Global Stock Market BLOG - Mike Burnick

ExxonMobil's Big Gaffe

ExxonMobil reminds me of the Brooklyn Dodgers – or perhaps a better modern-day metaphor would be the Chicago Cubs (with apologies to my colleague Chuck Dolce). They always seem to find a way to steal defeat from the jaws of victory.

At yesterday’s ExxonMobil annual meeting in Dallas, several shareholder resolutions were defeated that, if adopted by a forward-thinking board, could mean a much brighter future for this antiquated company.

As it is, ExxonMobile, the world’s largest oil & gas producer by market value, risks becoming a footnote in history. This is a company that had everything going for it, including record profits... and blew it, by refusing to change its old ways of doing business.

Global energy markets and sources of new supply will change radically in the next several decades. It looks to me like Exxon is hell-bent on getting left behind!

Of course one of the proposals defeated yesterday called for Exxon to adopt an alternative energy policy. The firm is one of the few major oil & gas companies that don’t invest a dime in bio-fuel, solar, or wind power. 

This quote from ExxonMobil’s CEO Rex Tillerson says it all about the firm’s backward thinking: “Twenty-five or 30 years from now, the world is still going to have to use oil and natural gas, whether people like it or not, that's a fact.”

How about trying this on for size Rex: 25 or 30 years from now, Exxon will find itself completely shut out of the most promising global oil & gas reserves... as OPEC, Russia, China, Brazil, Venezuela, etc, etc, TOTALLY CUT big U.S. oil companies out of the picture.

Tillerson was proud to point out that Exxon plans to spend $68 million a day this year exploring for new oil reserves... and presumably NOTHING on alternative energy. In reality, Exxon’s total R&D budget amounts to less than 0.2% of last year’s revenue.

Almost NONE of that will be spent on alternative energy research, even though this is clearly key to the future growth of the energy sector.

Peter O'Neill, a great-great grandson of John D. Rockefeller, founder of Standard Oil, had this to say: “All of Exxon Mobil's acknowledged strengths are no guarantee it will remain flexible and visionary in light of the changing energy realities.”

They just don't get it – the energy industry is changing in profound ways – but Exxon refuses to change with it. They may as well diversify into buggy-whip production, or textile manufacturing.

P.S. ExxonMobil may have its head firmly planted in the sand, refusing to see the market-shock changes taking place in the energy sector, but not me. I have been doing extensive research on the most promising, and profitable companies that are committed to alternative energy solutions.

These are the big winners going forward, while firms like Exxon get left behind. Find out specifically which companies I think are best positioned to capitalize. Read my new special report: How to Profit from the Great Fuel Revolution. It’s FREE when you sign up for a no-risk trial of Market Shock Trader .

The Great Fuel Revolution Begins in Dallas

The next great market shock starts at 10 am today at the Morton H. Meyerson Symphony Center in Dallas, Texas.

That’s when ExxonMobil CEO Rex Tillerson may be singing his swan-song as chairman of the board of the world’s largest oil & gas company.

I have been writing extensively about the Dallas market-shock resolution: a dissident shareholder push led by the Rockefeller Family, which seeks big changes at the world’s largest energy company. This is a water-shed event. Let me explain why…

Rockefeller Family Takes On Exxon’s Board

One of several resolutions to be voted on today in Dallas includes establishing an independent board of directors, by separating the post of chairman from CEO. Another, more far reaching resolution calls for the company to adopt an alternative energy policy, because at present ExxonMobil has none.

In fact, ExxonMobil earned revenues of one-billion dollars a day last year, but invested just 0.2% of that in research & development.

This is mind-boggling to me, since the company’s own slide presentation, on display in Dallas today (see below), clearly points out the promise of alternative energy.

Exxon’s Own Research Shows Greater Profit Potential in Alternative Energy

ExxonMobil’s own data shows alternative energy sources including: solar energy, wind power, and bio-fuels – will enjoy compound annual growth of almost 8.7% each and every year – all the way out to 2030.

Meanwhile, conventional fossil fuel growth is pegged at just 1.3% per year over the same period, according to ExxonMobil.

Given the proof of its own numbers… it’s a mystery to me why ExxonMobil refuses to spend more on alternative energy research and development projects. Most of its chief rivals including Chevron, and BP are spending far more to secure alternative energy sources.

The Rockefeller Family, descendants of the founder of ExxonMobil (John D. Rockefeller’s Standard Oil) realize how vitally important alternative energy is to the firm’s future.

That’s why they’ve publicly broken ranks with ExxonMobil’s management team over this issue. Here’s their key point, in the family’s own words: “If the next 20 years of the energy business were just going to be about oil and gas, we probably wouldn't be here today.”

It’s Time to Profit from the Next Great Investment Boom

Of course that’s NOT the case…fossil fuel supplies are dwindling as demand grows. The future is about alternative energy sources, the Rockefeller family knows it, and they’re forcing America’s biggest oil & gas company to listen.

Global investment in the alternative energy sector surged 60% last year to $148 billion in 2007. Silicon Valley venture capital firms – the same deep-pocketed investors who funded the technology and internet boom – are now pouring big money into alternative energy.

If you are correctly positioned to profit from this tidal-wave of investment spending, then you’ll be in on the ground floor of the next great investment boom.

While the sparks fly in Dallas, and no matter the outcome of today’s shareholder votes – the die is cast – the future belongs to alternative energy! I’m positioned to take advantage of the great fuel revolution – are you?

P.S. I’m pulling the trigger on my first market-shock recommendations to take advantage of the great fuel revolution. My first pick is a renegade oil firm that develops “HemiCell-190”, which already powers 2.6 million cars. My second selection is a “giant killer” that just scooped-up gold-mine in alternative energy assets that ExxonMobil threw away.

Subscribers to my signature research investment service Market Shock Trader will be hearing from me about even more ways to profit. Very soon, I’ll be sending them specific rifle-shot plays to cash in on alternative energy!  Click here for all the details and get access to my FREE special report: How to Profit from the Great Fuel Revolution.

Legendary Oil Man Turns Back on Oil…

Just last week, legendary Texas oilman T. Boone Pickens made headlines with another big bet on energy... but it was No ordinary oil & gas investment.

Fossil fuels are a dead-end strategy today. The future belongs to alternative energy sources. Over the past week, I have been writing extensively about the great fuel revolution that’s now underway. My research uncovered some very interesting investment candidates with lots of profit potential.

The interesting thing is... NONE of these firms are the traditional big oil & gas firms that investors are so fond of.

Crude oil soared as high as $135 a barrel last week – more than double the price of a year ago... but big oil firms like ExxonMobil WILL NOT be cashing in on the next phase of the energy boom – you can bet your bottom dollar on that.

Reserves are dwindling at the big oil companies, as they are denied access to the world’s most lucrative new finds.

Most oil-rich nations outside the U.S. are far too unstable to invest in directly… good luck collecting dividends from the Nigerian National Petroleum Corp, or PDVSA run by Hugo Chavez!

These and most other major oil producing nations just aren’t inviting ExxonMobil into their back yards to drill these days… not anymore!

Instead, the richest investment opportunities can be found in the fast-emerging alternative energy sector.

That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for $2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel...

*The market for ALL alternative energy sources grew 40% last year alone – to $77.3 billion – and will explode into a $250 billion industry within 10 years.

*Bio-fuel grew to a $25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just 4 years ago.

*The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into an $81 billion business within the next 10-years!

But you don’t have to wait two decades or even two years to start making serious money from the long-awaited Great Fuel Revolution—finally in progress!

I have been carefully researching the profitable trends emerging in alternative fuels for quite some time, and there are two technologies in particular that stand head & shoulders above the rest.

I’m almost set to pull the trigger on my first market-shock recommendation in this fast-growing industry.

For reasons you’ll discover, it could more than double your money or more by year end. And then provide even greater opportunities going forward.  But the ball starts to roll—with serious momentum—tomorrow. 

Tomorrow, a contentious board meeting takes place in Dallas Texas. The Rockefeller Family has publicly broken ranks with the management of ExxonMobil – the world’s largest conventional oil & gas company.

The Rockefellers and other investors are fed-up... they know the future belongs to alternative energy, and Exxon isn’t investing enough to take advantage of this growing trend, but you can...

Even before the fallout from the Dallas market-shock makes headlines, subscribers to my signature research investment service Market Shock Trader will be hearing from me about the best ways to profit.

Very soon, I’ll be telling them how to cash in on the great fuel revolution with specific rifle-shot plays on the alternative energy boom!

Here are a few of the details on just one of these picks...

*Industry Leading Technology: This company is the world’s largest grower and processor of sugarcane – the key ingredient in the revolutionary HemiCell-190 production process – the highest octane ethanol on earth!

*Soaring Sales: The firm’s top-line operating revenue has grown at a compound annual rate of 31.5% since 2004 – and sales jumped 45% last year alone!

*Double-Play Profit Potential: This firm is a leading global sugar exporter, cashing-in on soaring agriculture commodity prices. Plus, its state-of-the-art HemiCell-190 production process led to a 30% jump in the company’s ethanol sales last year.

This firm produces one of the best high-octane bio-fuels on the planet, and yet also enjoys the lowest production costs of any ethanol refiner I’m aware of.

The company I’m talking about is poised to totally dominated the fast growing bio-fuel industry of the 21st Century – the way oil & gas giants like ExxonMobil dominated the 20th.

Today, ExxonMobil is in the twilight of its power and status – but the company I’m recommending to Market Shock Trader subscribers is just beginning to soar in value. This company is just one of many alternative energy investments about to go mainstream as oil, coal, and natural gas costs sky-rocket!

Fossil fuels are dead – the future belongs to alternative energy. Vast fortunes will be made in the “great fuel revolution”... starting tomorrow!  Do not delay… discover the massive profit potential that awaits you by acting today.  Click below for all the details – and to access my special report: How to Profit from the Great Fuel Revolution.

The Flight of Dark 33 - Another Milestone in the Great Fuel Revolution!

On a crystal-clear March day a U.S. Air Force mission code named “Dark 33” swings into action. A lone B-1 super-sonic bomber races across the skies over the top-secret White Sands Missile Range deep in the New Mexico desert.

Captain Rick Fournier of the 9th Bomber Squadron based at Dyess Air Force Base in Texas is at the controls. He pushes “Dark 33” through a series of steep dives, sharp turns, and then climbs straight up toward the heavens. Next comes the ultimate test. Capt. Fournier guns the throttle as “Dark 33” breaks mach-1... flying faster than the speed of sound.

This mission has nothing to do with the war in Iraq or Afghanistan… but it is vitally important to the energy security of the United States – particularly the U.S. military. Mission accomplished, Capt. Fournier and his crew have successfully pushed the Air Force further into the wild-blue-yonder of the alternative fuel revolution.

U.S. Military Seeks Energy Security

You see, "Dark 33" was the first Air Force jet ever to break the sound barrier while running on alternative fuel – specifically synthetic jet fuel. The successful mission is a key milestone for the U.S. military in breaking its dependence on conventional fuel. The military burns up 340,000 barrels of oil every day.

The Pentagon's energy bill totaled $13.6 billion in 2006.

The cost of jet fuel for the Air Force alone has tripled in the past four years.

The Pentagon is worried about its dependence on foreign oil, which represents a “strategic threat” to American security. Global crude oil supplies are tight as a drum, and any unexpected disruption in the flow “could cripple military operations around the world,” according to a recent Wall Street Journal article.

So the military is now planning around the “peak oil” theory. That includes major investments in the alternative energy sector. Last year in fact, “Nellis Air Force Base near Las Vegas opened one of the largest solar arrays in the U.S., a 140-acre field of 72,000 motorized panels that powers the base and sells energy to nearby communities.”

Air Force Goes Green... Pushing Private-Sector Investment

As a huge consumer of jet fuel, the Air Force is spending even more time and money developing revolutionary new fuel sources for its aircraft. The Air Force first tested synthetic fuel in a B-52 bomber in 2006, and has been pushing forward to certify the use of alternative fuels in all its aircraft, now including the super-sonic flight of the B-1 bomber code named “Dark 33”.

The technology for turning coal and natural gas into liquid synthetic fuel has been around for a long time. The process was invented by a pair of German scientists, Franz Fischer and Hans Tropsch, in the 1920s. The trick has been to reduce the price tag of such synthetic fuel (or “synfuel”) to make it cost-competitive with crude.

When the Air Force tested synfuel in a B-52 in 2006, the cost was nearly $20 a gallon – not very appealing. But less than two years later the B-1 flight in March cost the Air Force just $4.62 a gallon – not much more than the petroleum based jet fuel it was mixed with. Now the Air Force is getting in the ballpark.

This story is a great example of how government research (in the case the U.S. military) helps push private enterprise into innovations they otherwise might not. Synfuel certainly isn’t economically feasible (or profitable) at $20 a gallon. But since the Air Force continues to make alternative sources a priority, private enterprise is willing to invest and innovate to bring costs down.

A few years ago, Canadian-based Baard Energy decided to build the first commercial-scale synthetic-fuel refinery in the U.S., to be completed in 2012. Explaining the investment, CEO John Baardson told the Wall Street Journal “he decided to roll the dice on the $6 billion plant because of the military's interest.

‘There isn't a market for this right now, so it takes a little bit of faith to get these plants going’… ‘Knowing the military was out there took one huge risk factor out of the decision-making process.’”

Profiting From the Great Fuel Revolution

Perhaps the best example of government-backed alternative fuel innovation can be found in Brazil. Stung by the oil price shocks of the 1970’s, the government invested heavily in sugar-based ethanol. Brazil mandated that every gasoline station carry ethanol, and that new cars must be flux-fuel capable.

Today 29,000 filling stations in Brazil have ethanol pumps – compared to just 700 in the U.S. – there’s one on every street corner. Also, 85% of all the new cars in Brazil can run on ethanol – compared to just 5% of U.S. cars.

Brazil has replaced 40% of the gasoline it consumes with ethanol – resulting in nearly $60 billion in oil import savings since 1975. Brazil’s booming sugar-cane based ethanol industry has also created 1 million new jobs along the way.

Similar innovations in the U.S. would lead to even bigger cost savings, and help our nation establish greater energy security, if not total independence. The Air Force is off to a flying start synfuel research and development, but much more can be done.

P.S. I have been doing lots of research into the alternative energy sector and have uncovered some exciting investment opportunities that are rich with profit potential. Tomorrow, I’ll be revealing a new recommendation to my subscribers. It’s a company that is leading the sugar-cane ethanol revolution in Brazil. Get all the details when you sign up for a no-risk trial of Market Shock Trader!

As an added bonus, I’ll send you my new special report: How to Profit from the Great Fuel Revolution. It’s packed with pages of research on the alternative fuel sector – and many more profitable trade recommendations for you to profit from this promising sector... the report is yours FREE, when you sign up for my signature research investment service Market Shock Trader!

The Plug-In Solution to Sky-High Gas Prices

I’m finishing up my last road-trip of the soccer season this weekend, and boy is my wallet happy.

My 11-year old Shannon, and are hitching a ride to Orlando this afternoon with another family from our travel soccer team... thank you Kelly & Ken! So we’re doing our part to conserve energy. My wife however, will drive up in the family truckster (our gas-guzzling Ford Explorer) tomorrow, after my older daughter winds-up the last volleyball match of her season on Saturday morning.

Driving the Florida Turnpike between Jupiter and Orlando usually saves you a few bucks on gas – and every penny counts these days! That’s because the gas stations at the state-run service plazas typically set their fuel prices a bit lower, but not anymore! Gas prices are even higher along the Turnpike now (up to $4.07/gal.) than back home in Jupiter. Thanks to the energy crunch, even this savings is long-gone.

I’m glad I filled up the truckster on Friday – for ONLY $3.95 a gallon – believe me, every cent counts with my gas-hog. But with the four of us driving back on Monday, plus luggage and soccer gear, we really don’t have the choice of “downsizing” to a smaller vehicle.

The Quest for a Fuel-Efficient SUV

My research into alternative fuels tells me that lots of progress is being made toward much more fuel efficient engines – even for large cars like my truckster. There are already hybrid-SUVs on the market, but there’s much more work still to be done to merge high-performance with high fuel efficiency.

But that means there is also more potential profit for the breakthrough companies that come up with these new technologies.

One very promising new technology, that’s just over the horizon, is plug-in hybrid cars. These vehicles are being designed right now by the big automakers, and should hit showrooms within the next two years. GM's Saturn division is developing a mid-sized SUV that runs on an innovative technology combining Lithium-Ion batteries and ultra capacitors with control electronics.

The Saturn VUE Green Line SUV is a hybrid that can be plugged into a standard electricity outlet in the garage to recharge its batteries, but still has a standard gasoline engine. In road tests the Saturn delivers high-performance – 0 to 60 miles per hour in just 6.9 seconds – that's faster than a Porsche Cayenne. And the SUV also delivers fuel efficiency in spades – 150 miles per gallon to be exact!

Replacing Our Fleet and Sticking-It to OPEC in the Process

The high-tech batteries that will power Saturn’s SUV and other cars like the plug-in Chevy Volt, are capable of 40-mile trips on a single charge. That’s typically more than enough for daily around-town driving, and even short commutes. What about the sticker-price? Estimates show that at a price of $5 per gallon for gasoline (we’ll be there sooner than you think), the price premium for these hybrid vehicles could be paid back in less-than 3 years!

Studies show that plug-in hybrids could replace 84% of America’s light vehicle fleet using existing, underutilized electric capacity. That’s 184 million cars, trucks and SUVs! Recharging the batteries would take place during off-peak hours, to keep utility rates from skyrocketing. In fact, the balance in electricity demand could actually make utilities more efficient and therefore profitable.

Talk about a potential breakthrough: a big switch to hybrid plug-in vehicles like this could reduce U.S. oil consumption by 6.2 million barrels per day, according to some estimates, cutting our imported oil in half! Watch out OPEC!

Unfortunately for me, this model won’t be available at my local Saturn dealer in time for the start of next travel soccer season in September. As Tom Petty says: “waiting is the hardest part”!

P.S. I have been writing extensively this week at what I see as the next major market shock you can profit from: the alternative energy sector. Alternatives to fossil fuel - also called "renewable", or "green" energy - has had a lot of hype associated with it over the years, but not much in the way of cash profits... however all that is about to change.

Alternative energy is quickly going main-stream with big profit potential for those who know where to invest. I just finished updating a new report: Go Green and Grow Rich, that's packed with profitable trading ideas in this promising sector... the report is yours FREE, when you sign up for my signature research investment service Market Shock Trader!

America's Energy Future...

The U.S. House of Representatives just passed a $57 billion alternative energy bill. The deal extends a broad range of tax incentives to invest in wind, solar, biofuel and other renewable energy technologies. However, to pay for this, congress is proposing some corporate tax increases to balance the equation. This part of the bill doesn’t sit well with the White House, so a compromise will have to be struck.

Considering that ... A: It’s an election year, and B: Oil prices touched $135 a barrel today – I have no doubt that the alternative energy bill will ultimately prevail – but unfortunately it’s not enough. In fact, extending the alternative energy incentives is a great step in the right direction, but it’s just a stop-gap measure – a band-aid solution.

A recent Wall Street Journal article details General Electric’s (GE) frustration with the lack of coordinated U.S. energy policy. CEO Jeff Imelt has successfully steered GE into a leading position as “a clean-tech juggernaut,” but is clearly worried about America’s piecemeal approach to investing in fossil fuel alternatives.

It’s not that Imelt is an environmental crusader either; “he just smells the chance to make a lot of money,” – ah the free enterprise profit motive at work. The trouble is, without a more clearly defined set of rules – an alternative energy play-book if you will – Imelt is worried that the U.S. may “miss the train altogether.”

As the WSJ article points out, “Lack of planning for new nuclear plants has paralyzed the industry; lack of progress on renewable-energy tax credits has clean-energy developers treading water. Worries over how carbon will be priced has the traditional coal-powered utility industry trembling.” 

Meanwhile, in another chamber of Congress, executives of big-oil firms were called on the carpet to answer for sky-rocketing crude oil prices.

Congress wants to know why crude oil is soaring past $135 a barrel – double the price of last year! Hmm... more demand than supply maybe? 

Of course Congress just doesn’t get it! As the CEO of ConocoPhillips correctly points out, “The fundamental laws of supply and demand are at work.” We are getting squeezed by oil exporting nations that are “managing demand for their own interest,” and severely restricted access to energy reserves both at home and abroad.

Today, the International Energy Agency said that a major supply crunch is looming unless the world’s oil majors can ratchet up production by 12.5 million barrels a day within the next seven years. Uh... don’t count on it.

Decades of underinvestment in new energy exploration and development, and a seismic shift in who controls access to new energy deposits means sustainable high prices for years to come. Fossil fuels are a dead-end for American big-oil firms – it’s time to embrace an alternative energy future!

Put This Emerging-Market Tiger in Your Tank!

Just over a month ago, I wrote an article detailing the global food crisis. According to data from the World Bank global food prices have soared 83% in the past three years.

There’s also another crisis brewing at the moment – that’s becoming more painfully obvious with each passing day: a global energy crisis! In many ways, the two are closely connected…

U.S. corn-based ethanol production is a big reason why corn prices surged 56% higher in the past 12 months alone. About one-third of the entire U.S. corn crop is being diverted from kitchen tables to gas tanks.

As a result, in poor countries around the world people are rioting in the streets in protest over U.S. corn-based ethanol. They complain bitterly that we are trading in THEIR food for OUR fuel… but there is a better way.

In fact, there is an “emerging” alternative bio-fuel source that is a lot more efficient than corn-based ethanol, and doesn’t require the same food vs. fuel trade-off.

It’s Brazilian sugar cane-based ethanol…

Brazil’s Big Ethanol Advantage

Brazil is far and away the global leader in ethanol production technology. In fact, the country began large-scale development of ethanol as an alternative fuel source amid the oil shock of the late 1970’s and early 80’s.

Today, ethanol accounts for 50% of Brazil’s total annual automotive fuel consumption. More than 70% of new cars sold in the country are flex-fuel capable; able to run either on gasoline, ethanol or some combination of the two.

Currently, Brazil is the world’s second-largest ethanol producer, and largest exporter, with total output of about 6 billion gallons a year.

Brazil uses just over half for domestic consumption each year, to fill up all those flex-fuel vehicles on Brazilian roadways. The rest of its ethanol production is targeted for a rapidly growing world-wide export market.

By 2020, Brazil’s global ethanol exports could total as much as 200 billion gallons a year – that’s over 30-times today’s ethanol production. Talk about a growing industry!

U.S., Europe, Just Can’t Compete with Brazilian Ethanol

This is where Brazil enjoys a big advantage over other nations – as the world’s lowest cost ethanol producer. As shown in the graph above, Brazil can distill bio-fuels from sugar cane at a significant cost advantage to other nations.

Neither U.S. corn-based ethanol, nor wheat-based ethanol from Europe, can come close to matching the Brazilians on a production cost basis.

The sugarcane plant, which flourishes in Brazil’s tropical climate, produces a “yield” of 6,000 liters of ethanol per hectare of land – that’s about twice the yield of corn-based ethanol!

In fact, Brazilian ethanol is about 40% cheaper to make than in the U.S. – and costs less than half the price of European ethanol.

When Trade Tariffs Fall, Brazilian Ethanol Will Flow

Of course Washington, in their infinite wisdom, maintains silly trade tariffs equal to 54-cents a gallon on imported ethanol. This ridiculous trade barrier benefits a relatively small number of U.S. corn farmers at the expense of millions of American drivers.

In spite of this, Brazil’s largest ethanol export market remains the U.S. In fact, Brazil shipped us more than 430 million gallons of ethanol last year – up four-fold from 2004! Wholesale gasoline prices in the U.S. are fast-approaching $4 a gallon, and will keep spiraling higher as crude oil goes through the roof during what’s shaping up to be a long, hot summer.

Naturally, pressure is mounting for Congress to eliminate this silly, protectionist ethanol tariff. When that happens, the floodgates will open wide for much-cheaper Brazilian ethanol to flow freely into U.S. markets.

By leveraging the strength of its vast sugarcane growing region, and building on its already well-established ethanol producing technology, Brazil is perfectly positioned to benefit.

In fact, this emerging market tiger could easily become the Saudi Arabia of ethanol within the next decade. You heard it here first!

P.S. On Thursday at high-noon I’ll be hosting a special teleconference with my colleagues to discuss the big upside potential we see in alternative energy – including Brazilian-based ethanol. To protect your portfolio and profit from the global energy crisis, I invite you to join me on this teleconference: just click here to sign up now.

My “Unlucky Number” Is $4.44!

Having just returned from Panama I can tell you that sky-rocketing energy costs is a prime issue on people’s minds right now.

We hosted about 300 attendees at this year’s Total Wealth Symposium in Panama City. It was an intense, week-long conference schedule packed with investment insights and wealth protection tactics from experts around the world. One issue that kept coming up over and over again is energy.

Several of the expert speakers worked energy into their presentations, and I personally fielded many more questions on the subject. As most of us are painfully aware by now, crude oil prices have doubled over the past year. The other two primary fossil fuels on which America is overly dependent are also going through the roof. Namely, coal and natural gas prices are both up about 50% in just the last six months.

And there doesn’t appear to be any end in sight either.

In fact, the “official” start of summer driving season doesn’t kick off until Memorial Day one week from today. Traditionally, millions of American drivers begin taking to the roads in May and June, as summer vacations begin. These road trips throughout the summer months place added strains on U.S. gasoline supplies. I’m not sure we can handle it this year.

Even before summer begins, wholesale gasoline prices in some areas of the U.S. are already above $4 per gallon. In fact, average prices in Long Island, New York, and Chicago, Illinois are already there. Prices in Chicago just notched a new all-time record high at $4.07 per gallon for regular unleaded.

Unfortunately, many more records are likely during the long, hot summer America faces.

I’ll be doing my part adding to traffic congestion Memorial Day weekend. My 11-year old daughter’s travel team has their last soccer tournament of the season at Disney World this weekend. I cringe just thinking about filling up our Explorer for this 3 hour road-trip on Friday, then again on Monday for the return trip. I’ve already calculated that my “magic number” is $4.44.

That’s the per gallon price at which it will cost me exactly one-hundred bucks to fill up the family truckster... my unlucky number is more like it!

Another season begins soon too. Less than one-week after Memorial Day is the start of the North Atlantic Hurricane season on Sunday June 1. Experts are predicting another “active” season with as many as 15 named storms. Any one storm could wreak havoc on offshore oil & gas production in the Gulf of Mexico.

These are potential supply disruptions we cannot afford with oil and gasoline prices already this high.

Japan Posts an Economic Surprise

"Japan's economy grew faster than economists estimated last quarter as exports to Asia and emerging markets helped the nation weather the U.S. slowdown" – Bloomberg

I did a major double-take when I read this lead-sentence from Bloomberg news last night.

I had just returned to my hotel room after a full day of exciting and very informative presentations at the Total Wealth Symposium here in Panama. Browsing online through my usual news sources – I couldn’t believe my eyes when I ran across this story.

That’s because just a few hours before this story was published online by Bloomberg, I spoke pretty much these same exact words in my afternoon workshop presentation here in Panama. So, was there a Bloomberg reporter sitting in the back of the conference room? I guess not, just one of those eerie coincidences… if you believe in that sort of thing.

As long-time readers of this blog know all too well, I’ve been very bullish on Japan since I first began buying this undervalued market (too early) last year. So the news of Japan’s better than expected first quarter GDP report was good-reading indeed!

Jason Clenfield, who actually DID write this story for Bloomberg (not me), does a great job (using some very familiar words), so I’ll let his words do some more talking…

“Gross domestic product expanded an annualized 3.3 percent in the three months ended March 31” – that was far better than economists had forecast but didn’t surprise me. The reason for this positive growth surprise: “A surge in shipments to emerging markets kept last quarter's growth above the average 2.1 percent of the past five years, even as exports to the U.S. fell for the quarter.”

As I have been pointing out for quite some time – and repeated again today for conference attendees here in Panama – Japan’s patterns of trade have changed – for the better. This is leading to much faster growth for Japan’s economy in the face of a sharp slowdown in the U.S. and Eurozone.

For the benefit of those of you keeping score at home, the U.S. economy expanded just 0.6% last quarter. Europe actually “beat” expectations… with growth of 0.7% last quarter… wow, that’s some “surprise”!

This graph clearly shows that Japan’s “best customers” in terms of export trade also happen to be among the world’s fastest growing economies – right in Japan’s back-yard – namely emerging Asia.

This trend goes back further, but just since 2000, Japan’s exports to the U.S. (as a % of total exports) have fallen from above 30% then… to just over 20% today. Exports to Europe have also declined as a share of Japan’s total.

So who’s picking up the slack?  Emerging Asia is importing more goods from Japan than ever before, led by China. Japan’s exports to China since 2000 have jumped from mid-single digits then, to about 15% now. Emerging Asia as a whole (including China) now accounts for nearly HALF of Japan’s total overseas shipments.

The entire Asia-Pacific region is becoming a fast-growing – and importantly – self-sustaining economic block… and Japan is benefiting in a very big way. Oh, and it just happens to be the world’s MOST undervalued major market too!

These are two very key factors in favor of higher Japanese share prices… at last.

Even in Panama, China is on My Mind

In Panama yesterday where I’m attending the Total Wealth Symposium, I got my first chance to rub elbows with Sovereign Society members from all over the world. The subject of China was on many people’s minds, judging from the number of questions I got.

Of course China just got thrust back into the headlines due to the tragic earthquake that hit the country recently, but the big issue on everyone’s mind is the future for China’s booming economy.

The contrast between China’s growth and stagnation in the U.S. is striking. I could go through mountains of economic data to prove the point, but two items in particular stand out…

1. China’s economy grew 10.6% last quarter – the fastest growth rate in the world. The U.S. economy grew 0.6% last quarter – the slowest growth rate in the world.

2. Retail sales figures were just released for both countries too. Last month U.S. consumer purchases declined -0.2%. In China, retail sales soared 24%

China’s output is growing nearly 10-times faster than in America. Due to the ongoing impact of the credit crunch, the U.S. economy faces the prospect of long-term stagnation. To be sure, China has its share of problems too.

The rate of inflation is close to 9% due to soaring food and energy costs. That’s a much bigger problem for China and other emerging markets than it is in the U.S. That’s because the average Chinese family spends a much higher share of their disposable income on the necessities of life – including food and fuel.

China is taking steps to try and reign in soaring inflation. Beijing has raised interest rates several times in the last year and has tightened bank lending. So far these measures don’t seem to be having much of an impact, judging by China’s 10.6% growth rate.

Of course economic growth doesn’t always correlate with stock market performance. In fact, China’s mainland markets in Shanghai and Shenzhen are down about 30% on a year to date basis – the world’s worst performing stock markets.

In my view, a better way to enter China now is through its neighbor Taiwan. Recent election results should lead to friendlier relations between the two Chinas – and that’s good for business. Taiwan is already very big investor in mainland China.

Profit opportunities in the mainland look a lot more attractive now, and are becoming easier for Taiwan investors to tap into.

Natural Gas Goes Global

I’m writing to you from Panama today where I’m attending the Sovereign Society’s Total Wealth Symposium. I’ll be here all week, and look forward to catching-up with many of our council of experts who traveled here from Europe, Asia, and elsewhere to bring their best investment and asset protection ideas to this conference.

Driving in from the airport yesterday it didn’t take long to see that the global energy crisis is hitting Panamanians pretty hard too. Gasoline here is over $4 per gallon, and according to our Panamanian cab driver – that’s producing intense sticker-shock at the pumps for consumers here.

Remember, Panama’s per-capita income isn’t on par with the U.S. so the average Panamanian is shelling out a lot more of his or her disposable income on fuel these days. As a consequence you don’t see many SUVs on Panama’s roads these days.

Crude Oil Isn’t the Only Energy Source Poised to Soar

I noticed that crude oil hit yet another record high overnight above $127 a barrel. With Sumer driving season getting ready to kick into high gear in a few weeks, we will soon be dealing with gas prices north of four bucks a gallon in the States too. It’s just a matter of time.

Another energy sector investment that’s been steadily climbing in price is natural gas, which I’ve written about before.

In addition to higher prices at the pump, there are good reasons to believe that natural gas will keep climbing too, even though prices in the U.S. have about doubled since last August. The problem here seems to be a familiar one: increased global competition for a scarce resource.

Up until the past few years, natural gas was a regional commodity. Most gas was consumed close to where it was produced. But now the market for natural gas is going global.

Asian Importers Have a Big Appetite for LNG

This increased global trade is made possible thanks to investment in high-tech liquefied natural gas terminals (LNG), that chills the gas to -260 degrees Fahrenheit, converting it to a liquid form. That makes it much more cost-effective for LNG tankers to transport gas across the world’s oceans.

Energy hungry countries in Asia, especially South Korea and Japan, have stepped up LNG imports in a big way, and they’re willing to pay-up for it. In fact, U.S. natural gas prices are pretty low by global standards, averaging about $10 per million BTUs in New York. In Japan and Korea, they’re willing to pay $14 for the same amount of gas. India is bidding $13.70 for LNG imports.

The inevitable result is that more U.S. gas is getting shipped overseas. LNG imports to the U.S. are also declining rapidly, as global producers prefer to sell to the highest bidders in Asia and elsewhere. Monthly imports of LNG to the U.S. have fallen 60% to 70% from peak levels of nearly 100 billion cubic feet in mid-2007.

With imported supplies falling this fast, and domestic natural gas producers able to sell at such a premium overseas, it’s just a matter of time before natural gas shoots higher in price too.

Another Not-So-Hot Earnings Season Comes to a Close

The vast majority of U.S. public companies have announced earnings for the first quarter of 2008, with just a few high-profile companies – such as retailer Wal-Mart (WMT) yet to report. With most of the numbers in, the results still don’t look pretty.

Overall, S&P 500 profits sank nearly 13% from a year ago. That’s quite a negative reversal of fortune, especially considering that back in January when the first quarter began, analysts were looking for an earning rebound from dismal fourth quarter results. That didn’t happen.

Once again the financial sector is largely to blame, with earnings plunging -67% in the quarter. It’s hard to believe, but that was even worse than analysts expected (-59%). This indicates that Wall Street’s rosy forecasts still haven’t caught up with reality.

There were a few bright spots however. Earnings in the technology sector (which I’m bullish on right now) rose 22% as did energy sector profits – the two strongest groups. Telecom sector shares surprised on the upside with a profit gain of nearly 11% vs. expectations of just 1.5% growth. Basic materials and consumer staples also performed well compared to forecasts.

According to some analysis I’ve read, if you exclude financials, first-quarter earnings rose 11% in the quarter over a year ago. Of course, you can’t really exclude financials, since this sector has a nearly 20% weighting in the S&P 500 Index. This reminds me of the tech-wreck early this decade when it became convenient for Wall Street to “exclude” plunging profits in the tech sector from the calculation.

The problem was that eventually other sectors caught up with the falling profits in the tech sector. Could 2008 be a repeat? Another troubling indicator is the fact that analyst estimates for the rest of this year still look too rosy. When earnings expectations are constantly being cut, it makes for a difficult environment for stocks.

This same trend is playing out – to a lesser degree so far – with earnings reports in Europe. Asian companies by contrast have continued to report very strong profit growth by and large, including the financial sector.

This week I’ll be traveling to Panama for the Sovereign Society’s Total Wealth Symposium. I’ll be eager to catch up with the European and Asian analysts who will be attending this conference. Stay tuned.

Don’t Look Now… But Mark-to-Make-Believe is On the Rise

Here's a little credit-crunch update for your consideration over the weekend...

Last year as the credit crunch market shock was just getting started, I wrote about accounting rule changes that signaled more trouble ahead for Wall Street’s big banks and brokers.

These troubles are now ballooning in value on the balance sheets of these firms. Watch out!

Here’s a quick refresher course on changes in the ground rules for this accounting shell-game. Last November a new accounting regulation from the Financial Accounting Standards Board took effect (FAS 157) that changes the way firms account for balance sheet assets. This new rule forces companies to “mark-to-market” their assets at the end of each quarter.

But it also allows firms to divide these assets into one of three categories. This change has had perhaps the biggest impact in the financial sector. Here’s how it works:

Level 1 assets have easily “observable market prices. Think of a company like Berkshire Hathaway (BRKA) for instance, which owns lots of Coca-Cola (KO) shares. That’s easy to value, just look up the quote on the NYSE. These assets have legitimate values.

Level 2 assets don’t have an easily “observable” price. These might be credit-default swaps or other derivatives, where you can have to “guess-timate” the value based on other market data such as Treasury yields. This is “mark-to-maybe” accounting; as in, maybe the value is right, and then again maybe it’s not.

Level 3 assets are the most opaque – if not totally fantasized. Here there are NO “observable prices”. Think of say, sub-prime mortgage backed securities, or leveraged loan securities – that don’t trade at all in this credit-challenged market.

Since there’s no market price available, the firm’s management and its bean counters have lots of leeway in making an “estimate”. This is what I call “mark-to-make-believe” accounting!

As in: I believe this Level 3 asset is worth a billion dollars today; maybe it’s only worth half-that (or even less), but let’s say it’s $1 billion this quarter and call it a day…

First Quarter Disclosures Show Soaring L-3 Assets on Wall Street

Now, if you fast-forward to the present, and look at some of the recent first-quarter financial statements from leading banks and brokers, guess what you’ll find?

Yep, Level 3 Assets are expanding fast! In spite of more than $320 billion in collective losses and asset write-offs (and still counting) taken by global financial firms so far, there’s still far too much mark-to-make-believe going on down on Wall Street.

Merrill Lynch (MER) has already written off nearly $32 billion in assets since the credit crunch began. But in the first quarter of 2008, Merrill’s hard to value Level 3 assets soared 70% to $82 billion, up from $48 billion in December.

Citigroup (C) has reported credit write-offs and losses of more than $40 billion so far. That didn’t stop Citi from reporting its Level 3 assets still climbed 20% last quarter to $160 billion!

Morgan Stanley’s (MS) illiquid assets jumped to $78 billion at the end of March. That's in addition to the $12.6 billion the firm has already written-off. At Goldman Sachs (GS), assets classified as Level-3 surged 39% to $96 billion last quarter.

How much, if any, of these illiquid asset values will ever be realized in cold hard cash is the multi-billion dollar question. Investors are right to be afraid (very afraid) of the day when Wall Street’s finest can no longer get away with this fantasyland asset pricing, and are forced to admit the ugly truth, there could be hundreds of billions more in losses.

That particular market shock is still lurking out there, cleverly hidden for the moment by Wall Street’s shell-game accounting rules. Stay tuned.

Is Gold Really Cheap, Or is Oil Just Expensive?

A feeding frenzy is taking place in the financial media about the prospects for oil prices reaching $200 per barrel.

Based on the sheer number of outlets who have picked up this story – and the volume with which they’re repeating it – you would think, perhaps crude will reach this forecast “target” sometime next week, if not sooner.

Yesterday’s Financial Times ran a short story and interesting graph that compares the price of gold to that of crude oil over time (a similar graph from the folks at www.zeal.com is below).

The upshot of the story is that commodity investors, eager to seize on any opportunity to reinforce their bullish long positions, are now focusing on the historic gold-oil ratio.

This ratio is said to be a good measure of the relative value between these two “headline” commodities. The article points out that “a common refrain of goldbugs is that an ounce of gold now buys less than eight barrels of oil, against a long-run average of just under 16. On that basis, gold is cheap and ought to rise as it reverts back to its ‘mean’.”

Of course this “long-run" ratio of 16 has often strayed far and wide from that mean. In fact the ratio has been over 30 and below 10 at extremes. It’s said that historically, whenever the ratio rises above 25, oil is cheap relative to gold. Likewise, whenever the ratio falls below 10, gold is a bargain compared to oil.

The article correctly points out that “making judgments on the future through a backward-looking ratio of market-set prices is nonsensical.” This reminds me of the old rule of thumb on Wall Street in the pre-1990’s era that said stocks aren’t cheap enough to buy until you get a single digit price-earnings ratio.

Investors who religiously followed that ratio “signal” have been on the sidelines – for the past 25 years – still patiently waiting for the next buying opportunity in stocks!

Still, the gold bugs will tell you the yellow metal is a screaming buy at today’s gold-oil ratio reading of about 8, and they may be right on the money. But, what happens if you turn this ratio upside-down and take another look?

Then the ratio may be telling us that instead of gold being dirt cheap at $869 an ounce – perhaps crude oil is too expensive at $122 a barrel!

In fact, both gold and oil have suffered sharp corrections during the extraordinary bull-run they’ve jointly enjoyed this decade.

Nearly every time there has been a break in the uptrend, it was gold that peaked first and started to correct in price ahead of oil.

Gold has declined about 15% from its recent peak above $1,000 an ounce, yet crude oil keeps setting new record highs. Something’s got to give – I’m betting it’s the price of crude. Stay tuned…

Brazil Finally Makes the Grade

Last week Brazilian financial markets got a good reason to celebrate as credit rating agency Standard & Poor’s finally elevated the country to “investment grade” status.

This comes as no surprise to me. In fact it serves as an epilogue to Brazil’s long story of economic success over the past decade. Since the end of 2000 Brazil’s Bovespa Index has been one of the world’s best performers gaining about 500%! So what will Brazil do for an encore?

I’ve been bullish on Brazil for a very long time. Last year I recommended the iShares Latin America Index ETF to Sovereign Society readers, which has a heavy allocation in this dynamic economy. The last time I wrote about Brazil in these pages (Amid Global Credit Crunch, It’s “Business as Usual” in Brazil) I described how the country has largely side-stepped the credit crunch turmoil that has impacted stock markets around the world.

Brazil’s Future is Now

In fact, Brazil’s Bovespa is one of just a handful of global indexes that’s actually posting year to date gains – up about 10% so far in 2008. For years investors derisively said that, Brazil is the country of the future… and it always will be!

The implication being that this vast resource rich nation has lots of potential… if it could only harness it and get its act together.

In recent years, Brazil finally got its fiscal house in order, paying off most of its foreign debts. Inflation, which ran over 1,000% in Brazil just ten years ago, has now been wrung out of the economy allowing interest rates to come down.

Today, Brazil is a creditor nation. It’s once shaky currency appreciated 22% against the U.S. dollar over the past 12 months! Brazil’s stock market is soared as its economy is humming along with robust growth of 6.6% in last year’s final quarter, compared to just 0.6% growth for the U.S. economy.

What a Difference an Extra “B” Makes

Given Brazil’s economic successes, it’s really no surprise that S&P elevated the nation’s credit rating from BB+ (junk bond status) to BBB- (investment grade) last week… what a difference an extra B makes.

The financial press was full of stories about how this ratings upgrade should lower Brazil’s cost of capital (true) and help deepen its financial markets by attracting more global capital flows (also true).

These are all very bullish arguments in favor of Brazil’s long-run growth potential. But 500% later, Brazil is really no secret to global investors anymore. Brazil’s booming economy is of course rich in natural resources. Leading companies such as CVRD and Petrobras come to mind.

The Next Great Buying Opportunity in Brazil

This dependence on resources has been one of Brazil’s greatest strengths in recent years, as commodity prices have soared.

However, it could also prove to be a weakness should commodities correct sharply.

The challenge for Brazil now is to diversify its economy away from such a heavy reliance on resource exports – and more toward internal consumption.

The country’s new investment-grade credit rating will help attract the capital needed to make this transition a reality.

In the meantime, if commodity markets correct more sharply in the months ahead – as I expect – it should provide another excellent long-term buying opportunity in Brazil.

Buffett Loses a Billion Dollars

Shareholders of Berkshire Hathaway (BRKA) got their “fix” this weekend as the Oracle of Omaha held center stage at the company’s annual meeting. One of the more interesting topics NOT covered much by the financial press, was how Berkshire managed to post a $1 billion first quarter investment loss!

In fact, during the run-up to this past weekend’s “Woodstock of capitalism,” I didn’t hear much on CNBC about Berkshire Hathaway’s report Friday that first quarter profits plunged 64% from a year ago

It’s not that people aren’t saving a lot of money anymore by switching to Geico.

In fact, Berkshire’s insurance operation are performing very well, thank you. Buffett’s entire shortfall came not from Berkshire’s operating businesses. The loss came from the investment side of the company, specifically from derivatives contracts.

Financial Weapons of Mass Destruction, Hard to Value in a Credit Crunch

That’s perhaps surprising that Buffett, known for his legendary value investing acumen, could lose a billion on investments.

No, Warren Buffett hasn’t lost his touch either. In fact, Berkshire’s quarterly shortfall shows the one of the pitfalls to investing these days amid the credit crunch, and complying with new accounting rules that can lead to wide valuation swings.

It is perhaps ironic that Berkshire would report a rare quarterly loss as a result of derivates, which Buffett himself has called “financial weapons of mass destruction.” But these losses can befall any financial firm, and they’re becoming much more frequent than ever before.

Berkshire booked a loss of nearly $500 billion on credit default swaps intended to protect against junk bond defaults. The larger share of the hit, at $1.2 billion was recorded for unrealized losses on long term put option contracts Berkshire wrote on the S&P 500, and other stock indexes.

This is a stark illustration of the unpredictability that’s created by new mark-to-market accounting rules. Berkshire’s loss is due to the fact that these derivatives contracts have temporarily moved against Buffett. Rather than ignoring the impact until sold, the new accounting rule compels firms like Berkshire to mark down the current value of these derivatives to reflect today’s market value instead of “cost.”

Mark to Market is Mostly a Good Thing, But Can Lead to Wide Valuation Swings... Just Ask Warren

In explaining this loss Buffett said that he’s not “bothered by these swings even though they could easily amount to $1bn or more in a quarter”.

Many other companies, particularly in the financial sector, have blamed larger than expected losses on the new mark-to-market rules. In fact, this accounting practice also had a hand in General Electric’s (GE) surprising first quarter earnings miss – all of which came from GE’s large financial services business.

Mark to market accounting is generally a good policy for creating more transparency in the financial sector. At the end of each quarter, four times every year, investors get to see exactly what a firm’s various investment contracts are worth... at fair market prices.

Mark-To-Market Can Lead to Negative Accounting Distortions

In an era of “creative” financial products that are very difficult to even understand, much less value, mark-to-market accounting can negatively distort a company’s financial position too. Such was the case with Berkshire’s nearly $1 billion net loss from investments last quarter.

During a credit crunch, financial markets are essentially grid-locked with sharp slowdowns in trading for many securities. Trying to mark-to-market these already illiquid securities can result in assigning a price that’s anything but “fair.”

Fire-sale prices might be a more accurate description. In many cases the unrealized losses that result are much worse than would be necessary in a normally functioning credit market.

Investor’s should keep this potential negative accounting aberration in mind whenever valuing a financial stock. Judging from the turnout of adoring fans at last weekend’s annual meeting, Berkshire Hathaway’s shareholders seem unfazed by Buffett’s billion dollar loss.

Reversal of Fortune: Markets Go From Worst to First in April

Happy May Day!

It’s hard to believe that summer’s heat (and Hurricane season) is almost here. As the calendar turns to another month it’s often quite interesting to take a look back at the month that was... to see which trends may be in for a switch.

One phrase comes to mind that perfectly sums up April’s market action: reversal of fortune! From November through March U.S. stocks (and most global equity markets) suffered a string of five-straight monthly declines. That’s a very rare occurrence that has only been seen on a handful of occasions in the past 40 years.

Sure enough, April saw a sharp reversal of the five-month downtrend. The Dow Jones Industrial Average had fallen over 11% at the March low. But the Dow got up off the mat in April to post a 4.5% gain. The Dow wasn’t alone. In fact, international stock markets pulled off much more dramatic reversals.

Japan is perhaps the most striking turnaround. I’ve been bullish on Japan since last year... and had been proven dead wrong through March. But Japan rallied strongly last month – soaring 11% in April alone – it’s biggest single-month gain since 1995! That’s 13 years ago.

In spite of this rally, Japan remains one of the world’s most undervalued major markets, but now it looks like global investors are catching on.

Honk Kong, another one of my favorite overseas markets, also pulled off a major turnaround in April.

After a drubbing of -18% in the first quarter of 2008, the Hang Seng Index jumped 13% last month.

Taiwan, another favorite, rose 4% in April. Mainland China too bounced back 6.3% last month. But Shanghai shares still have lots of “heavy lifting” ahead – as they’re still down 30% year to date.

Perhaps the biggest surprise was commodities. Gold and crude oil rallied pretty much in tandem through the end of 2007 and early 2008. Oil was up another 12% in April – adding to gains of nearly 20% year to date.

The yellow metal however declined nearly 6% last month. That’s gold’s second consecutive monthly decline; perhaps this precious metal will go for five in a row too!

Of course last month’s market action could prove very fleeting indeed. And I doubt that the ultimate “bottom” of this bear market has yet been reached. However, with such broad-based strength in equity markets around the world, we may be in for a decent rally that has some legs.

Yesterday, the Fed cut rates again as I expected to 2%. The financial media seems convinced that the Fed intends to “pause” sometime soon. That has helped the beleaguered U.S. dollar (talk about a bear market!) to stabilize somewhat.

If the buck can stage a more convincing reversal of fortune at this point, I would expect commodities to correct further, while global stocks (particularly emerging markets) should continue to get a boost. Stay tuned...