The underlying index uses a modified capitalization weighting with “pure play” companies receiving an 80% allocation and “diversified” companies receiving just a 20% allocation. The expense ratio will be capped at 0.70% for two years.

The top sectors are currently Industrials 42.2%, Technology 15.1%, and Utilities 7.0%. Top holdings include SMA Solar Technology AG 12.1%, Schneider Electric S.A. 8.9%, ITC Holdings 7.1%, Quanta Services 7.0%, and NGK Insulators 6.9%. I could not find information on country breakdown.

Additional information can be found in the Smart Grid Investor Guide, ETF summary page, fact sheet pdf, and list of complete holdings.

Ron Rowland
Invest With An Edge

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Let’s take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.

Nabucco and the competing projects

Nabucco is a 3,300 km natural gas pipeline going East to West, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe’s dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary. That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary and Slovenia. Nabucco’s estimated cost is about  €8 billion with a completion date of 2014 while south Stream’s estimated cost is from  €19 to €24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia’s President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia’s largest company and the world’s largest gas producer.

Nabucco and the supplier countries

Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available – as underutilizing the pipelines is not a viable option – but also to secure a political and financial will for the projects. Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers as a Russian natural chasse guardée such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.

The courtship is ongoing and in October 2009, Alexey Miller, Chairman of Gazprom, personally went to Baku, Azerbaijan to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives a good insight on what is at stake: ”Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase.”

This statement and contract are interesting because the agreement provides for a supply of 500 million cubic meters starting in January 2010, with potential increases depending on Azerbaijan’s export potential. This comes at a time when Gazprom has interrupted its deliveries of gas from Turkmenistan since April 2009, arguing a lesser demand from Europe. A few days after being in Azerbaijan, Miller was meeting with the President of Turkmenistan but no decision was reached regarding resumption of gas imports from Turkmenistan.

Who is holding whom by the tail?

The dynamics around Nabucco when looked at closely highlights a web of sweet deals corresponding to a complex reality of entangled needs.

Russia has very aggressively pursued locked-in supply agreements for extensive periods of time. The initial idea is that getting a deal in first could work towards keeping other players out. That approach did not end up creating exclusive relationships as countries such Azerbaijan and Turkmenistan appear to have enough supplies to satisfy multiple parties. Pricing agreements were also locked in for specified periods of time but the tumble in world energy prices put Gazprom in a dire situation: Gazprom is reported to have been paying $375.50 per thousand cubic meters (tcm) for Turkmen gas while only paying $217/tcm for Kazakhstani gas and $210/tcm for Uzbek gas. An “unfortunate” explosion in April 2009 that the Turkmens blame on Russia hit the pipeline connecting the two countries and deliveries have stopped. Gazprom stated it had not intention to resume purchasing Turkmen gas in 2009. Turkmenistan is said to be losing $1 billion/month over this issue. With Turkmenistan, Gazprom has a 25-year sale and purchase agreement Turkmenneftegaz signed in 2003. Prices were locked below world market prices, at less than half the price Europe was paying for its gas.  Subsequent price increases were negotiated but in exchange for the promise of higher delivery volumes with 60 bcm of gas in 2007, 60-70 bcm in 2008 and subsequently export up to 80 bcm annually through 2028.

Needless to say that Turkmenistan’s announcement in July 2009 of its willingness to provide gas to Nabucco does not come as a surprise in this context. Similarly the completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. The Turkmen government stated: “Getting gas supplies to China will mark another important milestone in the successful implementation of Turkmenistan’s strategy of diversifying energy export routes to world markets.”

Turkmenistan has been assiduously courted because of it immense gas reserves. In 2008 the oil advisory firm Gaffney Cline & Associates (GCA) conducted a study on the South Yolotan-Osman field and determined that that field alone was the fifth largest in the world, with an estimated 4 trillion to 14 trillion cubic meters of gas. That good new was tampered in October 2009 when reports surfaced that GCA may have been misled (see article: “Turmen Gas – Caveat Emptor” http://www.oilprice.com/article-turkmen-gas-caveat-emptor.html). In any event, the potential of Turkmenistan should not be underestimated.

Nabucco and the transit countries

Several Eastern European countries have been turning their back to Russia and have joined the European Union, espousing the EU’s energy security objectives to reduce its dependency on Russia gas.  The January 2009 showdown between Russia and Ukraine, which resulted on the gas supply to be cut to most of Europe in the midst of winter, could only serve as a wake-up call for the need to diversify energy routes. Bulgaria – which has the ambition to become an international gas hub and that is a party to both the Nabucco and South Stream projects – will benefit from that situation, notably by increasing its bargaining position to negotiate better energy agreements with Russia. It could, among other things, threaten to raise transit fees. Ukraine is using this threat against Russia and in September 2009, Gazprom expected Ukraine to increase gas transit fees by up to 58% in 2010. The stakes are high as transit fees represent a bonanza. While visiting Bulgaria in 2007, Vladimir Putin estimated that Bulgaria could earn up to $2.5 billion per year in transit fees alone.

Russia: just another shrewd player but…

One may think that Russia pockets the difference from rates below market prices, but the reality is that Russia uses the discounted gas for its own domestic needs. It also has been using it to supply Ukraine under very favorable terms, and Ukraine has been very vocal in resisting Russia’s attempts to raise prices. Note must be made that Ukraine imports the bulk of its natural gas from Turkmenistan via Russia. Countries like Russia and Ukraine have been resisting passing on price increases to end-users to avoid social unrest and have been struggling to keep non-competitive industries afloat. One way of doing so is by keeping the cost of energy low. The adverse effect is that Ukraine is one of the most energy inefficient countries in Europe.

A point must be made that Russia should not just be perceived as a natural bully but more as a wounded bear. Russia, like any country, is looking after its own interests and is not always subtle about it, even more so as it feels that everyone is ganging against her, rightfully or not. Russia is also confronted with its own economic reality, most notably the over reliance of its economy and state budget on oil & gas revenues. Efforts to diversify the economy have failed to generate visible results. It is therefore essential for Russia to secure a guaranteed income flow from the sale of it oil and gas, and from the oil and gas of its neighbors, that it buys to resale at a profit or that it routes through its extensive pipeline network for a fee. But things change: sourcing oil and gas from or routing it via Russia is no longer the only option.

… a new transportation mode is emerging

As the gas pipeline battles are under way, a new trend is emerging which is the transition towards Liquefied Natural Gas (LNG). That transportation mode of natural gas through seaborne tankers will open new markets, alleviate the dependency of some countries on existing pipeline routes, and reduce the number of players able to impact proper delivery and pricing.

This article was written by Philip H. de Leon for OilPrice.com – Who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

Palm (NASDAQ: PALM) shares rose 8 percent on today fueled by rumors that bigger rival phone maker Nokia may be eyeing the maker of the Pre and Pixi smartphones. "Palm shares leaped and its call volume surged to 9 times their normal level as more than 80,000 call contracts traded by midday on renewed takeover speculation. Representatives for Palm and Nokia were not immediately available to comment after Palm shares rose 8.1 percent to $12.38 in afternoon trading on the Nasdaq. -Reuters

Two private-equity owned U.S. retailers, discounter Dollar General Corp. (DG) and youth apparel chain rue21 Inc. (RUE) rose in their trading debuts today, in performances that will soothe worries that investor appetite for buyout-backed initial public offerings has waned. Shares of Dollar General rose as much as 10 percent on the New York Stock Exchange, while rue21 advanced as high as 28.4 percent on the Nasdaq, placing it on pace for one of the biggest first-day jumps of an IPO this year. In afternoon trading, Dollar General shares were quoted at $22.77/share, or up 8.4 percent, while rue21 was up 28.4 percent, trading for $24.40/share. -Daily Finance

While a number of factors are responsible for this oversight, including relative geographical isolation (Uzbekistan, along with Liechtenstein, is one of the world’s doubly landlocked nations, requiring crossing two other nations to gain access to the oceans), which currently limits energy exports available for the global market, there are a number of pluses that the country has for investors willing to “think outside the box.”

With a population of 27 million, Uzbekistan is Central Asia’s most populous and dominant power. A conservative fiscal policy since 1991, including inconvertibility of the national currency, the som, has shielded its citizens from the hyperinflation that ravaged other former Soviet republics, but the policy previously diminished potential foreign investment.

Since the global recession that began a year ago, however, Uzbekistan’s fiscal conservatism, previously dismissed by the foreign investment community, has looked more and more like a pragmatic policy that isolated the country from the worst aspects of the recession in stark contrast to other post-Soviet states that fervently embraced free market capitalism like Lithuania, whose economy contracted 18.1% this year and is expected to shrink further by 3.9% in 2010. In a move certain to be welcomed by foreign investor Uzbekistan is slowly moving towards making its currency convertible but whenever it happens, for the present the country offers a fiscal stability unmatched by many of its more free-market neighbors.

And now, the good news about the country’s resources. In 2006 Uzbekistan’s natural gas reserves were estimated at 1.798 trillion cubic meters (tcm). During the Soviet era Uzbekistan was the USSR’s third-largest producer of natural gas, accounting for more than 10% of the Soviet Union’s production, trailing only Russia and Turkmenistan. In 1992, the country’s first year of independence, Uzbekistan produced 42.8 billion cubic meters (bcm) of natural gas. Uzbekistan currently produces 60 bcm of natural gas annually, an amount nearly equal to Turkmenistan’s production. Uzbekistan’s reserves are primarily concentrated in Qashqadaryo province and near Bukhara in the country’s south-central region. During the 1970s Uzbekistan’s largest natural gas deposit at Boyangora-Gadzhak was discovered in Surkhandaryia province north of the Afghan border.

Unlike its energy-rich neighbors to the West, Kazakhstan and Turkmenistan, nearly 80 percent of Uzbekistan’s production, about 48.4 bcm, is currently reserved for domestic use at heavily subsidized rates. Of the remaining 12 bcm of natural gas that Uzbekistan exports, more than half currently goes to Russia, with the remainder to neighboring Central Asian states.

Under Uzbekistan’s fiercely patriotic President Islam Karimov relations with Europe’s favorite bête noire, Russia’s state-owned gas firm Gazprom, have been subject to fierce negotiations to win an equitable price for the country’s exports. Like other former Soviet republics, the Uzbek government chafed under Gazprom’s "buy cheap, sell dear" policies and in early December 2008 scored a significant negotiating success by getting an agreement that in 2009 Gazprom would pay $305 per thousand cubic meters (tcm). To put the accomplishment in perspective, Uzbekistan’s state gas company Uzbekneftegaz sold gas to Gazprom for $130 per tcm in the first half of 2008, which then rose to $160 in the second half of 2008.

Those betting on the eventual pacification of Afghanistan and the subsequent pipelines that would crisscross the country to deliver Central Asian gas to the massive Pakistani and Indian markets would also do well to take note of Uzbekistan’s persistent, low key policies over more than a decade attempting to bring peace to its hapless southern neighbor. The initiatives put forward by Uzbek President Islom Karimov during the NATO summit in Bucharest in April 2008 take on heightened importance as one of the few foreign policy ideas offering some hope to quelling Afghanistan’s three decades of turmoil. The text of Karimov’s address is at http://www.jahonnews.uz/eng/sections/politics/address_by_president_of_the_republic_of_uzbekistan_he_mr_islam_karimov.mgr.

Nearly completely overshadowed by the Bush administration’s relentless efforts to have Georgia and Ukraine join the alliance, Karimov proposed that the UN’s Afghanistan "6 plus 2" assembly, established in 1999, be revived by expanding it into a "6 plus 3" ensemble by including NATO because of its anti-terrorist operations in Afghanistan among the "six" members Uzbekistan, Tajikistan, Turkmenistan, Pakistan, China and Iran and the "two," the United States and Russia.

Noting that that it is impossible to solve Afghanistan’s problems without the direct involvement of neighboring countries, which have felt the destructive impact of the Afghan crisis for more than 30 years, as Afghanistan’s problems are now of global nature, Karimov told his audience in Bucharest that their resolution must also be global, with the participation of members of the international coalition that comprise NATO’s International Security Assistance Force (ISAF). Karimov concluded by noting that the current situation in Afghanistan precludes a purely military solution and that while it is possible to continue increasing the foreign military presence there, without a clear model of national reconciliation it will be impossible to end the conflict.

Needless to say, one of the benefits of peace and the aforementioned pipelines for Uzbekistan would be that it could export its surplus gas through Afghanistan to southern Asian markets for a higher price than it receives at home or Gazprom’s miserly accountants. Acting on Tashkent’s belief that economic assistance is of greater utility than military operations, Uzbekistan has become involved in a host of reconstruction projects in Afghanistan, including railways, power generation, mining, agriculture, irrigation, education and the exchange of specialists as well as providing its neighbor with construction materials, metals, fertilizer, food and other goods. Uzbek companies and engineers have built 11 bridges in the Mazar-e-Sharif-Kabul area and are finishing the construction of a 275-mile high-voltage line capable of transmitting 150 megawatts from Termez to Kabul across some of the world’s most mountainous terrain, which when it becomes fully operational next month, will provide power and light not only to the capital but the country’s five northern provinces.

For now, Uzbekistan remains largely a transit country rather than a net energy exporter in its own right. But the fiercely independent nationalist policy that Tashkent has followed since 1991 indicates that any company whose policies most benefit the country will have an inside track, and as the old saying goes, “fortune favors the bold.” Chinese, Malaysian, Russian and South Korean companies have already begun investing in Uzbekistan’s energy infrastructure – what do they seemingly know that American and European companies do not?

This article was written by John C.K. Daly for OilPrice.com – Who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

A shining example of using the sun’s energy to heat, cool and light the homes and businesses of a desert community in California is poised to power up next year. It’s due in part to the emergence of a technology that uses refraction rather than reflection to produce solar power on a utility-size scale at half the price of photovoltaic technology. But major credit also goes to the pioneering efforts of REDCO, a privately held company, which Ryan Davies established last year to unite free-market concepts with sound environmental policy. The Energy Report caught up with Ryan in the midst of Solar Power International 2009, North America’s largest B2B solar industry event. The event in Anaheim was about 250 miles from the forward-thinking community of Needles, where Ryan’s company is awaiting permit approvals to build a solar thermal plant that will provide peak power to some 2,500 homes.

The Energy Report: Let’s begin with a little thumbnail of REDCO—what your company is and what you do.

Ryan Davies: Sure. REDCO—the Renewable Energy Development Company—is a developer of renewable energy projects. We have a particular focus on wind and solar. We look for good pieces of land that have a strong wind and/or good solar resource and that have good proximity to transmission lines. Sometimes we do joint-venture projects, sometimes we sell projects; but, for the most part, we like to own and operate our own developments.

TER: What brought you to the solar arena? Why do you see solar as a great place for investors to be or for energy to be created?

RD: We have an abundance of sun, and our ability to harness the sun’s energy and create electricity is a pretty remarkable opportunity. The primary demand for power generation or power consumption is during the peak hours of the day; it’s called peak power. That’s when usage of electricity is the highest and also when the cost of the electricity is the highest. So utility companies are constantly looking for ways to increase that peak supply of power.

Because it’s an intermittent power source—wind, sun, etc.—solar is not the answer. But it is an important part of the answer. It doesn’t provide 24-hour-a-day, 7-day-a-week power. What is unique about solar is not only is it renewable but it also provides power during the peak periods of the day, when the sun is shining, which is very valuable to utility companies.

TER: The government is encouraging utilities and individuals to use solar. Could you talk a little bit about that, particularly the cities or utilities?

RD: A number of different mandates and incentive programs are sponsored by both federal and state governments. The most common of which is called a "renewable portfolio standard"—the acronym is RPS. There is not a federal RPS at this point, but I believe about 24 or 25 states have adopted their own programs. Much of the growth in demand stems from these mandates.

With an RPS, a certain percentage of power produced must come from a renewable resource. So the utility companies have to either go out and buy green power on the open market or build their own facilities. Every state is a little bit different. In California, for example, the goal is to have 33% of power come from a renewable resource by 2020, and that initiative, that mandate, kicks in next year, starting at 10%. Then it increases by about 2.5%, 2.7% per year until it reaches that 33% mark.

TER: And aren’t some consumer incentives offered as well?

RD: Yes, from an individual standpoint, there are federal and state tax incentives and benefits if you include solar in your development or if you retrofit a business or home to include solar.

TER: You’re involved with two solar projects for Needles, California. Could you describe how that’s working?

RD: At REDCO we really pride ourselves in being technology agnostic; in other words, as we see our opportunity as a developer is to find a good piece of land with a strong resource, find the right technology for that development, put the entitlements and financing in place, build a project and sell the power. As we did our due diligence and looked for the right solar technology, we came across International Automated Systems, Inc. (IAUS:PK) and have become quite enamored with their technology. It’s very different from the conventional, traditional solar that you see in the marketplace today.

TER: How does it differ?

RD: The majority of the solar systems in the market today are photovoltaic—it’s a reflective, mirror-type technology where the sun’s rays hit a reflective surface and bounce off into a collector shield above it. The IAS technology is very, very different in that they’ve created a technology using simpler, less expensive materials. It’s easier and cheaper to mass-produce. Another unique attribute is that it is a refractive technology, wherein the sun’s light passes through the panels instead off of them. They collect heat, which then heats up a water source. The hot water turns into the steam that propels a turbine. The turbine spins a generator, which creates electricity.

As a result, it’s quite different from conventional solar and it’s much, much cheaper—quite a bit less expensive to purchase. We’re in the process of building the very first commercial plant using IAS technology. All of our engineering reports and research data indicate that this technology will be significantly more efficient than PV. We’re quite excited about it.

TER: Is this a patented technology that IAS has?

RD: There are a number of patents on the technology, covering various facets from proprietary panels to the bladeless steam turbine. Several different patents have been issued, and several are pending on various other aspects of the technology and process.

TER: What are some of the companies in the flat panel technology?

RD: Suntech Power Holdings Co., Ltd. (NYSE:STP), First Solar, Inc. (NASDAQ:FSLR) ‎and BrightSource Energy, Inc. are a few. A number of companies that have good technology are doing very well. But it’s almost an apples-and-oranges scenario in the solar market because IAS is quite a bit different. In our estimation it’s much better alternative for utility-scale use. In addition to being less expensive to build and more efficient, it has a longer life and requires less maintenance. Plus, this technology has a lot fewer restrictions. For example, the way it’s constructed and developed, you can put it on various types of terrain. You don’t need costly grading plans prior to construction. It’s easier to permit because it has a very low impact on the environment. We see a number of advantages.

TER: You say it’s less expensive. Could you give us a relative cost comparison between IAS and photovoltaic technology?

RD: When you look at costs, you have to look at the entire system—not just the solar panel but the overall development, including the turbine and all of a project’s components. From a turnkey perspective, the majority of the PV technologies sell somewhere in the range of $4 to $6 per watt. That equates to about $4,000 to $6,000 per kilowatt or $4 million to $6 million per megawatt. In most cases, the IAS technology is about half the cost.

TER: Wow! And that’s total cost, when you boil everything down?

RD: When you compare all aspects of the development, yes.

TER: What’s the timeline on your Needles project with IAS?

RD: Phase 1 is a 5-megawatt project. We have executed a long-term Power Purchase Agreement (PPA) with the Needles Public Utilities Authority, wherein they have agreed to purchase the power we generate for 20 years. We’re in the permitting stage and hope to be in construction early next year.

TER: Once you get the permit, how long will it take to complete the project and when will the city of Needles be able to start using that electricity?

RD: We’re looking at construction period of about four to five months, and then maybe a month beyond that for testing before we go online. So, all in, it’s a five- to six-month process from the beginning of construction to when we begin selling the power. It’s a relatively short construction time.

TER: The key catalyst, then, is getting that permit

RD: That’s correct. We don’t have any reason to believe that the permit will not be issued. We have completed all of our studies—archeological, geotechnical, hydrology, water quality, drainage, environmental, biological. It’s just a matter of working through the normal bureaucratic process. We hope to have the project completely operational sometime next year.

TER: And that would lead to your second project. Beyond having the 5-megawatt plant up and running, do any conditions or milestones need to be reached to facilitate that?

RD: No, not at all. In fact, we are working on not just one other project but several. There will be a second phase in Needles but the power purchaser is a different entity. We will begin that project shortly after the 5-megawatt project is completed. We’re already working on all of the permitting for the project; we just haven’t made any formal announcements yet.

TER: Assuming that the first 5-megawatts goes according to plan, what do you think this means for International Automated Systems?

RD: Once the IAS technology is proven, it will show the marketplace its potential and I anticipate that would be quite good for the company. Having the ability to introduce low-cost solar to the marketplace in an innovative way could be a real boon.

TER: A lot of other utilities would be looking at this, especially in light of the fact that government mandates may be requiring up to one-third of their power either purchased or produced green within 10 years.

RD: That’s correct. And this really is a utility play. A lot of other technologies are better-suited for a shingled, residential home. IAS is not that, and from that standpoint, you’re absolutely correct. I am sure the utilities are eyeballing this and are very aware of it. Obviously, their intention is to not only to buy as much solar and as much renewable as they can, but to do it as cost effectively as possible. So there’s a tremendous upside for IAS if it can produce renewable energy 40% to 50% cheaper than its competition.

DISCLOSURE: Ryan Davies
I personally and/or my family own the following companies mentioned in this interview: N/A

Ryan has been active with the Oquirrh Institute, a nonprofit public policy organization whose mission is to create innovative market-based solutions for technology and the environment, and is an active member of his community. Ryan was elected to the Draper City Council in 2001 and during his tenure, CNN named his community one of the top 100 places to live (2003). (Draper, population 30,000, is located in the South Mountains about 20 miles south of Salt Lake City.)

In theory, Dollar General shares should perform well in this weak economy. With nearly 9,000 locations in 35 states, the company is a favorite of cost-conscious consumers. Dollar General competes with stores like Walmart (WMT) and Kroger’s (KR) Fred Meyer subsidiary by offering both name-brand and generic items at reasonable prices. Selection ranges from groceries to home decor.

Dollar General targets households with a median income of less than $75,000 per year, making it a direct competitor to Walmart, but this competition doesn’t appear to be hampering Dollar General’s earnings power. In October, the company said its fiscal second quarter profit more than tripled thanks to better margins and an 8.6% surge in same-store sales. The company also plans to increase store openings and remodel certain locations. Oddly enough, Dollar General has no stores in California, the largest state by population.

That’s the good news; now, what could go wrong? First, with IPOs it is always a good idea to ask why the owners are cashing out. Private equity firm KKR and Goldman Sachs bought Dollar General in a leveraged buyout before the credit crisis unfolded, leaving the company saddled with more than $4.1 billion in debt. That’s an enormous sum under any circumstances.

The company expects to raise $750 million in the IPO. Nearly $478 million of those proceeds will be used to redeem debt. The company had a cash balance of $515 million at the end of July and paid a dividend of $239 million in September. (No word yet on whether Dollar General will pay a dividend upon going public.) It’s a cash cow so long as the debt load can be managed and eliminated.

Dollar General has had 20 consecutive years of same-store sales growth. Its stores are typically cash flow positive within a year of opening. Those are positive signs and could mean this discount retailer won’t trade at discount prices for very long. To buy into a Walmart alternative that targets cost-conscious consumers, go with Dollar General. You may not be able to buy at the IPO price, but the shares will be available to the public soon.

Brandon Clay
Invest With An Edge

Professional investors make a distinction between portfolio management and trade execution. You might not be a professional, but you can still use the same thought process …

Portfolio management is when you make the decision to buy or sell a particular security. Normally there will be limits on the decision. For example, maybe you only want to buy the shares as long as the price is less than $50. Or perhaps you want to sell all of your shares and be completely out by the end of the month.

Trade execution comes after the portfolio decision. You’ve already decided what you’re going to do; now you want to do it as cost-effectively as possible. Maybe you’re willing to pay $50 a share, but you’d be even happier if you can get in at $49. Good execution helps make this happen.

The importance of execution is directly related to your time horizon. If you’re planning to hold an ETF position for years, a few pennies on the entry and exit may not seem so important. However, those same pennies can add up quickly if you’re moving in and out every week.

With that in mind, here are five suggestions to help improve your ETF trading results …

Trading Tip # 1:
Shop Around for Lower Commissions

Years ago, the only way to get into the stock market was through a broker, who charged dearly for his trouble. Now the story is different. You can bypass the smooth-talking salesman and buy stocks, mutual funds, and (best of all) ETFs online for a very small fee.

If you deal with a full-service broker, he’ll probably try to justify his exorbitant paycheck by telling you his firm really “works” your orders to get the best price. If you’re throwing around millions of dollars at a time, this may be true.

For the rest of us, you probably aren’t getting any better execution than you would at a discount broker. In fact, you may do better at a discount broker that doesn’t have a proprietary trading desk working against you.

Using a discount broker can save you a bundle.

These days it’s not hard to find reputable discount brokerage firms with rates of $8-12 for a typical small trade. And there’s really no reason to pay any more.

Trading Tip # 2:
Get Inside the Spread

If you look at an ETF quote during market hours, you’ll probably see some numbers called “bid” and “ask.” They may be quite different from the “last” trade price.

Bid and ask are the current market prices. The bid is the highest advertised price that you can get if you’re selling right now. The ask is the lowest advertised price you’ll pay if you’re buying right now. The “spread” between these numbers is how market makers earn a profit.

The key word here is “advertised.” Often you can buy for less than the ask, or sell for more than the bid. That’s why it is usually a good idea to try for a price somewhere between the bid and ask.

For instance, if you want to buy an ETF that has a bid/ask of $25.50/$25.80, try placing a limit order at $25.65. Wait a couple of minutes and see if anyone takes the bait. If they do, you just saved yourself fifteen cents a share.

Also keep in mind that the bid and ask aren’t unlimited. They apply only to a certain share quantity. A bid of $25, for instance, may be good only for 100 shares. Sell any more than that and you’ll get a lower price — and it could be a lot lower!

Trading Tip # 3:
Use Limit Orders

Notice that I said in the above example to enter a “limit” order. This is simply an instruction to your broker not to process the trade unless the price is at or better than the limit you define.

If you enter a “market” order, you might not get the best price. What you will get is the best available price at that moment. And it could be substantially higher or lower than you thought you’d get.

I’ve found that it’s almost always better to use a limit order when trading ETFs, even if it means your order isn’t filled right away. The odds are that you’ll get a better price by waiting.

QQQQ is one of the most liquid ETFs.

The only exception is a handful of mega-ETFs like SPDR S&P 500 (SPY) and PowerShares QQQ (QQQQ). These big, actively-traded ETFs normally have very tight spreads and ample liquidity. Small orders are filled instantly at the quoted bid or ask price.

Trading Tip # 4:
Watch the Underlying Market

Several factors define an ETF’s liquidity. One of the most important is the depth of the underlying market. This is the basket of stocks that compose the ETF. Institutional trading desks often try to pick up some quick profits by moving back and forth between ETF shares and baskets of the corresponding index.

If the index is composed of large, actively-traded stocks, the ETF will probably have an efficient market as well. Likewise, when the index consists of low-volume stocks, any ETF designed to reflect it will also reflect the lack of liquidity.

It also helps for the underlying market to be open when you’re trying to trade an ETF. For instance, if you’re trading an international ETF composed of European stocks, you may do better in the morning. That’s because there’s a few hours in the morning when the European and the U.S. exchanges are open. This means more depth and, usually, better prices.

Trading Tip # 5:
Be Aware of the Crowd

On a normal day the stock market tends to have a lot of volume in the first half-hour or so, less action in mid-day, and furious trading just before the close. The same is true of ETFs.

This pattern can work either for you or against you. If you’re trying to move a big quantity of shares, you probably want to take advantage of the depth present in the last hour. If you want to trade against someone who may not have thought ahead, you might find some good prices at lunchtime.

Successful traders get ahead of the crowd.

The point is that you must be aware of your surroundings. Market conditions are constantly changing. Just as you don’t go out in the rain unless you want to get wet, you shouldn’t go into a thin market unless you’re ready to turn it in your favor.

Follow these five trading tips and you’ll be surprised how much your results can improve. Are they magic? No, not at all.

You’ll still have plenty of ups and downs. But good trade execution is still a very important step for more active investors.

Best wishes,

Ron Rowland 
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

What are the questions that educated investors ask in oil and gas?

Last month I gave investors 10 questions they should be asking management teams, or searching for on the company website, in a recent article.  They were basic questions, and you can read them here. After those first 10 are answered, you know how much production a company has, how fast they’re growing, how much cash or debt they have etc.

But if you’re still not sure if you want to invest in the company after all that, or just want to know more…what are the right questions to ask?  What pitfalls or opportunities might an investor uncover?

1. Decline rates are something management teams don’t really hide, but don’t really talk about either.  Every well has declining production until it’s uneconomic.  The new shale gas plays often have 85% decline in production in the first year.  Tight oil plays (Bakken, Lower Shaunavon etc) have 75% initial decline rates. Decline rates are increasing over time now as the industry drills deeper and tighter plays.  Ask management what the initial decline rate is, both company wide, and specifically on their main, big play that they believe will be the growth engine of the company.  Then ask what the decline rate flattens out to—it’s usually 20-30%.

Why is this important? Because many investors, when forecasting growth, use the only public numbers given for a well – the ones in the press release.  Most companies have a production decline graph in their powerpoint, but few actually say what the production levels in the wells in the area flatten out at (and many research reports from analysts don’t either—don’t let The Machine fool you).

2. If the company is operating in a foreign country, what kind of political connections do they have – who from that country is in management or on the board of directors?

3. What is the break even cost, company wide, and in their main play, in terms of price per barrel?  Management should be able to tell you a very good ballpark number.

4. How much does it cost them to bring up a barrel of producing oil?  Costs can range from $8000 per flowing barrel to over $30000.  Obviously, the lower the better, as this will be more profitable.  Then you compare it to what companies are being bought out for.  If a company can produce a barrel of oil for $10,000, and the stocks are being bought or merged at valuations of $70,000 per barrel, that’s a very accretive oil or gas play!  Again, management should be able to answer that question on the phone.

5. What is the recycle ratio, both overall corporately and specifically on their main play that will be the growth engine for the company.  The recycle ratio is a key measure of profitability for an energy company.  It’s a fairly simple calculation, and many companies put it in their quarterly and a few even put it in their powerpoint.  Management will know this number off the top of their head like they know their wife’s name, so don’t be afraid to ask.

The recycle ratio is the profit per barrel (called the “netback”) divided over the cost of finding that barrel–“F&D”—Finding and Development Costs. Both the netback and the F&D costs are in all the quarterlies – usually broken out in simple charts and language in the notes.  The higher the recycle ratio the better.  Anything over 3 is great, 2 is really good and under 2 can still be OK if it’s a big field and lots of wells can be drilled.  Different companies report differently so not all recycle ratios are equal, but it will give you a general idea.

The higher the recycle ratio, the higher the valuation should be.

6. How much of their own infrastructure do they own?  And are they the operator of their plays? Infrastructure includes things like local or regional pipelines, storage facilities, processing facilities.  If they don’t own them, they have to pay charges to use them, and are subject to somebody else’s maintenance and upkeep.  And the market often pays a lot less for a non-operating interest in a play, as the operator gets to call the shots most of the time.

7. Ask management what kind of discount or premium they get for their production, from quoted prices like WTI crude or Brent Crude – and why that is.  For example, heavy oil gets a discount – up to 50% – from the WTI price or Brent crude price that is always quoted in the media.  Maybe their oil or gas has a high sulphur content (which would also give them a tougher time with environmental permits).  A company may say they are producing 10,000 bopd, but if their price is much lower than world price, their future cash flow could be much lower than you think.

8. How much stock does management own, which people on management are the largest shareholders in the group and how much hard cash – not stock options – does management have in the company.

9. If the company is operating in a foreign country, what kind of political connections do they have – who from that country is in management or on the board of directors?

10.  And lastly, ask open ended questions, like – what else is there about your company that you want to tell me? Where do you want to improve the most over the next 2-3 quarters?

The list of questions goes on and on.  I suggest that investors should remember that the answers to these questions are already priced into the stock; it’s highly unlikely you will find any bargains on the stock market from these questions.  But the answers will give you a better understanding of how stocks are valued and why, and give you more confidence in acting on your own intuition about a stock.

By Keith Schaefer
Oil & Gas Investments Bulletin

Part of the tech gain is related to how new media companies are categorized. Some of the stocks that make up the sector probably don’t belong there. Companies like Google (NASDAQ: GOOG), Ebay (NASDAQ: EBAY), and Mastercard (NYSE: MA) are considered tech stocks. The first two inherited the space because they are more internet-based than other companies. However, Google is more like a giant newspaper that gets its revenue from advertising. Like other media companies, GOOG might fit better in the Consumer Discretionary group. Ebay is an auction house – same thing. Mastercard is a credit card company but for some reason is not listed as a Financial. Yet all three companies contributed to the dramatic rise of the sector this year. Technology is more diversified than it looks.

Another Consumer Discretionary-like stock may soon be added to Technology sector: Facebook. Although not yet public, Facebook is heading toward an IPO. In September, Facebook announced it was cash-flow positive, making enough money to cover the expenses of its 300 million users. This is more than can be said for Amazon (NASDAQ: AMZN), which had negative cash-flow for years after going public.

Facebook is a a social media company. For those not yet in the club, Facebook allows users to build personal web pages and connect to “friends” in the network. According to Alexa.com, Facebook is now the 2nd most visited website on the planet – just behind Google. It’s big, it’s growing, and it’s almost surprising that it took so long for the company to make money.

In September, we told you how to buy a few other tech stocks in the media space. Today, we offer another way to get into social media before Facebook’s IPO. Last year, Facebook started allowing employees to sell stock. This helped open a secondary market for their pre-IPO stock. If you want to buy Facebook stock before their IPO, check out two sites that specialize in these sorts of transactions: Sharespost & SecondMarket. This isn’t a recommendation, just a tip. Buyer beware.

Brandon Clay
Invest With An Edge

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

In fact, we met someone who did it firsthand a few months ago. Over breakfast with Bob Quartermain, the president of Silver Standard Resources (NASDAQ:SSRI), your editor got the first-hand account of the company’s development.

Quartermain, a geologist by training, started at Silver Standard in 1985 when the precious metal bubble had just imploded. He had one goal: acquire silver assets. Silver projects were cheap and plentiful and Silver Standard was buying them.

To make a long story short, this strategy took Silver Standard from a company holding a few dozen “worthless” silver projects to a leading silver mining giant worth more than $1 billion today.

Early investors who spotted this opportunity made 20 to 50 times their original investment or more.

Now it’s looking like it’s happening all over again in another industry no one wants to touch – timber.

I know, I know…timber!…who wants timber? But please, here me out.

The “Insider” Advantage

For obvious reasons, timber is out of favor. Housing starts are still at multi-year lows. Lumber prices are down nearly 70% from their housing bubble peak. And shares of leading timber companies have recently been downgraded by analysts at JP Morgan, Credit Suisse, and other firms (could there be a better buy signal?).

There is, however, one industry insider who may be pulling together another Silver Standard-style success – only in timber. Even if it pays off only half as big though, it’s definitely worth a look.

Last week I was doing some research on a very early stage opportunity for President’s List readers and sat down for lunch with Rick Doman. The Doman name is a big one in the timber industry. Herb Doman, Rick’s father, built Doman Industries from the ground up. Herb started the company in 1953, listed it publicly in 1964, and eventually grew it into a $1 billion timber company.

When Herb left the company in 2001 it was in rough shape. It was weighed down by too much debt and Rick took the reins to lead a restructuring. Rick took the company from the verge of receivership to a $1 billion turnaround success story in about three years.

Rick spotted the housing bubble and realized the great times would not last forever. He knew the mistakes timber companies made in the 90s with debt and other structural mistakes because he witnessed them firsthand at Doman Industries. And when the newly reborn Doman Industries (under its new name Western Forest Products – TSX:WEF) was headed down the same road, Rick got out of there.

Over the next five years he would keep close tabs on the industry though as a consultant. Basically, he charged institutional investors thousands of dollars to tell them not to buy timber.

Frankly, you’d be hard pressed to find someone who knows the industry better. And that’s why your editor became very interested when we found out Rick was getting back into timber. After all, we know the value of the opportunity to accumulate assets no one else wants (who wants timber now?) and we had to get together to learn what he’s doing, why he’s doing it now, and what the real opportunities are out there.

The Real Future of Timber

Now, when you think timber (technically, softwood timber in this case), you think housing. The two industries are practically joined at the hip. Housing construction drives timber demand.

So when housing starts climbed to the rate of 2.2 million per year at the peak of the bubble, lumber prices surged too. Lumber climbed from $250 to $300 per 1,000 board feet at the start of the decade to more than $450.

The great times wouldn’t last forever. Lumber price collapsed when the housing bubble burst. They fell from the $450 peak to less than $150. The downturn forced companies to curtail production and sawmills to shut down as the industry contracted.

As I write, lumber prices are still under $200 and timber is still out of favor. But there’s actually a lot to get excited about.

Here are four reasons why a contrarian could really get excited about timber now (it’s not just housing):

Long-Run Housing Rebound – The housing market is currently working through the bubble era excesses. Prices are down and the government has the industry on life support.

Over the long run the outlook for housing is much different than it is now. It’s all because the fundamental driver of housing demand is population growth.

As a result, U.S. population growth will spark a rebound in housing construction. The boom times may never come again, but there is an equilibrium point the market must get back to. That equilibrium rate is much higher than the current rate. Here’s why.

The Population Reference Bureau expects the population to grow at 0.9% per year through 2050. If we extrapolate the results of recent Texas A&M University study, Housing Market Mirrors Population Growth, which correlates housing and population growth, excluding the recent bubble years, the 0.9% population growth means housing demand will increase 1.12% per year.

That means 1.26 million new homes (105 million currently + 1.12% per year growth) will need to be built each year.

Of course, you have to consider types of housing units, interest rates, and how long the newly constructed houses will last. However, 1.26 million per year estimate is right in line with long-run averages. The current new housing construction rate is 660,000 per year.

Barring an outright depression, housing construction must go up over the long run to meet basic demand from new families and to replace old ones. And the timber demand will rebound right along with it.

A Tight Correlation – Although the timber market is truly global, lumber and U.S. housing are very closely correlated.

For instance, a few hours before Rick and I sat down for lunch, the U.S. government announced plans to extend the $8,000 first-time homebuyer tax credit. That was expected. The market didn’t expect the extension of a $6,500 credit for other non-first-time homebuyers.

The reaction in the lumber trading pits in Chicago was euphoric. Lumber prices surged 5% and went “limit up” – the point at which trading is halted because the price has moved too much in a single day. It’s a very bullish sign.

The Russian Wildcard – Russia accounts for 22% of global wood trade. It is the third largest timber producer in the world behind Canada and the United States.

Russia has repeatedly proven its willingness to leverage natural resources to its political advantage. It has used oil and natural gas and -coming soon – agriculture (follow this link for Agriculture Report), with total disregard for the economic consequences in the country. Timber is about to join that group.

For example, Prime Minister Putin placed a 25% export duty on timber last year and announced it was going up to 80%, with the intention of encouraging foreign investment in Russia’s timber industry. The big increase has been delayed, but the delay is not indefinite.

The impact here is Russian timber became 25% more expensive on the world market with the swipe of a pen. And it’s only going to get more expensive. This creates a situation where timber production has much less competition at current prices.

In addition to all that though, other leading timber producing regions are facing their own set of challenges.

Pine Beetle Devastation – The biggest challenge facing the two largest timber producing regions is the pine beetle. Pine beetles bore through pine tree bark and basically kill the tree. They then move onto the next.

The pine beetle has ravaged forests across North America over the past few years. One of the hardest hit areas is in British Columbia, Canada. The timber industry throughout inland British Columbia has practically ground to a halt. For example, West Fraser Timber (TSX:WFT) closed its last timber mill in northern British Columbia last week. They had to shut it down because there aren’t enough trees. The pine beetle has killed most of them.

It doesn’t stop there; the pine beetle infestation is spreading. It has already spread through the U.S. northwest and has reached as far away as Colorado. The beetles have had the same impact there too. The Colorado State Forest Service recently reported 660,000 acres of lodgepole forests have been destroyed by the pine beetle. That’s more than 40% of Colorado’s forests!

To put the pine beetle infestations into perspective, think of timber like the oil industry. Then picture what would happen if Iran’s oil production was eliminated from the market.

Prices would go up – way up. That’s about what the pine beetle has done so far in the timber industry, but lumber prices haven’t gone up…yet.

Buying Low and Selling High

Needless to say, now is the time to get really interested in timber.

The industry has been decimated by the housing collapse. The sector is completely out of favor and assets are selling for pennies on the dollar.

The timber industry’s future, however, is quite bright for those willing to get past the knee-jerk “housing market is terrible” reaction and look at what’s really going on.

More importantly, all this truly shows there are folks looking to turn the current downturn into an absolute fortune. The markets may be weak and getting weaker, but as investors, we have the opportunity to get on board with the few who are doing it right and go along for the ride. It also shows the best low-risk/very high-reward opportunities will be limited to those of us with a contrarian approach looking where nobody else is.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

On Thursday, it was announced GDP is back on the climb. That was followed with the claim one million jobs were created or saved due to stimulus spending. And that’s right on pace to meet the goal (imagine that?). So the best marketers don’t want to let an opportunity to take credit for the free exchange of goods and services between individuals.

But on NBC’s Meet the Press, Treasury Secretary Geithner may have inadvertently signaled the gold bull market has a long way to run. In the interview, Geithner said, “[The recent positive economic news] shows that — when you act with force — you can stabilize a crisis like this.”

Force…Force is good!?!

Cranking up the printing press, nationalizing major industries, and increasing taxes (healthcare, cap and trade, VAT, and whatever else happens after 2010 elections) will, in the long run, go a long way to preventing a genuine recovery.

But this is part of the process. It’s training the monetary managers to make terrible mistakes, yet not realize they were mistakes. They’re learning the wrong lessons. And when the next downturn comes, whatever the catalyst, they’ll respond with even more “force.”

And it will be that move that pushes gold to much higher levels. In the interim, anticipation of that eventuality will help keep gold prices propped up.

That’s why now, with the markets showing their greatest weakness in months, gold stocks getting hit 10% to 30% across the board is a great time to continue getting in place for the next “forceful” response. Here are the two best spots to start putting your dollars to work in gold.

Exploration is Back

One of the hardest hit sectors during the credit crunch were the gold exploration companies. Their cash-draining business models were left for dead as the gold price fell, institutional investors saved cash to meet redemptions, and hedge funds deleveraged.

That was over a year ago though and a lot has changed. Gold is setting new highs and money is flowing back into the exploration market. More importantly though, there have been some major discoveries in the past few months which will bring even more speculators back into the market.

The biggest discovery of them all has been Ventana Gold (TSX:VEN). It’s a Columbian gold explorer which has leapt from discovery to development in a few short months.

Since we said Ventana was “the next bonanza discovery” and that it “struck gold – lots of gold!” in our free gold stock report a little more than six months ago, its shares have climbed more than 700%. And the company now counts mining entrepreneur Ross Beatty and Brazil’s richest man, Eike Batiste, among its shareholders. Both now own more than 10% of outstanding Ventana shares.

It has gone from unknown penny stock with a small cash position and an aggressive exploration program to a bona fide discovery with a market cap of more than $800 million which just closed a $40 million financing deal.

This is the type of discovery and massive gain (Ventana went from 20 cents per share to $10 per share in about a year) which sparks the greed necessary to help keep the money flowing into gold exploration stocks.

Of course, a lot of things have to come together before gold exploration really gets going. The combination of high gold prices, a rising stock market (increasing risk appetite), and a couple of major new gold discoveries have made it much more enticing though. Right now, there are still a lot of small exploration companies trading for less than $20 per ounce of gold in the ground and they were fetching as much as $50 per ounce of gold in the ground two years ago.

It’s not just the high-risk/high-reward gold exploration stock sector getting some attention; junior gold stocks are still in the relatively early stages of recovery too and offer exceptional value.

Junior Gold Stocks: 60% Undervalued

The other gold sector which just got a lot more attractive in the past week has been junior gold stocks.

A quick look at the McEwen Junior Gold Index shows it all. The index tracks junior gold stocks that are actively traded (minimum $50,000 average daily trading volume) and have minimum market caps of $50 million.

Since November 2007 when the index was hitting all-time highs, gold prices have climbed 30% and the junior gold index is down 60%.

That’s just half the story though. Their outlook gets even brighter when you look at the big gold stocks. The Philly Gold/Silver Index (XAU), which tracks the major gold and silver miners, is down only 15% from its November 2007 highs.

This is a really simple one. Gold is up 30%, major gold stocks are down 15%, and junior gold stocks are down 60%. Which one would you like to buy now?

If you like gold, you have to love the juniors.

The Trend is Still Up

Those are the best two opportunities in gold right now and this is as good a time as ever to start reloading on gold stocks.

You can practically see the confidence of administration and Federal Reserve officials growing by the day. They are now trained and will know exactly what to do next time. Regretfully, that move will likely be what propels gold prices to the next level.

It’s no wonder that while the government claiming “success” and “back from the brink” talk abounds, some of the world’s best investors are loading up on gold and gold stocks. Hedge fund manager John Paulson has led the headlines, but the ranks of newly minted “gold bugs” now includes top-performing investment managers Steve Leuthold,  and many others.

They see what’s coming and I hope you do to. Now, you just have to maximize the opportunity.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

• You may be buying, selling, or holding a primary residence or vacation home.

• You probably have a mortgage, and maybe a home equity loan.

• And you’re probably concerned about the broader economy, which the housing and mortgage markets significantly impact.

So where do we stand now?

Well, the stabilization and very mild recovery I first told you was coming back in the spring, continues apace. Sales have generally been picking up. The supply of homes for sale has generally been falling. And prices, while still weak and falling, are not falling as quickly.

The real question is: What happens when the mammoth support that the government is throwing at the market ends?

Used Home Market
Finding Its Footing

In September, existing homes sales hit a level not seen in over two years.

I’ll start with the existing home figures, since that’s the most important part of the market. Most of us own “used” homes and sales of such homes account for around 75 percent to 85 percent of overall transactions in any given month. The latest:

* Sales surged 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from 5.09 million in August. That was twice the gain that was expected, and it left sales running at the highest level since July 2007.

* Single-family sales gained 9.4 percent, while condo and cooperative sales rose 9.7 percent. By region, sales climbed across the board, with the Northeast bringing up the rear at +4.4 percent and the West leading at +13 percent.

* Better yet, the raw number of homes for sale dropped 7.5 percent to 3.63 million units from 3.92 million in August. Supply was down 15 percent from a year earlier. That helped push the “month’s supply at current sales pace” indicator of inventory down to 7.8 from 9.3. That’s still higher than the 5-6 month range that’s considered “normal.” But it’s a significant improvement from the double-digit readings we were seeing.

* Pricing is still weak, with the median price of an existing home down 8.5 percent year-over-year to $174,900. But as any good housing analyst will tell you: Pricing lags sales and supply.

Indeed, if you recall what I said in my May 8, Money and Markets column:  

“I still believe home prices have further downside. That’s because we remain oversupplied, with approximately 1 million excess housing units for sale in this country. More foreclosure inventory will likely hit the markets in the coming months, too. Reason: Many of the filing moratoriums put in place at the state and industry levels have expired.

“But the sharpest declines in residential real estate are, for now, mostly behind us. I expect to see sales volumes gradually stabilize on a nationwide basis over the coming year, with total inventory for sale (new plus used) gradually coming down. By mid-to-late 2010, we should see pricing stabilize and gradually turn higher, with the improvement coming in stages depending on location.”

Buying New?
Not Lately …

So what about the new home market? It’s taking a bit of a breather. An index put out by the National Association of Home Builders dropped to 18 in October from 19 in September. Builders said present sales, expectations about future sales, and prospective buyer traffic have all declined.

The new home market has slowed down a bit.

Meanwhile, actual sales have missed expectations for two months in a row. They dropped 3.6 percent in September to a seasonally adjusted annual rate of 402,000. Economists were expecting an increase to 440,000 units. Pricing remains weak, with the median price of a new home off more than 9 percent from a year ago to $204,800.

But here’s the thing: The supply picture in the new housing market has dramatically improved!

At the peak of the bubble, builders had 572,000 homes up for sale. That was the highest in U.S. history.

The dramatic cutback in production, combined with a general uptick in sales, has driven that number all the way down to 251,000. We haven’t had this few homes on the market since November 1982, almost 27 years ago.

Surprise, Surprise:
Government Policy Is
Distorting the Market …

Why are we seeing a divergence between the new and existing markets? Like it is in so many other parts of the economy, government policy is distorting things.

You see, the $8,000 first-time home buyer tax credit is set to expire on November 30. It applies to all transactions CLOSED by that date. The typical closing of an existing home takes about 30-60 days. So contracts signed as late as, say, July, August and even early September, are probably okay.

But when you sign a contract to buy a NEW home, unless it’s a “spec” property, you’re buying a plot of land. This means you’re looking at several months to build the house and close. So we got the tax-credit-fueled surge in the new home market EARLIER than the existing home market (June sales rose 7.6 percent, while May sales climbed 7.5 percent).

Since then, some buyers have gotten more reluctant to jump in because they fear they won’t be able to close in time to get their government handout … er … credit.

An extension in the tax credit should keep the housing recovery on track.

But — and this is important — Congress is now talking about extending the credit into 2010. The latest scuttlebutt is that the credit would now apply to all contracts signed through April 30 of next year, with an additional 60 days granted to close the transaction.

Not only that, but it may be expanded so that richer buyers could qualify! If that happens, couples making up to $225,000 would qualify, compared with $150,000 now. Plus it would no longer apply to only first-time buyers. If you’ve lived in your current home for at least five years, you would qualify for a credit of up to $6,500.

Bottom line is that the government’s massive housing and mortgage market support measures show no sign of letting up. In fact,

• The Federal Reserve is still buying $1.25 trillion of mortgage securities to keep rates low.

• The FHA is now backing the same kinds of high-risk loans that blew up private, high-risk lenders, allowing it to capture the largest share of the mortgage market in years.

• The “temporary” increases in the size of mortgages that FHA, Fannie Mae, and Freddie Mac can insure have essentially become permanent.

• And now, just as I forecast, the tax credit/handout is almost sure to be extended well into the future.

You don’t have to like it. Frankly, I don’t. But you do have to appreciate the reality of the situation and understand that it likely will keep the housing recovery on track.

It won’t be a linear process, though. Instead, I foresee more of a “three steps forward, two steps back” scenario.

Until next time,

Mike Larson
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Few technology stocks pay dividends like IBM. To be sure, the yield is only 1.8%. But that’s a lot more than you can expect from Apple (AAPL) or Google (GOOG), and IBM is a much better value at just 11 times 2010 earnings. Best of all, IBM’s dividend is as reliable any. The company has paid it every year since 1916. The five-year dividend growth rate is close to 27%.

In addition to the dividend outlook, IBM is in a solid cash position. The company recently announced it will add $5 billion to a share repurchase program that now rests at $9.4 billion. Management isn’t stopping there. IBM said it plans to ask its board for more buyback cash next year. Returning value to shareholders is obviously a priority for IBM, which says it has sent $73 billion to investors in the last decade in the form of buybacks and dividends.

IBM finished the third quarter with $3.4 billion in free cash, up $1.3 billion from a year earlier. In a market that prizes strong balance sheets, IBM is an alluring investment. The company is well-positioned to weather slow economic growth because it helps customers reduce costs and operate more efficiently. At the same time, any economic rebound will provide a jolt to IBM’s top line.

IBM’s cash position and emphasis on creating shareholder value make it one of the safer bets for long-term investors. To go with a growth-like stock and a solid, conservative company, buy IBM.

Brandon Clay
Invest With An Edge 

Disclosure compliant with FTC 16 CFR Part 255 covering myself and my employer: No positions in any securities mentioned. No income, revenue, or other compensation received directly from, or on behalf of, the companies mentioned.

 

Major market turning points are usually characterized by many of these tools. That was clearly the case in 2007 when everything fell neatly into place to call the end of a bull market that had started in 2003.

Bull markets don’t go straight up. And this one is no exception.

To a somewhat lesser degree that has also been the case starting this June, signaling a medium-term up trend. And that’s why I still expect it to continue during the coming months.

But even the strongest bull markets aren’t one-way affairs. They’re often interrupted by short-term corrections typically lasting six to eight weeks with prices falling 10 percent to 15 percent. And right now I think such a correction has just begun.

Here’s why …

All Major U.S. Stock Market Indexes Are
Bumping Against Important Resistance

These technical resistance points are important enough to warrant the beginning of the first large correction since this medium-term rally began in March 2009.

Let’s start with the S&P 500 …

As you can see on my first chart, this index hit the resistance line going back all the way to its October 2007 high.

Source: Bloomberg

This trend line is very significant, because it defines the bear market of 2007 to 2009 when the S&P 500 lost 57 percent. And I think it’s highly unlikely that this resistance line will be broken through on the very first try.

It’s much more likely that the market — which is already tired after the huge runup of the past months — will have to retreat from here to gather enough strength to overcome this technical hurdle.

Next, have a look at chart below of the Dow Jones Industrial Average …

On a first glance you may think there isn’t any resistance below 11,000, especially if you only look back two or three years. But if you go back a bit further, to 2005 and 2004, you can see the massive resistance around the 10,000 area. This marks the lower boundary of a very massive trading range.

Source: Bloomberg

Next, the Nasdaq Composite …

The Nasdaq has already reached the equivalent of 1,200 in the S&P or 11,000 in the Dow … the short-term bottom of 2008, before all hell broke loose. This is a very obvious resistance point.

Source: Bloomberg

Now, take a look at the Dow Jones Transportation Average …

The Transports are showing a huge topping formation that began to form at the end of 2005 and lasted until fall 2008. When it broke to the down side, a crash wave ensued.

As you can see on the chart below, this index is now back to the lower boundary of that huge formation, a classic resistance area that’s not easily broken.

Source: Bloomberg

Finally, let’s examine the Dow Jones Utility Average …

The Utilities have been relatively weak since their March low. But they, too, are bumping against resistance now. This index formed a very nice topping formation from 2006 to 2008, thus a bit shorter than its cousin, the Transportation Average. But the result when it was broken was the same: A market crash in 2008.

Source: Bloomberg

Even though this index has risen much less than the others, it has still entered a massive resistance area stemming from its trading range last fall.

Five Different Resistance Patterns

So here you have it. Five indexes showing very different chart patterns. But they’re all hitting major technical resistance areas at the same time! This makes for a very strong picture of a market that’ll have difficulties rising any further without a correction first.

In Fact, Other Technical Indicators Are Equally Weak …

The whole technical picture has become very fragile during the past weeks:

• Volumes have been dismal: Declining when the market rose and rising when it retreated.

• Momentum indicators show multiple negative divergences: They did not rise to new relative highs during the past three up-waves in the market.

• Market breadth shows a similar picture: The ratio of advancing to declining stocks was lower at each of the past up-moves in the market.

• Put-call-ratios were back to frothy levels: The equity only put-call-ratio fell to 0.52 a few days ago, a level often associated with short-term exhaustion.

All in all I get the impression that the first big correction of this medium-term up trend is already underway. I expect it to last until late November and bring prices back 10 percent to 15 percent.

However, I don’t expect this correction to herald a major trend change. Hence, I suggest you consider using it as a buying opportunity.

Best wishes,

Claus Vogt 
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

If you’re a Dividend Superstars subscriber, you should have closed out that position based on my recommendation in the issue that just went to press. I’m tracking a gain of 32.7 percent. Great!

Now today I want to talk about a couple of the other things I look at on charts … and how they apply to some of the other investments that I’ve mentioned before here in Money and Markets.

Let’s start with …

The Importance of Support and Resistance:
Understanding Investors’ “Lines in the Sand” 

Investors have a tendency to get hung up on certain numbers … quite often round ones. You know, like Dow 10,000.

I’m not a psychologist, so I’m not going to hypothesize on why it happens. But from many years of following the markets, I can tell you that it does happen with alarming regularity.

This is precisely why I pay close attention to clear levels of support and resistance whenever I look at any investment’s chart.

Let me explain with a real-world example …

Here’s a chart from Vanguard’s Inflation-Protected Securities fund (VIPSX), a good stand-in for the TIPS and I-Bond inflation hedges I’ve been regularly suggesting here and in Dividend Superstars …

In my past discussions of this particular fund, I pointed out that the low $12 level seemed very important psychologically to this particular investment. That’s because — as my trendline demonstrates — the fund had repeatedly bumped against this level before the credit crisis began … and again after the market rally started in 2009.

As you can see, once it recently broke through that level, it swiftly moved up another 4 percent. While that move might not sound huge, you have to remember that this is a mutual fund based on government bonds!

Are there fundamental reasons behind the move? Absolutely. Worries over a falling dollar and renewed inflation are obvious catalysts spurring investors to move into these hedging investments.

But that’s the point: These charts reflect the market’s collective thoughts and opinions. When events are enough to push an investment through a level that previously presented resistance … it means a certain critical mass has been achieved … and momentum quite often takes over from there.

Obviously the opposite is also true. When a level has previously held on countless downdrafts — forming a strong area of support — you better look out below the first time that level is seriously broken!

Now I’ll be the first to say that you never know when an important level is going to hold or not. However, simply being aware of critical breaking points — along with the fundamental reasons moving a market or an individual investment — will help you make more educated (and hopefully more profitable) decisions.

Of course, it never hurts to layer on one more relatively simple technical indicator that also measures levels of support and resistance …

Moving Averages: Another
Favorite Technical Analysis Tool

During my last analysis of Colgate in this column, I pointed to trendlines as a way to get a sense of an investment’s general direction.

Well, moving averages take trendlines to the next level because rather than being constructed somewhat arbitrarily (i.e. “pick a couple points that look important to you”), they are computed automatically based on a preset series of data. Specifically, a moving average is a line based on the arithmetic average of the prices it’s drawn against.

What’s the benefit? This way smoothes out all the little movements and creates a line that you can compare them to. Common moving average periods include 200-day, 90-day, and 60-day periods.

I like moving averages as another way to gauge general uptrends and downtrends, and to spot major market reversal points.

Speaking of which, here’s a chart of the S&P 500 with a 60-day moving average thrown in for good measure …

As you can see, the market is well above its moving average, and thus remains in an uptrend. Only a drop below the 1040 level would signal a change in that trend.

And perhaps the best part about technical analysis tools like moving averages is that they are no longer only available to professional investors with thousands of dollars in trading software. In fact, most online chart providers — including free websites like Yahoo Finance — now allow you to overlay these tools to whatever investment you’re viewing.

If you don’t already use these indicators, I encourage you to play around with them … they can give you another interesting way of viewing your investments.

Best wishes,

Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

S&A Resource Report editor Matt Badiali covers a broad expanse of ideas as well as geography in this exclusive interview with The Energy Report. He discusses the immense potential of Iraqi oil, and the smaller but surer resurrection of old oil fields in Illinois. In addition to sharing views about areas within the oil industry worthy of investors’ attention, he talks about the promise—and problems—associated with major oil finds that have been making the news. These discoveries may postpone peak oil by a decade or two, but they will take a long time to bring to production, too. Matt also points out how data reporting metrics (BOE) manage to hide the extent of dwindling oil production.

The Energy Report: When we interviewed you six months ago, you were talking about some new oil finds in the Tupi field off the coast of Brazil. Since then another big oil field has been identified offshore of Sub-Saharan Africa. Can you speak to these finds and what they will mean to the oil sector?

Matt Badiali: Sure. There have been several big pre-salt or sub-salt discoveries offshore South America, offshore Brazil. The ability to gather much more detailed seismic energy information is driving these new discoveries. They go out and collect seismic information, shooting sound waves through the ocean into the sediment beneath the ocean floor. The further away, the deeper it gets into the earth, the noisier it is. With the advances in computing power, they can actually filter out that noise and see deeper and deeper.

And salt created its own special problem because it attenuates the actual sound you put in; in the past, you couldn’t see underneath it with seismic data. They can do it now with the algorithms they’ve developed and faster, stronger computers.

Having found the oil is one thing. The problem is that the ability to see the oil got ahead of the ability to develop it. This oil is going to require some of the deepest wells ever drilled and the deepest production infrastructure ever placed. Superlatives like that concern me, because the costs go up. Because it’s never been done before, you can probably add a zero to the price tag when you bid out this oil pipeline. Making money on this oil will be a challenge for Petrobras (NYSE:PBR).

And as you mentioned, there is a new discovery in offshore Sub-Saharan Africa, kind of the horn of West Africa. Anadarko Petroleum Corporation (NYSE:APC) and Tullow Oil plc (LSE:TLW.L) have made a couple of really exciting discoveries there. They’re exciting because they’re separated by about 700 miles, stretching from Ghana on the east to Sierra Leone on the west. I think Exxon Mobil Corporation (NYSE:XOM) is competing with one of the Chinese oil companies to get a 25% stake in the Jubilee Field, which is the one south of offshore Ghana.

TER: This might move the peak oil date farther ahead.

MB: I think this is a really, really massive play. And yes, if that’s the case, it pricks the peak oil balloon again for another decade or so. When you start putting the discoveries together on this one, and consider some of the work that Anadarko has put together, you’re looking at 6 billion barrels conservatively.

That’s very similar to the Tupi discovery. So offshore Sub-Saharan Africa could be the next offshore Brazil, in which case we have lots and lots of oil out there. We just have to figure out how to develop it.

TER: And at what price.

MB: David O’Reilly, CEO of Chevron Corporation (NYSE:CVX), came out last week saying there’s going to be a shortage of oil in the next decade and he’s pointing to $100-plus a barrel again. His line of reasoning is rational. For instance, Venezuela basically uses all of its oil revenues to subsidize bizarre projects such as donating heating oil to people in the United States, keeping Chavez in power. Basically, Mexico did the same thing and ran themselves right into the ground. They are on track to becoming net oil importer from one of the biggest oil exporters in the world. And Mexico has the potential of doing the same thing. We’ve already seen it with Indonesia, which was one of the founding members of OPEC but got kicked out because they became a net oil importer a couple of years ago.

Oil fields require sustaining capital. You have to keep drilling. You have to rehabilitate the fields. You have to spend money on them. They’re not a golden goose. A lot of these countries where the sole source of GDP is oil don’t do that. They spread the wealth around and that’s a problem.

The other thing that you see—and you see it reflected in the mix of oil-to-gas reserves in a lot of these big companies—is that the discoveries of oil are declining and they’re replacing oil production with natural gas reserves. It’s very subtle because most oil companies present their data in BOE (barrels of oil equivalent), which is oil and gas combined and published in barrels. It’s kind of a slick way to not tell you that they’re actually finding natural gas and not oil.

So we could see more robust oil prices going forward. We hit $65–$70 a barrel in 2005, 2006, 2007, before things really got crazy, and we’re right back in that same groove. This isn’t out of line. I think $35 a barrel earlier this year was a market over-reaction to the catastrophe. Everybody was looking for the end of the world and when it didn’t happen, things are starting to get back to normal.

TER: Are you talking about a temporary spike due to the oil-producing countries depleting reserves and we don’t yet have the oil from these deepwater finds?

MB: If these countries continue to lose production, it’s going to be very, very difficult to replace it. So even when you bring these massive oil discoveries online, that’s going to take a long time—five, six, eight years down the road to build these pipes and put in the infrastructure they need. These are discovery stage. It takes a long time to go from discovery to 100,000 barrels a day, 300,000 barrels a day.

Part of the equation that’s still in limbo is Iraq. I think they’re shooting for 10 million barrels a day, and that’s oil that’s inexpensive to produce, is land-based, and just needs the infrastructure to be upgraded. That’s going to be the real hinge on what happens to oil prices. If Iraq doesn’t get its act together, we’ll have to rely on offshore oil fields to take up the slack. Then the oil price is going to be very, very cyclical. If there’s a storm, if there’s a riot, it’s going to get bad and oil prices will spike.

I won’t say oil is never going to go below $100 a barrel again, but I certainly am further over in the $100 a barrel camp today than I was April of 2008 when people were saying it was going to go to $200 a barrel and I couldn’t figure out why it was at even $100.

TER: In our last conversation, you were really hot on the oil services sector—partly because you expected the oil price to rise (which it has) and also because you saw the services sector trading for just about book value. You gave us a couple of recommendations, which have doubled or tripled since then. What do those oil service sector companies look like now in terms of investment opportunity?

MB: When you take gains like that, things get too expensive. We were buying those shares at fractions of book value. I think Parker Drilling Company (NYSE:PKD) was trading at 30 cents on the dollar in terms of the value of its rigs. When oil is cheap, the market looks at drill rigs sitting in parking lots and assigns them basically no value at all. I wanted things to get a little better and I knew we would make money that way—and we did. But now they’re trading at multiples of book value again and things could get worse.

The nice thing about the oil and gas industry is it’s very cyclical, so we get these opportunities. Right now I’m less interested in the service companies. There are sectors of it that I probably should be paying more attention to right now. When we talked in April, the number of onshore rigs drilling specifically for oil went from 224 to 204. They were getting clobbered. Today that’s rebounded all the way up to 309 rigs from its bottom in June. So, our timing on the investment was absolutely perfect.

Gas drilling rigs are starting to come back a little bit now, but they didn’t bottom until the middle of July. They went from 800 in April to 675 rigs in July and they’re back up to 721. To me that also speaks to the oil-versus-gas situation I mentioned earlier—300 rigs are out there drilling for oil and 700 are drilling for natural gas. These companies are replacing their reserves with natural gas, so there could be less oil available in the future.

TER: So if not oil services anymore, where do you see the action these days?

MB: I’m very excited about companies that have oil production that’s not the cheapest production in the world, so maybe they’re paying $25 or $30 a barrel to produce it. But as the oil prices go up, their earnings rise faster than lower cost producers. They have leverage to the oil price, so now I think gains will be made in those kinds of companies. These are companies that maybe produce heavy oil or tar sand.

But my favorite group of companies right now does enhanced oil recovery (EOR) or tertiary recovery. They go back into oil fields discovered around the turn of the last century, produced millions or billions of barrels of oil, and then were left for dead in the ’70s or ’80s or ’90s when oil hit $10 or $15 a barrel.

The Lawrence Field in Illinois is a great example. It probably still has 50% or 60% of its original oil in place. They produced maybe half of it, so a little company is back there now and injecting a chemically that acts basically like Dawn liquid dish soap.

TER: Dawn?

MB: Dawn takes the grease out of your way. It’s not really Dawn, but a surfactant. When they put the chemical into the reservoir, it kills the surface tension and the oil mixes with the water. They figure they’re going to get 20% of the original oil out. That’s hundreds of millions of barrels. And they’re going to do it for $25 or $30 a barrel. If oil hits $90, they’ll make a fortune. People are starting to pick up on it, but they haven’t quite gotten there yet.

I like that better than, say, tar sand, because it’s light, sweet crude—the real stuff. A couple of other companies that I really like are injecting CO2 into oil fields to lower the surface tension and loosen up the oil. With today’s society seeing carbon dioxide as a bad actor, an oil company that’s injecting carbon dioxide into its oil field to produce low-carbon oil is going to get a lot of attention. I think they will get a higher multiple for that oil, whether it’s deserved or not.

TER: Who are the companies?

MB: Probably 10 companies are doing this kind of stuff. Marathon Oil Corporation (NYSE:MRO) has done a lot of this, but I haven’t recommended them because it represents only a small fraction of their production. EnCana Corporation (NYSE:ECA) does this too. Marathon and EnCana are the two big guys.

TER: Which one is in Illinois?

MB: The company that’s working in the Lawrence Field is Rex Energy (NASDAQ:REXX). It has absolutely exploded, though, not because of the EOR work, but because they’re based in State College, Pennsylvania, right in the heart of the Marcellus Shale region and they have a partnership in the Marcellus. As soon as natural gas prices turned around, Rex exploded out of the gate.

TER: Do you have a target for Rex?

MB: No. I typically don’t do targets on the upside. I let the market tell me because my experience with a lot of these smaller companies is that I would be way too conservative. I basically told people to buy it up to $8 and it’s closing in on $10.

We don’t know what the oil price will be when the Lawrence Field production comes on and how much money they’re going to make. But at $90 a barrel, the economics of that field look much, much better than they did when I first recommended it, so that’s pretty exciting.

TER: And when do they anticipate production?

MB: The first or second quarter of 2010. I think the Lawrence Field story is fantastic. And bear in mind, this is a region of the United States that’s been hit particularly hard in the downturn and this oil company is putting people to work on an old oil field that was discovered in 1906.

To tie this back to Brazil, Petrobras very quietly put together a $145 million research project to inject CO2 into one of its fading onshore oil fields and it was pretty clear that they will do this to their offshore fields too, because it almost guarantees an additional 20% production. The people at Petrobras are no dummies. They want to get as much oil out of these fields as possible, so I wouldn’t be surprised if they build the infrastructure for their CO2 floods on the front end rather than trying to retrofit things.

TER: You said maybe 10 companies are doing enhanced oil recovery. Can you tell us about any more of them?

MB: BreitBurn Energy Partners L.P. (NASDAQ:BBEP), I believe, is doing some EOR work in California. And Venoco, Inc. (NYSE:VQ), which—believe it or not—has oil wells in downtown Los Angeles, also does this. They have elaborate façades; you wouldn’t even know you were walking by an oil well.

TER: Are you looking at any other oil plays?

MB: This is the perfect time to look at leveraged oil. Suppose a company produces oil for $30 a barrel and sells it for $40. The market says it will value the company at 10 times earnings. If this company then doubles its production or the oil price goes up by $10, it doubles its earnings. On a P/E multiple, that doubles the market cap. It usually doesn’t work quite that nicely, but that’s the way leverage to your commodity works.

With the higher-cost producers—EOR, heavy oil, tar sands—where their production costs are $25 or even $35 a barrel, that’s a very nice increase in share price if oil goes from $80 to $90. So that’s kind of what I’m looking at across the board.

TER: So do both heavy oil and tar sands provide more of that leverage?

MB: They both do. They’re both high-cost production, basically. But you don’t want to buy these high-cost producers in an environment where the price of the commodity could fall. That’s our biggest risk. If the dollar strengthens, the price of oil will come down and these high-cost producers will fall because that leverage also works in reverse. But I think we’re going to hit $90 before we hit $50; that’s what I keep in mind.

TER: Other than these leveraged oil plays, what are you watching?

MB: I’m still really excited about Iraq. I think there’s going to be some enormous discoveries. We recommended a company called Addax Petroleum Corporation in Iraq in May, because they had a discovery we really liked. I was really disappointed because we were only able to be in Addax for six weeks before Sinopec International Petroleum Exploration and Production Corporation (NYSE: SNP.N)bought it. But we made a 55% gain in those six weeks.

There are a couple of other oil companies in Iraq, but they trade mostly on foreign exchanges. Heritage Oil plc (LSE:HOIL; TSX:HOC) is in the process of merging with a privately held Turkish company, Genel Energy International. That’s a spectacular oil company and I think they’re going to make some big discoveries. But they haven’t moved a blip lately because they’re in the middle of a merger and the merger hit a couple of bumps.

Another company I recommended was working on a joint venture with the Iraqi government, the Iraqi State Drilling Company, to bring western drilling techniques into Iraq. Basically, Iraq has had no modern drilling since the ’80s. It is the home of billion-barrel-plus fields with very, very low operating costs. If I were going to start an oil company, Matt Badiali Enterprises, I’d go to Iraq. My operating costs would be less because people still think of Iraq as a war zone, but I’d have a great chance of finding massive oil reserves. To me it’s the best place for a small oil company to go to add a zero to its market cap, if it’s willing to accept the political risk.

When I’m playing oil discovery, I’m looking at places where people are a little afraid to go, political risk over technical risk. That’s the mistake that 90% of analysts are making with those offshore Brazil discoveries. There figure there’s no political risk, that Brazil is as excited as all get-out, but the technical risk is enormous. When you make a mistake on a $4 billion oil pipeline, it’s a problem. And there is political risk in Brazil that people are undervaluing.

TER: How so?

MB: Brazil has proposed to create a brand new company—a quasi state-owned, quasi public company—that will oversee all of these offshore oil fields and will take ownership in part of all fields held by foreign companies. And they’re going to go to production sharing agreements (PSAs), where the foreign companies will get cash per barrel, but won’t be able to book reserves. Knowing what I know about Brazil, I thought, "Man, they just legally added a whole other layer of graft to that system." This is just another way for Brazil to tax that oil discovery and to steal as much as they can.

This is a massive discovery but it’s not going to be the oil industry’s savior. As soon as the size of the deposits became clear, the country changed the rules. If Brazil isn’t careful, it could go the same route as Venezuela and Indonesia.

TER: Could you give us a quick synopsis of your view of the geothermal market as an investment? It’s been attracting a lot of attention of late.

MB: There are two very different investment theses behind some of the companies in this space. Ormat Technologies Inc. (NYSE: ORA) is a play on everybody else getting excited about geothermal. It does produce some geothermal energy, but it is more the general store for the geothermal industry.

And I think if any form of cap-and-trade passes that makes coal-generated electrical power much more expensive, Calpine Corp. (NYSE:CPN) is going to make a lot more money. I’ve actually visited the geysers, which is where Calpine produces a lot of its geothermal energy. They generate hundreds of megawatts and it’s silent, the coolest thing in the world.

TER: It sounds as if geothermal appeals to you.

MB: It does. What really what gets me excited about geothermal is that it works. It’s not solar and wind, which need subsidies; and it’s not tidal energy that works well on some engineer’s drawing board, but doesn’t translate into the real world.

I’ve heard that every megawatt of wind or solar energy needs a megawatt of natural gas or some other consistent power source to back it up, because there’s no way to store this energy. If you produce wind power and suddenly the wind stops blowing at peak hours, you have to be able to turn something else on and generate that electricity.

Geothermal works. It’s an economic, 24-hours-a-day source of power, and it makes a lot of sense. That’s why I’m glad to see these new mid-sized entrants into the geothermal space. I think it will be a race between Ram Power Corp. (TSX: RPG) and Magma Energy Corp. (TSX:MXY) to roll up the junior geothermal industry.

TER: Rick Rule and Ross Beaty. They’re good friends, too.

MB: The fact that Ross (Magma’s founder) got into this is very exciting, and Rick has been pounding the table on geothermal for a long time. So this is good. We’re going to need every source of energy we can get. As China gobbles up more and more energy abroad and our population grows, we will need as much domestic energy production as we can. That’s electricity and fuel.

I look at oil as not so much a source of electricity, but as a source of fuel for trains and boats and planes and cars, trucks. I look at natural gas, like coal, as a source of electricity.

I find it unbelievable how any carbon-producing fuel is suddenly bad. People getting angry about coal, to me, is a complete disconnect. I grew up about 50 miles from Three Mile Island. Remember all the horrors of the 1970s nuclear scares? Now we see green TV commercials with baby birds and bunnies and a nice lawn and an attractive couple who get their electricity from nuclear power. Talk about cyclical. Holy smokes.

Now coal’s the bad guy. But if we’re going to get rid of coal, we need more sources of electricity. That’s where geothermal fits in. It’s also going to spark the renaissance of natural gas, because we need a transitional fuel. If you want to get away from coal, you need something to produce electricity with and natural gas is going to be the source. You can build a natural gas plant far, far faster than you can build a new nuclear plant with far fewer regulations.

TER: That takes us into a whole other discussion. There’s so much to talk about. You’re in an exciting area.

MB: Oh, man, I love it. It’s been spectacular and it’s been fast, with opportunities flying by.

DISCLOSURE: Matt Badiali
I personally and/or my family do not own any of the companies mentioned in this interview.

A member of the Stansberry & Associates Investment Research team of editors, Matt Badiali produces the The S&A Resource Report, a monthly investment advisory that focuses on oil, energy and mining and sectors—from the biggest resource companies in the world to small-cap junior explorers. With "the global economy still in the grip of a long-term bull market for oil, precious metals and other natural resources the likes of which the world has never seen," his company says those are the sectors in which "demand is going through the roof, and one of the best places investors can have their money over the next few years."

Matt, who’s spent the last four years flying all around the world digging up the best resource investments, has more than 15 years of experience as a hydrologist, geologist and a consultant to the oil industry. He holds a master’s degree in geology from Florida Atlantic University and is pursuing his PhD at the University of North Carolina. He’s also a regular contributor to Growth Stock Wire, a free daily pre-market briefing on trading opportunities.

We have massive Ponzi schemes, equally massive losses and outsized systemic risks that are enough to frighten away even the hardiest of investors.

So before you leap, you need to look — carefully and deeply into this industry. When you do, however, you’ll also find that there’s a lot more to hedge funds than has been making it into the evening news …

Hedge funds are an integral part of our financial investment landscape. They often outperform the broad stock market by wide margins. Many are designed to make money in ANY market environment. And they are now more accessible to investors via a fast-growing new vehicle — funds of hedge funds.

This morning, I’ll give you a basic primer on hedge funds to help you decide if these unique investments are possibly right for you. And in the future, I’ll introduce you to specific funds — and strategies they use — for successful global investing.

What Are Hedge Funds?

The first hedge fund came out in 1949 as a strategy to neutralize the effect of overall market movements on a portfolio.

The strategy was simply to buy stocks that were expected to rise and selling short stocks expected to fall. The concept was to add BALANCE — to produce returns that were not market-dependent and tended to hedge a portfolio’s market exposure.

Nowadays, that has changed in a very fundamental way: Besides protecting a portfolio from downside risk, hedge funds often go for maximum return by deploying large amounts of leverage and investing in several asset classes among global markets.

Who Invests in Hedge Funds?

Hedge funds are private partnerships that are open to a limited number of investors, with qualification criteria determined by the SEC. To get into one, you’ll need to prove you have a net worth greater than $1 million and meet a minimum income requirement.

The reason for these stringent requirements is simple: The SEC feels that hedge funds are riskier and less transparent than mutual funds and most other investments.

Beyond high-net-worth individuals, institutional investors are also a dominant force behind the rising popularity of hedge funds. Two such groups are …

#1. Pension Funds

Unfortunately, U.S. corporate and government pension funds rarely have enough money in their kitty to cover all their expected future liabilities to their members. In fact, assuming the most likely future scenario, the expected shortfall is almost $1.5 trillion!

This is a major reason why pension fund managers have reached beyond traditional investment vehicles to seek outsized returns. And many fund managers think hedge funds are the best places to find them.

Estimates vary. But up to 20 percent of European and American pension funds — plus 40 percent of Japanese pensions — are believed to invest in hedge funds.

Two prime examples: As of January 2, 2009, the two largest government pension funds investing in hedge funds were the California Public Employees’ Retirement System with a total market value of $188 billion and the Ontario Teachers Pension Plan with $108 billion in net assets.

#2. Endowments

Endowments include colleges and universities as well as charitable institutions. And in the latest National Association of College and University Business Officers Endowment Study, hedge funds made up 18 percent of college and university portfolios on a dollar-weighted basis. This puts hedge funds second only to stocks (with a 48 percent allocation).

Additionally, the data reveals another not-so-surprising trend: The larger the institution, the higher the percentage of assets invested in hedge funds.

Even assuming no hanky-panky, the risks are clear. But don’t ignore …

Four Key Benefits Of
Investing in Hedge Funds

Benefit #1 — True diversification across multiple asset classes. Hedge funds operate in any and every asset class imaginable, from the traditional equities and bonds to currencies, commodities, real estate, and even fine art.

Benefit #2 —True global diversification. While most of the strategies used by hedge fund managers are concentrated in developed countries, there are funds focused on the emerging markets of Asia, Latin America, and Eastern Europe. I’m also seeing hedge funds foray into frontier markets — extremely underdeveloped markets of Africa and the Middle East.

Benefit #3 — Non-correlation with traditional investments. The instruments used by hedge funds are diverse. Hedge funds can utilize futures, swaps, and options. This allows them to produce returns that vary wildly from those of broad markets and more common investments.

Benefit #4 — The concept of absolute returns. Hedge funds exist to make money in any market environment. They’re not content to help you “lose less money than the averages.” They make their fees only if they give you a positive absolute return. This is a very powerful incentive. It’s backed by years of solid performance. And I think it’s the main reason the hedge fund industry has been attracting capital from all kinds of investors.

The following chart shows the annualized returns from 1997 to 2008 of various hedge fund strategies as compared to the S&P 500 index.

Among six of the most widely used hedge fund strategies, five have greatly outperformed the S&P 500 Index; only one fell short.

Clearly, if you are qualified for a hedge fund — or a fund of hedge funds — and you can gain the knowledge to help you avoid the pitfalls, this is not a track record you can afford to ignore.

Best regards,

Monty Agarwal
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

And it’s as simple as supply versus demand.

Big investors in the East are concerned about their supply of oil.  Investors in the West are more concerned about the lack of demand.

In an October 18 research note, Goldman Sachs echoed this theme, explaining that China cannot produce enough oil to meet their domestic needs, and will need to consistently acquire foreign reserves.

The Goldman analysts who authored the report also say that in their opinion, China’s growth and infrastructure build out will continue for many years.  And so nervous investors in Europe and North America who are fretting about a collapse in China and oil prices will be miss the boat on oil stocks.

The report stated: ”China-based investors focused on supply side of our bullish view as opposed to demand in sharp contrast to most investors in US and Europe we meet with that are focused on demand uncertainty as opposed to oil supply…Given that China is emerging as an economic super power at a time of limited oil supply growth, we think it is likely to lead to the country adding to its SPR (Strategic Petroleum Reserve) continuously for many decades to come.”

Oil bulls are quick to point out that China only used 2.2 barrels of oil per person in 2008, versus the 23.3 barrels used in the USA.

Supply versus demand.  East versus West.  And with oil at US$80, it looks like the Eastern philosophy is winning out.

There is another huge benefit to national oil companies (NOCs) buying oil assets, and it is this: they get to spend their large currency reserves in US dollars into an asset that basically hedges against the greenback’s decline.

Asian countries like China and South Korea run a large trade surplus with the US.  They then use those excess dollars and buy US Treasuries, the largest, the most liquid, and the most transparent investment vehicle in the world.

But the US dollar is moving steadily down, eroding value for Treasury buyers.  So instead, they diversify and buy hard assets like Canadian oil companies such as Harvest Energy Trust. 

Harvest’s stock was a huge laggard compared to its peers, because of the high debt levels in the company.  But KNOC didn’t care about that – not with South Korea running a trade surplus of $5 billion in September alone.

KNOC’s $4.1 billion bid values Harvest at $77,700 per flowing barrel of production, which is almost exactly the average for the energy trust valuations in BMO Nesbitt Burns coverage universe this week.  (Peters & Co. out of Calgary called it $63,000 after removing value for Harvest’s downstream assets.)

Regardless, it was a 47% premium over what western investors thought it was worth.

How typical.

Keith Schaefer
Oil & Gas Investments Bulletin

But Now Another Important Market
Has Given a Clear Buying Signal …

As you can see on the following chart, crude oil prices have been hovering between $60 and $75 for roughly four months. At the same time the Price Momentum Oscillator (PMO), which signals the strength of a price trend, has corrected its overbought readings by coming back down to the zero line.

Source: www.decisionpoint.com

While the price of oil was going sideways, this momentum indicator was creating an interesting bottoming formation.

Then, last week, an important event occurred: The price of oil broke above its upper boundary, and the PMO finished its consolidation. Both lines on the chart, price and momentum, were thus giving key buying signals.

My analysis tells me that the next price target stemming from this four-month consolidation formation is approximately $100 per barrel.

That’s not particularly good news for you or me as consumers. After all, we’ll have to pay more to fill up our gas tanks, heat our homes, and more.

So it’s difficult for me to understand how some pundits can claim that rising oil prices might be a good thing for the economy …

The way I see it, higher prices are like an additional tax for American and European consumers and businesses alike. They’ll dampen the still-nascent economic recovery before it gets real traction.

As governments shift their printing presses into overdrive, you can expect inflation to surge.

What’s more, rising oil prices are in step with the message coming from gold’s price advance. Here’s why I say that …

Rising Prices Are Caused By
Governments’ Policies …

Rising gold and oil prices are symptoms of the inflationary monetary and fiscal policies that have been implemented. These were without doubt global governments’ absurd and counterproductive answers to the popped real estate bubble.

My basis for this conclusion is very straightforward: If governments continue printing boatloads of money, the prices for goods and services have to rise sooner or later. There’s no way they won’t!

And whether it happens sooner or later depends on certain circumstances, such as changes in the velocity of money or money demand.

The breakouts in gold and crude oil are like early warning indicators. And the commodity markets are clearly telling us that inflation will rise sooner rather than later and will become a major problem for the world economy.

Fortunately as investors, we can turn that problem into a tremendous opportunity. And my colleagues and I will continue to show you how to do that every chance we get.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Almost every sector has done exceptionally well.

Car rental companies have delivered 500%+ returns from their lows. Banks and real estate stocks just go higher and higher. Oil’s inching closer to $80 a barrel. Natural gas has recovered nicely from its summer beating.

Even long-time contrarian standbys like gold and silver stocks have, in many cases, bounced back to their 2008 highs.

The breadth of the rally has been exceptional. The run over the last six months has pushed the S&P 500 P/E ratio from below 15 in March to above 19 (as tracked by Robert Shiller’s inflation adjusted, 10 year average earnings model). Also, the dividend yield for the S&P 500 sits at a low 2.28%. The index’s yield has historically hit 6% or higher at true stock market bottoms.

Basically, the market is overvalued. Frankly, it has been for more than 20 years.

It will change – eventually. That doesn’t mean there’s no opportunity. As in all type of markets, bull or bear, there will always be safety and opportunity in value stocks. The more out of favor the sector or stock, the lower the downside risk and the greater the upside potential.

But here’s the problem. After such a meteoric rise in the markets, are there any true values really left? Are there any sectors or stocks which haven’t done well in this rally?

Well, all I can tell you is there aren’t many. But there is one that, due to an improbable one-time event, has barely joined in this rally at all. Yet still offers plenty of opportunity in the months ahead as well as exceptional opportunity in the next decade. And a few days ago we got the perfect “buy” signal from the markets.

Anything That Can Go Right, Might Go Right

I’m talking about agriculture. We all know the basic story for agriculture. World population is growing. The world is getting richer. And the world is consuming more food.

It’s there, its long term, and everyone knows it. The way the agriculture situation is shaping up, the only way you will not come out ahead is if you sell out too early or don’t have a long enough time frame.

Despite all the obvious long-run upside potential though, agriculture sector stocks have fallen grossly out of favor lately. But it won’t last forever. And there will be a few opportunities to buy in at great prices. Right now is one of those times.

The past year or so has been tough for agriculture for a number of reasons.

First, there was a truly massive agriculture bubble last year. Hedge funds were leveraged to the hilt raking in massive gains on the steady 5% to 10% monthly returns from stocks across the agriculture sector. All the warning signs were there. The bubble was a great ride up and led to an equally great fall when it burst.

Second, the past year’s growing season turned out to be another exceptionally great one. The agriculture growing season could not have started out any worse. South American farms’ harvest was devastated by drought to start off the year. Floods in the leading agriculture-producing states pushed plantings weeks and, in some cases, months behind schedule. And the credit crunch cut into farmers’ risk appetite and they scaled back greatly on fertilizer use.

It was the perfect storm for agriculture. But again, this is farming and there are a lot of other variables. The most unpredictable and most important one is weather. This year the weather turned out perfectly. Farmers needed sun, they got it. They needed a break for rain, they got it.

Anything that could have gone right did go right. The expected disaster was, for one more year, narrowly averted. The US Department of Agriculture officially reported “bumper crops” across many major agriculture commodities like wheat, soybeans, and corn.

But farmers won’t be able to bypass Murphy’s Law like they have been over the past three years forever. An off-year will come. And, quite frankly, it’s due.

That’s why, after the third stellar annual harvest, agriculture stocks are looking as good as they have in years. And right now is looking like a good time to move into them.

The Greatest Buy Signal of All

The old saying, “buy on bad news, sell on good news” has worked out exceptionally during the last bull market. Odds are that if you bought on bad news between 1982 and 2007, the stock would eventually reach a higher point.

Bull markets have a tendency to make almost any strategy look good though. And we’re no longer in a bull market. As a result, the safest and most profitable opportunities will come to those who wait for the really bad news.

The really bad news came for agriculture stocks last week. Although the mainstream financial headlines were focused on gold, banks, and real estate, one of the world’s leading fertilizer stocks quietly sent out a buy signal early last week.

You see, Mosaic (NYSE:MOS), a company which produces the full spectrum of fertilizers, reported its earnings fell 91% when compared to the same quarter last year. The company cited a sharp decline in sales. Mosaic’s top-line revenues fell from $4.32 billion in the same period a year ago to a paltry $1.46 billion this year.

On top of that, Mosaic missed already tragically low expectations Wall Street had for it and other fertilizer companies (see table below for how low the estimates were).

In Mosaic’s case, analysts were expecting earnings of 35 cents per share. The company only posted 23 cents in earnings per share.

Everything that could have gone wrong went wrong for Mosaic. But something odd happened. Shares of Mosaic actually went up.

That’s the “buy” signal. When terrible news comes out or exceptionally poor earnings results and the stock goes up, it’s a clear signal all the sellers who wanted out have gotten out.

It’s Tough to Go Wrong When Everything is Expected to Go Wrong

That’s why there are a lot of reasons to like agriculture – specifically fertilizer stocks – even more so right now.

Sure, we have the long-term fundamentals. There’s pressing issue of Peak Soil, growing world population, ballooning global middle class, etc.

But there’s also another very important reason for a strong year for fertilizer next year which most investors are just catching onto. That’s the impact of this year’s bumper crop. Plants take nutrients out of the ground. The bigger they grow, the more nutrients they use. That’s why after this season’s exceptional crop, farmers will need to use a lot more fertilizer next year to make up for the lost nutrients.

Finally, from a timing perspective, it really is tough to go wrong when expectations are so low. Remember, great expectations tend to produce great disappointments. And the same is true inversely.

So yes, the markets are soaring. Yes, there aren’t very many undervalued sectors out there. Yes, despite the strength and length of this rally, we’re still in a long-run bear market. But, for those willing to find them, there is always some sort of opportunity out there.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Today’s analysis comes courtesy my friends at STRATFOR, a global intelligence company. They provide unique and on-the-money analysis and forecasts on all things global, essential for any alternative investment strategy. They’ve got a free newsletter as well, for which I encourage you to sign up by clicking here – so you’re not limited to my caprice.

John Mauldin
Editor, Outside the Box

The China Files (Special Project): Real Estate

October 13, 2009 | 1149 GMT

Summary

The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.

Editor’s Note: This analysis is part of a series that explores China’s industry, finance and statistics.

Analysis

Related Special Topic Page

The China Files (Special Project)

PDF Version: Click here to download a PDF of this report

On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.

The purchase created China’s newest "land king," a term for the real estate developer who pays the highest price for a piece of real estate during a land auction. And 7.006 billion yuan was the highest price ever paid for a piece of Chinese real estate for any purpose – residential or commercial. The milestone is a result of an increasingly intense competition for land in major cities that began early in the year, when Beijing began distributing stimulus money to various industries – including the real estate sector – to sustain the economy. As a result, land prices have soared throughout China. And with increasing speculative investment in residential real estate, the market faces a surging bubble that jeopardizes the country’s long-term economic development.

Since 1998, real estate investment in China has accounted for more than 10 percent of the country’s gross domestic product (GDP), compared to only 3 percent to 5 percent in the United States. Such investment is also closely associated with many other industries, such as construction and finance, and it provides an abundance of jobs. Therefore, it is seen as a critical pillar of China’s economy and enjoys favorable policies from the government and state-owned banks (more than 70 percent of real estate investment in China comes from bank loans). At the same time, real estate developers, local government officials and investors have escalated housing prices across the country by acquiring massive land holdings, limiting the supply and inflating prices, creating a real estate bubble that is not sustainable in the long run.

The bubble has grown mainly on the residential side of the market, where there is more demand and higher profits to be made. However, while fewer developers and investors have been chasing nonresidential projects, Beijing’s 4 trillion yuan ($586 billion) stimulus package in early 2009 has generated more interest and activity in the commercial side. Indeed, there are signs that commercial real estate may also be headed for a bubble, and STRATFOR will be watching the situation closely.

Origins of the Bubble

Since 1978, China’s pace of urbanization has increased dramatically, with the number of middle-size and large cities (those having nonagricultural populations of more than 200,000) growing rapidly. Beginning in 1985, economic reforms implemented in urban areas to make China’s planned economy more market-oriented added even more momentum to the real estate boom, with real estate investment increasing by 71 percent by 1987. The government’s macroeconomic policy of monetary belt-tightening helped cool this overheated market, which was further tempered by the government’s continuing to provide housing for state employees (fu li fen fang, or "welfare housing").

However, when the state significantly cut back on its welfare housing program in 1998, the Chinese perception of personal property changed, and this would have an important impact on the real estate sector. The government began this privatization process by making a private dwelling a "commodity" and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.

Thus, the residential real estate market would boom in almost every urban area in China – and particularly in the "first-tier" and "second-tier" cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).

A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.

The Recovery Bubble

Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing’s stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.

Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country’s underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution – limiting the flow of cash and credit – could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.

As housing prices continue to rise, a parallel trend is manifesting itself – rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for "commodity housing" (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing – pressure that continues to drive up the prices.

This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services.

Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion – and corruption – among government officials, real estate developers and investors.

One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.

Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership).

All of these factors contribute to the burgeoning real estate bubble – and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.

Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.

But in China’s real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task

John F. Mauldin
johnmauldin@investorsinsight.com

__________________________________

Note: John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Plexus Asset Management; Fynn Capital; and Nicola Wealth Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

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Source: www.decisionpoint.com

On that date, I said, “This breakout of a huge triangle is a clear technical buying signal.” I added that the minimum price target of this triangle formation was roughly $1,100. This was well above major resistance in the $1,000 area, thus hinting that another major breakout and buying signal would take place soon.

Well, that’s exactly what happened last week!

Gold Hit 1,059 …
Triggering Another Major Buy Signal

Take a look at the weekly chart below. It gives you a good perspective of how important this breakout to new high ground actually is. As you can see, it signals the end of a medium-term correction that began in March 2008 and the beginning of the next medium-term up trend of a secular bull market that started in 2001.

Source: www.decisionpoint.com

The minimum price target of this huge consolidation pattern is $1,300. And I believe much larger gains are certainly possible.

Also consider this: Four weeks ago the Hulbert Gold Newsletter Sentiment Index (HGNSI) stood at 25.2 percent. Now, four weeks later and gold nearly $100 higher, the HGNSI has actually fallen to as low as 18 percent! A rising market accompanied by a declining number of bulls is a rare development. And it’s clearly bullish.

Longer Term Fundamentals
For Gold Are Very Bullish, Too

There are many fundamental reasons to own gold.

Besides the technical buying signals I’ve given you today, I want to repeat the major fundamental arguments for owning gold:

• As a consequence of the current financial and economic crisis, government debt is going through the roof — not just in the U.S., but all over the world.

• Worldwide central banks are printing money like there is no tomorrow.

• Gold demand is rising due to wealth creation in emerging economies where gold still plays a large role as a store of value.

• Gold demand is even rising in the West as more investors doubt the wisdom of central banks and governments.

• Gold supply is stagnating or even slightly shrinking — despite the metal’s price rise since 2001. This is because it’s getting ever more difficult and expensive to get gold out of the earth.

• Finally, central bankers who were eager to sell government gold at much lower prices a few years ago, are getting increasingly reluctant to keep doing so. Emerging market central banks are even buying.

As long as most of these catalysts for higher gold prices remain in place, I expect the long-term bull market to continue. And much higher highs are very likely.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Will companies be able to top estimates again? Earnings estimates are low, but they’re not as low as they were last quarter when 70% of the S&P 500 beat estimates.

Will the $3.5 trillion parked in money market funds continue to make its way back into the market? Once cash and bank deposits are added in, there’s $9.55 trillion ready to be spent once consumer confidence returns or that could go chasing after stocks.

Will the Fed put an end to the party and start raising interest rates sooner than later? Australia’s central bank started raising rates yesterday.

These are all questions for the short-term though and, if they’ve been on your mind, you know how easy they are to get caught up in. But I want to step aside from the daily upheavals and look at where some of the savviest investors with a time horizon of three to five years see the biggest rewards.

Buy and “Can’t Sell” Investing

Imagine you were forced to buy and hold a stock for five years. You cannot sell out early, take partial profits, or anything like that. You must hold on for five years.

What sector would you invest in? Biotech, healthcare, gold, energy, etc?

Kind of a tough choice, huh?

Well, there are some investors who are faced with this question every day.

They’re venture capitalists. They invest in private businesses – start-ups, mostly – and they’re in them for the long haul. In most cases there’s no early or easy out. Either takeover or IPO is the only way to really cash out. That’s why venture capitalists are true long-term holders.

And for the first time in history, they’re betting on a completely new sector which has an exceptionally high upside.

Last quarter, venture capitalists (as a whole) drifted away from the traditional mainstays of biotech and software and moved into clean energy technologies. Deloitte & Touche reports 27% of all venture capital investments flowed into clean tech. Meanwhile, biotech, software, and medical devices moved to the back of the line with 24%, 18%, and 17% respectively.

The clean tech investments were spread across all sorts of sub sectors. Solar led the way with the most investment dollars and was followed by energy efficient building materials, advanced batteries, hybrid cars, etc.

The investments were spread around the world too. Two-thirds of all clean tech venture capital investments were in North America. Europe and Israel took 29%. And 4% went to Asia and India.

The Next Big Thing

Although this news didn’t make too many headlines, it does signify a very important trend.

You see, in exchange for being “tied up” in a high-risk investment for years, venture capitalists need to see the potential for massive rewards. After all, many of the companies will fail (I’ve seen estimates as high as 60% of all venture capital investments fail completely). And many of those venture capital investments that do “succeed,” they may never turn out to be anything more than a dozen guys installing solar panels in Arizona.

That’s why venture capitalists have to go after the big prizes and it’s always good to keep an eye on where they’re putting their high-risk/exceptionally high reward investment capital.

It looks like they see what we see…

– Much higher energy prices – inevitable result of inept nationalized oil companies, offshore drilling ban, and inflation
– Government mandated energy efficient – fuel efficiency, building codes, light bulbs
– Consumers turning green – green is the new black, being green is “cool,” etc.

There are a lot of drivers for an ongoing rally in green energy.

Pockets of Strength

Prosperity Dispatch readers know, there are two ways to make money in the stock market.

There’s the contrarian approach, which entails buying stuff no one wants and waiting for it to be in demand again. This is perfect at inflection points in the market.

Then there’s the herd approach. This involves catching onto a major trend and riding it to the top. The Internet in the mid 90’s is a good example. The modern Internet was around for over a decade, yet it was for geeks only. Then in the 90’s, thanks in large part to the efforts of AOL and billions of low-cost free CDs, the Internet turned mainstream.

You certainly wouldn’t have been the first to buy into the Internet in the mid-90s, but you certainly weren’t the last either. And that was a bubble that turned more regular investors into millionaires than any one I can think of. 

That’s the key thing to remember in the clean technology field. You certainly won’t be the first in, but at this point you certainly won’t be the last either.

Clean technology, regardless of its relative efficiency or the seriously flawed global warming/climate change arguments (ironic how a lot of folks blame the computer models which helped create the housing bubble now implicitly trust the climate change computer models which predict the end of the world), is going to be a big winner in the years ahead.

Earlier this year I called clean energy the “next big bubble” and yesterday I told Prudent Investing readers it’s “like 1995” in clean tech. It’s still coming together and it’s just another positive sign the venture capitalists are getting on board too.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Editor’s Note: Not all clean technologies are created equal. Andrew believes one of the biggest opportunities will be hybrid car batteries. And from his early research of the “hot” A123 Systems months before it hit the major headlines up to now, he has been through almost every battery-maker and technology company out there and identified one as the best.

Learn more about how to ensure you get his top hybrid battery pick when it’s released tomorrow here.

Why do people consistently do things like this? Why do they wait until the last possible moment to move over, even when there were ten signs warning them to do so for the last five miles?

I lump them into two categories:

The first group wants to eke out every last possible foot before they merge, thinking they’re going to time it perfectly. Never mind that it rarely happens and they end up sitting in gridlock with everyone else. It’s not about the end result — it’s about the thrill of going for an extra advantage.

The second — and larger — group is simply not paying attention. Maybe they’re talking on their phones, shaving, or eating burgers. Whatever the reason, they don’t even see the signs in the first place. They’re blindly following the car ahead of them.

None of this is news to you, I’m sure. If you’ve driven on a U.S. highway, you’ve seen these people in action over and over again. But I bring it up today because these very same psychological mistakes can prevent us from successfully building wealth.

Let’s Start with the Proverbial Portfolio Lane Changers …

There’s nothing wrong with trying to actively manage your portfolio. In fact, I think you’re right to stay on top of your finances day in and day out.

However, I don’t think you’re going to get ahead by shifting out of an investment every time it slows down a little bit.

Not only will commissions — and possibly taxes — put a serious drag on your performance, but you face very stiff odds of regularly outperforming, too.

There’s an important difference between taking charge of your finances and making too many micro adjustments.

As a real world example, I’d point to my portfolio in Dividend Superstars. Some of our positions were initiated in the summer and fall of 2007 … right as the market was beginning to crack. And during the March lows, they had fallen substantially (though a lot less than the broad market).

However, their fundamental businesses hadn’t changed. The dividend income was still flowing. There was no reason to abandon ship, in my opinion … so I told my subscribers to continue holding.

Today, the shares have recovered quite nicely. And once you factor in the dividend income, they have really outperformed their benchmarks.

Had we jumped in and out, we would have run the risk of getting whipsawed over and over again.

So my message is this: If you’re already paying attention to the market “signs,” and adjusting accordingly … great! Just don’t overdo it. Major shifts should be undertaken only after much consideration.

Meanwhile, Inertia Can Be Even More Damaging
To Your Ability to Consistently Build Wealth!

I was recently at the Salvation Army to donate some items. As you’d expect, I asked for a donation form so I could write off these donations on my tax return.

That’s a logical thing to do, right? I mean, who wouldn’t take the two minutes to fill out a simple piece of paper for the chance to keep some more of their hard-earned dollars away from Uncle Sam!

Well, the answer is “a lot of people,” apparently.

I say that because as I was filling out my form, another guy next to me grabbed a form and asked me some basic questions about how it worked.

I explained that it was pretty simple. You just wrote down what you were donating and took your copy home with you. An accompanying piece of paper would tell you how much your items were realistically worth for deduction purposes.

He started to write down a word or two … then said something like, “Who am I kidding? This isn’t worth it!” He crumpled up the paper and walked away. And he wasn’t alone. I saw plenty of folks who just dropped stuff off and left.

Sometimes filling out a simple form can yield big financial rewards!

Look, if you’re just giving a couple t-shirts, I understand — it’s not worth the hassle. But I’m talking about people who were giving chairs, tables, and many other big items.

My point is this: Nearly everyone knows that donating to a charity is tax deductible. Yet not everyone will take even one very easy step to ensure that they reap the financial benefit of doing so.

Yet if you want to build and maintain wealth you have to not only think about money matters on a regular basis, but also have the discipline to follow through on your plans!

Consider retirement planning, one of my favorite subjects …

It’s no secret that contributing to a 401(k) plan makes sense for most workers. There are upfront tax advantages. Many companies toss in “free” money in the form of matched contributions. And it’s pretty clear that the traditional retirement anchors such as pensions and Social Security aren’t necessarily going to be there the way they were in prior years.

Yet according to mutual fund behemoth Vanguard, only 60 percent of workers eligible for 401(k) plans chose to participate in 2008.

Sure, you could argue that the other 40 percent had a better use for their money. Or that the recession crunched their finances to the point where contributions weren’t possible.

BUT, Vanguard also found that 84 percent of workers in 401(k) plans with AUTOMATIC enrollment participated.

That 24-percentage-point difference tells me that, for a lot of workers, the sheer “hassle” of filling out a simple form is too much of a burden. They’d rather miss out on all the great advantages of participation than do a couple minutes worth of work. It has nothing to do with their financial situations at all.

Want Prosperity? Just Follow the Rules of the Road!

Since you read Money and Markets, I know you’re already pretty serious about building — and maintaining — your wealth. You’re already very disciplined. And I’m positive that you know a heck of a lot more about financial matters than most other investors out there.

But I also know that we all change lanes a little too frequently, or fail to heed warnings along the road from time to time. So it’s nice to get a gentle reminder that little steps DO pay off down the line. And that it is indeed possible to obsess over your portfolio a little too much.

Remember, all the knowledge in the world doesn’t mean a thing if you don’t use it properly.

So continue to do what you’re doing, and always keep an eye on places in your financial life that you could improve. Here are just four areas off the top of my head:

Taxes: Whether it’s taking the time to fill out a donation form, or enrolling in a tax-sheltered retirement plan, there are plenty of ways to lower your tax bill.

Asset allocation: Periodically revisit your portfolio and make sure you’re happy with how much money you’ve got invested in stocks, bonds, commodities and so on. The percentages should jibe with your age, your risk tolerance, and your overall opinion of where the world economy is heading.

Specific investments: Don’t stick with winners or losers just because. Make sure their stories are still sound … and their purpose in your overall portfolio is still valid.

Your budget: I’ve discussed this in detail before, but it really pays to keep track of what you’re making AND what you’re spending. I think you’ll find that there’s always another way to put a little extra money away for a rainy day. And as many Americans are now discovering, getting thriftier can actually be enjoyable!

Heck, at least think about these things the next time you’re stuck in traffic. Because we all have the tools and potential to build wealth consistently. It just takes a little planning and a lot of patience.

Best wishes,

Nilus Mattive
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Back in the mid- to late 1970’s, as gold went up from its 1972 low of $60 to $850 in 1980 (and silver to $50), gold and silver stocks realized absolutely amazing gains:

·                                 Lion Mines – 1975 price: $0.07 / 1980 price: $380 i.e. an increase of 542,757%!!!

·                                 Azure Resources – 1975 price: $.05 / 1980 price: $109 i.e. an increase of 217,900%!!

·                                 Wharf Resources - 1975 price: $.40 / 1980 price: $560 i.e. an increase of 139,000%!!

·                                 Mineral Resources – 1975 price: $.60 / 1980 price: $415 i.e. an increase of 69,067%!!

·                                 Steep Rock – 1975 price: $.93 / 1980 price: $440 i.e. an increase of 47,212%!!

·                                 Bankeno – 1975 price: $1.25 / 1980 price: $430 i.e. an increase of 34,300%!!

The percentage returns above, averaging 70,627%, seem totally unbelievable but they are verifiable. They were achieved by investing in the right stocks at the right time. Imagine, and the above companies were only a handful of the gold and silver stocks that generated such astounding returns.

To put things in perspective let’s look at it this way. Had an astute investor divided a $10,000 investment equally among the 6 companies mentioned above in 1975 it would have grown to $7,072,700 just 5 years later!  I can’t imagine that ever happening again but that is what actually happened back then. It is absolutely amazing, isn’t it? Even a 10,000% appreciation would have turned that $10,000 into $1 million dollars! Remember, it only takes a few good investment decisions in one’s life to be exceedingly successful and that was such a time.

I know, I know, you think that was then and this is now and increases in excess of 500% let alone 1000% or more would never happen again. Well, that was not the case. Take a look below (chart compliments of Doug Casey’s International Spectator) at what happened to the shares of mining companies during the mini-bull market in gold in 1993-1996. The larger producers did well (+84.2%) but look at what happened to a selected group of juniors during that 3 year period. The returns averaged 1,546.4%!

Will such happen again within the next 5 years? Most likely! In fact, just in the past 12 months the Gold/Silver Companies with Warrants Index (GCWI) of 22 such companies (5 large-cap; 3 mid-cap; 2 small-cap; 12 micro or nano-cap) has already appreciated by 183.7% from its 52-week lows while the 24+ months duration warrants of those companies (26 in total) in our Precious Metals Warrants Index (PMWII) have already gone up 366.2%. That is correct: 366.2%!  And that only represents the first year of major gains.

As seen below the GCWI is up 51.6% YTD and the PMWI is up 73.8% YTD. Yes, the Commodity Companies with Warrants Index (CCWI) and Commodity Warrants Index (CWI) are up by even greater amounts (85.5% and 153.7% respectively) but these indices also include other mining companies (8), oil and gas companies (2), merchant banks (3) and 1 mutual fund with one or more warrants each (47 in total).

Last Week’s % Performance(1)

All calculations are based on U.S. dollar equivalents

(2) Week ending October 2nd, 2009

(3)HUI is the symbol of the AMEX Gold BUGS Index consisting of a Basket of Unhedged Gold Stocks. It is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.

(4)GDM is the symbol for the NYSE Arca Gold Miners Index. It is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.

(5)CDNX is the symbol for the S&P/TSX Venture Composite Index. It consists of 558 micro and nano cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.

(6)CCWI represents the Commodity Companies with Warrants Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies with warrants of at least 24 months duration outstanding trading on the Canadian and U.S. stock exchanges.

(7)CWI represents the Commodity Warrants Index. It is an equal dollar- weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.

(8)PMWI represents the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 26 gold and silver warrants, of at least a 24 months duration, found in the CWI.

(9)GCWI represents the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 22 gold and silver mining and royalty companies with warrants in the CCWI.

Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

Are you are of the opinion that the U.S. dollar is going to continue to weaken against other currencies? Are you of the opinion that we are going to have significant inflation in the next few years? If so, then we are going to see gold and silver doubling or tripling in price as a result. As such, it is imperative that you invest in either the stocks of the companies that mine the gold and silver and/or in the royalty companies that buy the gold and silver from mining companies at predetermined fixed prices. Better yet, much better in fact, is that, wherever possible, you should purchase certain of the long-term warrants offered by some of the gold and silver mining and royalty companies as a means of realizing your +5,000% returns.

Why Buy Gold and/or Silver Mining/Royalty Stocks instead of Physical Gold or Silver?  To Double Your Returns – or Possibly More!

If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to  $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!

That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap companies (currently 2.6:1 YTD for HUI companies according to the table above) on average to as much as 6:1 for gold and silver mining/royalty companies (currently 3.9:1 YTD according to the Gold/Silver Companies with Warrants Index), on average and even 10:1 in exceptional circumstances for certain truly outstanding performers. All the more reason for you to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties and reap the major benefits of such a surge in the future price of gold and silver.

Why Buy the Warrants instead of the Stock of Certain Gold/Silver Mining and Royalty Companies? To Further Double Your Returns – or More!

For those of you who are prudent enough to do your homework and buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s undervalued prices, your eventual returns would likely be 1.5 to 3 times greater (currently 1.4:1 YTD for the Precious Metals Warrants Index vs. the Gold/Silver with Warrants Index) on average than had you invested in their associated stocks. For companies whose stock prices go through the roof with monster gains that ratio could even be as high as 5:1.

That’s referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock. For those who don’t have a clue what a warrant is, which companies have them, which have the best values, exactly how to go about buying them and which on-line brokers are sufficiently knowledgeable and capable of placing American, European, Australian and Asian orders (there are no problems for Canadians placing such orders with their brokers as most such securities are traded on their TSX or TSX Venture exchanges) check out the PreciousMetalsWarrants site below.

Can Gold and Silver Equities Expect +5,000% Returns Once Again?

Using the above ratios the answer is: “Yes they can!”  True, not all such companies with reap such returns but a few of the well chosen ones will once again see returns that most gold bugs dream about. All it is going to take is an environment in which some combination of a declining U.S. dollar, rampant inflation (or fear thereof), high interest rates, ongoing financial instability, further economic turmoil and occasional acts of terrorism come together to interact with high gold and silver prices and some trading mania. We are moving in that direction right across the board so it is just a matter of time.

We are in the eye of the storm and when the other side of the vortex engulfs us gold and silver will increase considerably, their associated stocks will go up substantially and their warrants, where available, will escalate dramatically. Those mega returns can be yours in the future if you start today to prepare for that day.

To my readers:

Contact me at Lorimer@preciousmetalswarrants.com with questions and comments. I promise a reply. Don’t be shy – drop me a line or two.

Guest Contributors are welcome – just send me a draft of your proposed article for consideration. That’s how I got started. It is a very enjoyable and stimulating activity. I will be speaking at the World MoneyShow in Toronto in October. If you attend please introduce yourself.

We have two web sites that we believe will help you make money in these very volatile times.

a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular.

b) www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

Thanks for the read.  – Lorimer.

Then it happened, the next great leg down occurred in one of the most vicious bear markets since the 1930’s. The economist’s out there all said the markets are fine and will recover shortly(December 2008). The markets nose dived into March 2008 when Bear Stearns collapsed and was bought by JP Morgan for $2 bucks a share(they later paid $10/share to appease the public).

In March 2008, the market rallied after the Bear Stearns collapse which was not called by any analyst or an economist that I know of. The low on the SPX in March 2008 was 1256 and when the SPX hit 1440 in May the bulk of economist’s and analyst’s everywhere were proclaiming a new growth cycle. Then on May 19th, 2008 the next move down took place in a violent, and fast decline. What happened to the new growth cycle?

As we all know the market has now put in a low in March 2009. This is on the back of a global coordinated stimulus plan by all central banks, a zero percent Fed’s fund rate, and money printing that the world has never seen before. What else could the market do for a few months but rally with that kind of liquidity? However, the analysts, and the economists are back in full force. Upgrades and downgrades are occurring like it was 1999 again(we all remember what happened in 2000). It still amazes me that people are upgrading JPM and the rest of the bank stocks now when these stocks have rallied 300%. Where were the upgrades when theses stocks were in the single digits or when JPM was $15 bucks. Lets not forget Goldman Sachs hit a low of $47 a share in late 2008 as well. However, the upgrades come pouring in when it hit $150 a share. Lets not forget all of these stocks have done huge secondary offerings diluting their shares so they are really above their 2007 highs in real terms. Yet the analysts love them up here and the economists say the world is on the road to recovery.

When the economists and analysts all say things are well in Mayberry it is time to get worried. This is something that much be watched. Why? Because it has called every major top in the market since 2000. I’m just waiting for someone to upgrade Lehman Brothers (that still trades on the pink sheets). Then I will know the top is certainly in.

Nicholas Santiago,
Chief Market Strategist
www.InTheMoneyStocks.com

Bloomberg:

A measure of U.S. business activity unexpectedly shrank in September, indicating companies are likely to limit spending and production.

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 46.1, worse than the lowest estimate of economists surveyed by Bloomberg News, from 50 in August. Readings below 50 signal contraction.

Near-record excess capacity and gains in spending induced almost solely by government stimulus programs are likely to prevent companies from ramping up assembly lines. The manufacturing recovery may be uneven as federal assistance begins to wind down.

“Conditions are still very sobering,” said Ellen Zentner, a senior macro economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “There’s always a payback period on the other side for government stimulus.”

My comment: Taking money from Peter to pay Paul can only give the illusion of a rebounding economy. How anyone thinks 25 plus years of excess will be cured in one or two years is beyond me. Things will continue to worsen as we are nowhere near the bottom. if you are speculating in the stockmarket you should be very wary of the economic underpinnings so many are betting on.

John Polomny
The Real Deal