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Todays terror attacks in London are tragic for more reasons than one. Theyve struck just hours after millions celebrated Londons winning bid for the Olympics of 2012. Thats patently cruel and unfair. Theyve shattered the quiet and complacency that had, until this morning, enveloped the great financial capitals of the world. And theyve triggered a new wave of selling in the Dow, the S&P and other world stock markets. This selling, in turn, masks and distorts the legitimate reasons investors have for unloading their stocks that I told you about yesterday: Rising energy costs. Rising borrowing costs. And falling profit growth rates. A natural decline in the stock market is not a bad thing. It gives new investors an opportunity to buy. And it may even sway our economic leaders to start doing the right thing for our country, for a change. But a decline thats triggered by terrorist attacks is sad. Lets pray that the attacks are isolated and not the beginning of a trend. At the same time, lets not delay in taking protective action. For starters, to help hedge against a stock market decline, I recommend a modest allocation to Rydex Ursa a mutual fund designed to go up in value as the S&P 500 Index falls. The more the market falls, the more money you can make. Of course, thats a double-edged sword. If the S&P 500 goes UP, this fund will automatically go down. But if you have exposure to falling stock prices, it gives you good protection. Next, I recommend you seriously consider Larrys recommendations … $70 Oil Coming Quickly! A series of powerful forces are converging in one time and place to drive oil prices ever higher: Supply shortages. Rising demand. And now, another, unusually severe hurricane season in the Gulf of Mexico that could disrupt production. Thats why oil was up ANOTHER $2.29 a barrel yesterday. And thats also why, despite any decline in the wake of the London attacks, I have little doubt well soon see oil at $70. Then, after a few more zigs and zags, oil will head EVEN higher! Keep in mind that when you allow for the decline in the purchasing power of the dollar over the last 25 years, the inflation-adjusted high price of oil should actually be near $100 a barrel. So $60 oil, even $70 oil, is cheap by comparison. Theres much more upside coming. And in an acute supply crisis, the price of oil could spike even further than $100 a barrel. Heres an interesting factoid: The all-time high for oil did not occur in early 1980 (at $91 in todays equivalent dollars), as so many analyst and traders have come to believe. The record, all-time inflation adjusted high for the price of oil was actually recorded back in 1869 at $1,010 per barrel. Yes, you read that right over $1,000 per barrel. No, I dont expect an oil price anywhere near that level. But a spike in oil prices beyond $100 oil later this year or early next would not surprise me in the least. One of the reasons … In addition to the already-bullish fundamentals underlying the bull market in oil, theres now a mad dash perhaps even a Worldwide Oil War breaking out around the globe. The opening salvo China National Offshore Oil Corporations (CNOOC) $18.5 BILLION bid to buy California-based Unocal. Like Tony explained yesterday, theres no point getting into the politics of China buying an American company. Thats not an issue that directly concerns investors. Heres what does matter: The CNOOC bid is just the first salvo in a long battle for oil that could engulf the United States, China, India, Nigeria, much of the Middle East, Russia, Europe, and South America. Dont misunderstand. Im not talking about a shooting war, although violence is also possible in certain regions. Im talking primarily about an economic war waged with nearly every trade and financial weapon available. The driving force: There is simply not enough oil to go around. The panic to secure oil supplies is going to set off economic and geo-political clashes in every corner of the globe. Its also going to set off a merger-and-acquisition buying spree in oil and energy, the likes of which we have never seen before … and which will generate a string of glorious profit opportunities. Consider CNOOCs bid for Unocal, for example. On the surface, the $18.5 billion bid sounds outrageous. But its not. When you look at the value of the oil reserves Unocal is sitting on, the bid is peanuts. Unocal has 1.7 BILLION barrels of oil and oil equivalents. At $60 a barrel, Unocals reserves, once extracted, would be worth $102 BILLION, for which CNOOC is paying $18.5 billion. Put another way, CNOOC is offering to pay the equivalent of $5.51 a barrel of oil in the ground. Thats like buying oil for NINE CENTS on the dollar. Smart on CNOOCs behalf? You bet it is! 5 Oil and Gas Merger Candidates Are there plays to be made in the shares of CNOOC or Unocal, or rival bidder Chevron? Yes, but not right now. I suggest you hold off on buying their shares. Despite the rising oil price, theres too much political uncertainty surrounding both companies right now. Let the dust settle first. Moreover, there are many other plays out there that are not going to be embroiled in international politics. Based on reserves, my latest review shows 5 major oil and gas companies that should be on the prowl for acquisitions … or could become targets themselves.
In the far right column, youll see that the oil reserves of Anadarko, Devon and Talisman are valued between $6.57 to $8.71 per barrel. All three of these companies are likely takeover candidates. Meanwhile, ExxonMobil and Suncors reserves are valued at substantially higher prices, but still cheap compared to the price of oil once extracted. No matter how you look at it, this indicates that many oil shares are undervalued and have much more upside potential in them. My view: With oil solidly in its next phase up and headed toward $70 a barrel and with CNOOC kicking off a wave of mergers and acquisitions in oil the oil markets are going to be hotter than ever, and the profit potential, monstrous. For 20 long months now, the Dow Jones Industrials and the S&P 500 Indexes have been in a very narrow 4 – 5% trading range. Yet, according to Investors Intelligence, bullish sentiment is as high as it was right before the stock market peak of 2000. This, in itself, is a contrarian warning sign that the market is overvalued and ready to roll over. Twenty months of no upside progress … and yet there are just as many bulls as there were 5 years ago?! No, you cant trade this market based strictly on one indicator. Thats why, nearly 20 years ago, I worked with the Foundation for the Study of Cycles to develop a reversal model that would give me the most accurate buy and sell timing signals I could find. The results were astonishing, and I have been using my proprietary reversal model ever since. It allowed me to forecast the Crash of 1987, nearly to the day. It helped me forecast new highs in the Dow by 1990 and the recession that followed. It also predicted that the 1990s bull market would last till April of 1998. It was two years premature. As it turned out, stocks didnt peak in that month or even in that year. But the NYSE advance/decline ratio did. And although most stocks went higher into 2000, the ensuing collapse erased all the 1998 – 1999 gains and more. What is my model saying now? Phase II of a Great Bear Market is about to begin! Indeed, just yesterday, my model triggered its first major sell signals in 20 months in both the Dow and the S&P 500. This next phase of the decline should see the Dow fall back to 7,500, and the S&P 500 into the low 800s. Sounds crazy? Perhaps. But this model has never failed me on the big picture. Not once. Moreover, when I look at all the fundamentals underlying the U.S. economy, I understand where the signals are coming from. Theres just way too much debt in this country and not enough savings. The Federal deficits are a disaster, as are the current account deficit and the national debt. The U.S. dollar, despite its recent bounce, is still weak at the knees and could crumble again. Soaring oil prices are now hammering the earnings of nearly every industry under the sun (except oil and energy!). Meanwhile, because Fed chief Alan Greenspan has not acted aggressively enough to raise interest rates, overseas investors are sitting on the edge of their seats, ready to bolt out the door and yank tens of billions of dollars, if not more, out of the U.S. financial markets (and real estate). In the Dow, keep your eyes peeled on the 10,011 level. If the Dow closes below that level at any time, you will very likely see a plunge to 9,000 then even lower. Except for natural resource stocks, get out now. Or, balance your stock positions with mutual funds that are designed to go up in value when the market goes down, such as the Rydex Ursa fund Martin recommended above. The attacks in London this morning are triggering a rush into gold.But gold has been showing bullish signs long before today. Since the middle of May, just less than two months ago, the average gold mining share has jumped over 17%. And this has occurred despite a rally in the value of the U.S. dollar. In my book, this is an extremely bullish sign for gold and gold shares. I think its telling you that The Federal Reserve is behind the curve on interest rates Inflation is going to head higher Most stocks and bonds are very vulnerable to a decline Soaring oil prices are for real My view: If you dont own any gold investments for whatever reason make sure you buy some now. My two favorite diversified gold mutual funds: Scudder Gold and Precious Metals Fund (SGLDX) and The Tocqueville Gold Fund (TGLDX). I would put up to 5% of your total portfolio in these funds, spread equally between the two. Lastly, make sure you keep your eyes peeled to the oil market. There may be some brief pullbacks, but if so, theyll merely be buying opportunities. Oil is about to head to $70 a barrel, which will send shockwaves throughout the world. Best wishes for health and wealth, Larry Edelson About MONEY AND MARKETS MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, David Dutkewych, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss. 2005 by Weiss Research, Inc. All rights reserved. |
