think you should have exposure to that economy.

In terms of finding stocks there, you really have to be careful in the small-cap space. China is a conservative nation that's not nearly as leveraged as the U.S. So you're going to see strong balance sheets for most of these companies. But I want to see strong growth on both the top and bottom line. Where possible, I want to see the insider buying that reduces downside risk (if key insiders are buying at current levels). I also look for experienced management—that's where I start. China is a much different economy; it's kind of like the U.S. in the '40s and '50s.

TER: But are you looking for a certain multiple threshold? Are you looking for cash flow?

FC: Well, you're going to see strong cash flow and fundamentals. Many Chinese companies have these qualities. But I think you have to look a little deeper to ascertain where else the company has exposure. You have to look at what's driving its growth (e.g., stock price moves over the prior 12 months) to see where it went down. You're not going to see charts that go straight up over those 12 months. Small caps, particularly, are all over the place. If you see the stock rise or fall 20%, find out why. Is it because of earnings? If it is, you can go back to the earnings conference call on the company's website to identify what investors want to see in the company.

With Chinese companies, you really have to go that extra mile. You can access free conference call transcripts on Reuters and other sites. But you really have to do a little bit more digging; the fundamentals are positive, so you need to make sure they're as accurate as possible. Hopefully, you can find a company that is audited by one of the Big 4 firms. Some are; some aren't. Those are the steps I take to determine if a company's share price can go a lot higher.

TER: What about oil versus gas in China? Natural gas prices are certainly higher there. But there's not enough to go around, so it's importing liquefied natural gas (LNG). Is that a game changer for Chinese and American O&G plays?

FC: It does change the game a little bit. I would go into the natural gas sector in China quicker than I would here in the U.S. because we have a ton of supply. But I really look at fundamentals.

TER: What are some Chinese companies that you like?

FC: One company I really like is called Puda Coal Inc. (AMEX:PUDA). China uses massive amounts of coal; in fact, coal provides more than 70% of China's energy needs. I'm sure many of your readers know that about China, but what they don't know is that China sees more mining deaths than any other place in the world. Most of these deaths come from small mines operated by underground millionaires who don't bother with safety inspections.

The government is cracking down on these small coal mines by forcing sales of their mines to larger players. The government calls these companies "consolidators," of which Puda Coal is one. It's able to buy these mines at $0.30 on the dollar. Earnings from these mines won't hit Puda's bottom line for another six to nine months. In the meantime, Puda's normal coal-washing operations are on fire. The company beat its last-quarter earnings by about 50%. And, over the last 12 months, Puda was able to generate $260M in sales from its coal-washing business alone. Going forward, half of its revenues will come from coal mining—which provides much, much higher profit margins. Puda Coal is an incredible, under-the-radar play; and I think its earnings will more than double once mining operations are up and running next year.

TER: That's fantastic. What about some other Chinese plays?

FC: One company I like is Fuel Tech, Inc. (NASDAQ:FTEK), which makes fuel technology to reduce emissions in its coal-fired plants. The company has small operations in China that are expanding rapidly. Its earnings last quarter were very strong; Fuel Tech is a great company, and it's been doing quite well lately.

TER: Do you have some parting thoughts on the oil and gas sector in general?

FC: I mentioned a lot of companies today. Investors just need to be patient with entry points. When the S&P 500 goes down 6% in August and up 8%–9% in September, you're going to see massive fluctuations no matter what a stock's fundamentals look like. So, if you're going to buy a lot of these stocks, definitely use stop losses and be patient on your entries. You might not see wide fluctuations in the large-cap space, but small caps could see 15%–20% price movements over the next 12 to 18 months. Be patient, and scale into these positions.

Frank Curzio is the editor of Penny Stock Specialist—an investment advisory that focuses on stocks trading under $10—and its exclusive Phase 1 Investor advisory. With more than 15 years of investing experience, Frank is the latest addition to the Stansberry and Associates team.

Before joining Stansberry, Frank wrote a newsletter on under-$10 stocks for The Street. He's also been a guest on various programs, including Fox Business News and CNBC's The Kudlow Report and The Call and is a featured guest on CNN Radio. He's also been quoted in financial publications—both online and off—and has enjoyed numerous mentions on Jim Cramer's Mad Money. Frank's "S&A Investor Radio" is one of the most widely followed financial broadcasts in the country, and his investment strategies—value, growth, top-down and technical analysis—have regularly produced 200%–500% winners for his subscribers over the past 15 years.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Frank Curzio: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

Our premium options trading service, OptionTrader, closed 5 trades last week, banking profits of 100.00%, 101.34%, 101.49%, 85.05% and 81.43%

SK Chart 17 October 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link. We will update the chart this weekend as further profits have been banked.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.


Tuesday
Oct192010

Mickey Fulp: Hard Rock Geologist

Source: Karen Roche of The Energy Report  10/19/2010
http://www.theenergyreport.com/cs/user/print/na/7644

Mickey Fulp.JPG

Some analysts talk the talk, but Mercenary Geologist Mickey Fulp walks the walk and kicks the rocks to find undervalued mining stocks. In this exclusive interview with The Energy Report, Mickey forecasts a continuing uptrend in the uranium price and weeds out the true rare earth contenders in a market full of pretenders.

The Energy Report: The media is abuzz about energy, but it seems none of the individual energy sectors is really breaking out. What's your take on the energy sector as a whole?

Mickey Fulp: Well, here's what I know—oil is currently undervalued with respect to gold. Historically, you could buy 12 barrels of oil for 1 ounce of gold. Right now, that ratio is above 16.

I think gold is being driven solely by speculation, and I expect a pullback. Gas is severely depressed with respect to oil. Historically speaking, the oil:gas price ratio should be around 6:1. Right now, it's about 23:1. You can argue that not only should oil's price be higher, but gas is also way out of whack due to the oversupply in the U.S. The so-called "green" energies that include wind, solar, geothermal and hydro have somewhat limited applications. And wind and solar will require government subsidies and tax incentives to make them economic and drive growth.

TER: Oil relative to gold is low and gas relative to oil is low. Gas I can understand due to the current U.S. oversupply. What's going to kick oil up to historic ratios? Or are you expecting gold to pull back to create the historic ratios?

MF: However, oil is not in short supply right now. The price for West Texas crude is $82 a barrel, which is as high as it's been in awhile. At an investment conference in June, we were asked to predict oil prices through the end of the year. I said $70–$90. So far, I'm good on that prediction.

TER: Clearly, you are a fan of uranium. Since last year, you've been saying that uranium is the only sector wherein you feel the entire sector is undervalued—not just a few companies within the sector. Why does it remain undervalued?

MF: The sector remains undervalued because it is driven by the spot price of uranium. Although the spot price amounts to only 15%–20% of demand in any given year, the market pays attention—rightly or wrongly—to the spot price. Until the spot price increases, the sector will continue to be undervalued.

Not every company is undervalued within that sector. I can give you a couple of names that are wildly overvalued. But I see upside in the sector as a whole, which I've been saying since January 2009. We've started to see some movement in the spot price over the last two or three months. Plus, there's increased awareness, especially by the 800-pound gorilla on the block—the American retail investor. As awareness increases, we would expect market valuations to increase. Again, that's very dependent on the spot price.

TER: What's going to drive the spot price up?

MF: Buying at higher prices. Spot prices are negotiated with buyers and sellers sitting across the table (e.g., "I've got some uranium to sell; how much are you going to pay me for it?"). I think there's a growing consensus among uranium analysts that the supply fundamentals are skewed. We do not produce enough uranium to supply all of the nuclear reactors currently under construction. We expect that the supply/demand fundamentals will lead toward a higher price.

TER: That argument has been around for a few years. At some point in time, it's going to come true. Do you have any additional insights as to when supply will become an issue and, thus, drive stock prices up?

MF: I thought it was going to come true in 2009, but it didn't happen. In 2013, the Russians are going to cut off the supply of high-enriched uranium to be converted to low-enriched uranium. Currently, that supplies a big portion of the market. And there are still government stockpiles; the U.S. Department of Energy (DOE) is still sitting on slightly less than one year of total global demand of low-enriched uranium suitable for reactors. That overhangs the market. Kazakhstan set record production figures last year, and we expect continuing high production from Kazakhstan, but that's certainly not a place where most people would choose to invest.

It's a very complicated equation. You have geopolitics heavily involved in the uranium sector. Chinese national nuclear corporations are attempting to build a reactor in Pakistan right now, and the U.S. is not very happy about that because Pakistan has never signed the nuclear non-proliferation treaty.

Predicting when it's going to turn around is very difficult; predicting that it will turn around isn't so difficult because we see increased demand on a yearly basis. Where is that supply going to come from? Currently, mine supply satisfies about two-thirds of demand every year. That's going to become more skewed when the Russians quit selling high-enriched uranium in 2013.

TER: In your Mercenary Musings newsletter, you wrote up Strathmore Minerals Corp. (TSX.V:STM; OTC.PK SHEETS:STHJF) recently. Can you give our readers a summary of your observations on the company?

MF: Strathmore has been my favorite uranium company ever since I got involved with the sector. It is without a doubt the most undervalued uranium company in the junior development sector. Strathmore is proceeding nicely with its feasibility study at Roca Honda in the Grants Mineral Belt. That's a joint venture (JV) with Sumitomo Metal Mining Co. Ltd. (STMNF:US), the giant Japanese resource conglomerate. I expect some positive news to come out soon on its second core asset in the Gas Hills of Wyoming. The company is aggressively pursuing spinouts of seven other non-core uranium development assets. It has sold two projects this year, one of which generated about $30 million in cash and royalties for Strathmore. I would expect some additional spinouts in the mid to near term.

TER: Is that $30 million being distributed to shareholders or put back into feasibility studies and further exploration?

MF: It will help the company fund its share of the feasibility study at Roca Honda and progress with development of the Gas Hills assets. Those two projects are arguably the most robust, undeveloped uranium projects in the U.S.

TER: Given that you love this whole sector, you must be following other uranium companies. What other names are you following in the space?

MF: Uranium Energy Corp. (NYSE.A:UEC). It recently cleared another environmental hurdle in south Texas and is still on schedule for initial uranium production in the fourth quarter. Uranium Resources Inc. (NAS: URRE) had a key win in a court case that clears the way for development of the Church Rock deposit near Gallup, New Mexico. Hathor Exploration Ltd. (TSX.V:HAT) continues to drill on its Roughrider deposit in the Athabasca Basin in Canada. Hathor is by far the most overvalued uranium company in the explorer space. That said, I am a long-term shareholder of Hathor. I'm not selling Hathor because the Roughrider deposit continues to grow more pounds in the ground.

On trend but 10 km. away from Hathor is a little penny stock called Forum Uranium Corp. (TSX.V:FDC). It will be drilling this winter on the ice. At some point, I think Forum has a good chance of making a discovery on its ground. The property is on the right structure intersections and has drilled the right style of alteration. At $0.08–$0.10 a share, it won't take much to get your dough out of that one on a double.

TER: Would you consider Forum one of your undervalued uranium juniors?

MF: That's pure speculation right now. It's an $0.08 stock, but the company has more than 100 million shares outstanding. It's a low market-cap stock that will double easily if the company hits a nice uranium intersection next winter. That's what I'm playing it for. I see little downside risk in the stock.

TER: You are also heavily involved in the rare earth element (REE) sector. What's your take on the sector at this point in time?

MF: It is the hottest commodity space around just like the Yukon is the hottest area play. Valuations have gone through the roof over the last couple of months. With a speculative play like this, it's necessary to separate the few contenders from the many pretenders early on. I think I've done that. The stocks have been on quite a run since early July, and the companies that I'm invested in average returns of about 300%. This entire sector is an overvalued speculation right now.

TER: Some might point to China's export restrictions, but that was last year. What's causing the sudden move in the sector this summer?

MF: China further restricted export quotas this summer. The country announced that it was going to crack down on the black market in south China, which is estimated to supply from 20%–33% of the market. This morning I heard an estimate that two-thirds of the supply of heavy rare earths (HREEs) is coming from the black market. China is trying to nationalize its heavy rare earth element sector and force the small and illegal miners to become parts of larger companies.

There is also increased awareness about the sector in the U.S. I think the U.S. retail investor is driving this market. A final catalyst—and perhaps the biggest—was Molycorp Inc.'s (NYSE:MCP) initial public offering (IPO) on the New York Stock Exchange at a little less than $14/share. It was not well received and went down to $12. During the past six weeks, however, the stock has reached a high of $30.

TER: For investors who aren't already in rare earths, is it too late to get into the game?

MF: I don't think they're too late, but they have to be very selective. Let me give you some examples. In early July, you could've bought Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), Quest Rare Minerals Ltd. (TSX.V:QRM) and Avalon Rare Metals Inc. (TSX:AVL; OTCQX:AVARF) on weakness for less than $2. Quest went to something like $5.50 before it pulled back to about $4.50, and Avalon went above $4. Rare Element has been the real star—that stock touched $9.90. Buying stocks on weakness in a bull market is a strategy that will work.

There is a lot of risk involved in buying these stocks; however, Avalon just raised $30 million for its feasibility study. Quest is in the middle of raising $50 million, which will take it through feasibility and provide working capital.

Rare Element Resources also is looking at a major equity financing in the near term, something in the range of Quest and Avalon. These companies have gone to the next level. Probably my favorite in the sector right now is Scandinavian explorer Tasman Metals Ltd. (TSX.V:TSM; Fkft:T61; OTCPK:TASXF). It was a $0.51 stock and has gone as high as $2. It's pulled back now to around $1.90; I think there's upside with Tasman Metals.

TER: You mentioned risk in buying these stocks. Yet all of them seem to be going up and with some type of financing. The sector is really hot so companies probably get the capital easily. Where does the risk come in?

MF: There's extreme risk in this sector because it is highly dependent on the economic health of the world. We saw that with the "flash crash" and the Greek crisis in late May–late June. These better rare earth element explorers took major hits to their market capitalization. If we don't have a robust world economy, these stocks will suffer.

TER: One of the arguments I've heard is that rare earth metals are becoming a strategic metal for governments and military uses, so there's some impetus for the U.S. to ensure it can produce its own rare earths. Are you discounting that argument?

MF: That's part of the equation in the U.S. for sure, but less so outside of our country because U.S. defense operations are so much larger than any other country in the world. What portion of HREE demand goes to the military? I have no idea.

Here's what I see—in the U.S., the United Steelworkers Union is asking the government to file a complaint with the World Trade Organization (WTO) about China's export restrictions and there are ongoing congressional hearings, as well as the House passage of a bill that sets up studies and committees to institute national policies. I don't really consider those legal beagle efforts to be material changes to what we do in the U.S with respect to securing REE supply.

Meanwhile, the Japanese are buying—or trying to buy—offtake contracts from future producers and tying up exploration plays in Canada through JVs and in Vietnam. Japan has been very proactive, whereas, in the U.S., it looks like we'll just sic the lawyers and politicians on it.

TER: In your newsletter, you wrote that REE mines "will not be built and operate under the usual economic models of profitability or rate of return. The financial reward in this market is the downstream supply chain." To me, it sounds like this sector will be relying on offtake agreements. Once you get those, there'll be some type of long-term fixed prices.

MF: I think that has yet to play out. The market will likely operate on long-term offtake contracts, but these contracts are likely to be graduated for worldwide increases in prices—and for higher operating costs. I don't think it's necessary for them to be long-term fixed prices; they could be floating prices. Security of supply is the key ingredient here. I see offtake contracts as one way to do it—also strategic alliances with consumers of the products and/or consolidation of players within the industry. One company has a deposit. Another needs supply of the separated, or even the concentrated, oxides. Then you have another one down the line that makes magnets. Finally you have end-users, such as hybrid carmakers, wind turbine generators, and the fluorescent light industry. There are endless possibilities in terms of how this could work out.

Only a few deposits in the world are likely to be developed, and that depends somewhat on who is the first to develop strategic alliances or sell future products. All of the juniors I mentioned have robust deposits—but these explorers will not become miners without help. They are generally run by geologists and are adding engineering staff, but these projects are much larger than any junior could possibly fund. That's going to mean demand for partners on both the financial end and downstream supply chain.

TER: The companies you mentioned earlier, Rare Element, Avalon and Quest, all seem to be raising money. Do you expect that money to come from a JV partner or the ultimate REE user like a carmaker from Japan?

MF: In the case of Avalon and Quest, the funds have been raised largely through North American-based financial institutions. I don't know where Rare Element's money is going to come from. All I've heard is that it will be raising major money in the near term. At this point, the various entities comprising demand for REE have not been in the public eye. Financial institutions are funding the feasibility studies and prefeasibility studies.

TER: I'm intrigued that the ultimate users are not coming up with the financing. When would you see the offtake contracts coming into play?

MF: I expect them to come into play soon. Companies need to get to the prefeasibility stage where financial analysis can be done and capital expenditures and costs of production lead to net present values and internal rates of return that actually have solid studies behind them. We should see this happen within the next year for Quest and Rare Element. Avalon has published a prefeasibility study, but it is marginally economic.

TER: In rare earths, there's an advantage to being the first to produce. There are more than enough REEs around the world to meet demand, and the first to produce will get most of the market share. Do you agree?

MF: There are probably more metals in deposits right now than there is demand. This entire sector is based on future demand outside of China. I very much think that China is tightening exports because it sees internal demand increasing, especially for select HREEs, and won't be able to supply the world as it has for the last 20 or so years. We need a secure supply in the West. That's what's driving the sector right now.

TER: I understand you recently met Gino Roger, CEO of Midland Exploration Inc. (TSX.V:MD) and are now getting up to speed on the Midland story.

MF: It's a very well-run company, a prospect generator in Quebec, with one rare element project of significance that's joint-ventured with Japan Oil, Gas and Metals National Corp. (JOGMEC). Their projects are very early, however.

TER: What else is the company doing?

MF: It also has gold and base metal plays. Its share price has touched about $2.

TER: Anything else you'd like to share with our readers in terms of either uranium or the rare earths?

MF: I'll give you another idea in the rare earth element space, Medallion Resources Ltd. (TSX.V:MDL). It has two projects in Northern Canada—a light rare earth element (LREE) project in Manitoba and an HREE project in Eastern Labrador. Its share price has tripled since the last financing. There is some risk but it's still a penny stock, so it might be something speculators want to take a look at.

TER: How far along are Medallion's projects?

MF: Very early stage. The project in Manitoba has a few drill holes. It is a JV with Rare Element Resources. Medallion CEO Bill Bird was the chief executive of Rare Element when that drilling was done around 2006. Its play in Eastern Labrador in the Red Wine complex is at the drill-targeting stage with geophysics, prospecting and sampling being done. And it has a low market capitalization right now, which the more advanced companies in this space do not have.

TER: Thanks so much for your time today, Mickey.

MF: The pleasure is always mine, Karen. As a final note, I would like to say that readers should realize that I am talking my own book here and it is incumbent on all investors to do their own research and due diligence before speculating in the junior resource sector.

Michael S. "Mickey" Fulp is author of The Mercenary Geologist newsletter. He is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has more than 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The GoldReport: Strathmore, Rare Element, Avalon, Midland and Medallion.
3) Mickey Fulp: I personally and/or my family own shares of the following companies mentioned in this interview: Strathmore, Hathor, Forum Uranium, Avalon, Quest, Tasman Metals and Medallion Resources. I personally and/or my family am paid by the following companies mentioned in this interview: Strathmore, Quest and Tasman are current sponsors of my website.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
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Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

Our premium options trading service, OptionTrader, closed 5 trades last week, banking profits of 100.00%, 101.34%, 101.49%, 85.05% and 81.43%

sk options chart

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

Monday
Oct182010

Laramide Resources Limited Doubles in 4 Months

LAM Chart 19 October 2010.JPG

A good day for Laramide Resources Limited (LAM) as it gains 11.63% to close at $1.92, which is more than double what the stock price was in July 2010. The technical indicators are high at the moment and suggest that this stock is now overbought. In particular the RSI has just passed through the '70' level so Laramide may well take a breather shortly.

Laramide has acquired known uranium assets with drilled out resources. Currently Laramide has approximately 62 million pounds of U3O8 (uranium oxide) located in NI 43-101 compliant resources in Australia and the U.S. One U.S. asset is in the permit comment period with a second US asset to be developed when title transfer is finalized.

The Company’s main focus is the advancement of its flagship asset, the Westmoreland Uranium Project in Queensland, Australia. In 2009, Mining Associates of Australia completed a technical report that showed Westmoreland has an indicated resource of 36.0 M lbs @ 0.089% U3O8 and an inferred resource of 15.9 M lbs @ 0.083% U3O8 which ranks it as one of the ten largest uranium deposits in Australia and only one of a handful not under the control of a major mining company.


There isn't much in the way of news that we can detect other than the acquisition of the La Sal property in San Juan County, Utah for purchase consideration of US$500,000. However, the property had been encumbered since 2005 preventing Laramide from developing the asset despite its advanced status as a previously permitted project with a 1,200 metre access drive constructed and with access to a commercial mill. The La Sal property contains a historic resource estimated by technical consultants engaged by the previous owner for purposes of mine planning, before the implementation of NI 43-101 requirements (see full disclaimer below*). The historical resource consisted of 440,000 tons grading 0.31% U3O8, for 2.7 million contained pounds U3O8. The resource was estimated using a minimum undiluted thickness of six feet at a cut-off grade of 0.16% U3O8.


Not a great deal to report today other that it is pleasing to see this stock head a little higher, for now.

Laramide Resources Limited trades on the Toronto Stock Exchange under the symbol of LAM and has a Market Capitalization of $129.69 million, a 52 week trading range of $0.71to $1.98.


Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

Our premium options trading service, OptionTrader, closed 5 trades last week, banking profits of 100.00%, 101.34%, 101.49%, 85.05% and 81.43%

SK Chart 17 October 2010.JPG

The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.
Monday
Oct182010

OptionTrader Closes 5 trades: Average Profit of 94% in 18 days

Our premium options trading service, OptionTrader, closed 5 trades this week, banking profits of 100.00%, 101.34%, 101.49%, 85.05% and 81.43%

This brings our total of closed trades to 35, with 33 winners. To demonstrate our performance, lets say a subscriber had invested $1000 in each of our 35 trades. That subscriber would have banked profits of $13742.90.

option-trader-acc-profits-5.png

Please not that these are closed trades, profits that we have taken and are in the bank, not paper gains in a portfolio that can vanish as quickly as they arrive.

In addition to this we have 3 open trades at present, showing gains of 144.55%, 140.38% and 68.75%.

We understand that what matters to investors and traders more than anything is the bottom line. Therefore our focus is on producing profitable results, and we feel we have achieved that. Our full trading record can be viewed here, which contains a complete record of all 35 of our closed trades.

Not just our best 35 trades, not a handpicked selection of 35 trades, but all 35 trades that OptionTrader has recommended and closed.

The five trades we closed this week are summarised below:


Bought GLD Jan-11 $131 CALLS @ $3.55 on 17/9/10
Sold for $7.10 on the 15/10/10
100% Profit in 29 days

Bought GLD Dec-10 $131 CALLS @ $2.98 on 28/9/10
Sold for $6.00 on 15/10/10
101.34% Profit in 17 days

Bought GLD Dec-10 $132 CALLS @ $2.68 on 28/9/10
Sold for $5.40 on the 15/10/10
101.49% Profit in 17 days

Bought GLD Dec-10 $135 CALLS @ $2.15 on 1/10/10
Sold at $4.00 on the 15/10/10
86.05% Profit in 14 days

Bought GLD Dec-10 $134 CALLS @ $2.37 on 1/10/10
Sold at $4.30 on the 15/10/10
81.43% Profit in 14 days

With a 6 month subscription costing just $99, and the average return on a trade being 39.26%, one would only need to have invested $1000 in just one average trade to have paid for the cost of subscription almost four times over!

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Friday
Oct152010

Casey Research Identifies Next Generation of Resource Leaders with Casey’s NexTen

Casey Research logo 15 October 2010.JPG

Stowe, VT, October 12, 2010 – Casey Research, a leader in providing in-depth, independent analysis of high-growth investment opportunities, announced today Casey’s NextTen, the next generation of leaders in the natural resource industry.

Successful investors, like Casey Research founder Doug Casey, have long recognized that there are no more important considerations when investing than the people. For years, Casey Research has helped its subscribers succeed by closely following the careers of the most successful explorers in the industry, those top few percent who consistently generate the majority of returns for shareholders.

And now, it is proud to present the next generation of industry leaders to keep a close eye on -- the top 10 up-and-coming resource stars 40 years and under who are already demonstrating a strong track record in innovation, exploration, and financing – Casey’s NexTen.

“There is no question that when following the right people, the resource sector can be an extremely lucrative place to invest,” said Marin Katusa, chief energy investment strategist, Casey Research. “Over his 40 years of investing, our founder Doug Casey noticed a pattern emerge that a mere 4 percent of the entrepreneurs in the resource sector came up with over 64 percent of the wins. That is why we concentrate our efforts on finding and investing with that 4 percent.”

Over the past five years, Casey’s team of analysts have met with company heads and geologists to get to know them in the office and in the field. Using Casey’s 8Ps investment methodology – People (the most important of all), Project, Politics, Paper, Promotion, Phinancing, Push, and Price – they were able to identify the next generation of professionals who will unlock some of the huge gains waiting in the resource sector.

The inaugural Casey NexTen include:
 
#1 – Kevin Bambrough: President, CEO and Director, Sprott Resource Corp (TSX:SCP); President, Sprott Inc. (TSX:SII); Director, Sprott Asset Management; President, CEO, and Director, Sprott Consulting.

#2 – Brian Dalton: President, CEO and Non-Independent Director, Altius Minerals (TSX:ALS).

#3 – Pat DiCapo: Managing Director, PowerOne Capital Markets; Director, Exempt Market Dealers Association; Director, Petrolifera Petroleum Limited (TSX:PDP); Chairman, Governance Committee, Petrolifera Petroleum Limited.

#4 – Amir Adnani: President, CEO and Director, Uranium Energy Corp (NYSE:UEC).

#5 – Dr. Nicole Adshead-Bell: Vice President Investment Banking, Haywood Securities; Director, Association for Mineral Exploration British Columbia. Kevin Campbell: Vice President Investment Banking, Haywood Securities.

#6 – Jorge A. Ganoza Durant: Geological Engineer, President, CEO, and Director, Fortuna Silver (TSX:FVI).

#7 – Morgan Poliquin: President and COO, Almaden Minerals Ltd (TSX:AMM, NYSE:AMM).

#8 – Govind Friedland: President and CEO, Govi High-Power Exploration (Private Company).

#9 – Nolan Watson: President, CEO and Director, Sandstorm Resources Ltd. (TSX-V:SSL);
Director, Gold Wheaton Gold Corp. (TSX:GLW).

#10 – Robert John “Lucky Shot” McLeod: Director, Underworld Resources Inc. (Recently acquired by Kinross); Director, Keegan Resources Inc. (TSX:KGN); Director and VP Exploration, Full Metal Minerals Ltd. (TSX-V:FMM); Director, Nuukfjord Gold (now Revolution Resources, TSX:RV).

Maximum resource exploration profits depend on investing at the early stages of a company’s growth. Investing in the right companies run by the right people is crucial. Casey’s two premier advisory services – Casey’s Energy Report and Casey’s International Speculator – will track the progress of the NexTen and report on any breaking news or deals-in-the-making they are involved in, providing a unique opportunity for investors to be close to the action and aware of the best opportunities in resource exploration investing today.

To get more details on Casey’s NexTen and Marin Katusa’s top stock picks from this group, go to www.caseyresearch.com/nexten/.

Back to our latest venture which was the launch of an Options trading service we are pleased to report that it is going very well so its a big thanks to all those who have signed up for it and the supportive emails that you have sent us.

SK Chart 11 October 2010.JPG


The above progress chart is being updated constantly. However, to see exactly how it is going, please click this link.


Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.



To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.






Thursday
Oct142010

Jerry Swank: The Man with the MLP Plan



Source: Brian Sylvester of The Energy Report  10/14/2010

Jerry Swank.JPG

Master Limited Partnerships (MLPs) are just about the most stable asset class in America, and the man with the MLP vehicles is Jerry Swank, founder and managing partner of Dallas-based Swank Capital. In this exclusive interview with The Energy Report, Jerry and Libby Toudouze, partner and portfolio manager, provide a comprehensive and insightful look at the MLP business and offer readers a bounty of MLP names.

The Energy Report: Jerry, tell us about your firm.

Jerry Swank: I've spent my life in the investment business. I spent 14 years on the sell side at First Boston, the predecessor to Credit Suisse. During my last 10 years there, I was a director and ran the fixed-income business as a portfolio manager. Then I ran a private oil and gas (O&G) research and consulting firm called John S. Herold, Inc. I think the fact I know the energy business and the fixed income business lead me to MLPs.

When I decided to start this business in 2002, my goal was to build a Wall Street-quality research department on the buy side. We were one of the first to bring institutional-quality research to this very inefficient sector. We've grown primarily in the hedge fund business. But we've also broadened our mandate to include an MLP closed-end fund. And we have an ETN based on our Cushing 30 MLP Index. We have over $1 billion under management and are affiliated with Riverstone Holdings, the largest private equity firm in the space.

TER: Did you see quality analysis as a means to become more widely accepted as an asset class?

JS: Certainly. MLPs were a retail product. When we started, there were several MLPs that had never had serious investment analysis. The local UBS broker would just take a look at the various MLPs and buy the ones with the highest yield.

We now have models on every MLP company. We know every management team. We know the assets as well as you can from this side. That's given us a leg up.

TER: Enterprise Products Partners, L.P. (NYSE:EPD), one of the largest MLPs by market cap, recently made an offer for its general partner, Enterprise GP Holdings, L.P. (NYSE:EPE). It's become something of a trend for the parent MLP to takeover its general partner (GP). What do you think of that trend?

JS: I hate it because we own a lot of GPs and it's taking a lot of very good companies from us. I owned general partners in '02, '03 and '04—when there wasn't even a research report on them. We actually have a dedicated general partner hedge fund, Cushing GP Strategies Fund. I've had all these GPs that were stable businesses, growing their distributions at 15%–20%, which is a very attractive proposition. Hopefully, we will see some new GPs come to market.

TER: Why is it happening?

JS: The general partners own an increasing part of the cash flows of the underlying MLPs. As MLPs' distributions rise, the GPs' distributions increase at a rate anywhere from 2x–4x as fast. Because they take an increasing part of the cash flow, it has increased the cost of capital for the underlying master limited partnership. As a result, it's more difficult to do transactions, acquisitions and organic growth projects.

It happened with Magellan Midstream Partners, L.P. (NYSE:MMP). It's happening with Buckeye Partners, L.P. (NYSE:BPL) and its Buckeye GP Holdings (NYSE:BGH) and Inergy Holdings, L.P. (NYSE:NRGP). Since then, we've also had two more GP buyouts in the coal space.

It's not only the cost of capital, but there are some tax issues in the Kerry-Lieberman Energy Bill that specifically relate to individual holders of the GPs. The owners could face some tax consequences. On top of this cost-of-capital issue, I think this potential tax hit is causing this trend.

TER: But isn't it also the fundamental structure of MLPs that is causing these takeovers?

JS: Yes, that's true. In 2003, when Enterprise bought GulfTerra, it reduced the top split from 50% to 25%. I agree with the math. But it's really only when you get to the 50% splits for a long period that it's a serious problem.

On the other hand, you have Kinder Morgan Energy Partners, L.P. (NYSE:KMP), which is the second largest MLP by market cap. It took its GP private three years ago, and rumor has it the company's going to bring it public again. Rich Kinder, who really is the guy who founded the MLP business when he left Enron, steadfastly believes that he can properly grow his business in the top splits. And you can't argue because he's done a great job.

Targa Resources Partners, L.P. (NYSE:NGLS) also wants to bring its GP public. And maybe Plains All American Pipeline, L.P. (NYSE:PAA), too.

TER: You named maybe six MLPs that have bought their GPs. Should investors be buying more GPs belonging to the large MLPs?

JS: I think the trend will soon be over because of the timeframe on this tax issue. But, yes, I would take this money—and we always have—and invest it in the remaining GPs. Those are names like Energy Transfer Equity, L.P. (NYSE:ETE), Alliance Holdings GP L.P. (NASDAQ:AHGP), NuStar Energy, L.P. (NYSE:NS) and Penn Virginia Holdings L.P. (NYSE:PVG). I would invest it in those because the fundamentals of the GPs are so strong compared to the underlying MLPs.

TER: Do you own Energy Transfer Partners, L.P.'s (NYSE:ETP), GP, Energy Transfer Equity?

JS: Yes, we own Energy Transfer Partners, L.P.'s general partner, and we've been buying more. ETP has had seven or eight quarters of fairly flat earnings. It is in the natural-gas transportation business and controls most of the pipelines out of the Barnett Shale—the largest natural gas field in the United States. And ETP has great exposure to the Haynesville, which will be the biggest one. It's had rapid, rapid growth out of the Barnett for several years.

Unfortunately, because gas prices are so low, there's no differential from gas prices in west Texas and New York. You would think that gas prices in New York would be higher than they are in the middle of the west Texas desert, but the curve's been very flat. That's hurt them because they ship a lot of gas from west to east and that spread has been flat for the last year. But they've been investing billions in new pipelines, and they just had some pipelines like Tiger Pipeline coming onstream. We think you ought to be buying here because it's a getting ready to go back to a grower. We play it primarily through the GP. Although we do own some of the MLP, we own the GP because the dividend will start growing fast and it's just crazy cheap in our judgment.

TER: Which GPs are paying distributions?

JS: The remaining GPs that are paying distributions are Energy Transfer Equity and NuStar, Penn Virginia, Inergy and Alliance. The two that aren't paying dividends at this time are Crosstex Energy, L.P. Ltd. (NASDAQ:XTEX) and Atlas Pipeline Partners L.P. (NYSE:APL). They aren't paying distributions yet, but they will fairly soon. Then we have a few diversified companies that have the GPs inside of them. Those names include Atlas Energy, Inc. (NASDAQ:ATLS), El Paso Corporation (NYSE:EP), ONEOK Partners, L.P. (NYSE:OKS) and Williams Companies (NYSE:WMB), which is a very interesting play. We've always been overweighted in general partners. We've always understood the math and they've always been a great investment for us.

TER: How long should people hold the GPs?

JS: For the long term. These things have yields in the 5% range. The underlying distributions are growing at double-digit rates. And the underlying businesses are very stable. Where else would you see double-digit growth rates with absolute yields of 5% or 6%? These are the same assets, same management as the underlying MLPs; it's just a different financial structure.

TER: You own a lot of GPs, but 5% of your publicly traded portfolio is MLP bonds. If you're holding an MLP's bond, which are earning interest, and the same MLP's units, which are often paying high yields, aren't you getting paid twice? And is that the strategy behind holding them?

JS: You're one of the few guys that hit the nail on the head. MLPs pay distributions four times a year; so, in theory, you only have to own them four days a year. The rest of the time, they don't make any income. During that period, we take some of our holdings and put them in MLP bonds where we're getting +7% yields. We can earn interest on those 89 days of the month when you don't get it. So, yes that's one reason we do that. I wouldn't say it's getting paid twice, but we're using our money pretty efficiently.

TER: What are some names that you're into on both of those levels?

JS: It depends on who's in the market. We used to own the bonds of Energy Transfer, ETP. We now own the bonds of general partner ETE and Regency Energy Partners, L.P. (NASDAQ:RGNC). We've owned Plains All American and Enterprise, and recently bought some Targa bonds. It just depends on who in the market has the more attractive deal. There's not much spread left in the really strong investment-grade names like Kinder, Plains, Energy and Enterprise.

TER: MLPs are a cash-intensive business. They're paying out all of their distributions so companies need to constantly raise money in order to expand and buy other assets. In the tech sector, we've recently seen IBM and Microsoft raise literally billions with 3-year bonds. IBM's were at 1% and Microsoft's were at 0.875% per year. Do MLPs have similar access to cash right now?

JS: Yes, MLPs are voracious users of capital. That's really the only weak link in MLP story.

MLPs don't get as favorable rates because IBM and Microsoft are double A and triple A rated issuers. Because MLP balance sheets are 50% debt and 50% equity, at best they receive triple B investment grade ratings. So, instead of borrowing at 1%, we're talking about 3.5% or 4.25%.

While the spread is higher, their access to capital, debt and equity is very good right now. With these low rates, virtually all of the MLPs are funding out their bank debt with term debt.

Also with these very low levels of interest rates, returns on capital are going to be fairly high because the spreads they're making between the return on projects and the cost of debt are very wide.

TER: Are there a couple of names with some of those high-return projects that you could share with us?

JS: Yes, on aggregate, billions are being invested in the shale gas plays. We have built out most of the Barnett and the Haynesville pipeline systems. But everybody and their brother is trying to get involved in the Marcellus. MarkWest Energy Partners, L.P. (NYSE.A:MWE) probably has the best exposure.

Several companies are trying to do pipeline take-away capacity drop in the Marcellus: El Paso Pipeline Partners, L.P. (NYSE:EPB) and Spectra Energy Partners, L.P. (NYSE:SEP). These MLPs and their parent companies have been very involved in those projects. And ONEOK just announced a big project to get natural gas liquids (NGLs) out of the Bakken, which is a big oil play in Montana. But most of the large MLPs have $200–$300 million in organic projects, like small add-on pipelines or storage facilities they can do every year at attractive rates of return.

Magellan Midstream just bought a big package of assets from BP Plc (NYSE:BP; LSE:BP) in the Cushing area to add to storage. Plains All American keeps adding storage facilities, too. There's a lot of capital being spent at very good margins right now.

TER: If you include natural gas storage, 35% of your public portfolio is directly in the natural gas business. With natural gas prices obscenely low, why do you have more natural gas–related MLPs than anything else?

JS: A couple of things. We're out of the gas storage business right now because of some weak fundamentals and the shape of the gas curve.

Our MLPs have to build out the pipeline infrastructure in the shale plays. Primarily these pipelines are toll roads, especially the long-haul gas lines that get the natural gas from Texas/Louisiana to the East Coast and the Midwest. It really hasn't mattered if gas is at $4 or $10, El Paso, for example, is getting paid to move the product under long term fixed contracts.

Most of the pipelines that have been built in the last couple of years by Energy Transfer, Boardwalk Pipeline Partners, L.P. (NYSE:BWP) and Regency; almost all of these are fully committed by the oil and gas exploration and production (E&P) Companies.

It's kind of a Catch-22. On the E&P company side, these guys have continued to drill and find gas and push the price down. That's bad for their stocks. But for the guys transporting it, our toll road guys, it's good because they've had more volumes.

In the transmission business, we have El Paso, Boardwalk. These are the big guys. Enterprise Products Partners is big in the natural gas liquids. Other names include Kinder Morgan, Oneok, Sempra Energy (NYSE:SRE) and Williams. These are all large-cap MLPs. The average market cap in this space is probably $10 billion. These are stable, high quality companies.

TER: Do any of those names have specific catalysts for growth in the near term?

JS: I would say all of those names have different projects coming on. As I said El Paso is doing things in the Marcellus. Oneok is doing things with natural gas liquids and building a new pipeline out of the Bakken. Those are a couple of examples of natural gas guys that are adding capacity and growing.

TER: There have been some unfortunate pipeline accidents of late. A couple of spills have involved pipelines owned by Enbridge Energy Partners, L.P. (NYSE:EEP/EEQ). Could this be a buying opportunity for EEP?

JS: Have you been listening in on my meetings? Well, yes, Enbridge is a great buy. It's controlled by a huge Canadian utility company with a huge market cap. It's a very good company. They had some issues with a couple of leaks but they've been fixed. They have insurance; they didn't blow up the business. We very much view this weakness in Enbridge as an interesting buying opportunity.

TER: You're not worried about lawsuits?

JS: I don't think that anything that's happened is a result of huge neglect. This has got a lot of publicity because of BP's Macondo accident.

I would submit that the pipelines managed by MLPs have higher maintenance standards and are in better shape than ones run by other companies because it's the MLPs' only business.

I think you'll get more federal regulations as it relates to maintenance and things like that. But we think that will have a minor impact going forward.

TER: Another thing EEP is doing is building a pipeline out of the Bakken.

JS: Yes, EEP is building a pipeline to connect to their big main line, Lakehead. The Bakken is one of the few growing oil fields in the United States. It's a shale play. Production is 120,000 barrels a day and it will probably be 400,000 barrels a day in two years, big play. There's not enough capacity to get the oil out so you've got several people building new pipelines.

Lakehead is a few hundred miles away. EEP is building a 200- or 300-mile pipeline that they can hook into both on the Canadian and U.S. side to get the oil down to Cushing and the Gulf Coast.

TER: You're a sponsor of the Cushing 30 Index. Could you tell us a little about the Cushing 30?

JS: I'll let Libby, the creator of the ETN, contrast that against the other indexes.

Libby Toudouze: We're the sponsor and creator of the Cushing 30 MLP Index. S&P calculates and maintains it.

We designed it because there really wasn't an index out there that truly represented the asset class. The few that were out there were market cap–weighted and that gives you too much company specific risk. Five companies probably make up as much as 50% of the market cap weighted From a fiduciary standpoint; that's not a prudent way to manage a portfolio so the market cap indices are not a good benchmark. The Cushing 30 MLP Index is well diversified due to the equal weighting methodology.

Much like our active portfolio management, we developed a fundamental proprietary ranking system and basically ranked the MLP universe. The top 30 names that made the index are a great representation of the true infrastructure companies and we believe the true benchmark for the asset class. It doesn't include upstream and it doesn't include the shipping MLPs because those are a little more commodity sensitive.

We think the index will help drive some institutional flows into the MLP space. Credit Suisse launched an ETN based on this index. RBC has done some private structured notes on this index. We have several managed accounts based on the index. We've got big institutional accounts that want to swap into the index so the Cushing 30 MLP Index is really helping the asset class grow.

We have also launched the Cushing MLP High Income Index. There will be an ETN based on that index sometime later in the fall. With that index we developed a methodology to select the highest yielding MLPs. Again, with a couple of fundamental screens and you can get a 150 basis point pickup from the Cushing 30 MLP Index.

We think those are two good options to represent the asset class, depending on your focus. And, hopefully, we'll bring more money to the space.

TER: Since its inception what sort of annualized returns has the Cushing 30 had?

LT: The Cushing 30 has had a compound annual return of about 20%. Just for perspective, the closest performance by another index was I believe 17%, which was a new index that was market cap weighted but with a cap. The rest of the MLP indicies are around 15%.

JS: It makes a very representative index for portfolio managers to use.

TER: What does it mean to be a sponsor?

LT: It means that we created it and we will license it to people. And our index department maintains it.

The Cushing 30 is designed to be a static index. That seems to be a very good attribute for an index. When a name drops out, rather than re-ranking the entire index, the 29 that are still in there remain unless there are a couple of features that would kick them out. The balance of the universe is re-ranked and the number-one name goes in. That happened this year in the 3Q as WMZ was bought and PVG replaced it.

TER: Could you comment on MLPs going from something that was primarily held by retail investors to an asset class that is increasingly being held by large institutions?

JS: I'm not sure that's completely true.

First, and I've said this since 2004, this is just like the Real Estate Income Trust (REIT) business was in the 1990s. We have an asset class that looks a lot like REITs. You have real assets, real cash flows and high yields. The difference is the underlying MLP business is actually a better business than the majority of the REIT businesses were.

Finally the asset class is getting big enough that institutional money can enter. But more importantly, what I think is happening is that we're getting institutions, but the structure of the retail holding has become institutionalized. Let me explain that.

In the past these assets were 60% to 70% owned by retail. It was in your brokerage account at UBS, at Goldman, at Citibank at Morgan Stanley, etc. Your broker owned 5 or 10 of these stocks. Now with the advent of some new structures, the closed-end fund structure, the ETN structure, the retail broker is getting professional management. He's getting one statement. He's getting consolidated tax returns. No K-1s.

So he's selling those six or seven stocks and buying these funds. They're still owned by retail investors, but it's in an institutional wrapper with institutional management.

And I would define institutions as pensions, endowments, state funds etc.

LT: I'd just add that the sector's $225 billion market cap is helping. As Jerry mentioned, the different structures have really opened the doors. But when you are a pension fund or an endowment in today's environment, you've always struggled with balancing growth and income. Here is an asset class that can give you both and at high levels. You mentioned the IBM and Microsoft bonds paying 1% or less. Where can they find high yields like this plus growth? I think the fact the asset class has grown to this size is driving the pensions, endowments and foundations to take a hard look at this asset class.

TER: Thank you for talking with us today.

Jerry V. Swank has 34 years of experience in investment management and research analysis. He is the former president and CEO of John S. Herold, a 50-year-old independent oil and gas research firm. Prior to that, Jerry was director of CS First Boston and a former buy-side analyst and portfolio manager. He earned his MBA from the University of North Texas and BA in economics from Missouri University.

Libby F. Toudouze, Partner and Portfolio Manager for Swank Capital's offshore MLP funds and the Swank Best Ideas Fund, L.P. has 24 years of experience in the investment management business. Prior to joining Swank Capital, she established and ran a family office, where she developed investment policies, created an asset allocation framework and analyzed investments in both private and public markets. Libby received her BBA from Southern Methodist University and an MBA from The Cox School of Business at Southern Methodist University.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Atlas, Enbridge and Energy Transfer Partners.
3) Jerry Swank: I personally and/or my family own shares of the following companies mentioned in this interview: Energy Transfer Equity, Energy Transfer Partners, MarkWest Energy, Atlas and Regency. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Libby Toudouze: From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.
From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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