Since we took Memorial Day off with our families, Tony and I are sharing the podium today to alert you to two major developments:
First, a new turn of events in an oil-rich region of the Persian Gulf that could trigger an explosive surge in oil, gold and interest rates.
Second, an explosion of a positive kind in the financial markets of East Asia.
Oil-Rich Region of Iraq on
The Verge of Blowing Up
by Martin D. Weiss
When Allied forces invaded Iraq in 2003, one of their most urgent priorities was to secure the oil fields of the southern region of Basra, and they managed to do so very quickly.
Even as M1 Abrams tanks and Bradley Fighting Vehicles closed in on Baghdad, oil engineers employed by Houston-based KBR were already working alongside the Army Corps of Engineers in the countrys most productive Basra fields, seeking to secure key wells, pipelines, storage areas and port facilities.
The reasons were obvious:
- Iraq has 115 billion barrels of proven oil reserves, the second largest on the planet, surpassed only by Saudi Arabias …
- A large portion of the countrys oil reserves and production are in the southern Basra region, and …
- Basra has Iraqs only port, Umm Qasr, through which almost all of Iraqs oil exports are being shipped today.
Yes, in the last three years, the results have been disappointing: Iraqs oil industry has been plagued by insurgent attacks, looting, sabotage, outdated equipment, shoddy maintenance, and unreliable electric power.
And yes, production has fallen to 2 million barrels per day or less.
But despite everything, Iraq still managed to export 1.4 million barrels per day of crude oil in March, an amount that easily exceeds the so-called excess production capacity of neighboring Saudi Arabia.
So imagine what could happen to the price of crude if those supplies are suddenly removed from the worlds already-tight oil market! It could rocket to $80 … $90 … $100 … and beyond.
Gold, silver, copper and other metals would surge. Interest rates, already rising, would be boosted even further.
Can it happen? Absolutely. Indeed, heres why I believe its going to be hard to avoid …
Iran-Backed Shiite Insurgency in
Southern Iraq Threatens to Make
Sunni Insurgency of Central Iraq
Seem Tame by Comparison
While British forces administering the Basra region have progressively sought a low profile, Iranian operatives have been relentlessly pouring over their 700-mile border with Iraq, penetrating every aspect of Basra life mosques, political parties, militias, police forces, even local government offices.
Knight-Ridders Tom Lasseter, writing this past Saturday, sums up the explosive situation in Basra this way:
Southern Iraq, long touted as a peaceful region thats likely to be among the first areas returned to Iraqi control, is now dominated by Shiite Muslim warlords and militiamen who are laying the groundwork for an Islamic fundamentalist government …
The militias appear to be supported by Iranian intelligence or military units that are shipping weapons to the militias in Iraq and providing training for them in Iran.
Some British officials believe the Iranians want to hasten the withdrawal of U.S.-backed coalition forces to pave the way for Iran-friendly clerical rule.
Iranian influence is evident throughout the area. In one government office, an aide approached a Knight Ridder reporter and, mistaking him for an Iranian, said, Dont be afraid to speak Farsi in Basra. We are a branch of Iran.
The Basra region is critical to Iraqs economy. Without Basra, Iraq has virtually no way to export oil or import needed machinery, parts and commodities.
Nor does the U.S. army have a viable alternative route to ship in large quantities of supplies.
But Basra is also the region with the largest population closest to Iran both geographically and culturally. Indeed, its not an overstatement to say that Irans radical president Mahmoud Ahmadinejad may have more influence over Basra than he does over his own northern region of Iran, now in rebellion against the central government.
If Basra falls to Iran, it would endanger the entire American enterprise in Iraq, and it could make it impossible for Iraq to continue to exist as a nation.
Saudi Arabia, already aiding the Sunnis in Basra, would jump into the war with both feet, potentially engulfing the entire Arabian peninsula in the conflict. Syria, Kuwait and other Arab nations would also join the fray.
Thats why Basra is so critical. And thats why I say that all markets not just oil are likely to be impacted by the events in that region.
This Isnt a Far-Away Eventuality.
Its Starting to Happen Right Now.
This situation has been building up during three years of allied complacency and neglect. But now, it has reached a new, critical threshold beyond which it could reel out of control.
Just last week, the top U.S. commander in Iraq, Gen. George W. Casey Jr., traveled by helicopter to two points along the Iran-Iraq border.
He discovered that smuggling and infiltration into Iraq is virtually out of control.
And he got new intelligence that Iranian men, weapons and money are moving in large quantities to at least two Shiite militia groups the Badr Brigade, which I warned you about earlier this year … and the Mahdi Army, which is loyal to the fiery Shiite cleric, Muqtada al-Sadr.
The British say five surface-to-air missile systems were likely smuggled in from Iran in late April. And they suspect that it was one of these missiles that was used to shoot down a British helicopter over Basra on May 6, killing five British soldiers.
As in Baghdad, its the civilians in Basra that are the primary victims. At least 40 have been killed in Basra this month, following 75 killed in April, all victims of assassinations and sectarian strife.
In protest, thousands of the city residents have taken to the streets, expressing their anger over high unemployment and corruption in the governors office.
And while the Iran-inspired violence grabs the headlines, behind the scenes …
Allied-Backed Authorities Could Lose
Control of Most of Iraqs Oil industry.
Iraqs Oil Ministrys inspector general revealed that $1 billion in Iraqi oil is being illegally smuggled out of the country every month.
And now, a Basra-based Shiite political party, largely unnoticed by the Western media, has emerged as a critical force threatening the oil industry.
Its name: Virtue (Fadhila in Arabic).
It has a majority on the Basra provincial council. It controls the New South Oil Company that manages virtually all the oil in the southern region of Iraq, including Basra and neighboring provinces.
And until now, the Virtue Party also controlled Iraqs Oil Ministry, while fending off growing accusations of rampant corruption and oil smuggling.
But last week, Iraqs new Prime Minister, Nouri al-Maliki, snatched the Oil Ministry out of Virtues hands, appointing an independent as the new oil minister.
Almost immediately, Virtues leaders rebelled. They pulled out of the governing Shiite alliance in Baghdad, weakening Al-Malikis majority in parliament. They vowed to block all of Iraqs oil exports out of Basra until they regain control of Iraqs Oil Ministry. And they turned down any compromise deal.
The main reason: There is no authority or force in Iraq thats able or willing to stop them.
Remember: Although Southern Iraq is patrolled by the British Army, the British have a largely hands-off attitude toward Basra. Its the militias that rule. So Virtue doesnt have to take control of Basras oil industry. It already has effective control.
I cant say if Basra will blow up today, tomorrow or next month. The new government in Baghdad may strike a bargain with Virtue to stem the immediate showdown. And they seem to striking a similar bargain with Iran, temporarily averting a direct confrontation.
But whether it happens gradually through Irans progressive infiltration … or abruptly with the expulsion of British forces by an Iran-backed Shiite rebellion … I think Basra will fall. And when it does, a new, broader regional war could begin.
It wont be the end of the world. History proves that disasters eventually lead to solutions; and the worst of times usually precede the best of times. But right now …
Make Sure You Are
Ready for the Fallout!
Seriously consider …
1. Keeping a solid chunk of your money in short-term Treasuries. You can buy 3-month Treasury bills directly from the U.S. Treasury Department or you can use one of several money-market funds specialized in short-term Treasuries and equivalent. Here are some of our favorites:
- Am. Century Capital Preservation Fund (CPFXX; 800-345-2021)
- Dreyfus 100% U.S. Treasury Fund (DUSXX; 800-645-6561)
- Fidelity Spartan U.S. Treasury Fund (FDLXX; 800-544-8888)
- USGI U.S. Treasury Securities Cash Fund (USTXX; 800-873-8637)
- Vanguard Treasury MMF (VMPXX; 800-662-7447)
- Weiss Treasury Only Money Fund (WEOXX; 800-430-9617)
These are designed to give you maximum liquidity and safety. Plus, as interest rates go up, their yields should rise in tandem. But dont expect short-term Treasuries to serve the function of protecting you from a decline in the dollar. For that purpose, consider …
2. Allocating some of your money to contra-dollar investments those likely to rise as the Mid-East crisis heats up and the dollar falls. Two examples:
- StreetTRACKS Gold Shares (GLD), the leading gold exchange-traded fund, representing 1/10th of an ounce of bullion.
On May 24, when gold fell sharply, GLD traded as low as $63.22. But now its starting to recover, reaching $65.10 at the close of trading last week. With the situation heating up in Iraq and the Middle East, expect it to move toward new 25-year highs.
- Oil Service HOLDRs (OIH), the leading exchange-traded fund, including Halliburton, Baker Hughes, Transocean, Schlumberger and others.
On May 22, after falling as low as $140.30 with the oil market correction, OIH has now recovered to $150.13 at Fridays close and seems poised to move sharply higher.
For both, the timing seems very good.
3. Profiting from higher interest rates. Just a couple of weeks ago, Wall Street seemed convinced (again!) that the next Fed rate hike would be the last. But last week, when it was announced that April consumer prices surged far more than expected, that hope was dashed. And in the weeks ahead, if Im right about a new explosion in commodity prices propelled by another oil crisis, the pressure on the Fed to raise rates will be even greater.
(Editors note: To profit from the situation, you can buy special interest-rate options that cost as little as $500 but potentially control as much as $1,000,000. For more information, call 800-815-2917.)
4. Learning more about Asian stock markets the subject of Tonys article this morning.
Where to Catch and Where NOT to Catch
Some of The Biggest Fish in Todays Markets
by Tony Sagami
I hope you had a nice, relaxing holiday. Im still in weekend mode myself.
Thats why Im thinking about fishing. And thats why I remember the words of Bing Carlin of IAI funds an old friend and one of the sharpest investment minds Ive ever met. He always said:
If you want to catch a trophy fish,
you gotta fish in a trophy lake.
I think thats good advice, whether youre talking about fish or about stocks. And right now, I think Asias the best place to catch trophy stocks.
There are lots of big whoppers already swimming around the Pacific … and I expect upcoming initial public offerings (IPOs) to spawn many more.
In a minute, Ill tell you about a few. But first, lets look at one thats already got investors jumping for joy …
Bank of Chinas IPO
Goes Berserk
My 22-year old son, Ryan, and I recently returned from a whirlwind trip to Taiwan, Macau, and Hong Kong, where we visited the Bank of China Tower in Hong Kong.
The skyscraper was designed by world-renowned architect I.M. Pei. Its 1,209 feet tall and mimics bamboo, a symbol of vitality and growth. It was the first building outside the United States to break the 1000-foot mark … the tallest non-U.S. building in the world until 1990 … and the largest to blend modern and traditional Chinese design.
Inside are the Hong Kong headquarters of Beijing-based Bank of China. Founded in 1912, its Chinas oldest bank.
Now heres where the real fun begins: The bank went public last week, and thousands of small investors lined up outside Hong Kong banks and brokerage firms for application forms to buy its shares.
The demand from retail investors was so strong that the IPO was oversubscribed by a factor of 80 to one.
End result: The Bank of China raised $9.7 billion, making it the worlds largest IPO in six years.
Think back for a moment and remember all the excitement that surrounded Google when it went public in April of 2004. Well, guess what! The Bank of Chinas IPO was almost six times bigger than Googles!
But Bank of China is actually the third Chinese bank to go public in the last 12 months. The other two were:
- China Construction Bank, which went public in October, raising $9.2 billion. The shares have climbed more than 40% since!
- Bank of Communications, which went public in May 2005. Its shares have roughly doubled since then.
Chinese banks are jumping for good reason: the five publicly-traded Chinese banks posted average profit growth of 30% in the first quarter of 2006.
And its not just Chinas banks that are on fire.
Dalian Port, the biggest operator in Chinas largest port, has surged 48% since its debut just this past April.
I told you that this IPO was going to be a big winner, and it was. But dont feel bad if you missed it because theres …
A Boatload of Hot Asian IPOs
Still on the Immediate Horizon
Heres the scoop on whats happening:
First, China just reopened the application process for IPOs after a yearlong suspension.
Second, thats paving the way for a flood of new issues and secondary offerings.
Now, a long list of Chinese companies are just itching to raise capital. And I expect many of them to be mammoth winners.
Heres just a taste:
- Industrial & Commercial Bank of China, Chinas fourth largest bank, will go public in the fall. Ive already told you how well Chinese banks are doing.
- Chinese property developer Shui On Land is set to go public on the Nasdaq June 23. To me, the shares look attractive. Shui On Land owns a portfolio of property that is estimated to be worth U.S $3.8 to $4.1 billion. It also has six property projects at various stages of development in China.
- At least 25 other companies, including China Merchants Bank, Shanghai International Port, and Ningbo Port, plan to sell shares in Hong Kong later this year.
As Ive been writing all along, you cant ignore this. These companies are far removed from the Mid-East crisis Martin has been warning you about. And they have a series of strategic advantages over their U.S. counterparts. For details, see my article, Three Down-to-Earth Rules.
Meanwhile, in the U.S., we see one flop after another.
One of the Most Recent
Big Flops: Vonage IPO
Sadly, you might not have heard much about the Bank of Chinas IPO from U.S. newspapers, Internet sites, TV stations, or Wall Street experts.
But you probably heard plenty about the IPO by Vonage, the largest voice-over-internet (VoIP) phone company in the world.
This companys 1.6 million subscribers plug their phones into specialized adapters that connect to a broadband Internet connection. For $24.99 per month, they can make an unlimited number of calls to the U.S., Canada and much of Western Europe, using regular phones.
Vonage went public last Wednesday at $17 a share. But its investors found themselves swimming upstream as the stock sank steadily, closing at $14.85.
Its decline 12.6% signaled one of the worst IPOs in nearly two years!
And I expect the stock to continue falling. Why? Because cable companies have started to aggressively promote their own VoIP services, and theyre quickly catching up to Vonage.
Remember the dot-com days of eyeballs, page views, … and zero profits? Well, as I see it, Vonage is a throwback to those times. Heck, the company spent $88.3 million on marketing and lost a net $85.2 million in the first quarter of the year.
My point: The mainstream media guided investors to the wrong fishing hole. So open your mind to investing outside of the U.S. Think globally so you can tune in to opportunities like the Bank of China.
The banks 94-year-old chairman, Xiao Gang, puts it this way:
I believe we have tianshi, dili, renhe.
Hes referring to an ancient Chinese saying about the three keys to success good timing, good location, and human harmony.
The good timing may be elusive.
And human harmony (especially in the financial markets) may also be hard to achieve consistently.
But I think Mr. Xiao is certainly right about good location: Right now, the best place for stocks is across the Pacific.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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