Month: April 2012

By MoneyMorning.com.au

Resource investing is a bit like the world of fashion.

The latest ‘hot commodity’ trend changes quicker than you can say ‘mullet’.

Of course there are evergreen commodities, like coal, iron ore and copper, which never go out of style.

They are mainstays. You can be sure coal stocks will look good for the next few years. Just like a good pair of jeans … as long as that ‘waistband doesn’t shrink’.

And just as in fashion, there are those commodities that become hot property overnight.

There is usually a reason why this happens. For example, China putting the brakes on ‘rare earths‘ exports, or Russian palladium stockpiles running out, and putting the media spotlight on that commodity. Or maybe there’s a novelty factor that gives the story some pizzazz, which helps tip the idea into the mainstream. Like lithium for example.

I’m not saying there’s no investment case for rare earths, palladium, or lithium. Far from it. In fact, palladium looks like it could be a great trade this year.

The problem is when the market gets carried away with the idea of a ‘hot commodity‘, the stock prices run too far.

Of course, you can trade these movements. And very profitably too.

The trick is to get in at the start – before a commodity becomes ‘hot’ – and then to try to get out at the top. This is easier said than done.

Take rare earths. This was probably the ‘hot commodity’ of 2009 when China started limiting exports. The investment case was that any company outside China with rare earths stood to make good money, as China’s limited exports pushed rare earth prices up.

The share price of one of the best rare earths stocks, Lynas (ASX:LYC), increased five-fold from $0.50 to $2.50 between April 2010 and April 2011. Great work if you sold at the top.

Click here to enlarge

But a year later Lynas has fallen from $2.50 to almost $1.00.

There are two ingredients to the emergence in the new ‘hot commodity’.

One, the story – the thing that gives people a reason to invest – which we’ve just talked about.

The second thing you need is investors to be bullish.

Which is why when the markets turned up after Christmas, the first contender for Hot Commodity of 2012 emerged…

Graphite – the Commodity of 2012?

Graphite has the requisite wow factor.

Demand is strong. Forget pencils and squash racquets. A third of it is used to make equipment, like crucibles for foundries. Industry also uses it increasingly in pebble-bed nuclear reactors, and fuel cells.

Demand is also rising thanks to an increasing demand from the production of lithium ion batteries. These batteries bizarrely contain more graphite than anything else, including lithium. Less than 10% of the world’s graphite production goes to lithium ion batteries. Demand from battery producers is increasing rapidly, and should be half of global use by the end of this decade.

An exciting graphite polymer, ‘graphene’, seems to have some unique properties that the electronics industry is getting hot under the collar about. It’s still early days, but graphene demand may increase demand in the future.

The result is the price of pure graphite has now tripled in 10 years. Unless China starts increasing production and exports, the price will keep rising.

In total, the graphite industry produced about 1.3 million tonnes of the stuff last year. At current prices, this makes it 10 times bigger than the rare earths market.

But analysts reckon global production will need to DOUBLE to at least 2.6 million tonnes by 2020. That will take a lot of new graphite mines, so there should be an investment opportunity here.

In terms of production, much like rare earths, China is in control. And graphite has come to the market’s attention now China is reducing production and exports. Around 70% of the world’s graphite comes from China, so this is a problem. Other exporters like India, Brazil and Canada make up a small amount of the market and couldn’t compensate for anything but the smallest shortfall.

This is why the US and Europe put graphite on the critical elements list. The UK’s Royal Geological Society now ranks graphite just behind rare earths for supply risk.

The Investment Opportunity in Graphite

So graphite stocks have been taking off.

The Canadian stock market is the largest resource market in the world, so there is normally a bigger selection of stocks in each commodity. The story has been playing out on the Canadian market a bit longer than it has on the Aussie market.

The ‘Prospectors and Developers Association of Canada’ Mining conference, or ‘PDAC’ took place in Canada recently. 50,000 people turned up – that’s a huge conference by any measure. Everyone I spoke to that went said ‘graphite’ was the buzzword.

No wonder the market is now paying attention. Stock prices of some graphite stocks are flying.

For example, Canadian graphite stock Focus Metals (CVE:FMS) is up 1163% in 18 months.

Click here to enlarge

Canada has quite a few graphite stocks. Back in the 1980s, graphite prices were high and the Canadians started building dozens of graphite mines. China then flooded the market with graphite in the 1990s to suppress prices. So the Canadians mothballed these mines. Now high prices are back, these mines are coming back to life!

Another Canadian stock, Energizer Resources (TSE:EGZ) has gained 157.1% in just three months. This stock’s main project is based off the East Coast of Africa, on the island of Madagascar.

Could good Australian market graphite stocks take off like the Canadians?

We are a bit behind the Canadians, but the sector is warming up quickly, with a few stocks doubling or tripling already this year. This is something I’m keeping a close eye on.

What to Look For When Investing in Graphite Stocks

When a ‘hot commodity’ takes off, all the stocks tend to go up with it.

But to pick the ones that will go the distance, some research is needed. One thing to watch in the graphite market specifically is what type of graphite the company has.

Because there is graphite … and there is graphite.

Graphite comes as ‘flake’ or ‘vein’ types, which are the best quality. This is the graphite used for batteries and pebble-bed nuclear reactors, which sells for up to $3,000 / tonne. Then there is ‘amorphous’ graphite, a lower quality product, which sells for about $1,000 / tonne.

Probably the big risk to the graphite market is that China increases exports to pull prices down and kill the competition, as it did in the 1990s.

It is a risk, but there are two problems with this argument. First, most analysts reckon that graphite supply is so tight now, that new demand from new applications would easily soak up any new supply.

Secondly, China’s graphite is mostly the ‘amorphous’ type, and this is no good for the new applications driving demand growth.

So the case for graphite looks solid.

And the story has only been rolling in earnest in the Aussie market since January. Looking at the length of the initial bull-run in stocks for other ‘hot commodities’, graphite stocks could have at least a year or more of gains ahead of them yet.

Dr. Alex Cowie
Editor, Diggers & Drillers

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Graphite: Is This the Hottest Commodity on the Aussie Market Right Now?

By MoneyMorning.com.au

With oil prices soaring ever higher, Saudi Arabia stepped and vowed to increase its production by 25% if necessary.

But while that assurance managed to siphon a few dollars off oil futures, the reality is there’s nothing Saudi Arabia – or anyone else, for that matter – can do about rising oil prices.

In fact, crude oil is still on track to reach $150 a barrel.

As Saudi Oil Minister Ali Naimi pointed out, current oil supplies already exceed global demand by 1 million-2 million barrels per day.

For its part, Saudi Arabia is already breaking its own OPEC-imposed production quota limit, churning out about 10 million barrels of oil per day – close to its 12.5 million barrel capacity.

Yet the effect of that production has been negligible.

That has clearly flummoxed the world’s largest oil producer.

“I think high prices are unjustified today on a supply-demand basis,” said Naimi. “We really don’t understand why the prices are behaving the way they are.”

Naimi and his colleagues may not understand oil’s price gyrations, but Dr. Kent Moors, an adviser to six of the world’s top 10 oil companies and energy consultant to governments around the world, does.

“Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve,” said Moors. “In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel.”

And with tensions with Iran running high, we are currently in crisis mode. Pushed to the brink by Western sanctions, Iran has threatened to close the Strait of Hormuz – the narrow channel in the Persian Gulf through which 35% of the world’s seaborne oil shipments and at least 18% of daily global crude shipments pass.

If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel within hours. Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.

The situation is further complicated by potential military conflict – such as an Israeli air strike on Iran’s nuclear facilities.

And with indications that Iran will have the ability to develop nuclear weapons in the next 18 to 24 months, Western powers have apparently shifted their focus from halting Iran’s nuclear program to sowing instability in the country with the hopes of catalyzing a regime change.

So what does that mean for investors?

Making the Most of High Oil Prices

First and foremost, it means oil prices are set to go even higher.

To be clear, the only ones who stand to benefit from the situation in Iran are commodities brokers. Whether Iran successfully develops a nuclear bomb, Western powers intervene with military force, or the country’s political regime is overthrown, the resulting turmoil will lead to an oil price spike.

Consider the effect the Libyan civil war had on the energy markets last year: Libya’s revolution took oil prices from $83.13 a barrel on Feb. 15 to $113.39 a barrel on April 29.

That’s a 36% surge in a period of about two and a half months.

At that time, Libya was only the world’s 17th-biggest oil producer. Iran is the world’s fourth-largest oil producer.

The country pumps out about 3.6 million barrels of oil a day, which is about 5% of the world’s total supply. By comparison, Libya produced about 1.5 million barrels of oil per day prior to its civil war, or about 2% of the world’s total.

And the situation would be further exacerbated if Iran follows through on its threat to close the Strait of Hormuz.

Brace yourself now, if you haven’t already.

Jason Simpkins
Managing Editor, Money Morning (USA)

Publisher’s Note: This is an edited version of an article that first appeared in Money Morning (USA).

From the Archives…

Why Spain’s Economy is the Next Big Problem for the Eurozone
2012-03-30 – John Stepek

Water: A Long Term Trend to Follow
2012-03-29 – Patrick Vail

How to Avoid the Welfare State Hunger Games
2012-03-28 – Kris Sayce

What Happens When You Put Someone With No Market Experience in the Top Job?
2012-03-27 – Dr. Alex Cowie

The Star Stocks of the Resource Sector
2012-03-26 – Dr. Alex Cowie

Not Even Saudi Arabia Can Save Us From High Oil Prices

By MoneyMorning.com.au

At some $600bn, Norway now has the second largest sovereign wealth fund in the world. This massive oil wealth isn’t left for the government to spend (squander). Instead, it’s rolled up into the petroleum fund, which is then managed by Norges Bank.

This fund grows bigger and more important every day – especially when oil is trading at today’s prices. But even more importantly, the fund has had an excellent record on its investments.

As it happens, Norway is currently Europe’s biggest equity investor. But here’s the thing: it plans to sharply reduce its exposure to Europe.

The Norwegians, it turns out, had their fingers burnt on Greek debt. Maybe they had been a little naive. They believed the Europeans when they said “no defaults”. They convinced themselves that the European man’s word was his bond. More fool them!

So maybe now it’s a case of once bitten, twice shy. Their strategy suggests wariness over European bonds. The European fixed-income portfolio is to be cut from 60% to 40%.

Interestingly it’s not just Europe’s bonds that worry them. Exposure to European equities will be cut from 47% to 38%.

Of course, this will be a gradual rebalancing. These sorts of positions take a while to unwind. But it’s still a sizeable chunk.

And what are they doing instead? Well, mostly they’re reinvesting in emerging markets and Asia-Pacific. That’s what I took away after reading the fund managers’ strategy documents.

How exactly are they doing that?

Well, although it was set up over twenty years ago, it wasn’t until recently that the fund went into equities. It was originally set up as a bond fund. And that’s turned out to have been an inspired move. Perhaps it’s been as much to do with luck as judgement, but the fact of the matter is that barring the odd Greek hiccup, sovereign bonds have been a fantastic asset class. They’ve offered safe and steady returns.

Norges Bank is looking to repeat the same trick in emerging markets.

According to [the] report, “Norges Bank recommends the expansion of the strategic benchmark index for bond investments to include emerging market currencies…”

And that’s not all. It’s also going to raise the stakes in developed Asia-Pacific’s bonds too. It’s going to expand exposure from the current 5% to 11%.

This is a currency issue. The Norwegians can see as well as anyone else the dangers presented by money printing. Though they didn’t say, I suspect they’re looking towards strongly managed economies like Singapore, Malaysia and Hong Kong to balance their exposure to dollar, euro and yen debt. They see better returns with reduced volatility on the other side of the globe. And I’d have to agree with them.

Bengt Saelensminde
Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

Why Spain’s Economy is the Next Big Problem for the Eurozone
2012-03-30 – John Stepek

Water: A Long Term Trend to Follow
2012-03-29 – Patrick Vail

How to Avoid the Welfare State Hunger Games
2012-03-28 – Kris Sayce

What Happens When You Put Someone With No Market Experience in the Top Job?
2012-03-27 – Dr. Alex Cowie

The Star Stocks of the Resource Sector
2012-03-26 – Dr. Alex Cowie

Why You Should Follow the Norwegians East to Emerging Markets

By David Banister, ActiveTradingPartners.com

After a few years of testing with both ETF’s and then individual stocks, we rolled out our MRM (momentum reversal method) platform at my ATP subscription service in November 2011.  This is now beginning to get alot of attention in the trading community as in addition to the ATP service, I have shared some of the real time MRM type plays online with some very top notch traders.

In essence, my work revolves around crowd psychology or what I call “Crowd Behavior”.  If there is one thing in the stock markets that never changes, it’s how crowds react to news, events, and also how they over-react more importantly.  My MRM system helps to define where the crowd may be over-reacting on the upside and also obviously the downside of a move in a security.  Knowing roughly where that upside and downside exhaustion point may be, can obviously be a huge tool in a traders tool box.

Let’s be honest, the Holy Grail of investing and or position trading would be to buy low and sell high as often as possible with as few mistakes as possible right?  The ATP MRM crowd based timing method is what that aims to do, a lofty goal but one we feel we are achieving on a regular basis.  The major problem most investors have is selling out of a position at the extreme areas of “Pain”, where your emotions take over and you cant take the paper loss any longer and you sell.  The other issue is chasing stocks higher because the adrenaline and excitement of owning a stock that is rushing higher is too hard to pass up.

Both of those investor psychology based decisions are made in panic buy and panic sell modes.  That leads to a recipe for disaster for a trading account over time.  Instead, what we want to do is the opposite right? We want to calmly buy shares in a stock that has become oversold due to emotional responses from the crowd, and sell into a huge rally where the crowd has become overly exuberant.  What if you could do that on a regular basis all the time with cool and calm nerves of steel?

Our MRM trading system at ATP allows us as best as we can to cooly and calmly enter into oversold stocks right near the apex of the lows, and then quietly exit into the rush as the stock reverses back to the upside.

Recent examples include the ETF NUGT.  This is a 300% leveraged ETF to the Gold Stock Index.  Now we all know the Gold Stocks have been under severe pressure of late as the GDX ETF has cratered from its highs over the last many months.  My MRM system though kept us out of the gold stocks, until very recently when we saw the idea entry point for a swing.  Based on the GDX falling into the 49 and below level, my MRM targets said we were at an extreme emotional bottom using my 1 day, 3 day, and weekly crowd indicators.  We therefore entered calmly into NUGT at 15.61, and within 48 hours we saw that ETF rally to 17.81!  We sold at 16.80 and 17.10 for 1/2 and 1/2 tranches to pocket 7-10% gains inside of 2 days.   The move from 15.61 to 17.81 was a 14% move inside of 48 hours!!  We also knew to sell into that rally because just a few short days later the NUGT had fallen all the way back to 15.30 per share.  My MRM method then said 15.31 was another entry buy, and 24 hours later NUGT was up another 7%!  So in the span of 6 trading days, MRM gave out an 8.5% blended return, and then followed it up with another 7% return.  Thats 15.5% of return with low downside risk in 6 trading days on just one ETF position!

We usually apply this type of work to MRM Positions that we actually intend to position ourselves in weeks not days.  However, if we do get extreme moves in a short period of time, we always look to trim back some of those profits in the position.  The samples above are what I call “Active Trades” at my ATP service, these are intended to days not weeks in holding period.  Keep in mind alot of our work is in an Active MRM portfolio where again, we are holding swing positions for weeks and not days, so it does not require as much daily work by our partners.

Some additional recent samples include CVV which we entered twice for profits inside of a few months.  We banked 13-16% gains on one swing, waited weeks and entered again.  The stock actually dropped below our MRM entry and we held on knowing that it was likely bottoming out amidst panic emotional selling at 10.66 per share.  A few weeks later our patience paid off as the stock rose to 13.80 per share.  Most traders would have taken the loss below $11 per share, and missed the reversal back up for 25% or more.  When you take a loss that way, you must then replace that position with another trade that gains 25% or more in this case.  MRM helps to avoid panic selling, and often to take advantage of panic drops in a stock to buy more.

Consider joining us for 90 days trial period and play along.  We provide all the alerts in real time via Email and internet posting. We provide daily updates on all positions and 24/7 Email access to me for any questions. By David Banister, ActiveTradingPartners.com

Source: ForexYard

The Greenback showed its strength versus the Euro after a report showed growth in the U.S Manufacturing sector.It was quite the opposite for the Euro as the 17-nation currency had a similar report with weaker figures.

The Euro slipped as low as $1,3276, before showing some fight to reach back to $1,3334,a few ticks up from the figure reach during Friday’s late session.

The Institute of Supply Management’s Index on U.S manufacturing activity appreciated to 53.4 for the month of March, a result slightly above the expected. The single currency depreciated after the Euro-zone PMI showed signs of weakening for manufacturing activity for the 17-nation currency worsened in the month of March. The recent figures could cause further concern into the financial stability of the Euro-zone as the currency has nothing to show for its gains of late.

Two important economic events that will keep investor’s eyes on the markets is the European Central Bank’s monthly policy meeting and Friday’s highly anticipated U.S Non-Farm Payrolls.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By Alvi Erine

The key to success in forex is building a trading system that suits your needs and forex strategies that fulfil your goals. So the first thing a trader needs to be absolutely clear about is “What is my goal?” Clearly and specifically define your goal. To make loads and loads of money is a Forex dream not a forex goal. “How much money?” and “How fast do I want to make money?” are the first basic questions you need to ask yourself to figure out what you want from the Forex market. Based on these two answers, strategies can be classified as Investment Based Strategies and Day trading Based Strategies.

Investment Based Strategies

If you plan to stay and trade in forex for a longer period of time and your goal is more than short term profits, your strategies have to be investment oriented. These strategies will give you long term financial stability and consistent revenue over time. Risk management is the key in these forex strategies. You need to have a wider grasp about currency trading and fundamental trading strategies which are more complex than simple trading strategies are suited for investment based trading systems.

Day Trading Based Strategies

Day trading strategies focus on making profits from the intra-day currency fluctuations without taking into account the long term market trends. These rely heavily on technical analysis and forex software systems.

Choosing a forex strategy is matter of personal discretion. You can use existing strategies or create your own strategies. The aim should be to build a good profit generating trading system. No matter what strategy one may choose the three basic principles that must be upheld by your strategy are:

Buy Low Sell High

The patience to follow this fundamental rule will never fail to do you good. This can be done on any charting frame even daily and weekly spreads. Try and recognise the pattern of fluctuation in a currency pair. Place orders when the rates are in lower range and take profit orders when the rates are at the highest. Then patiently wait. Patience is the key in trading.

Money Management

Managing your money well means taking care of all possibilities. Risk only as much as you can afford to lose. Extreme leverage is a bad idea. Start with minimum amounts and always use demo-accounts for testing and learning whether it is a new trading system or forex software.

Emotional Composure

Indecisiveness, fear, greed, impatience and lack of emotional stability are common trading psychological pitfalls and can ruin even the best of strategies. Practice on a demo-account and risk management can help you keep these factors in control. Make sure you are comfortable with your strategy and are prepared for every possibility.
The forex strategies you ultimately choose to work with should be technically sound and yet it should be the one you personally find convincing and most intuitive to use.

About the Author

Alvi Erine is an experienced foreign exchange broker and works for YouTradeFX that offers the best forex strategies, platforms and forex software for online currency trading. Create a demo or live account here to learn all the tricks and execute a profitable deal. Visit today!

By TraderVox.com

Tradervox (Dublin) – The pressure on the single currency was evident during the US session as it plunged below the 1.3300 levels to print a fresh low of 1.3277. It has come above the 1.3300 levels and is trading around 1.3310, down about 0.38% for the day. The support may be seen at 1.3280 and below at 1.3230.

The resistance may be seen at 1.3325 and above at 1.3380. The ISM data was released today which came better than expected at 53.4. The consensus was 53. Construction spending in US decreased by 1.1% against the expected rise 0.6%.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
Tradervox.com is a Forex News Portal that provides real-time news and analysis relating to the Currency Markets.
News and analysis are produced throughout the day by our in-house staff.
Follow us on twitter: www.twitter.com/tradervox

Article by Investment U

Healthcare reform could be a minefield for Big Pharma in the long run.

The Patient Protection and Affordable Care Act – less fondly known as “Obamacare” – was the big story to close out the month of March, as the Supreme Court officially took the case.

In an effort to figure out which way the vote was going to swing, the media analyzed every word, pause and twitch the justices made. Though all of that heavy-duty analysis doesn’t actually prove anything; while the Court has likely already decided the healthcare mandate’s fate one way or the other, “We the People” probably won’t find out until June.

Considering the political left’s repeated complaints about Solicitor General Donald Verrilli Jr. and Deputy Attorney General Edwin S. Kneedler’s admittedly painful performance in explaining and defending the law’s constitutionality, many legal beagles and casual observers alike believe “Obamacare” has less than a glowing chance of standing.

But if they’re wrong and the Supreme Court rules in its favor, there’s one set of stocks that’s going to suffer miserably in the long run.

That sector would be pharmaceuticals, both big and small. And there’s a little-known reason why that’s so…

How the Rest of the World Gets its Healthcare so Cheaply

It’s a commonly known fact that U.S. citizens pay a hefty price for their prescription medication compared to just about any other country.

In December 2009, D. Brad Wright, then a doctoral candidate at the University of North Carolina, looked into the price differentiations of Plavix, Nexium and Lipitor, all important drugs designed to treat common but serious health complications. He concluded that Europeans and Canadians often pay less than half of what their U.S. counterparts are forced to shell out.

That’s definitely a sad story (for the United States, at least), but there’s a twist to it that few people fully understand…

The real reason Americans pay so much more than New Zealand, Canada, Mexico, England, Germany, France, et al. is because – for better or worse – those countries all practice some form of socialized medicine. Because the governments pay the bulk of their citizens’ healthcare costs, they set very strict limits on just how much they’ll pay for medication.

And those limits lead to significant losses for the pharmaceutical companies that sell them. That makes sense, considering how much time and money it takes to bring drugs from theory to viability.

There are costly materials to work with, numerous tests to run, top-of-the-line facilities to maintain, the best and the brightest to hire and retain, and all of the other expenses naturally associated with running a business to pay for. In addition, clinical research can take an easy decade to complete… or they fail somewhere along the way, costing pharmaceutical companies millions and even billions in the process.

In short, there’s a reason why drugs are so expensive to buy.

It’s because they’re so expensive to make.

The Last Healthcare System Standing

The United States is one of the few – if not the only – major countries out there that allows pharmaceutical companies to set their own prices. So America is one of the few countries they actually make a profit off of… a profit they need in order to survive.

Writing for MedcineNet.com, Dr. Omudhome Ogbru explains it this way:

“In a nutshell, the price paid by a patient for a medication must cover the costs of developing new compounds that become approved drugs and compounds that fail to become drugs, as well as marketing, post-marketing studies, and a profit. The profit ensures that the company provides a return to investors. Profit is the incentive for the risk that the company takes. Without the promise of a reasonable profit, there is very little incentive for any company to develop new drugs.”

All in all, it’s fairly safe to say that, without the United States paying more than its fair share of costs, the rest of the world wouldn’t have it nearly so easy. But even that cushion can’t last very long if the Patient Protection and Affordable Act stands.

As it stands now, the law requires everybody to have health insurance by 2014, either from a private insurer or the government. And if the U.S. government is going to remain financially feasible for long under that added burden, it’s going to have to start implementing the same price limits that the rest of the world is already working with.

In that case, companies like Johnson & Johnson (NYSE: JNJ), Pfizer Inc. (NYSE: PFE), Eli Lilly (NYSE: LLY), Abbott Laboratories (NYSE: ABT), Merck & Company, Inc. (NYSE: MRK), AstraZeneca (NYSE: AZN) and Novartis (NYSE: NVS) are all going to lose out big time before too long.

Good Investing,

Jeannette Di Louie

Article by Investment U

Article by Investment U

You can be a contrarian. Or you can be a victim. If you prefer the former, here are a few simple ways to invest in water.

“You can be a contrarian. Or you can be a victim.”
– Rick Rule

As Executive Editor of Investment U, I’m dedicated to providing you with the most sound investment philosophies and unique contrarian investment ideas on a daily basis.

And as our Chief Investment Strategist Alexander Green wrote earlier this year, our newsletter’s aim is to provide you with “the best investment you can make in four minutes each day.”

In that light, I made some time to sit down with legendary resource expert Rick Rule at our 14^th Annual Investment U Conference two weeks ago. Rick is the Chairman and CEO of Global Resource Investments LTD – part of the Sprott Group of Companies.

Rick is known to be a fierce contrarian. So of course I was curious – as I’m sure many of you are – what he sees as the most contrarian investment right now.

His answer may surprise you…

“The most obvious contrarian investment that I see isn’t one that people are pessimistic on, it’s one that people ignore totally,” Rule said. “It requires patience, but that commodity – the most underpriced commodity that I see in the spectrum – is water.”

And Rick isn’t the only one who sees water as an intriguing opportunity right now. Our own emerging markets expert Carl Delfeld recently told Oxford Club members:

“During the last century, oil was at the heart of the global economy. Nearly every development in the financial news was somehow linked to its price and availability. But in the twenty-first century, I believe the price and supply of water will dominate the headlines.”

Carl also cites a World Bank estimate that global water demand will actually double every 20 years.

Who else is making a big bet on water? None other than T. Boone Pickens…

As Carl alluded to in his recent article in The Oxford Club’s Communiqué, Pickens – through a company he controls called Mesa Water L.P. – is the largest individual water owner in America.

So what’s so impressive about water?

Politics, Politics, Politics…

In his article, Carl mentions that governments heavily subsidize water prices and like to keep tight control over water supplies.

Hmm… Governments meddling in free markets? Who would have thunk it?

Rick, who’s based out of California, is especially knowledgeable about the situation in his own state.

“[Water is] delivered politically, which means the market doesn’t work. Which means ultimately the supply won’t work because it’s mismatched with demand. In California, we use water for such ‘intelligent’ things as growing rice in the desert and producing subsidized alfalfa.

“[Meanwhile] the highest and best use in the state of California is flushing toilets and brushing teeth. And yet we supply water to some farmers in California for prices in the range of $55-$60 an acre foot and we charge urban users $1600 per acre foot. But the delta between $50/acre foot and $1500/acre foot is a very, very, very interesting arbitrage – which is effectively political.

“People who have watched the movie ‘Chinatown’ understand something about the genesis of this politics. The takeover by the city of Los Angeles – fair and square by the way, purchasing it in the market – of the water in the Ojai Valley, united the agricultural community against urban users in the 1890s and 1900s. At that point in time, the state’s economy was predominantly agricultural and the political power base in the state was rural rather than urban.”

The result, according to Rick, is 85% of the state’s water resources being used to create 3% of the state’s GDP. An interesting market anomaly indeed…

But considering most investors don’t have the financial resources or the logistical ability to invest in actual water rights, how can average investors cash in on this arbitrage?

How to Invest in Water

“The simplest way to invest in water is to invest in water,” Rule said. “The most leveraged ways might involve the technologies. But that involves being right or not being right about selecting among the best technologies. What I prefer to do is either own water rights or own companies that own water rights. I prefer for my own investing portfolio to treat water itself as a resource.”

Rick also provides a few guidelines of what potential water investors should be looking for:

• Scarcity and Locality –“Water is very local because its heavy, it costs a lot to transport. When making a water investment, one must invest in water at a place where it’s scarce. There’s no particular point in owning a bunch of water in Northern British Columbia where your challenge is to make it go away.”
• Affordability –“The second thing it has to be, is in a place where it’s not only scarce, but where the market can afford to buy it. Unfortunately, owning water in Ethiopia or Eretria where the people can’t buy it, although they need it, doesn’t yield any economic return. So it has to be scarce and it has to be rich.”
• A Sense of the Politics – “And the third thing is that water has traditionally been allocated politically. So you have to have some sense that there is going to be the rule of law and that there is, eventually, going to be a rational social response to the political idiocy of allocating water to votes rather than the market.”

Illustrative Examples

Rick is prohibited by regulation to make specific recommendations, but he did tell us that the most opportunistic regions were places like the U.S. Southwest, Southern Australia, Italy, Greece and Spain.

He also provided a few illustrative examples (not recommendations, mind you) of the types of companies that offer a play on water rights. Here are a couple:

• J.G. Boswell (OTC: BWEL.PK) – Although it’s traded over the counter, it’s a 110-yr old company. It’s also the largest cotton farmer in the world and the largest tomato farmer in the world. It owns 2,000 acres of farmland and effectively 200,000 acres of pertinent water rights. Right now, the water is used to grow cotton and tomatoes…
• Limoneira (Nasdaq: LMNR) – The second example of a water rights company masquerading as a farming company is Limoneira. It’s the largest independent lemon producer and one of the largest avocado producers. According to Rick, they control the some of the most important undeveloped water rights in Ventura County.
• Pico Holdings (Nasdaq: PICO) – Pico is an acronym for Physicians Insurance Company of Ohio. Pico is a group of financial operators who took over insurance companies and have invested the float in a series of accretive transactions. Pico was the largest water rights owner in Arizona at one time and is currently the largest water rights owner in the state of Nevada.

There are also numerous mutual funds and ETFs that offer potent exposure to water rights and water technologies. So while “the herd” is loading into toxic bond funds and precious metals, investing in water as a resource may very well be the proverbial elephant in the room for well-educated contrarians like ourselves.

Good Investing,

Justin Dove

P.S. Rick clued me into an incredible – and better yet, totally free – resource for investors who want to learn more about the energy and resource industries. You’ll definitely want to bookmark this page…

To check out Sprott Global’s free Investment University lecture library along with other helpful resources, click here.

Article by Investment U

Article by Investment U

The upcoming dividend tax increase will most likely make dividend paying stocks cheaper, which means great buys for long-term investors.

The President’s budget was released last week, and it wants to get back to taxing dividends at ordinary income levels for individuals making more than $200,000 a year and couples making more than $250,000. The proposal, which returns the tax treatment of dividends back to policies in place before 2003, would raise an estimated $206.4 billion over 10 years.

This may not be the most opportune time for such a plan when everyone is looking to dividends for steady returns over those historically low Treasury yields.

Some fund managers and financial advisers are already preparing for a dividend tax hike due to a monumental federal deficit and public sentiment heavily favoring higher taxes for the rich.

Valuations Will Fall

Higher taxes would most likely make companies that pay dividends cheaper, experts say.

In the past, dividend-paying stocks have lagged non-paying companies for about six months after the tax increase, according to Ned Davis Research Group.

But analysts say that those investors with a long-term horizon might make out because of these declines.

“If history is any guide, this will provide a buying opportunity for the dividend-oriented investor,” said Linda Duessel, a Senior Equity Strategist at Federated Investors who specializes in equity income. She – like Investment U expert Marc Lichtenfeld – expects dividend-paying stocks to outperform their counterparts over the long term.

Also, take this statement from Matt McCormick, VP and Portfolio Manager at Bahl & Gaynor, into account: “My conclusion is this, if you see taxes go up… that’s going to impact the market to the downside… I think investors will go back into dividend-paying stocks to protect on the downside.”

Also Expect Increasing Dividends

Last year brought a record 22 dividend initiations by companies in the Standard & Poor’s 500 Index. There have been five so far in 2012. And analysts believe that an evitable dividend tax increase would push companies to return the record amounts of cash on their balance sheets back to the investors.

When dividend taxes were scheduled to return to earlier levels in 2010 – when there was a fear that the Bush-era tax cuts would expire – more than 100 companies declared special dividends that year to give back some cash to shareholders ahead of the planned tax change, according to Standard & Poor’s.

There’s a lot of space for a larger number and dollar amount of payments. While 397 S&P 500 companies pay dividends, the average since 1980 is 413 companies. And payments as a percentage of profits are only 30% now, versus a historical average of 52%, according to S&P.

All told, dividend spending by S&P 500 companies should increase 15% this year, estimates Howard Silverblatt, Senior Index Analyst at S&P.

A Solid Play for Growing Dividends

I think the easiest way to take advantage of the changing landscape would be to buy a mutual fund focused on companies with growing dividends. Two that come to mind are the T. Rowe Price Dividend Growth (PRDGX) or Vanguard Dividend Growth (VDIGX) funds. The T. Rowe Price fund ranks among the top one-quarter of its peers for 10-year performance. The Vanguard fund ranks among the top one-tenth.

Good Investing,

Jason Jenkins

Article by Investment U