Cheap Oil Like Jamestown Kool-Aid

“Americans are delusional,” began James Howard Kunstler, speaking to the investment conference we are attending here in Vancouver.

“They think they can continue living the way they’ve been living for the last 50 years. They think the key to it is to find a way to keep getting fuel. And Vice President Cheney summed up this line of thinking when he said, ‘the American way of life is non-negotiable.’ The trouble is, Americans may not be willing to negotiate. But if they don’t, they are going to find that someone else is negotiating for them. And that someone else is called reality.”

Kunstler is a good speaker. His vision of the world…and the future…has a certain power and authority to it. He imagines that higher fuel prices will change everything – the suburbs will become unlivable and undesirable…Wal-Mart will be unable to continue stocking its shelves with cheap imports…food will have to be produced locally, not shipped half-way around the world…and people will have to find ways to manufacture locally too.

“Globalization is not a permanent trend,” he cautions. “It is a consequence of two transient and unstable trends. Currently, the world’s governments are favorable to it…they provide the political stability necessary. And the price of the fuel that transports all this stuff is unsustainably low. Both those trends are going to change.”

Kuntsler is the author of The Long Emergency. What is the long emergency? We’re not sure. We think it is the fact that energy is going up in price…making a lot of arrangements – the aforementioned suburbs, for example – untenable. But, listening to him, we got the impression that he hated big cars and parking lots long before he discovered peak oil. The man has a vision of the way things “ought to be” in America. The rising cost of gasoline is probably just a prop – an argumentum that turns “ought” into “will”. Since the era of cheap oil is coming to a close, he says, Americans will have to stop living in ugly, soul-destroying suburbs; they will have to stop their vulgar consumerism; the moron masses won’t be able to keep driving their commuter tanks either. They’ll have to change, whether they like it or not.

This will come as a rude shock to most people. They’ve come to depend on cheap fuel the way Jonestown depended on Kool-Aid.

But the days of cheap gas are over. Our friend, Byron King, made the same point. North Sea oil went into a decline in 1999. Mexico’s Cantarell field peaked out in 2006. Alaska’s Prudhoe Bay is producing less and less oil every year. But that is happening all over the world. Oil fields are peaking out…and going into double digit declines.

“We’re using it up fast,” says Byron. “In fact, we’ve used up most of America’s oil already. I hope you enjoyed it…I know I did.”

Mexico’s national government gets an incredible 40% of its budget from the Cantarell field. “You think we have a problem with illegal immigration now,” Byron continued. “Just wait until the budget gets cut in half as revenues from oil go down.”

Bill Bonner
The Daily Reckoning
Vancouver, British Columbia
Thursday, July 26, 2007

More news:

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Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“The rebound in the U.S. dollar versus the euro and pound was a normal reaction in a market that had been going one direction for too long…this dollar rally had all the signs of normal profit taking.”

For the rest of this story, and for more market insights, read today’s issue of The Daily Pfennig

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And more thoughts from Vancouver…

*** For the oil consumer, the news from around the world is not good. Oil fields are depleted. Few are promising new discoveries. The Chinese are muscling into Canada’s Tar Sands. And most importantly, the price is up seven times in the last ten years.

But wait.

“The resource business is not a cyclical industry. It is an extremely cyclical business. More cyclical than you can imagine,” says our old friend, Rick Rule.

“In natural resources you only have two choices,” he continues. “You can be a contrarian or you can be a victim. And yet, many people still buy resource companies after they have been run-up. They still sell them when they get disgusted after they have fallen down. That is no way to make money.”

So…does that mean it is time to sell oil? Maybe.

Rick says there are three rules to buying resource stocks.

First, you have to be contrarian. You have to buy them when others don’t want them.

Second, you have to buy the good ones. Most resource companies are run by incompetents, he says, or worse – “people who would normally wear a mask when they go to the 7-11.” The 80-20 rule applies here as elsewhere. Only 20% of the companies will make 80% of the profits. And the 80-20 rule applies to the 20% too. So only 20% of the 20% of companies will make 80% of 80% of the profits. You have to do some serious research and analysis to figure out which those companies are.

“I look for serial and sequential winners,” says Rick. “I look for the people who have proven that they can produce profits.

Finally, Rick says you need to look for projects in places where most people don’t want to go. Political risk is always a problem for resource companies. But the political risk is not what most people think. Most investors judge the risk high in the Congo, or in Mayanmar, and low in California. “Actually, the opposite is true,” Rick explains. “California is so rich that it can afford to treat mining projects badly. But these poor, basket-case countries need them. They are much more respectful to miners.

“What you want is a place where people have misjudged the political risk, as they did in Thailand after the general’s coup d’etat last year. So when you see those scary stories on TV – those places that look dangerous and too backward to want to visit – that’s where I’ll be.”

Unfortunately, we are running low on space (and time) and can’t give you Rick’s speech in its entirety – but you don’t have to completely miss out just because you couldn’t join us in Vancouver this year. We have been audio recording the speeches this year and are offering them (and a special report) at a very low price – but only until our roving reporter, Monica Day’s duties are over on Tuesday. After Tuesday, the price of this CD set will go up from $99 to $149.

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The Daily Reckoning PRESENTS: Do you sometimes feel as if Wall Street is not giving you all the facts? Well, that might not be too far from the truth. Greg Guenthner explores this idea through the story of one man and his guidelines for investing…or lack there of. Read on…

DON’T WITHHOLD THE DON’TS

I’m sure you’ve heard people say that Wall Street never gives you the whole story. That it’s not in the Street’s best interests to tell you about the market’s biggest opportunities. That it keeps you in the dark about all the money over-the-counter and bulletin board stocks can deliver.

It might sound cliché…but I’ve found tangible proof that there’s some truth to those stories. At least one of Wall Street’s most trusted companies is pulling the wool over your eyes. It’s everything short of a deliberate attempt to steer you away from the stocks it doesn’t approve of.

I’ll explain in a second. But first, a little background is in order.

The story starts with a man named Philip Fisher.

A stock analyst who survived the market crash of 1929, Fisher made his mark with a landmark book, Common Stocks and Uncommon Profits. In fact, it was the first investment book ever to make The New York Times best-seller list. And while most people like to associate Warren Buffett’s investment style with Benjamin Graham’s, the Oracle of Omaha admits that Fisher inspired him, as well.

That’s partially because Fisher was a strong advocate of buying and holding. He once said the best time to sell was “almost never.” Of course, he didn’t mean you should blindly hold onto losing stocks…he meant that if you did your research right before you bought – and paid attention thereafter – you’d never have to worry about selling.

So it’s pretty amazing when you realize that Fisher was primarily a growth investor. He didn’t care about a company’s fundamentals…he cared about its business. He loved companies that were “highly speculative and beneath the notice of conservative investors or big institutions.” In fact, he famously bought Texas Instruments and Motorola long before they were household names – and even held Motorola until his death.

In Common Stocks and Uncommon Profits, Fisher spelled out 15 questions he used to evaluate a company. They were pretty open-ended and could be subject to interpretation. They were not, as he put it, “determined by cloistered mathematical calculation.” They were:

1. “Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?”
2. “Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?”
3. “How effective are the company’s research and development efforts in relation to its size?”
4. “Does the company have an above-average sales organization?”
5. “Does the company have a worthwhile profit margin?”
6. “What is the company doing to maintain or improve profit margins?”
7. “Does the company have outstanding labor and personnel relations?”
8. “Does the company have outstanding executive relations?”
9. “Does the company have depth to its management?”
10. “How good are the company’s cost analysis and accounting controls?”
11. “Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?”
12. “Does the company have a short-range or long-range outlook in regard to profits?”
13. “In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder’s benefit from this anticipated growth?”
14. “Does the management talk freely to investors about its affairs when things are going well but ‘clam up’ when troubles and disappointments occur?”
15. “Does the company have a management of unquestionable integrity?”

Now, I’ll admit, there’s nothing groundbreaking here. Fisher’s 15 questions are fairly well known, and you can find them or slight variations all over the Internet. But I recently discovered that some of Fisher’s wisdom has been purposefully been withheld from investors. In fact, one of Wall Street’s most trusted Web sites glosses over some of what Fisher had to say.

You see, Fisher also listed five “don’ts for investors”:

1. “Don’t buy into promotional companies.”
2. “Don’t ignore a good stock just because it is traded ‘over-the-counter.'”
3. “Don’t buy a stock just because you like the ‘tone’ of its annual report.”
4. “Don’t assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.” (Or put simply, price to earnings isn’t everything.)
5. “Don’t quibble over eighths and quarters.” (That is, don’t stress over a few cents difference in price.)

Please pay attention to No. 2, in which a man hailed as one of the greatest investors says there’s nothing wrong with trading bulletin board and Pink Sheet stocks.

I ask you to pay attention, because the good folks at Morningstar.com think you shouldn’t know that rule.

It’s true. Its Web site has an Investor Classroom, which includes a profile of Philip Fisher. The article patiently explains his love of growth stocks. His 15 points are spelled out in detail. And then it goes on to paraphrase Fisher’s “don’ts” – all three of them. Not five…three.

Any bets on which ones are missing? Here’s a hint – they’re the ones that have nothing to do with fundamental analysis or exchange-traded stocks.

Now, I know – Morningstar can easily claim it’s doing this for investors’ own good. That over-the-counter stocks can be risky…and discounting fundamental analysis may encourage bad research.

But whatever its reasons, one thing is clear – Morningstar.com is not giving you the whole story on Philip Fisher’s investment philosophy. Yet if it worked for him, why can’t it work for anyone else?

Regards,

Greg Guenthner
for The Daily Reckoning
July 26, 2007

Editor’s Note: Greg Guenthner has dedicated himself fully to investigating the opportunities available to investors in the oft-overlooked bulletin board companies. In other words, he looks at the whole story. It’s telling too, because not one of the companies he has in his recently released Bulletin Board Elite portfolio is down. Companies traded in this arena stand to make huge gains when they list on the major exchanges.