We like to give issues of The 5 a theme once in a while. You might recall our “commodity issue” last week or “the everyman’s issue” earlier this month. We’ve got a theme for you today, but it doesn’t exactly roll of the tongue. Oh well, it needs to happen:

Welcome to a “hot-button issues we can no longer avoid” edition of The 5 Min. Forecast.
First up, climate change. We’d love nothing more than to leave this debate to Al Gore and Wall Street Journal editorialists. And for the most part, we will. But as you know, the House passed their climate change bill late Friday, and the entire energy industry is targeted for reform. Here’s the rundown in case you didn’t get to read its 1,200 pages — as all of our representatives in Washington surely did:

• Greenhouse gasses must be cut 17% by 2020 and 80% by 2050. Emissions from factories, power plants, refineries and energy distributors will make up most of the cut. The infamous cow fart emission cap was taken out
• A cap-and-trade system will cut these emissions. The government will issue a limited number of 1-ton permits each year, which companies will have to obtain if they wish to emit greenhouse gasses. Each year, the government will issue fewer permits. Thus, companies will have to clean up operations, use more green alternatives or invest money in “offset projects” — like a paper mill planting more trees
• 12% of power from electric utility companies must be from renewable resources by 2020
• New office buildings must be 30% more efficient by 2012
• The Congressional Budget Office expects the current rendition of this bill to cost U.S. households $175 a year. We’ve heard alternative estimates as high as $2,000.

“Rome is burning,” says our energy man Byron King. “Well, maybe not. This could alter our culture’s use of the metaphor. Burning Rome? Sorry, not without your carbon permit.

“After a millennium of merely tossing sticks and logs into burn pits, the Industrial Revolution was when mankind finally figured out how to use ancient forms of stored energy — coal, oil and natural gas — to build and maintain a vast manufacturing economy. In consequence of the carbon-fuelled revolution in productivity, the earth went from a population of about a billion, to near seven billion today.

“And now, per the House bill, our government has started on the way to reversing THAT Industrial Revolution. The new Big Idea is that there will be another, ‘carbon neutral’ Industrial Revolution, based on harnessing solar, wind and geothermal energy. Carbon is sooooo 20th century. Carbon neutral is the new black.

“The House legislation is 1,200 pages of special deals and giveaways, grafted onto a Soviet-style 40-Year Plan. (I should note that even the Soviets, for all their ambitions, worked in 5-year plans.) Cap and trade will be the largest tax increase in U.S. history. It’s the triumph of the tax raisers, central planners and controllers, and an arrow into the chest cavity of free market capitalism.

“So with higher energy costs throughout the economy, plus an immense new level of state control over economic activity, can the U.S. — at least as we know it — make the transition to that mythical carbon-neutral energy economy? My hunch is no. Cap and trade will breed more problems, which will lead to more taxes and even more regulations. There’s never just one cockroach. And while we live through the consequences of what’s going to happen, there will be a lot of misallocation of resources throughout the economy.

“I hope your subscription is current to Outstanding Investments, because that’s where I’ll be showing you how to invest your way around the consequences of our national hubris.”
Oil futures haven’t been fazed by the climate change bill.After all, it still needs to slither its way through the slimy halls of the Senate. Oil’s up $2 today, to $71 a barrel.
Unrest in Iran could accelerate a global energy breakthrough, reports our tech analyst Patrick Cox. We’ve been avoiding Iran’s issues lately as well. While fascinating, and certainly dynamic, it’s just not our beat… or so we thought:

“The central tension in the Iranian situation is the nuclear issue,” Patrick tells us. “That country’s autocracy is dead set on getting nuclear capabilities — and not without reason. Iran does need nuclear energy to promote economic growth. Contrary to popular wisdom, the country’s petroleum is not a good source of electrical power.

“The problem, of course, is that the technology being pursued by Iran can also be used to create nuclear weapons. This, naturally, worries a lot of people who fear the regime’s threats to destroy both Israel and America might actually lead to war. Many Iranians, in fact, are unhappy about the nuclear plans of the country’s rulers. Israel and Iran’s Sunni Arab neighbors are also plainly anxious.

“Iran’s relationships with the rest of the world would be an order of magnitude less stressful if it were not producing weaponizable fuels. This is why my sources tell me that thorium is enjoying a significant increase in interest lately. As we’ve discussed, thorium is not only a superior nuclear fuel from the technical and economic perspectives, but it solves the proliferation problem because it produces no waste products useful in weapons.

“Like every other sector, energy development has taken a big hit during this downturn… Ultimately, I believe, the superior nuclear technology will win out. In some ways, the financial meltdown has made pragmatism even more important than it was when tax revenues were flowing far more freely.”

Want to learn about Patrick’s favorite thorium play, along with the rest of his breakthrough technology picks? Check out Breakthrough Technology Alert.
“Iran has a bigger place in the global economy than most people know,” adds Chris Mayer

“The first thing that I don’t think many people appreciate is how big the country is. The population of Iran is 66 million. That makes it the 19th most populous country on the planet — more populous than France, the U.K., Italy and South Korea. Iran is in the top 10 in terms of contributing to population growth.

“Economically, Iran is an important link in the New Silk Road, that growing trade relationship between Asia and the Middle East. Iran is a big market for Asian exports. Take a look the next chart, which shows the sharp growth in trade:

“Iran has plenty of oil and gas, which it exports to pay for Asian imports of cars, clothes and other goods. Increasingly, Iran is turning to Asia for these goods, rather than Europe.

“Iran is the third largest supplier of crude oil to China. It makes up 12% of China’s total annual oil consumption. As Ilan Berman notes in a recent issue of the Far Eastern Economic Review: ‘Iran has become an engine of Chinese economic growth, and an indispensable part of Beijing’s energy plans.’

“No surprise that China will help Iran finance its $3.2 billion expansion of its mammoth South Pars natural gas field. I am sure the Chinese are watching what happens in Iran with great interest. It makes for a complicated political situation.”
The world’s rank and file of millionaires are in for quite a shake-up. Here’s some takeaways from our latest read: The 2009 World Wealth Report, by Merrill Lynch and Capgemini.

First, the number of global millionaires fell at a record rate in 2008, led by North Americans. The credit crisis wiped out 15% of the world’s millionaire population, now at just 8.6 million “high net worth individuals (HNWI),” as Merrill puts it. The total worth of the world’s wealthy fell about $7 trillion last year, to $32.8 trillion.

North America was the greatest victim of 2008, shedding 600,000 millionaires and roughly $2.8 trillion in HNWI wealth. Of course, we’re still at the top… but for how long? Check out this chart:

We should hedge this chart a bit: First, it’s from Merrill Lynch… need we say more? They use some rosy projections for global economic and market recovery for the next few years. Expecting the coffers of HNWI to grow at an annualized rate of 8.1% over the next four years is the same kind of Ivy League MBA thinking that caused Merrill’s collapse and subsequent fire sale to Bank of America.

That being said, we wouldn’t be surprised if their forecast comes true. Simple ratios alone make an Asian takeover seem inevitable: One out of every 195 North Americans are millionaires. Only one in about 1,700 Asians can say the same.

(This would be one of many reasons we’re burning the midnight oil on a BRIC report, just for you… stay tuned.)
Five banks failed this weekend, bringing the 2009 running total to 45. The five failures this weekend cost the FDIC another $264 million.

And what’s up with Georgia? Two of the weekend’s failures were there, bringing the Peach State up to 14 for the year — the most of any state. We’ve been told the lending market in Atlanta was hit exceptionally hard by the housing bust… if you’re from the area, let us know what’s going on.
Stocks are cautiously rising today after their first weekly loss since early May. The S&P 500 fell 2.6% last week, but as we write, it’s up about 1%.
The dollar index is right were we left it on Friday, just under 80.
Another sign of the times: Warren Buffett’s annual charity lunch sold Friday for 20% less than 2008’s price. Last year, a Chinese fund manager proudly bought the lunch for $2.1 million. This year, a currently anonymous Buffett disciple picked it up for $1.68 million.
No economic data to speak of today, but the next three days of this shortened trading week are jampacked with juicy numbers. We’ll see new consumer confidence and Case/Shiller home price index details tomorrow. Then there’s ADP’s employment count, construction spending, the ISM manufacturing index, pending home sales and auto sales on Wednesday. Then Thursday — the infamous Labor Department jobs report, where the unemployment rate is expected to reach 9.6%.

All interesting stuff… stick around — we’ll keep you in the loop.
Last today, one more issue we love to avoid: Bernie Madoff. He was sentenced to 150 years in jail today. CNBC spent most of their morning debating whether the 71-year-old should get 25, 50, 100 or 150 years in prison and recounting the sob stories of his victims… those fools whose mothers never told them, “Don’t put all your eggs in one basket.”

Our take: Why not park the cameras outside the SEC, instead of the ninth-floor courtroom in lower Manhattan? Where’s the outrage toward a government arm that scams us all — our tax dollars in exchange for financial security… the kind that routinely arrives too little, too late. Not only is there no blood in streets in front of the SEC, but they’re on track to get more funding… crazy.

Source: The Hot Button Issue: Climate Change, Iran, Madoff and More!

That correction may now be underway. Crude oil has dropped more than $15 in the last three days. And Ian says there’s a lot more downside is in the works. In fact, he says oil could be headed as low as $50.

And if oil crashes natural gas will be close behind. Ian advises staying out of both markets until the current correction plays out…

Natural gas is like crude oil’s younger sibling. The natural gas price shadows the price of crude oil wherever it goes.

The two have a follow-the-leader relationship because about 18% of natural gas usage can be switched to petroleum products. Also, drilling these two forms of energy requires many of the same resources… like geologists, drill-rig operators, and rigs.

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The following chart shows the close relationship between crude oil and natural gas.

Where Crude Oil Goes, Natural Gas Follows

As you can see, the two energies rarely diverge by much. However, the price of crude oil has outpaced natural gas in the last couple of years. That’s not unusual… the natural gas price often lags the price of crude oil.

Like an older brother, the crude oil market is much bigger than the natural gas market. So the price of crude oil is determined on the world stage. But natural gas prices are determined by region. So the price of crude oil drives the natural gas price and not vice-versa.

According to a Department of Energy study, if crude oil pops up 20%, natural gas climbs 16% over the following year. Eventually, natural gas rises the full 20%. But the price rises more slowly as the fuels return to their normal relationship. (On average, a barrell of oil costs eight times as much as 1 million BTUs of natural gas.)

So natural gas has been playing catch-up for the last two years. Now that crude oil is falling, we’ll see the same thing in reverse. Natural gas will also fall, but more slowly than crude oil.

Let’s say crude oil does fall to $50 (a huge fall, but not impossible). That would be a 66% decline. If the historic relationship between the two fuels reasserted itself, natural gas would be $6.24 per million BTU. That’s a more modest drop of 52%.

So I don’t think natural gas has as much downside risk as oil… but the picture is still ugly. My advice is to stay out of both energy markets until the correction plays out.

Source: Another Nasty Oil Correction Is Close at Hand

On Sunday Anheuser-Busch (BUD) accepted a $49.9 billion takeover bid from Belgian-based InBev (INB). This consolidation in the market has sent brewery stocks rallying while US benchmark indexes tumble.

If the takeover goes through, Ian Davis  in The Growth Stock Wire says InBev will be the undisputed leader in the global market. This is not only a safe option during an economic downturn, but it’s also a great way of investing in emerging markets…

I’ll start today’s column with an incredible statistic… 48.

Forty-eight is how many out of every 100 domestic beers sold in America are made by Anheuser-Busch (NYSE:BUD).

This is why, along with companies like Nike (NYSE:NKE), Coca-Cola (NYSE:KO), and Harley-Davidson (NYSE:HOG), Anheuser-Busch is one of the most valuable brands ever created… And it’s why a Belgian brewery will most likely be the proud owner of the company.

On Friday, InBev (EBR:INB) – which makes Stella Artois and Beck’s – got a little closer to acquiring Anheuser-Busch. InBev is the world’s second-largest brewery by volume sold.

This consolidation talk has been bullish for the beer sector. As the following chart shows, an index of brewers is up 13% since February. The S&P 500, on the other hand, is down 10.8% over the same period.

Brewers Have Soared 13% Since February

This strength is a classic case of a “defensive” sector doing its job. Here’s the argument: In tough economic times, consumers tend to cut down on expensive motorcycles and boats, but they’ll keep drinking beer. (If they’re behind on their subprime loan payments, they may even increase their beer intake.)

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Anheuser-Busch isn’t solely responsible for the Brewery Index’s strong performance. Since February, Boston Beer (NYSE:SAM) is up 6.9%, Molson Coors Brewing (NYSE:TAP) is up 16.3%, and Constellation Brands (NYSE:STZ) is nearly flat at -1.4%. This is actually fantastic performance when the S&P 500 is cratering.

These shares are also doing well because speculators are betting more consolidation is in the works. Whether this consolidation happens or not, you should still consider a position in breweries. They’re simply one of the steadiest sectors in the market… especially during a recession.

Consider that Anheuser-Busch’s earnings grew from $1.33 per share in 2000 to $2.44 per share in 2003, during the dot-com crash. And here’s a look at how its stock and other major alcohol distributors performed.

Performance from March 2000 to March 2003 Boston Beer (SAM) 81.8% Molson Coors Brewing (TAP) 10.0% Constellation Brands (STZ) 93.3% S&P 500 -40.5%

As you can see, breweries are a solid recession investment. (They’re also a phenomenal way to invest in emerging markets. A single company often dominates an emerging-market’s beer industry.)

Brewery stocks are getting too much media attention these days (because of the Anheuser-Busch story)… so I won’t be surprised if they move lower over the next few weeks.

However, if the takeover goes through, InBev may be an interesting investment opportunity as the world’s undisputed king of beers. If you buy this stock – and others like it – you’re getting in on one of the world’s steadiest trends.

Source: A Simple Investment That Can Soar in a Recession

Today, though, I’m going to talk about another beneficiary of the commodity boom… one you’ve probably never considered a commodity play: Thailand.

For starters, Thailand has large reserves of iron ore and rubber. China’s construction and automobile industry have driven the price of these two commodities through the roof in the past several years.

Thailand is also the world’s largest exporter of rice, responsible for 26% of all rice exports. Rice has tripled in price in the last four years. It climbed 175% in the first five months of 2008.

This is part of the reason Thai stocks have done so well lately. The Datastream Thailand Index has climbed 23.7% in the last year.

However, despite their recent gains, Thai stocks are still well below the all-time high they reached in 1996, more than 12 years ago.

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Out of all the countries effected by the 1997 Asian Financial Crisis, Thailand is the only one that hasn’t fully recovered. Take a look:

As you can see, Thai stocks soared in the ’80s and early ’90s. At the time, Thailand was a “tiger” economy, growing by more than 9% per year. However, by 1997, the economy became overheated, and the Asian Financial Crisis began…

So, is Thailand a good investment today?

From a trend standpoint, Thailand looks great. Thai stocks have steadily appreciated since 2002.

Thailand is also moderately free. It’s the 54th freest country in the world (out of 157), according to the Heritage Foundation’s Index of economic freedom. This is a measure of how much government control businesses face in a country.

However, Thailand has had some trouble lately…

Two and a half years ago, Thailand’s president was ousted while addressing the U.N. in New York. Coups are never good for business, although this one was bloodless and generally supported by the people.

However, the new military-imposed government started off on the wrong foot. It installed controls on foreign capital, which immediately sent the Thai stock market into a tailspin. Fortunately, these restrictions were partially lifted, and the stock market has since recovered (aided by the commodity boom).

Finally, Thailand is relatively cheap. Its price-to-earnings ratio (P/E) is 11.4, 12.3% below its median level of 13 (the U.S. market carries a P/E of about 21).

You’ll need specialized knowledge (and a specialized broker) if you want to buy individual Thai stocks. There are also three Thai ETFs. You can investigate them at www.etfconnect.com. Type “Thai” or “Thailand” into the search box on the top right-hand corner of the web page.

Asia’s phenomenal growth will eventually produce a new bull market in the region’s stocks. If you’re looking for a unique way to play it, keep this commodity producer on your radar.

Good investing,

Ian Davis

Source: A Small Asian Commodity Play Your Broker Won’t Mention

It seems there’s no time like the present for getting into gold. In New York trade the precious metal rose lockstep with crude — the black goo hitting yet another record price at $143.67 a barrel. Gold futures for August delivery rose $1.80, or 0.2 percent, to $933.10 an ounce.

A Unique Gold Mining Business Is Making Some People Rich

Ian Davis

In today’s essay, I’m going to tell you about a new era of gold mining. This type of mining has no exploration costs. It requires no digging or drilling. The mineral veins are incredibly consistent and yield 29 times more gold than the average mine.

You could call it e-mining.

On average, one ton of rock from a gold mine yields around 0.18 ounces of gold. One ton of discarded mobile phones, on the other hand, contains about 5.3 ounces of gold (according to a study done by Yokohama Metal, a recycling firm). Cell phone manufacturers like gold for its conductivity and malleability.

That same ton of phones also contains, on average, around 100 kilograms of copper, three kilograms of silver, and a slew of other metals.

Right now, recycling, and especially recycling “e-waste,” makes up a small portion of the waste disposal business. For example, recycling only accounted for 9.8% of first-quarter revenue at Waste Management (the largest U.S. waste disposal company). Most of that recycling revenue came from processing corrugated cardboard and newsprint.

However, the e-waste niche has a lot of growth potential. High metals prices are making it economical to sort all of this stuff out. Currently, in the U.S., less than 20% of e-waste is separated from other trash for processing and recovery.

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Actually, all types of “processing and recovery” have a lot of growth potential. The “green” movement – with leaders like Al Gore and Ted Turner – has never been stronger.

So today, we’re going to look at the waste sector. As you’ll see, the potential growth in recycling is the latest revenue stream in a very consistent industry.

The following chart shows the performance of the waste disposal sector since 1973, including dividends.

As you can see, the latter half of the 1970s, and all of the 1980s, was a great time to invest in waste collection. If you had invested in the sector between 1975 and 1990, you would have made a 32.6% a year, including dividends. By 1990, Waste Management sold for 80 times earnings.

Since then, the sector has struggled. If you had invested in waste collection between 1990 and today, you would have earned just 3% a year, including dividends. I guess the waste industry ran too far too fast. And waste disposal lacked the “tech” story everyone wanted to hear back then.

But today, the public is much more willing to fund environmental protection than 20 years ago. Country’s like Brazil, Russia, and China are getting richer, which means more money to spend on cleanup. Global warming is all over the news. And as I explained, e-mining is attractive due to high commodity prices…

As you can see from the chart above, waste has been in a nice uptrend since 2003. Also, the valuations for waste companies are back to reasonable levels. The Datastream Waste & Disposal index has a P/E of 19.4… which is a bit less than the overall market.

You have a few options if you want to invest in waste companies. One is buying the big players, including Waste Management (WMI) and Republic Services (RSG).

Another option is the Market Vectors Environmental Services ETF (EVX). This fund tracks the AMEX environmental services index, which is loaded with companies that e-mine, haul garbage, manage sewers, filter water, and do all things related to cleanup. If you’re looking for a typically boring, steady business with a few hi-tech kickers, this one is worth a look. Or at least see how much those old cell phones are worth.

Good investing,

Ian

Source:  A Unique Gold Mining Business is Making Some People Rich

It’s a blue-chip company. But it’s not a bank. Or a car manufacturer. Or Mircorsoft. Or Google.

It’s cigarette company Philip Morris.

Despite litigation and all the negative publicity, Ian Davis in the Growth Stock Wire thinks an investment in cigarettes is an excellent recession play – they do have a 15% annualized growth rate after all…

 Back in the day, cigarette smoking was a respectable business.

In the 19th century, Philip Morris (PM) was a luxury cigarette company and had one tiny, boutique shop on London’s Bond Street.

In 1901, by royal warrant, Philip Morris & Co. became the royal tobacconist to King Edward VII… and with success came growth. Just one year later, the company expanded its business to the United States.

In 1938, the company went public… and investors have been reaping the rewards ever since.

Between 1957 and 2007, Philip Morris was the single highest-returning stock in the United States. A $1,000 investment in Philip Morris in 1957 would be worth about $5.8 million today.

Although Altria’s (MO) returns are the best in the business, other tobacco companies have performed almost as well. Even today, amid declining smoking rates in the U.S., tobacco companies continue to outperform other equities.

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Take a look at the performance of the Datastream Tobacco index since 1973. As you can see, the index has maintained an amazingly consistent 15% annualized growth rate for most of its history.

And more importantly right now, downturns in the tobacco sector do not seem to correspond with market downturns.

Tobacco Is Alive and Well in the U.S.

I’m not saying tobacco companies can’t correct… In 1999, the tobacco index fell by a precipitous 60%. But the stocks were back at new highs a year later…

The fall came after the index was selling for a relatively high 23 times earnings. The companies had settled a number of lawsuits in 1998, and investors were optimistic. After an adverse court ruling in Florida, the index fell down to a P/E of 6.1.

The constant risk of litigation is why this sector is usually so cheap, with a median P/E of 13. But right now, it’s relatively pricey…Although well below all-time highs, the tobacco index is selling for 15 times earnings (18% above its median). Investors are probably bidding these stocks up, cashing in on their reputation for being a safe haven in a tough market.

With these valuations, I wouldn’t hop on tobacco right now for a short-term trade. But as you can see, the sector has always been a good long-term hold.

Good investing,

Ian Davis

P.S. In 1985, Philip Morris changed its name to Altria Group. Then earlier this year, Altria spun off Phillip Morris International to focus on the U.S. market.

Right now, Altria is the most expensive cigarette by price to earnings. Historically, Reynolds American (RAI) and UST have held this honor. Apparently, investors liked the spinoff and have bid up Altria’s stock price accordingly.

Reynolds American is currently the cheapest tobacco company in the Datastream index. It is trading at a P/E of 10.2, about 29% below its median.

But they were wrong. The Datastream Internet Index reached its peak on January 3, 2000, and then collapsed, falling 93.8% over the next 34 months.

In 2005, investors thought the real estate market was “different.” Homeowners were buying houses more expensive than they could afford because they thought inflation would protect them. While home prices could stagnate, they wouldn’t go down.

But, as you know, they were wrong. Beginning July 2006, real estate has fallen 16.2%.

Investors will come up with any excuse to continue pumping money into a sector that’s produced amazing returns for them in the past. And when the money starts piling in, it’s time for you to get out.

Today, the sector is oil. In inflation-adjusted terms, the price of oil is up 140% in the last 18 months. At first glance, the logic seems plausible…

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Global demand for oil is surging. Most of this increase comes from emerging economies like China and India. And global oil supply is on the decline. A large cause is poor reserve management by nationalized oil companies.

Venezuela’s oil production, for example, decreased by at least 1 million barrels per day (bpd) since President Hugo Chavez nationalized the country’s oil fields between mid-2006 and 2007. And Iran’s leaders can’t attract private capital and technology, so production is down 3 million bpd to half of what it used to be under the Shah.

Russia and Nigeria are in the same boat… The problem is, high oil prices make governments greedy. They take over oil fields and mismanage them, decreasing supply growth… and leading to even higher oil prices.

This imbalance has catapulted the price of oil to stratospheric levels. Even when adjusted for inflation, the price of crude oil is now far above its 1980 peak.

In the long run, simple economics tells us the price of a barrel of oil should equal the cost of producing the most expensive barrel of oil needed to meet global demand.

According to the Energy Information Administration (EIA), the oil market has a small surplus of existing production. And according to a Dallas Federal Reserve economist, the most expensive barrel of oil needed to meet global demand is being produced at just $50. With oil currently priced at $137 a barrel, the incentive to find and produce more oil is enormous.

This process takes time… But there are already signs supply is climbing. Shale oil in the Dakotas and in the Canadian tar sands – which costs about $70 a barrel to produce in both places – is attracting enormous amounts of investment capital.

In addition, research into the process of converting coal to oil might yield a more environmentally friendly process sometime in the near future, which would overcome one of the major hurdles facing coal-to-oil production now. The supply of coal in the U.S., if you were wondering, is plentiful.

From the demand side, the EIA reports consumption in 30 developed countries has fallen 460,000 bpd since last year. Most of that decline comes from plummeting U.S. demand.

This commodity rally – and the oil boom in particular – is not any different than previous booms. The market will find a new equilibrium, and the price of oil will undergo a nasty correction.

Good investing,

Ian

P.S. As my colleague Matt Badiali explained in a recent DailyWealth essay, don’t confuse brains with a bull market. If you own oil and gas stocks, now’s the time to keep an eye on your stops. On the other hand, the market has mauled refiners. But I think right now, refining stocks are perfectly positioned for the coming oil rout.

Source:  Why Oil May Be Headed for $50

The situation for oil refiners in mid-2007 was just too good. Their profits were far too large. I didn’t think the stocks could go any higher. Here’s why…

A refinery converts crude oil into usable products like diesel and gasoline. Its profits come from the “crack spread,” which is the difference between the cost of oil and the price of gas or diesel. The best situation for these companies arises when the crack spread is large and they can sell their product for a high amount relative to crude oil. This situation arose in mid-2007…

Between February 20 and March 28, the average price of unleaded gasoline rose 49.4%, but the price of crude oil only rose 21.1%. This led to huge profit margins for the oil refiners… profit margins that seemed likely to persist.

You see, demand for petroleum products was growing, and no new refineries were being built. The last new refinery in the United States was constructed in 1976. Major hurdles prevent the construction of new refineries: financing a new project, getting permits, dealing with the environmental concerns.

And refineries experienced more than 30 unplanned outages in the U.S. in April 2007. Because of these outages, 400,000 fewer barrels of oil were being processed into gasoline each day, driving gas prices higher.

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This is why most people thought I was crazy when I made a bearish call on refiners in a June 2007 issue of the S&A Digest. Investors were making money on refiners hand over fist, and the stocks were priced as if the good times would continue forever. Refiners were the darlings of Wall Street.

I disagreed…

Refinery outages are temporary problems, and simple economics says demand will moderate as prices increase. Less demand from consumers, along with the same level of gasoline production, leads to lower gas prices. So I knew these margins had to shrink.

As it turns out, I was right. By last month, refiners’ profit margins had disappeared… and with them went the refiners’ stock prices. An index of the four largest refiners fell by half.

Today, however, we are in the opposite situation. The price of oil has outrun the price of gasoline, and oil refiners’ margins are terrible.

The following chart shows my crack-spread indicator (a ratio of the price of gasoline to the price of oil) compared to an index of oil refining stocks. If the gray line is above zero, the crack spread is above its average level. If it is below zero, it’s below average.

As you can see, the crack spread has risen substantially from its March low.

Oil refiners are cheap, they are rallying, and investment banks are upgrading the stocks. Unfortunately, there is no refiner ETF. But here’s a look at the four largest U.S. refiners…

As you can see, all of these stocks are extremely cheap right now. And I believe the worst is now over for oil refiners. The situation is going from bad to less bad. The last time oil refiners were in this situation, the refiner index rallied by 40% in the following six months.

Good investing,

Ian

Source: A Six Month Trade for 40%

In fact, the home-furnishings sector, as a whole, has lost 27.3% of its value in the last 11 months. It is also down 31.7% from its highest close, which occurred almost three years ago.

For some individual companies, it’s even worse…

On May 2, New Jersey-based Linens ‘n Things filed for bankruptcy, defaulting on $1.35 billion worth of debt. This may finally be a sign that the market is nearing its bottom.

Bankruptcies will lead to decreased supply (Linens ‘n Things has already announced it will close 120 stores) and less competition… two factors that should help the profit margins on the remaining retailers.

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As you can see, after getting killed in 2007, home-furnishing companies are finally stabilizing. The sector has risen 13% since March. And it’s cheap. The sector is trading at a 34.1% discount to its historical, median P/E.

But, while the sector is no doubt very cheap, a 13% rally is not enough to get me excited…

The sector may just be in a temporary upswing in an otherwise bear market. I wouldn’t feel comfortable getting into this sector until it tests its previous low. If it makes another downward move that fails to take it to new lows, then the worst is likely behind us.

At that point you could buy any of the companies I mentioned above – Target, Bed Bath & Beyond, or Tuesday Morning. Costco and Wal-Mart would also benefit from an upswing in the sector, as would upscale retailer Williams-Sonoma

Good investing,

Ian Davis

Source: These Beaten-Up Retailers Are Showing Signs of an Uptrend

It’s experiencing real economic growth – which doesn’t count inflation – of 4.7%. That puts to shame the 2.2% real economic growth of the United States last year.

It is also the third most economically free country in the world, after Hong Kong and Singapore, according to the Heritage Foundation. That means its citizens are relatively free to “work, produce, consume, and invest in any way they please,” and the government protects that freedom. (The U.S. is fifth on the list.)

Finally, this country is a developed nation in Western Europe, it is a member of the European Union, and it has one of the smallest debt-to-budget ratios in the E.U.

Now, the amazing thing is, if you had invested in this booming economy on January 1, 2007, you would be down 31.4% to date. In fact, out of all of the indexes I follow, this country – Ireland – has the single worst-performing stock market over the last 12 months.———- Advertisement ———-
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The following chart shows the Datastream Total Market Ireland index since 2000. This index holds Irish companies that range in market cap from €12 billion to about €50 million.

As you can see, Irish stocks peaked in early 2007 and have performed horribly ever since. How could a country that experienced such explosive growth in 2007 have seen its market tumble so far?

Stock markets are forecasting machines. And although Ireland’s economic situation was bullish in 2007, investors expect it to become much worse in 2008…

Here is the situation: A large portion of Ireland’s GDP growth came from industries related to real estate development. And like in the U.S., Ireland property is in the midst of a slowdown.

According to The Economist, “If the decline in [Ireland's] house prices were to accelerate, a recession would be likely.”

So it doesn’t sound like trend followers should buy now… But I am going to put Ireland on my watch list. Ireland’s stock market is cheap. Its historical median price-to-earnings ratio is 12. Right now, Ireland is going for a P/E of 8. That’s a big discount to where it normally trades…

When investors realize they may have overreacted and the uptrend starts, I’ll know it’s finally time to jump in.

At that point, we’ll probably take a look at the New Ireland Fund (IRL). IRL invests at least 65% of its assets in Irish Equity. It invests the rest in companies outside Ireland that should benefit from improving economic conditions in Ireland.

Good investing,

Ian

Source: The World’s Worst Performing Stock Market