Global Stock Market BLOG - Mike Burnick

Shocked to Find Conflicted Research Still Exists on Wall Street

The WWII era film Casablanca is one of my all time favorites. And one of the best scenes in the film is when Captain Louis Renault threatens to shut down Rick’s night club-casino, saying: I'm shocked, shocked to find that there is gambling going on here!”

I immediately had a flash-back to this scene from Casablanca when I read the following headline from the Financial Times referring to Wall Street analysts; “Executives find favours bring better ratings”.

I’m similarly shocked, shocked to find that Wall Street’s analysts stand accused of “conflicts of interest”, and doling out favorable ratings in exchange for favors.

According to new academic research, “corporate executives have been able to secure more favourable research ratings for their companies from investment banks by bestowing professional favours on Wall Street analysts”.

Desp ite efforts in recent years to clean-up Wall Street’s conflicted research, this new study found that “by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.

“The frequency of favours increased in line with the shortfall between the company’s earnings and market expectations – a crucial determinant of analysts’ stock ratings,” according to the article.

Why do I have visions of more investigations into all those favorable ratings bestowed on all those sub-prime and junk bond offerings in recent years? It just goes to show that on Wall Street: the more things change…

Can Overseas Profits Save the Floundering U.S. Stock Market?

To say that it was a bad week on Wall Street is to put it mildly.

When all was said and done, and after two days of nerve-wracking triple-digit declines in the Dow Jones Industrial Average, that venerable blue-chip index ended 4.2% cheaper for the week. This comes just one week after the Dow closed in record territory above 14,000 for the first time ever.

The S&P 500 Index dropped 5% last week while the Nasdaq Composite Index skidded to a 4.6% loss rounding out the worst week for American equity investors in more than four years.

The more worrisome sign for global investors is that this apparent “credit contagion” which began on Wall Street, is having such an impact in other markets around the world. Both European and Asian bourses suffered equally sharp losses last week, in spite of the fact that many economies in these regions are performing much stronger than in the U.S.

Even the U.S. economy finally showed signs of life, according to fresh data released Friday, which was pretty much ignored amid the mayhem. Preliminary numbers show the American economy expanding 3.4% in the second quarter, a substantial pickup from the first. However, the government statisticians also revised lower U.S. GDP figures from 2004, ’05, and ’06 in one retroactive stroke of the pen.

Corporate profits on Wall Street have also been a bright spot. There have been some disappointments, but of more than 300 firms in the S&P 500 that have reported second quarter results so far, profit growth is running at 9%-plus. That’s a big improvement on estimates at the beginning of this month, which forecast just 4.1% earnings growth.

And there are still nearly 100 firms in the S&P 500 scheduled to report this week, putting us over the hump for this earnings season – so hold your breath.

An interesting article in the Financial Times notes that Wall Street might already be in much worse shape if it weren’t for the very strong profit growth being contributed from abroad. Specifically, the overseas operations of America’s biggest public companies are kicking-in a large share of the S&P 500’s overall earnings growth.

According to analysis from Bank of America, “this will be the twentieth consecutive quarter in which foreign earnings of US groups have grown at a double-digit clip.” In fact, overseas profits among the S&P 500 are growing at a rate double that of profits from domestic operations.

Companies including UPS (UPS), Pepsico (PEP), United Airlines (UAUA), General Electric (GE), Boeing (BA) and IBM (IBM) have all benefited big-time from their diversified global revenue streams, in the face of sluggish demand in the U.S. According to the article, “given the domestic economic doldrums, corporate America’s foreign outposts are now the crucial swing factor to stave off a US “earnings recession” in 2007.”

According to recently revised figures from the International Monetary Fund, global growth is expected to exceed 5.2% in 2007, while the U.S. economy expands just 2% this year.

Can the power of globalization, and more robust overseas profits, save the floundering U.S. stock market?

The Minus $1.3 Trillion Day in Global Markets

Perhaps predictably most Asian markets, which opened for business last night (New York time), followed U.S. and most global markets lower as Thursday’s rout hacked an estimated US$1.3 trillion off world-wide market capitalization.

The only major markets I could find bucking this down trend were in China. The Morgan Stanley Asia-Pacific index, which covers most all of the major markets in this fast growing region of the world, dropped about 3% in value yesterday. That’s roughly in line with emerging market losses suffered in Europe and Latin American, and just slightly worse than the 2.5% drop on Wall Street.

China’s CSI 300 index of mainland shares swam upstream against the selling trend to post a gain, although it was just 0.09% -- but I’ll take any “green” I can get amid a sea of “red”.

Today, you’ll start hearing the post-mortems of how this sell-off took place, why we should have seen it coming, and most important: what comes next.

It’s this “what comes next” part that may consume the most air time on CNBC and ink in the Wall Street Journal, but don’t expect any easy answers. Those answers will only come with the fullness of time.

If you think it can’t get worse, don’t forget the late February global sell-off, supposedly sparked by China, that spread globally and wiped out $3.3 trillion of market value in just a few days.

That correction was more than twice as steep as we saw yesterday – and yet within weeks stocks were posting new record highs once again.

My instincts so far tell me this particular correction may be similar in scope to that brief bout of panic selling in February and March.

The markets are way overdue for a correction; the last “serious” pullback of 10% or more globally occurred more than a year ago in May 2006. And I wouldn’t be surprised to see something similar here, but I DON’T see any evidence that tells me this is the end of the line for the global bull market, not yet anyway.

This morning futures are indicating an upside bounce on Wall Street, while in Europe, stocks staged an early morning rebound before slipping again into the “red”. Stay tuned!

When Credit Goes CRUNCH on Wall Street!

Just Another Manic Thursday on Wall Street...

As I watched the carnage unfold on CNBC today, they trotted out the Mad-Money-Man of pop-TV – Cramer – the unofficial class clown of Wall Street - way ahead of his usual prime-time slot.

That’s when I knew the market was in real trouble!

About that time, I had the strongest urge to hit the mute button on my TV (anything to avoid another Cramer rant)... crank-up the old ‘60s tune Wipe Out on my CD player... grab a cold beer... and just sit back and take it all in!

Unfortunately, it was only Noon -- the Dow Industrials were already down 250 -- and I had lots of work to do. So I pressed on...

Obviously, the hedge fund wiz-kids on Wall Street decided to simultaneously press the SELL button this morning, sending stocks lower from the opening bell. Actually, Europe was already down at the New York open, but wasn’t so far gone that it couldn’t recover with a little rally attempt by Wall Street. But that was certainly not in the cards today.

The key trigger for the Wall Street wipe-out was deepening worries about the shaky state of sub-prime, CMOs, CDOs, CLOs (oh my) and other assorted derivatives of every shape and size; including both the semi-transparent and completely opaque varieties.

This has so far been a creeping sinister selloff; actually today was the third such liquidity-unwind “event” since last Friday, briefly interrupted by short bounces in between so as to carry retail investors for a few more rounds before blindly panicing them.

But something hasn't been quite right with the stock market ever since two Bear Stearns hedge funds went POOF several weeks ago. Rising credit spreads in the fixed income sector, and rising volatility in global markets since the Bear Stearns debacle, have been like brightly flashing yellow caution lights for the markets.

Today was a clear-cut, headlong, no-holds-bared liquidity-flush in financial markets around the globe. In the end, it wasn’t just stocks that got hammered, but also commodities, REITs, corporate bonds, derivatives, and just about every other financial asset you can think of. And the selling was carried out in nearly every market around the world (see table above).

The one exception, of course, were U.S. Treasury bonds, which caught enough of a safe-haven bid to send the yield on the 10-year benchmark all the way back down to 4.75%!

In a recent Sovereign Society Offshore A-Letter, (Is the Liquidity Tide Finally Rushing Out of Wall Street?) I explained why I thought just such an event might soon affect the markets. I wrote, “It is now becoming all too apparent that credit market woes are spilling over to the broader financial markets. And the ever-present liquidity that has supported all asset classes in recent years may be at risk of drying up.”

Yesterday, it was disclosed that the big leveraged buyout of automaker Chrysler (DCX) by private equity firm Cerberus Capital Management, may now be in jeopardy. It seems that Wall Street banks can’t find buyers for $10 billion worth of loans intended to help finance the deal. Talk about liquidity drying up fast!

It’s hard to say just how much further this liquidity-flush may carry. Just how much will reformed investors embrace this strange, new religion of risk-aversion? After all, it’s been absent from investment circles for so long.

Tomorrow morning, we get to see how Asia and particularly China reacts to today’s selling in the Western financial world.

China’s mainland CSI 300 Index just hit a new all time high yesterday. So we’ll see if the tail can wag the dog; or vice versa.

Fridays (and especially the following Monday) are always fun on Wall Street... let me just make sure the fridge is well stocked with Heineken and let the games begin!

P.S. You're probably wondering about the blank space in the table above where key Asian markets are listed. These markets are a day ahead of us and were already closed when Wall Street swooned today. Asia won't get a chance to react until tonight, but check back tomorrow morning for an update!

Energy Markets Attracting a Chorus of Bulls Again

Yesterday, I discussed how Wall Street’s energy analysts are finally coming around to the view that oil prices may be heading higher – imagine that.

The only downside to this vindication of my own long-held views and that of my colleague, Eric Roseman, is that it’s suddenly getting rather crowded in the oil bullish camp once again.

I liked in better when I was more of a lone-wolf on the subject.

Recently, I posted this article to my blog saying, “Don’t look now, but crude oil prices have quietly surged up to $75 per barrel again, for the first time in nearly a year, and are fast closing in on fresh record highs.”

In a follow up article: (The Coming World Oil Crunch), I pointed out the simple oil price rule of thumb: which states that a rough approximation for the average price of crude can be derived by taking the last digit of the year, and adding a zero. This rule correctly predicts $70 a barrel in 2007, and $100 per barrel in 2010, less than three years away.

I also suggested that, given the extremely tight supply/demand relationship, this rule of thumb may break down this year as crude oil shoots much higher, I concluded the article by stating “Somehow I think that Jim Rogers recent prediction of $100 a barrel oil may in fact come a lot sooner than 2010!”

There’s Still a Strong Bullish Case to be Made for Higher Oil

In a recent Bloomberg story predicting the likelihood of higher crude prices dead ahead, one commodity analyst puts it this way, “$95 crude is likely this year unless OPEC unexpectedly increases production, and declining inventories are raising the chances for $100 oil.”

That’s the big wall of worry that prices are now climbing. An output boost by OPEC could send oil prices tumbling again, but here’s why that’s unlikely to happen...

In spite of the fact that oil is fast approaching record highs, OPEC’s oil ministers are busy singing the blues.

Since oil is (mostly) priced in dollars on world commodity markets, and the value of the dollar has been steadily sinking in recent years, OPEC says that oil today is selling for just $45 a barrel, when you adjust for inflation and currency exchange rates. That’s well below the current spot price near $75.

OPEC Purchasing Power Takes a Big Hit

Of course the Sheiks of the burning sands aren’t hurting too much. After all, years of soaring oil prices have certainly enriched Middle Eastern economies, but there is an ugly downside.

Since most Middle Eastern countries (Kuwait notwithstanding) are still pegged to the dollar, these oil exporters just aren’t realizing the full wealth-effect of rising oil, because the dollars they earn is itself losing value rapidly; down about 20% globally over the last five years.

Making matters even worse, OPEC countries get more than 30% of their imports from Europe; the Sheiks just love those air-conditioned Mercedes! The greenback however has been especially weak against the euro – falling about 60% in value over the last five-years – and making imported goods from Europe a lot more expensive to the average Saudi consumer.

In fact, Morgan Stanley estimates that for every 10% drop in the dollar, OPEC’s purchasing power falls by about 5%. So given the fact that the buck is down 60% in recent years – it’s easy to calculate that the spending power of the Sheiks is sinking right along with it – to the tune of down 30% over this period.

No wonder General Motors (GM) reported record auto sales in the Gulf region during June – if you can no longer afford that new Mercedes – Cadillac is a decent substitute!

$100 Oil, Here We Come!

OPEC is meeting in September to discuss output quotas, but a large production boost isn’t likely because that would only help push prices still lower.

Instead, OPEC is more likely to discuss the merits of pricing their oil sales in a currency other than the dollar, which Iran is already doing; or decoupling their own currencies from the buck, which Kuwait has already done.

This time last year, crude oil set a new nominal record high at $79 a barrel, but as the chart above clearly shows, oil would need to reach $100 just to match its old inflation-adjusted high!

According to Bloomberg, “this market is strikingly similar to a year ago,” says one analyst, “What is different? Supply is down a million barrels a day, demand is up a million barrels a day. The market is in a deficit.”

As my friend and colleague Eric Roseman is fond of saying: I’m still long and strong Energy! To get the full scoop on the energy-sector positions I'm currently recommending in my Global Market Investor service, click here!

Wall Street’s “Experts” Agree with Our Energy Forecasts – Now I’m Getting Nervous!

As I scanned the pages of Bloomberg news Monday morning while sipping my third cup of coffee, as I do to start most every day, I ran across a story that nearly made me spit-out my Java Special Dark Roast all over the computer screen.

It seems that some of Wall Street’s best and brightest analysts are coming around to our own views here at the Sovereign Society, on the likely trajectory of oil prices. According to the story, “The $100-a-barrel oil that Goldman Sachs Group Inc. said would prevail by 2009 may be only a few months away.”

Now that crude prices are in a steady uptrend again, almost ignored when the move began months ago, now Wall Street is abuzz with predictions of much higher prices.

Again, quoting Bloomberg: “‘We're only a headline of significance away from $100 oil’, said John Kilduff, an analyst in the New York office of futures broker Man Financial Inc.”

$100 Oil is Old News to Sovereign Society Members

This news comes as no surprise to me, or my colleague Eric Roseman. In fact, we have both talked at length about our expectations for the next uptrend in oil here in our blogs for many months.

Way back in January, when oil briefly traded below $50 a barrel, the energy-sector bears were quick to come out of the woodwork proclaiming the death of the oil bull market. In a blog post: (Is Uncle Sam Bottom-Fishing the Energy Sector?), I wrote, “amid signs of firming economic growth, and with global crude oil capacity still tight enough to allow little margin for error, the stock market doesn’t seem worried about current oil prices.

Since its July 14, 2006 peak, crude oil has fallen about 30%; but the 33 stocks that make up the S&P 500 Energy Sector index have actually gained 3.4%. That’s a strong signal of stable-to-higher oil prices ahead.”

Energy Sector Bottom Fishing with Few Other Boats in Sight

The very next month, with crude prices firming, but not yet clearly in a new uptrend, many on Wall Street continued to predict lower prices ahead amid a clearly slowing U.S. economy. I recommended an international energy ETF to our subscribers in February, which has since gained nearly 30% in value.

Since then, I’ve recommended several additional energy-sector investments, even as Wall Street was busy "downgrading" the sector. But now, with the Wall Street consensus changing its tune, and singing bullish again, you can understand why I’m getting nervous about my energy sector holdings!

When I’m out fishing on weekends, I just love to sneak up on a great spot and be the only boat in sight working that piece of ocean. Invariably, other boats show up however, especially when “the bite” gets red-hot. Then it’s time to move on...

P.S. tune in tomorrow for my latest views on oil, and for more details on my specific energy-sector picks in Global Market Investor, Click Here for more information.

A Landslide Victory for Turkey’s Economy

Turkey’s Prime Minister Recep Tayyip Erdogan and his ruling Justice and Development Party (AKP), in power since 2002, were swept to another landslide victory in elections over the weekend. Mr. Erdogan said, “We’ve passed an important test of democracy that is an example to the world.”

Turkish politics, and financial markets, were thrown into a brief tizzy in May when Erdogan’s candidate for the Presidency, largely a ceremonial position in Turkey, was blocked by opposition parties. Abdullah Gul, the erstwhile Presidential candidate was seen as too “Islamic” for the likes of many secular Turks, including the Army’s general staff, which voiced concerns at the time.

But Mr. Erdogan and the AKP made all the right moves in response. Avoiding a confrontation that could have spelled trouble for Turkey, Erdgoan followed the political book chapter and verse. Exercising his constitutional authority as Prime Minister, Erdogan called for early parliamentary elections that were originally not scheduled to take place until this fall, in an effort to seek a broader political mandate for the AKP’s programs.

Turkish Government Receives a Clear Mandate for Progress on Sunday

And what a mandate... the people of Turkey have spoken.

The AKP took 47% of the vote with nearly all ballots counted early Monday morning; that’s more than twice the share of the closest rival party. In fact, Erdogan won the largest share of votes in a Turkish election since 1965, providing him with a clear mandate in favor of the AKP’s program of economic progress in bringing Turkey closer to the European Union.

The magnitude of the election victory is not really surprising to me; Erdogan’s party was after all clearly leading in the polls prior to Election Day. It’s also not a big surprise considering the amazing economic progress achieved by the AKP in recent years.

Turkey’s economy has been growing faster than any other major economy in the region – with year over year GDP growth averaging better than 7% over the past five years.

Turkish Stocks Celebrate Election Win in Record Style

Economic reform in Turkey has meant record foreign investment flowing into the country – $20 billion last year alone. The economy has expanded now for 21 straight quarters, the longest period of growth since the Turkish Republic was founded in 1923!

So Sunday’s balloting, more than anything else, was a vote by Turks in favor of the policies of wealth creation and economic progress that Erdogan and the AKP have so skillfully executed in recent years.

I was a bit surprised at the magnitude of the celebration in Turkey’s stock market, since after all the election win by the AKP should have been pretty well “discounted” in the market already. Istanbul’s ISE National-100 stock index gained over 5% yesterday to a new record high!

Now that’s what I call a strong vote of confidence in Turkey’s investment future.

European Utility Goes Green and Grows Rich

I have written extensively about the big profit potential that can be found in Green Energy investing; most recently in this article: (The Profit Potential in This Sector Will Have You Seeing Lots of Green). Wind power is one of the leading alternative energy sources, especially in Europe where windmill farms dot the coastline.

But now it seems that the race to harness the wind as a renewable energy source has hit an air-pocket: interest in new high-tech windmills around the world has been so red-hot, that the makers of wind-turbines simply can't keep up with surging demand.

According to a recent article in the Wall Street Journal, “improved technology has made it possible to build bigger, more efficient windmills. That, combined with surging political support for renewable energy, has driven up demand. Now, makers can't keep up -- mostly because they can't get the parts they need fast enough.”

European Firms Set for a Wind-fall in Green Energy

Utilities in Europe are far ahead of their U.S. counterparts in embracing alternative energy technology, particularly when it comes to the promise of wind power. So now that there’s a wind-turbine supply bottleneck, these European firms enjoy a competitive advantage in the green energy sector.

In fact, a number of wind-power projects in the U.S. have been stalled due to shortages of available wind-turbine equipment. Meanwhile, utilities in Europe are cashing in, since they locked in long-term supply contracts with wind turbine manufacturers, anticipating the current surge in demand. In some cases, the biggest European buyers of wind energy technology made strategic investments in the suppliers of turbine equipment, so now they’re sitting pretty.

For instance, the big Spanish utility Iberdrola SA, a global leader in renewable energy, paid about $4 billion last year to buy a 24% stake in Spanish turbine maker Gamesa SA – and lock up most of it’s production through 2009! This investment gives Iberdrola a big edge in the industry since it now controls its own supply.

Euro-Utilities on the Prowl for U.S. Wind Energy Assets

The move really paid dividends for Iberdrola last year when it was contacted by Community Energy, a utility in Pennsylvania that was stalled in its own efforts to build a new wind farm.

Iberdrola provided the wind-turbine technology that Community Energy was lacking (and ended up buying the company outright), and today the utility provides enough power from the wind to light up about 6,500 homes.

Iberdrola is also on the prowl in other parts of the U.S.; buying out two other wind farm developers last year in Iowa and Virginia. Just last month, Iberdrola offered to purchase Maine’s Energy East Corp., a large utility based in Portland for $4.6 billion. Part of the attraction here is U.S. government tax credits offered for alternative energy investment in wind power.

This is only the tip of the iceberg for wind power going mainstream.

Europe has already committed to a plan that calls for 20% of its energy needs to come from renewable sources by 2020, up from just 6% today, and wind power is expected to play a leading role.

U.S. Playing Catch-up in Wind Energy

The U.S. is working hard at playing catch-up. Last year alone, 2,454 megawatts of wind power was installed in the U.S. – more than the combined power output of two nuclear reactors.

But even though more new wind farms were constructed here last year than anywhere else on the planet, the U.S. sill only gets about 1% of its power needs from wind. But that's about to change, “20 states now have price supports for wind-generated electricity, and there is a federal tax credit to encourage new wind-park development.”

The big question now is: who’s going to earn the biggest windfall in wind energy riches: European, or U.S. firms?

So far, European firms like Iberdrola seem to have the upper hand in terms of installed wind energy capacity, and it’s not alone.

This year, a Portuguese utility purchased Horizon Wind Energy of Houston, another Spanish utility bought a wind power firm in the Midwest, and BP Alternative Energy, part of the UK’s energy giant BP Plc (BP), bought Virginia’s Greenlight Energy last year.

In fact, “European companies are estimated to own 20% of all the wind energy in the U.S.,” according to a report from Emerging Energy Research, as quoted in the Wall Street Journal article.

U.S. firms are still scrambling to close the windmill gap: Chicago based Invenergy LLC signed a $1 billion deal with General Electric Corp. (GE) to secure its own supply of high-tech turbines. Also, Florida Power & Light (FPL) our own local utility here is ranked #2 among global utilities in its use of wind energy technology.

What’s the Best Way for You to Profit from Green Energy

At the Sovereign Society, we have long recognized the fact that there is plenty of money to be made in the green energy sector. In our monthly newsletter we recommended buying Vestas Wind Systems, the world’s leading manufacturers of wind turbines; the shares have shot up more than 70% in value since then.

I also recommended an exchange traded fund in May that invests exclusively in the clean energy sector; this ETF is already up about 14% in less than three months. Recently, I took a special look inside what’s making the alternative energy sector tick, and the reasons why it should prove to be such a money-maker for investors over the next several years.

In my special report: Go Green and Grow Rich, I detail how big-money venture capital firms are pouring money into investments in the green energy industry; and I reveal several specific investments you can take advantage of now in this booming sector. To access my special report, click here.

Russia, Up to Old Tricks, Makes Another Oil Grab

In recent weeks, Russia’s dollar-denominated RTS stock index finally joined the global equity party, as it breached the 2,000 level and notched new all-time highs (the index closed Friday at 2,069.9).

It’s about time! Russian stocks have the dubious distinction of being one of the world’s worst performing markets through the first-half of 2007, with a fall of -1.3% in the six-months ended June, compared to an 11% gain for the Dow Jones World ex-U.S. Index of international markets.

In fact, the only major bourses to perform worse in the first half of this year were Sri Lanka and Caracas. And despite the recent surge, the RTS still lags far behind most major global stock indexes.

But I would have to say the jury is still out as to whether or not Russian stocks will be able to catch-up. Why? The Kremlin is up to its old tricks again...

The $290 Million Chevron Shakedown

According to a recent story in Bloomberg news, “Chevron Corp.'s (CVX) Caspian Pipeline Consortium, the only foreign-owned oil export link in Russia, received a $290 million back tax claim as President Vladimir Putin presses for control of foreign-owned energy projects.”

It’s the same old story in Russia, where the Kremlin under Mr. Putin’s reign has a long-standing tradition of bullying Western firms out of lucrative energy production and exploration deals that the Russian government had previously agreed to.

“Russia, the world's biggest energy producer, has used charges of environmental mismanagement and contract violations to take over domestic oil and gas projects from foreign producers such as Royal Dutch Shell Plc (RDS/B) and BP Plc (BP)”, according to the article.

In many cases, Russia’s bare-knuckles tactics have forced big global energy firms to write-down many years worth of investment in infrastructure, and accept a much smaller ownership stake in key energy projects within the country.

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CPC Hopes to Get its Day in Court!

The Caspian Pipeline Consortium (CPC) that’s the subject of the latest dispute operates a transport link that carries crude oil from Kazakhstan through Russia to markets elsewhere. Chevron owns 15% of the project, Exxon Mobile (XOM) has a 7.5% stake and OAO Transneft, the Kremlin-controlled pipeline monopoly, owns a 24% stake and manages the operation on behalf of the consortium. The governments of Kazakhstan and Oman own the remaining interests.

Recently, Transneft lobbied to boost the crude oil pumping tariffs CPC charges to transport oil, while private shareholders want to increase the capacity of the pipeline to 1.35 million barrels per day, to account for higher output from Kazakhstan’s oil fields. So it would seem that CPC is becoming a hot-property in the region; explaining why the Russian government is attempting to muscle in and take greater control.

The nearly $300 million claim for back-taxes, levied against Chevron by Russia's Federal Tax Service, is currently being challenged in the Moscow City Courts... best of luck Chevron, you'll need it!

The Politics of Alternative Fuels

My blog post from yesterday (Why the Rising Price of Cheerios and Milk Keeps Gentle Ben Awake Nights) generated several responses – thank you for all or your comments, questions and responses, and please keep them coming.

One of these comments really stands out. I am not sure if this content is original analysis from the reader herself, or if it’s taken from another article or blog, but no matter. It is a particularly well researched and well written discussion of why the U.S., it spite of our nation’s leading ethanol-production prowess, remains far from achieving true oil independence using alternative sources of energy.

In a word it’s all about: POLITICS! Please read and enjoy…

“Consumers Pay High Cost for Green Energy Tariffs.  A common conversation around American dinner tables lately is the high price of gas at the pump. With the summer driving season kicked off by Memorial Day weekend American consumers are going to be feeling that 3.00+ per gallon. However, human innovation could soon trump our oil dilemma.

“Ethanol is a clean renewable bio-fuel that can be produced from any cellulose producing plant that is high in sugar. In the US this means mainly corn, but here’s the catch: corn ethanol only produces a tiny amount of energy compared to the energy used to produce it.
In other words, corn ethanol is a zero-sum game.

“Ethanol produced from other plants such as sugarcane (produces 8 times the amount of energy used to produce it), switchgrass, and soybeans are significantly more efficient means of producing this cost effective and clean fuel. Brazil is one of the first countries to free itself from oil by using Ethanol, and many consumers, from the price conscious to the environmentally conscious in the US would like to follow suit.

“Ok so you’re probably saying, “Great, let’s just use sugarcane ethanol, since its cheaper and more energy efficient.” But the US government and the corn growers it’s protecting have other ideas. The US gives a 51 cent per gallon (cpg) “Blender's Credit” subsidy that is applied to ethanol regardless of its country of origin.

“However, a 54 cent per gallon secondary tariff on ethanol imported into the United States keeps Brazilian sugarcane ethanol out of US markets.

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“Legislators from farm-states seek to maintain the ethanol tariff to appease their corn-growing constituents. But it’s not just the friendly family farm that gets the benefits of these subsidies. Under the current farm bill, which is up for reauthorization this year, we taxpayers give over $25 billion each year to corn growers, 62% of which are large, industrial corporate farms.

“American consumers have another factor to worry about with the demand for ethanol increasing in a protected US market: the rising price of food. An Iowa State University study found that under several projected scenarios affecting fluctuating weather patterns, demand for E85 (that’s fuel that is 85% ethanol and only 15% gasoline) fuel, land space and oil prices, the price of food will rise significantly in an ethanol market dominated by US corn based ethanol producers.

“The price of corn can effect the price of many food items especially meat and poultry whose growers use corn-based feed to nourish their livestock. This extra cost will surely be passed along to the consumer.

“The study also found that other, more efficient renewable fuel sources such as soybeans and switchgrass would not be able to become economically viable with corn ethanol being the dominant fuel crop supported by government subsidy.

“The ethanol tariff prohibits the free competition of ethanol with gasoline. The federal gas tax is 18.4 cpg while the prohibitive tariff on Ethanol is an exorbitant 54 cpg.

“American consumers deserve the choice to drive green but instead our best interests are being back seated for the interests of corporate industrial farms with far reaching influence over their farm-state representatives. This tariff is corporate welfare that hurts consumers and disrupts free trade and competition.”

Bravo to the author, whoever he/she is!

Why the Rising Price of Cheerios and Milk Keeps Gentle Ben Awake Nights

Rising food prices around the world are complicating efforts by the U.S. Federal Reserve, and other global central bankers, to keep inflation expectations in check. According to a recent story in Bloomberg, the world is experiencing “the fastest increase in food commodity prices in at least a decade.”

Some central banks including those in Great Britain, Mexico, Chile and South Africa, have already singled out rising food prices as a reason to boost interest rates. In America, the Federal Reserve has kept its benchmark borrowing cost on hold for nearly a year now, but just yesterday Fed chief Ben Barnanke reiterated to Congress that fighting rising inflation expectations remains his #1 priority.

Of course the U.S. Fed, like many central banks, like to officially ignore the rising costs of food and energy. These “non-core” items it seems can be especially volatile – distorting the true trend in underlying inflation, at least so says the Fed. The trouble is, oil price volatility in recent years has been almost totally on the upside – and now it’s beginning to look the same way for food.

Global Food Prices Spike Higher

According to the story, International Monetary Fund data shows an unprecedented 23% surge in global food prices, over just the past 18 months! The price spike in agricultural commodities is due to rising global demand, especially from rapidly industrializing nations in Asia and Eastern Europe.

Also, the increased interest in ethanol as an alternative fuel has squeezed already tight agricultural markets even more. U.S. output of corn-based ethanol and European consumption of oilseeds for biofuels is expected to double over the next 10 years.

Production of ethanol in Brazil, one of the world’s leading producers using sugar as its preferred ingredient, will expand even faster according to the UN. Even China is jumping onto the ethanol bandwagon in a big way, since that fast-growing nation has a heavy reliance on imported crude oil.

Grain Inventories Lowest in 30 Years

As a result of these secular shifts in demand, the U.S. Department of Agriculture estimated that global grain inventories have sunk to the lowest level in 30 years! This is pushing the price of basic agricultural staples like bread, cereal, corn and milk to much higher levels.

The thinking inside the hallowed halls of the Fed is that such spikes in the price of individual foodstuffs does not necessarily spill over to its preferred “core rate”, a better measure of underlying price pressures.

Considering what I now pay for a box of Cheerios and a gallon of milk at the store – not to mention the gas needed to lug my groceries home – I’m just not buying the Fed’s argument. In fact, General Mills Inc (GIS), the second-largest U.S. cereal maker, just boosted prices in June.

And you can bet that if the price of Cheerios and Milk are going higher, then prices of Kellogg's (K) Corn Flakes, Hershey's (HSY) chocolate bars, and Kraft (KFT) macaroni & cheese are sure to follow! In fact, even Starbucks (SBUX) warned recently that it may not acheive its profit target this year due to rising milk costs! Better cut back on the cream in your coffee! Somehow in the end, I think we'll all be paying more very soon for these things.

China, Other Emerging Nations, Suffer Most

But the plight of the average consumer is even worse in many emerging markets, amid rising food prices. That’s because consumers in developing nations spend a much higher share of income on the necessities of life like food. In China for instance, food accounts for one-third of the consumer price index, more than double the percentage in the U.S. CPI.

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In fact rising food and fuel costs pushed Chinese inflation to 4.4% in June, the fastest growth in prices in almost four years. The rate of inflation in China has remained above the central bank's 3% target for the last four months straight. According to Beijing’s statistics bureau, higher food prices alone have accounted for nearly 80% of the overall rise in inflation during the first half of 2007.

Agricultural Commodities are "the Place to Be"!

This tells me that that we are in the midst of a secular trend in rising commodity prices. As crude oil shoots higher once again, agricultural resource prices are not far behind. In fact, renowned investor and Adventure Capitalist Jim Rogers recently said that: “I'm long nearly all agricultural commodities, about 20 of them, because that's the place to be. It's better than the stock market, the bond market or any other market that I know of right now.”

That’s some very good advice. Recently, I recommended several specific ways to play rising commodity prices – investments that are simple and easy to trade using a standard brokerage account. No futures, no options, no leverage and no risky bets.

Instead, I favor low-risk, high-probability bets on the long-term secular rise I see playing out in global commodities over the next several years. To learn more about how to profit from these trends, click here for more information, and access my free special report: Global Investing Made Easy

Is the Liquidity Tide Going Out on Wall Street?

The ongoing train-wreck that is the U.S. housing market, and the closely related sub-prime lending debacle, has been unfolding for quite some time.

Only recently however, did we begin to see the affects on broader financial markets. Now it seems, these credit market after-shocks are spreading – which threatens to knock-out a key support to the global equity rally.

By now, nearly everyone is familiar with Bear Stearns’ hedge fund blow-up. Today the Wall Street Journal printed the post mortem: “Investors in two troubled Bear Stearns Cos.(BSC) hedge funds that made big bets on subprime mortgages have been practically wiped out”, according to the firm.

It seems one of these funds, heavily invested (and leveraged) in sub-rime securities gone bad, is now worth ZERO; while investors in the other fund can count themselves more fortunate to be getting back 10-cents on each dollar they invested!

As a result, Bear Stearns has had to shell out $1.6 billion of its own money as “rescue financing”. Throw me a life-saver because we’re going down!

Collateral Damage Trickles Down Wall Street as Cracks Appear in the M&A Foundation

For awhile it appeared any collateral damage was limited to the riskiest areas of the sub-prime securities market, where after all Wall Streets big-boys should expect the occasional land-mine to go off.

Both Treasury bonds and corporate fixed-income markets tumbled at first, when the magnitude of the hedge fund losses first came to light a few weeks ago, but markets quickly stabilized and investors by and large remained calm. A story on Bloomberg however reveals that perhaps all is not well in the state of corporate finance on Wall Street after all.

According to the story, “Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co.(JPM) and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.”

As I have written about previously, merger and acquisition (M&A) activity this year is surging, setting new records not only in the U.S. but in Europe as well. This is one of the reasons global stock markets have performed so well, because private equity firms are constantly on the prowl to buy out public companies.

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According to a recent report by Northern Trust (NTRS), a record $415 billion of stock was “retired” from the market last year, with private equity led buyouts and other M&A activity playing a very big role. Obviously, such strong buyout activity in the stock markets helps provide major support to share prices.

It keeps a “bid” under the market, helping dampen volatility for instance, and minimizing declines in the major indexes. That’s because the private equity and hedge fund crowd is in the market as a ready buyer of shares.

Junk-Bonds Join Sub-Prime Sector in the Dog-House

Of course much of this buyout activity by private equity firms such as Blackstone Group (BX) is financed with high-yield bonds; also known in less politically-correct terms as: junk bonds. In fact, this year’s record buyout activity “helped push sales of high-yield bonds and loans worldwide up more than 70 percent during the first half of the year to a record $708 billion” according to Bloomberg.

But in the wake of the widening credit market crunch, first triggered in the sub-prime lending sector, recently the junk bond market has been getting hammered also.

In fact, junk bond spreads, which narrowed to a record low of just 2.4% over U.S. Treasury bonds in June, down from a peak of more than 10% in 2002, have since widened considerably. 

The corresponding decline in the market value of junk bonds (which move in the opposite direction of rising yields) has triggered the biggest rout “in high-yield debt in more than two years”, according to Bloomberg.

As a result, Wall Street’s aforementioned best and brightest are stuck holding an estimated $11 billion worth of loans and bonds, some of them at steep losses, which they can’t unload given current market conditions.

Will the Buyout “Bid” Vanish as Bond Losses Mount and Liquidity Dries Up?

Meanwhile, back in sub-prime land, conditions are going from bad to worse! A popular benchmark index that tracks different classes of sub-prime bonds, hit new lows yesterday.

According to the Wall Street Journal (emphasis mine), “in the past few months, the portions of the index that tracked especially risky mortgage bonds with junk-grade ratings had been falling. But now, the portions of the index that track safer mortgage bonds, with ratings of triple-A or double-A, are also falling sharply.”

It is now becoming all too apparent that credit market woes are spilling over to the broader financial markets. And the ever-present liquidity that has support all asset classes in recent years may be at risk of drying up.

Wall Street firms are beginning to suffer widening losses, first on their sub-prime holdings, now on junk bond positions, plus who knows what kind of hit they are taking on murky derivatives tied to both.

Against this backdrop however, is it not reasonable to expect a further contraction in liquidity as Wall Street’s losses mount, keeping them from investing in new “deals”?

Watch out for the other shoe to drop – when the private equity, M&A inspired “bid” in the market, turns around and becomes an “offer.” As in: an offer to sell stocks rather than buy; in order to raise cash to pay for margin calls generated by growing losses in other parts of their investment portfolios.

At that point the whole liquidity dynamic could easily begin to run in reverse; and look out below!

Make Your Wager on “the Safest Bet on Earth”

Several months ago, I wrote about the stunning rise of tiny Macau as the world’s fastest growing gaming destination (What Happened in Vegas Didn’t Stay in Vegas: It Moved to China). Recently, none other than Las Vegas Casino magnate Steve Wynn commented that investing in Macau ”is the safest bet on Earth”, this from a man who made billions transforming the Las Vegas strip. He knows of what he speaks.

In fact, Wynn’s new Macau Casino and Resort opened in September 2006, and in just the first 117 days of operation raked in some US$61 million in business! Slot machines at the Wynn Macau pull in about $400 per day on average, more than double the average take form slots on the Vegas Strip.

Location, Location, Location

This thriving island-municipality is strategically located just off the coast of China’s booming Guangdong province; a stone’s throw from Hong Kong. There are more than 100 million people within a three-hour drive and more than 1 billion people live within an easy plane flight of Macau.

From Honk Kong, you can hop aboard any number of ferry operators for the one-hour ride to Macau. In a hurry to make your date with lady luck?  No problem; just hop the helicopter taxi in Hong Kong instead, and be in Macau in fifteen minutes.

According to research by Deutsche Bank, revenue in the Macau casino market may grow 25% a year over the next five years. The average casino win per table per day in Macau is $22,000, compared with $2,600 in New Jersey’s Atlantic City, and $2,200 in Las Vegas. With statistics like these on Macau's side; it's no wonder gamblers, and casino operators alike, are scrambling for a piece of the action!

The Las Vegas of the Orient is on a Roll

Macau’s first quarter 2007 casino revenues shattered records at HK$17.87 billion (US$3.3 billion). Table game revenues jumped 32% to HK$ 5.49 billion, while the take from slots jumped 72% in the first quarter alone, to HK$732 million.

Recently, Playboy Enterprises announced plans for a 40,000 square foot “entertainment” complex; Asia’s first Playboy Club since a club in Manila closed in 1991. Gambling in Macau’s Playboy Club may be a bit… distracting, given the ever present bunny-suited cocktail waitresses, but no doubt management is counting on that!

Las Vegas Sands Corp will soon open its 10.5 million square foot Venetian Macao Resort – which reportedly will have twice the retail shopping space as the huge Las Vegas Venetian. Kirk Kerkorian’s MGM Mirage, and Sir Richard Branson of Virgin Group fame are considering big investments in Macau too.

For his part, Steve Wynn is sold on Macau’s potential as the safest bet on Earth; in 2009 Wynn plans to open an all-new US$1 billion 600-room casino resort.

Brace Yourself for Earnings Season

For U.S. stock market investors, it’s that time of year again!

Over the next few weeks, America’s public companies will be trotting out their performance report cards for the just ended second-quarter earnings season. Wall Street analysts have set the expectations bar pretty low for the upcoming earnings season, which should help many firms beat forecasts by a comfortable margin, as occurred last time.

Right now, collective profit forecasts call for about 5% year over year profit growth for companies in the S&P 500 index, about the same level expectations were set in the first quarter. But everyone knows the Wall Street earnings game is about managing those expectations to a modest level of growth, then issuing positive actual profit surprises.

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In the first quarter, consensus estimates also called for 5% profit growth for the S&P 500, but when all was said and done, final earnings growth checked in at better than 8% in the three months ended March. That corporate America was able to shake off the effects of a sharply slowing economy in the first quarter to post such positive results, was seen as a reason to celebrate on Wall Street. In fact, the S&P 500 rallied sharply in the month of April as profit results were tallied, gaining 4.3% for the month.

Overseas Operations Likely to Produce the Biggest Profit Punch

This time around, some expect a similar result in the back-half of July as the majority of S&P 500 firms once again beat the estimate, propelling their share prices higher. Stocks in general are already quite extended at this juncture however. In fact, both the Dow Industrials and S&P 500 closed out last week at new record highs. So any carry-on effect to good earnings results may in fact be more muted this time.

One thing is certain however: companies in the S&P 500 with the most overseas exposure are likely to produce some of the best profit results. “The amount of profits earned for S&P 500 companies outside the US most likely surpassed the one-third level in the latest quarter”, according to analysis from Briefing.com. And the trend is likely to continue.

For instance, firms such as Intel (INTC), Freeport McMoRan (FCX), Coca Cola (KO) and Exxon (XOM) get a disproportionate amount of total sales from overseas -- and stand to benefit accordingly!

U.S. companies with big overseas operations are enjoying a double-benefit to their bottom lines right now. First, economies in Europe, Latin America, and especially in Asia, are growing much faster than the U.S. economy.

Therefore companies that do lots of business in international markets are getting an organic boost from stronger sales growth in these markets. Second, the falling U.S. dollar provides an extra margin of profitability to American companies who earn a large share of profits in stronger foreign currencies; when foreign currency earnings are converted back to U.S. dollars at quarters-end.

For these reasons, I expect some of the biggest positive surprises to come from U.S. companies that do most of their business outside the U.S. – because that’s where the growth is.

Delving Deeper Into The Venezuela Disaster

As I mentioned in my last blog post, the email-man has been busy lately bringing me comments and questions from readers. In this post, I thought it would be worth answering another one for the benefit of all readers.

In response to a recent article on soaring crude oil and gasoline prices, (Misery Returns to the Gas Pumps as Oil Shoots Above US$75 a Barrel), I received this note from a reader: “In your article... you seem to blame OPEC for the rise in gas prices, and you didn't even want to write about Venezuela. Well, I think you should have gone deeper into Venezuela.”

Well, you asked for it, so you got it!

I have actually commented on the slow-motion socialist train-wreck that is Venezuela in my blog on several occasions; most recently here: (Energy Firm Draws a Line in the Sand, Taking a Stand Against Confiscation), but here’s a recap of my current thoughts on the subject.

Venezuelan Confiscation Sends Oil Output Plunging

Since President Hugo Chávez took power in 1999, crude oil production by the state-run energy firm PDVSA has fallen almost 50%, according to independent global energy consultants at PFC Energy. And while production may have rebounded somewhat since a 2002 strike, when Chavez ousted most of PDVSA’s middle and upper management ranks, it’s difficult to verify the “official numbers”.

PDVSA reports production of 3.3 million barrels a day, but most outside analysts, including the International Energy Agency (IEA) say the real number is perhaps inflated by as much as 20% to 25%, with real production closer to 2.6 million barrels.

The bottom line is that Venezuela’s newly nationalized oil industry (the entire economy appears headed this way) has been an absolute disaster so far, on its way to becoming a catastrophe.

For more proof, just look at how poorly the Caracas stock exchange has been doing – it’s the world’s worst performer so far in 2007 – down 24% in the first-half of this year alone! Venezuela is ranked 58th out of the 58 global market indexes that I track; dead last!

Are Higher Energy Prices a Sign of Inflation, or Robust Global Growth?

The reader goes on to comment: “there is the increase in the supply of dollars caused by the runaway US dollar printing spree that's been going on,” and says that the high price of oil may have “more to do with this supply and demand of dollars than the supply and demand of oil.”

This statement I agree with, at least in part. There’s no doubt that America’s ultra easy-money policies (the so-called printing press) has had a lot to do with the asset inflation going on around the world.

The falling greenback has certainly played a role in the price of everything from gold, to zinc and yes oil going up in dollar terms; but don’t discount the astonishing increase in net consumption as a result of rapid economic growth either.

Higher Global Rates a Concern for Growth, Commodity Prices

Economies in Asia including China are growing faster than 8% annually compared to 3% or so in developed nations and less than 1% last quarter in the U.S. This simple fact, coupled with years of under-investment in the energy sector globally, is the main reason for rising energy prices in my view.

In fact, this is why higher interest rates haven’t hurt energy prices at least so far, and they probably won’t, unless rates get a whole lot more restrictive. If that happens it could really bite into global growth, and would lessen upside pressure on energy from the demand side of the equation; but I don’t see that as a very high probability.

Thanks for all your comments questions and compliments; (especially the nice ones from you Mom!) And please keep ‘em coming!

Reader’s Mailbag... The Global Market Investor Responds:

Recently, several of my blog posts have generated quite a few responses. I’m happy to say the overwhelming majority of them are positive; thanks Mom! And many contain interesting queries and counterpoints that I thought it would be worth addressing here on this site, for the benefit of all readers.

In response to my recent article on Hong Kong (A Lunch Lesson in Asian Efficiency), a reader asks: “One thing that intrigues me is how can foreigners invest in Mainland companies?” and “Will you be revealing anything about entering the Chinese market in your upcoming conference?”

Well those are both very good questions, and part of the answer is a bit of a history lesson in China’s ever changing regulatory regime.

I have written extensively about China in this blog (see Hong Kong “Buzzing” from China’s Latest “Gift” and China (Finally) Moves to Help Level the Playing Field for Mainland Investors for more of my writings). In fact, China is one of my favorite long-term investment plays, but let me give you some background about investing there.

Investing in China-101

Authorities in Beijing have been worried for years about allowing the Chinese currency to be freely convertible on global markets, fearing massive capital flight from the country.

For the same reasons China’s mainland domestic stock markets in Shanghai and Shenzhen are largely off-limits to overseas investors. These are the so called A-share markets where you hear all the stories about rampant speculation and day-trading going on by Chinese investors.

Beijing realizes that eventually, to truly take its place as a first rate global powerhouse, it’s got to open up its markets. So the authorities are moving in this direction, but are taking very slow, measured steps to do it.

Some time ago, China set up a program called Qualified Foreign Institutional Investor (QFII), which allows certain sanctioned foreign institutions to invest in shares within China, shares trading in Shanghai and Shenzhen.

Beijing Cracks Open the Door to Foreign Investment

There’s a list of about 50 mostly large investment firms that are approved for the QFII trading scheme, which include big global banking and brokerage outfits like Barclays, Morgan Stanley, and DBS Bank.

Beijing currently allows all these firms a quota of up to $10 billion worth of investments in Chinese mainland stocks.

Recently, the authorities considered tripling the QFII quota to $30 billion, but no word yet on when.

So yes, it is possible to invest in certain specialty funds and ETFs, which in turn can either buy A-share stocks directly, or can invest in what are called Chinese A-share Access Products (CAAPs).

The real irony here is that with China such a hot-ticket item for investors today, instead of capital flight being a concern, it’s too much money flooding INTO China that regulators should be worried about.

The Best Way to Enter China: Meet Me in Hong Kong

And in answer to the second question: will I be revealing anything about entering the Chinese market at the upcoming conference, my answer is an unqualified: You Bet!

China is one of my favorite global investment destinations over the long term. Right now, the mainland markets are experiencing another one of those periodic corrections. In fact, the CSI 300 Index of A-share stocks has pulled back about 16% or so since mid-June, so right now I’m putting together a shopping list!

But there are other profitable ways into Chinese shares too; after all, there’s always more than one way to skin a cat. And right now, I’m focused on these markets rather than the mainland.

In October, I'll be in Hong Kong for the Sovereign Society Asian Advantage Tour to share my favorite ways to invest in China.  If you want to be there in person to find out exactly which China plays I believe have the most upside potential, then you should plan on joining me in this fabulous city; the gateway to China! You can get more information from our website by clicking here:(Sovereign Society Events).

The Coming World “Oil Crunch”

In a post on this site last week,(Bubbling Crude Prices Heading Higher Again), I described how crude oil has been locked in another upside rally, with prices moving above $75 a barrel again recently and closing in on fresh all-time highs.

Well, I hate to revisit this same topic again so soon ... you’ll get the idea that I’m beating an empty oil drum on behalf of the “peak-oil” crowd.

Heck, I don’t enjoy paying over three-bucks a gallon to fill up my SUV anymore than the next guy. And I’m paying prices closer to $4 a gallon at my local marina fuel dock – which is seriously putting a dent in my offshore fishing trips!

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So I would rather not think about the ongoing oil squeeze, but just the other day the International Energy Agency (IEA) came out with a new report warning that the world is headed for an imminent oil supply “crunch”, which forces me take note.

Demand Increases Faster While Supplies are Tighter than Expected

The report, quoted by the Financial Times states: “oil looks extremely tight in five years time” and “prospects of even tighter natural gas markets at the turn of the decade”. That’s funny; I thought the crunch was already here!

According to the story the IEA is concerned “that supply was falling faster than expected in mature areas, such as the North Sea or Mexico.” Meanwhile, production of new finds in places like the Russian Far East “faced long delays.”

Thanks to President Putin’s bare-knuckle negotiating tactics with western oil companies, not to mention Venezuela’s wholesale confiscation of western oil field assets, production in these areas has either leveled off or is in decline due to lack of investment. But the lack of internal investment on the part of western companies is also to blame.

Lack of Investment

Do you remember when oil was below $20 a barrel? So do the major global oil companies, and it’s a big reason why they have been hesitant to increase exploration and production budgets, due to worries that crude prices might tumble again. Perhaps the new IEA report will finally lay those unfounded fears to rest.

In fact, the report mentions a “disconnect” in the fact that big oil companies are boosting dividend payments to shareholders, instead of perhaps better investing the windfall in exploration and production activities, where there’s been little real change in recent years.

As the Times article states: “oil majors are enjoying the fruits of past investments without providing adequately for their own financial future.”

Stats Point to More Upward Pressure on Energy Prices

The IEA, which has repeatedly boosted its demand forecasts, now reckons that world oil consumption will grow to 95.8 million barrels per day by 2012 -- up some 11% over the next five years alone. Once again, fast growing China, India and other emerging markets are singled out as the primary culprits for increased demand. And of course the other side of the coin is that already stretched global supplies, leave prices just one way to go, higher!

The article points out that there’s been a rule of thumb at work in oil prices in recent years: to approximate the price of oil, just “take the last digit of the year and add a zero: 2002 saw prices in the $20s; 2003 in the $30s”... you get the picture. Of course now that we’re a bit more than half-way through 2007, prices are a bit north of $75 a barrel - right on target - and continuing to climb with the summer heat.

Somehow I think that Jim Rogers recent prediction of $100 a barrel oil may in fact come a lot sooner than 2010!

Custom Tailoring Isn’t China’s Only Attraction

Yesterday in my blog, I told you about a tip I received on a great Hong Kong based tailor, who is capable of turning out high-quality, custom-tailored suits at bargain prices – and delivered to you literally overnight.

This is the kind of high-end tailoring that would cost many times more in Beverly Hills or New York - much less in Italy (considering the euro's appreciation). Hong Kong's reputation for efficiency and good value still applies, which is in fact a metaphor for China as a whole.

Oh, I realize we have all read horror stories about China's long list of problems - corruption, mismanagement, and stifling regulations are just a few of Beijing's faults. But it's funny how the same things have been said about Washington, New York, London, and Tokyo - and are repeated still today.

Centuries-old Capitalist Spirit is Alive and Well

But China - although it's branded as communist - has a thriving merchant class and an entrepreneurial tradition many centuries old. Its entrepreneurial spirit dates back even further than the rise of Renaissance era mercantilism in Europe. In fact, there is evidence that Chinese sailing ships plied the waters off the western American coast long before the Spanish or Portuguese arrived.

The Chinese work ethic is incredibly strong - as you can see from the tale of the Hong Kong tailor. Well here's another example: Less than 20 years ago, if you wanted to drive across country from Shanghai to China's western frontier, you would have been forced to drive across open expanses of desert with no roads for hundreds of miles.

Today, modern motorways crisscross China the likes of which rival the autobahn or the U.S. interstate highway system. The roads were built day and at night, under floodlights to increase efficiency.

China's Recent Stock Market Revival Still Has Miles to Go

China's stock market traditions are very old, attesting to deep a seated capitalist spirit in this country. In fact, prior to World War II, China's stock market was the largest between New York and London - easily Asia's biggest exchange.

Of course, the Communist Revolution in 1949 closed the exchanges for the next 40 years. In 1990, when Deng Xiaoping sought to rekindle that capitalist spirit, stock exchanges in Shanghai and Shenzhen were reopened. Less than 20 years later, China's mainland exchanges have already reached a market capitalization of more than US$2 trillion, surpassing even Hong Kong. Now that's efficiency!

Currently, there’s another one of those periodic slumps taking place in mainland markets. So far, the decline has chipped about 17% off the value of China’s benchmark CSI 300 Index (of domestic A-share stocks) since mid-June, and this pull back again has investors worried if this is the beginning of the end for China. Nonsense, says I!

China Appears to Have a Very Bright Future Indeed

There will inevitably be stock market setbacks like this from time to time. Great investment opportunities such as this, the kind that come along just once or twice in a lifetime, always test your patience and resolve.

Jim Rogers, co-founder of the Quantum hedge fund and no slouch at global investing, has said that China is the one market that he doesn't ever want to sell. He also said that he would add to his holdings "in a big way" should the market fall 40% to 50%. Clearly the "Investment Biker" has nerves of steel!

China is a big part of my diversified global portfolio - you could say the upside profit opportunities found there are tailor-made for my long term investment view. Right now, I’m making up my shopping list!

This coming October, I'll have the opportunity to experience Asian efficiency firsthand. I'll be in Hong Kong attending the Sovereign Society Asian Advantage Tour to share my favorite emerging Asian investment ideas with our members.  If you’re interested in coming along to join in the fun, and potential profits, you can get more information on our website by clicking here:(Sovereign Society Events ). If you’re lucky, I’ll even give you the name of a great Hong Kong tailor!

A Lunch Lesson in Asian Efficiency

Recently in Zurich Switzerland, while attending the Sovereign Society European Advantage Tour, I was fortunate to have lunch with a delightful couple from Reno, Nevada.

We naturally chatted about the global investment climate and sky-rocketing real estate prices in the western states. Eventually the conversation turned to Asia and Hong Kong in particular, where this couple had recently visited.

Since I find Asia to be home of perhaps the best long-term investment opportunities the world has to offer, this is when the conversation really got interesting for me. It seems this gentleman, while visiting Hong Kong not too long ago, got a first hand look at Chinese efficiency in action – and a nice new wardrobe in the bargain. Let me explain…

The Global Shoppers Guide to Bargain Fashions

Hong Kong is legendary for high quality, but reasonably priced custom tailoring. The city’s back-ally garment district is teaming with such shops, and many of the finest hotels in town have tailors lurking about the premises – sizing up potential clients – literally!

But I thought most of this talk was more urban legend than reality. A relic of Hong Kong’s past – but boy was I wrong. As my luncheon companion explained, he walked into a tailor’s shop one morning inquiring about a tuxedo he required for a formal reception.

The tailor quickly took measurements and displayed various fabrics for his new customer to select. As soon as everything met with the customer’s approval, a quick cell phone call produced a garment district courier riding a motor scooter at the front door of the shop. Away road the bolts of fabric selected – along with the vital measurements – while the customer was invited to check back in the afternoon – perhaps after lunch.

Old World Quality and Efficiency Still Available in Hong Kong

Upon returning just a few hours later, the customer was astonished to find just half a tuxedo available for his fitting. The customer’s new suit had just one arm of the jacket, and only one pants leg complete, but still fit remarkably well. Final measurements taken, and off went the half-complete tux to be finished – with delivery scheduled for the next morning – a turnaround time of just 24 hours!

As I mentioned earlier in this post, I consider China to be one of those places that offer truly outstanding long-term growth potential, notwithstanding the inevitable bumps and bruises likely to occur along the way. In October, I’ll be attending the Sovereign Society Asian Advantage Tour in Hong Kong – and I can’t wait to pay a visit to this same tailor in Kowloon.

Tune in to my blog tomorrow, when I’ll touch on China’s rich capitalist history, ingrained work ethic, and explain just why I see this country as such a compelling investment destination.

Beware Signs of a Global Credit-Crunch

As I mentioned in my blog yesterday, international stock markets have performed very well in recent years, consitently outperforming the U.S. benchmark S&P 500 index in fact.

But equities are not alone in terms of stellar returns – in fact most asset classes the world over are posting big gains – a very unusual situation.

Renowned global money manager and market commentator Marc Faber recently penned an interesting editorial for the Financial Times (Beware the driving forces behind surging asset prices), in which he points out that all asset classes around the world are appreciating in unison.

Faber notes that since the end of the last bear-market in 2002, “asset prices have soared in value everywhere in the world”, he goes on to correctly point out that: “Prices of stocks, commodities, real estate, art and every kind of useless collectible have shot up.”

Rampant Credit Growth Fuels Global Asset Boom

Faber goes on to detail just how unusual this situation is, since “previous asset bubbles were concentrated in just one or a few classes.”  The main culprit according to Faber is "ultra-expansionary monetary policy." In other words, coordinated credit growth, here at home and nearly everywhere around the world, is responsible for these big gains in multiple asset classes.

For more than a year now, the U.S. Federal Reserve has remained on hold, not moving benchmark interest rates, for the eighth-straight meeting recently. With benchmark rates currently sitting at 5.25%, many investors are worried about the Fed choking off growth, while many other pundits say that rates are still too accommodative at these levels.

Certainly rates in Japan appear to be plenty accommodative, with the BOJ holding its benchmark lending rate at just 0.5%. The Japanese central bank has used fears of deflation in Japan’s reviving, but still slow growing economy, as a pretext to drag their feet on rate increased. This policy stance by the BOJ is funding the global carry-trade, which of course continues to inflate asset prices world wide.

Investing in the “Danger Zone”

In Faber’s view: “we have already reached the danger zone. It is no longer the real economy that is driving asset prices.” This is because credit growth around the world is no longer growing at a fast enough pace to support still more asset appreciation. Faber points to the recent sub-prime lending woes in the U.S. as a case where credit tightening is happening in spite of the Fed’s inaction on rates, as mortgage lenders tighten their credit standards in the face of mounting foreclosures for example.

Faber as always, makes an interesting and persuasive case. But in my view, any credit-draining unwind in global markets has yet to show up in most of the data I monitor. That said, it may only be a matter of time.

As my colleague Eric Roseman correctly points out, global equity markets have had a mostly uninterrupted upside run for an extended period, the S&P 500 for instance hasn't pulled back even 10% in about four years time. So a correction of 10% to 15% in stocks (perhaps more in emerging markets) would not be surprising. And such a correction would not necessarily mean the start of a bear market in all asset classes.

Keep an Eye on the Dollar Indicator

Here’s an indicator to keep an eye on however, courtesy of Marc Faber. He points out that historically, these periods of global credit contraction, or “conditions of relative tightening” in global monetary conditions have boosted the US dollar, while being negative for other asset markets.

My colleague Jack Crooks speaks with more authority about currencies than I, so it's a good idea to read his blog on a regular basis (Crooks on Currencies). And keep an eye on the beleaguered buck; a turnaround for the greenback may signal trouble ahead in other markets.

Chart of the Week: International Markets Continue to Outperform U.S.

We are just past the half-way mark for 2007 global financial market returns, so it’s worth taking a look at how well the U.S. has performed so far this year compared with international markets.

For the blue-chip S&P 500 index, so far it’s closer - but still no cigar!

Through the first six-months of 2007, the S&P 500 index gained 6%, while international stock markets are up 9.1% this year (as measured by the MSCI EAFE index of major non-U.S. markets). And the MSCI Emerging Markets index is turning in yet another spectacular performance – up 16.1% so far in '07!

This merely continues a long-standing trend that has seen international stocks beat the S&P 500 for the past five years straight – and going on six in 2007 – as can be seen in the chart below.

Investors are Simply Going Where the Growth Is

There is a very good reason for this international out-performance however. According to forecasts from the International Monetary Fund, global economic growth, while expected to slow somewhat from last year’s torrid pace, should still exceed 5% in 2007.

What’s more, corporate earnings growth in global markets as a whole are on pace to continue at an above-trend rate of about 8% this year – while emerging markets are forecast to enjoy robust earnings growth of 14.5%.

The US economy, not withstanding recent signs of a pick-up, is still only expected to grow 2.3% for all of 2007 – about half the global rate. And domestic profits may grow just 5% to 7% this year -- among the slowest regions of the world. Bottom line: for better stock market gains go global -- selectively!

Bubbling Crude Prices Heading Higher Again

Don’t look now, but crude oil prices have quietly surged up to $75 per barrel again, for the first time in nearly a year, and are fast closing in on fresh record highs.

The catalyst this time around is “renewed unrest in Nigeria’s delta oil producing region.” One of the world’s largest and yet most unstable oil fields. No news there. After all the Middle East isn’t exactly a model of stability either, and let’s not even talk about Venezuela.

In Nigeria, violence by militant groups has cut the country’s oil output by at least 25%. Recently Royal Dutch Shell, Nigeria’s largest foreign oil producer, said that it would not re-start its oil production in Nigeria for the rest of this year, due to the ongoing violence.

In the Middle East, the Organization of Petroleum Exporting Countries (OPEC) resfuses to raise its output quotas, which help boost prices even more.

OPEC, the oil cartel that controls about 43% of global oil production, refuses to even contemplate raising output before a meeting scheduled for September. Clearly a policy stance intended to push prices even higher.