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You have certain stocks in an accelerating upswing thanks to surging energy, copper, and other natural resources. Simultaneously, you have major sectors still trapped in a decline — airlines, auto manufacturers, high-risk mortgage lenders, and home construction companies. This market schizophrenia has not been changed by the recent rally in the Dow, S&P or Nasdaq. Nor is it likely to change even if the rally continues. The split personality is deeply ingrained in the fundamental nature of the forces that dominate our era.
They visit the New York Stock Exchange and ask merely if it’s going up or going down. No one has told them about the split. One reason is that it’s virtually unprecedented. In all my 40 years of watching the market, the only time I’ve seen a schism like this was in the 1970s. Inflation was driving up asset values. But at the same time, it was bleeding corporate earnings. Most people didn’t understand the dichotomy. And they still don’t. In that era, housing and real estate went through a great boom and bust, but it was far smaller than the boom-bust cycle we’re confronting today. Major oil companies were making big profits, but nothing like today’s. And airlines were feeling the pinch of surging fuel costs, but it was not nearly as severe as the pain they’ve been through this time around.
At the time, Pan American was America’s premier international airline, and its building had the most commercial office space of any in the world. Dad said Pan Am would go bust and have to sell the building, probably to a major oil company. He was only halfway right. When Pan Am went under, it sold the building to Met Life. He said that if the energy crisis was especially bad, the majority of large U.S. airlines would also go under. Fortunately, that forecast did not come true … until now, that is.
Dad glanced at it and said: “When you have a schizophrenic market like this … don’t walk! Run! “Run away from the companies that are going to get hurt by inflation and interest rates. And run toward cash, plus the investments that are going to benefit.†Today, the same recommendation applies: Don’t walk — run! Get away from the companies most vulnerable to rising inflation and interest rates. Focus instead on those best able to help the world cope with the shortage of critical resources. Already … Investors on the Bright Side Are Making a Fortune While In this environment, the contrast between the winners and the losers is mind-boggling. Suppose, for example, you followed Wall Street’s standard advice and invested in a diversified portfolio of blue-chip stocks, allocating, say, $10,000 to the largest of them all, General Motors. If you had started on May 15, 2002, your investment would be worth a meager $3,397 today, a 66% loss. In contrast, if you had invested in the energy sector instead, your results would be precisely the opposite: Even if you had not been very aggressive — focusing mostly on companies that aimed to provide a good income rather than a big profit — you would have much more money in your pocket right now. Take Enerplus (ERF), for example, a Canadian royalty trust that I’ve recommended on and off in my Safe Money Report.
So instead of just $3,397 in your portfolio, you’d have $26,816, or nearly EIGHT times more. This is far from being the most extreme example. Other energy investments — in oil service companies and smaller exploration companies — have produced three, four, even ten times the gains delivered by Enerplus. On the other extreme, major companies that were hurt earliest and most severely by the energy crisis are already bankrupt, leaving investors with a big fat zero in their account. Nor is this based merely on 20-20 hindsight. We’ve been alerting readers about the winners and losers since the energy crisis began. And looking ahead, we see no sign of change in this powerful trend. The stock market rally has done virtually nothing to lift General Motors, Ford or even Dell from the slumps we have been spotlighting here. By the same token, the oil-price correction of the last couple of months has not stopped the winners from making money hand over fist. Indeed … Most Oil Service Company Stocks Have
So far, oil prices have failed to recover from their correction. But investors in companies that service the oil industry aren’t waiting around for that to happen. They see oil prices stabilizing at these still-high price levels. They see the companies’ profits continuing to grow at a rapid clip. And so they’re beginning to put some money back into their shares. As a result, the oil service exchange-traded fund we’ve been tracking here in Money and Markets — the Oil Service HOLDRS (OIH) — has abruptly ended its temporary slump, popped back up sharply and surged to a new, all-time high last week. Meanwhile, Weatherford International (WFT), the nation’s fourth largest oil service company, which we highlighted here a few days ago, has now done the same: It has surpassed its post-Katrina peak, paving the way for still higher price levels. Some other energy companies may not be quite this far along. But the OIH is clearly pointing the way: No end to the energy boom … no end to the rise in natural resources … no end to inflation or rising interest rates … and no end to the substantial gains investors can achieve by staying on the bright side of this schizophrenic stock market. Two other prime examples: Companies Producing For over three years, gold has marched higher at an even pace, steadily opening up new opportunities for investors.
Investors in the shares of senior mining companies, like Newmont Mining (NEM) and Agnico-Eagle Mines (AEM), have enjoyed similar results. And those willing to take more risk — with junior mines like Glamis Gold (GLG) — could have seen a $10,000 investment in early 2001 grow into over $163,000 right now.
While the pace of gold’s rise has been more or less steady, the pattern in copper has been one of phase-by-phase acceleration. Copper saw a moderate rise in 2002 and 2003 … followed by a more rapid rise from 2004 to the middle of 2005 … and now, an even more accelerated phase as its prices explode to the upside. Price corrections are to be expected, and one could begin at almost any time. But that’s not likely to change the big-picture outlook. And it’s highly doubtful it will slow down companies in the forefront of copper production. With this in mind, our associate and good friend Sean Brodrick just got back from visiting a promising copper exploration and mining company last week. Here’s his report …
Small Copper Company Last week, I flew up to western Canada to check up on several companies I’ve been tracking — including one specialized in coal, one in tungsten and one in uranium. But with copper prices going through the roof, I figured it would be dumb not to also dedicate quality time to a copper miner. The one I just found has at least $382 million worth of copper sitting in the ground, probably much more. Yet the total market value of this company’s stock is under $9 million right now. That means its shares give you a vehicle for buying the copper for a meager 2.3 cents on the dollar. If all this company had was an exploration project that might never turn into an actual, working mine, I would be more skeptical. But its primary property already was a working mine. The mine shut down in the 1980s when the price of copper was down to 60 cents a pound. Now, copper is over $1.90 per pound, more than triple what it was back then. Moreover, back in the 1980s, the copper in this mine was seen as a low-grade deposit. But that was before modern mining techniques. Now, airborne surveys using new technology indicate the copper deposit could be much richer than previously believed. It may also contain silver, zinc, cobalt and even some gold. A Disappearing Glacier Opens a New
The primary mine was originally built in a picturesque — but largely inhospitable — corner of British Columbia, covered by a large glacier. In fact, in the early 1970s, the area held the world’s record for one winter’s snowfall — over 92 feet! But now most of the planet — British Columbia included — is warming up. And don’t let anyone tell you it’s not happening. Although the cause of global warming is still in dispute, the rise in average temperatures is undeniable. This particular area still gets a lot of snow. But it’s “only†10 to 20 feet a year, which is manageable. Bottom line: The mine is still there. But the glacier has receded. So regardless of any concern global warming may be causing elsewhere, it is playing right into this company’s hands. It makes previously known copper deposits easier to mine. Plus, as an added bonus, it has cleared the path to uncover more copper — richer deposits than any of those known to the original miners. Takeover Feeding Frenzy The mine won’t restart tomorrow — it’s going to take time for the company to learn and develop the full extent of the resources it has. But with the rise in copper prices now accelerating and with new world supplies tight as a drum, I expect the stock’s price to run up far in advance of those events. Chinese firms are trucking through Canada’s mineral-rich areas with bags of money. American companies are buying up their resource-rich cousins. Even European firms are getting into the act. The mergers and buy-outs I see coming will be like a whole new gold rush. And the prices these companies command should be extraordinary. For example, Barrick Gold just bid $9 billion for Placer Dome — a 24% mark-up over Placer Dome’s share price when it made the bid. But Placer Dome has rejected the offer as too low! Foreign buyers are already lining up to pay top dollar for Canadian firms in other sectors, including Dofasco, Hudson Bay, ID Biochemical, Fairmont Hotels and Resorts, Algoma Steel, and more. It’s a takeover feeding frenzy. And in this frenzy, no stocks shine brighter than mineral producers like this little giant. With the glacier melting away, mining costs drop considerably. Even taking into account today’s higher wages and fuel costs, the company’s CFO estimates the cost to remove the copper should run at around 60 cents a pound. At current copper prices, that would mean a hefty 218% profit margin on every pound of copper they pull out of the ground. Our Recommendations First and foremost, get away from the companies that are continuing to get killed by surging prices and rising interest rates. If you were early in getting out of these, great. But if you’re late, don’t let that stop you. Some of them — like General Motors — could sink into bankruptcy. Then your chances of recovering your money will be close to nil. Second, put a substantial portion of the proceeds in cash or equivalent money market funds. Don’t even think about locking in today’s low yields for five, ten or thirty years. Those rates are still near the lowest in history, and they have nowhere to go but up. Third, don’t veer from the energy and gold investments Martin and Larry have been recommending in their Safe Money Report (mostly for conservative investors) and Real Wealth Report (mostly on natural resources). These investments have been going up for years and they should continue to do so. Enerplus is a good example. Although Martin recommended taking a nice profit in the stock recently, there should be a good chance to buy it back again in the near future. Fourth, if you have some money you can afford to risk, consider options on these soaring investments. When a stock goes up 10% or 20%, a well-timed option on that stock can go up 100%, 200% or more. Also consider the kinds of companies I’m turning up. They’re not for money you must have for your retirement or your long-term health care. But for money you can afford to invest more aggressively, the opportunities are boundless and the risk is strictly limited. Martin told you how investors could have turned $10,000 into $163,000 with just one junior gold mine. Well, I believe that you have the potential to do equally well with the copper mine I’m looking at. And even if you do only half as well, I don’t think that would be a disappointment. My first three recommendations — on the companies specialized in coal, tungsten, and uranium — are going out later today to members of my new service, Red-Hot Canadian Small-Caps. And I plan to get the details on this copper company to them next week. The service is limited to only 500 investors, and the membership slots are filling up. But you can still join by clicking here or by calling 800-871-2374. Best wishes, Sean Brodrick About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. 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. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
Oil Services at New, All-Time Highs! Here's What's Next …
If the stock market had a personality, it would be evenly split between the positive forces on the bright side … and the equally strong negative forces on the dark side. 
But strangely, most people still don’t get it. They talk about “the market†as if it were a monolith. 
I remember the scene vividly: One cold winter morning, my father, my uncle, and I talked about the consequences of a future energy crisis as we walked up Park Avenue toward the Pan Am building that towered over mid-Manhattan. 
We stopped at a traffic light, where a red “DON’T WALK†sign was flashing. 
Starting on May 15, 2002, $10,000 invested in this company would be worth $26,816 right now, a gain of 168%, excluding dividends.
Investors using no leverage whatsoever — strictly in bullion bars or coins — have more than doubled their money in the last three years.
But if you think that’s impressive, just take a look at what’s been happing in the world of copper!
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