Month: October 2013

Source: JT Long of The Gold Report (10/11/13)

http://www.theaureport.com/pub/na/busting-the-myths-that-could-wipe-out-your-investments-louis-james-marin-katusa-and-rick-rule

The Gold Report sat down with three of the mythbusters-in-chief at the recent Casey Research 2013 Summit. Louis James, Marin Katusa and Rick Rule debunk myths that range from quantitative easing to crowdfunding, and touch on an array of resource sectors, including gold, platinum, palladium and oil. Get insights about the work investors need to do to succeed and learn why age matters.

Myth: Quantitative Easing Is Being Tapered Off

The Gold Report: Why is the theory of tapering or turning quantitative easing (QE) off a myth and who really benefits from QE?

Rick Rule: My view, as an investor, not an economist, is that QE is misnamed. I think it’s another way of saying counterfeiting. It exists in large measure because we’re running a trillion-dollar deficit and, while we can hoodwink investors into funding two-thirds of it, we need to print away the last third.

TGR: What are the consequences of turning off QE?

Louis James: Federal Reserve Chairman Ben Bernanke said himself that he had certain criteria he wanted to see before tapering—employment in particular. Those have not been met. Employment figures have improved, but only in—I guess the technical term would be “crappy” jobs. Long-term employment, the middle class’ bread and butter, is not better.

TGR: Rick, you defy common sense and argue that bull markets are bad and bear markets are good, but it doesn’t feel that way.

RR: JT, at the risk of being sexist, women are normally more rational shoppers than men. Think about the stock market as a mall.

In the mall, the store on the left-hand of the entrance has a big flashing sign that says, “Bear Market Merchants All Goods 70% Off, No Reasonable Offer Refused, Come Back Tomorrow—Prices May be Lower.” The store on the right-hand side has a tiny sign that says, “Bespoke Bear Market Merchants, No Deals Ever, High-Margin for Merchants, Don’t Even Think About Asking for a Deal, Prices May be Higher Next Week.”

If you’re going to buy a pair of shoes, which store would you go to?

This is a no-brainer. When people buy physical goods, they act rationally. When they buy financial goods, they want to overpay. It’s totally irrational and it’s extraordinarily common. If you want to become wealthier, why wouldn’t you buy financial assets when they’re on sale?

TGR: Staying with the mall analogy, does that suggest that people are afraid stocks with be on even deeper sale tomorrow?

Marin Katusa: You have to look at the timeframe. This is a great market if you’re an accredited investor and have an account with someone like Rick Rule or you subscribe to the International Speculator and follow the right management teams. Today, you can invest in deals with five-year full warrants that would not have been available three years ago. Rick and I have been in meetings where the venture teams laughed at me when I requested full warrants. Rick just said, bite your lip, smile and wait. And he was right.

If you’re buying stock today in hopes that the market will go up the next day, you’ll be in a lot of pain. But if you have a two-to-five year timeframe, you can get guys like Bob Quartermain and Lukas Lundin on sale.

LJ: What would you give to go back in time and buy Apple just after the Apple II came out? Or buy Microsoft when DOS was new?

Over the course of the last decade, what I think of as the first half of this great bull cycle, billions of dollars have gone into the ground and done good work.

Companies with 10 million ounces of high-grade gold in a safe mining jurisdiction are on sale below IPO prices. Some companies with excellent management and assets in hand are selling for less than cash value. You can buy these companies now, instead of looking for the next Apple or Microsoft.

RR: Words like want and hope in speculation are truly four-letter words, profanities. Having a stock in your portfolio that cost $200,000 and has a current market valuation of $40,000 is unfortunate, but irrelevant. Investors need to take advantage of their education and do their best with the situation at hand. Right now, things are cheap. When things are cheap you’re supposed to buy. In bull markets when things are expensive, you’re supposed to sell.

Right now, buying is easy because you have no competitors. In a bull market, selling is easy because everybody is a buyer. If the market is desperately looking for bids and you are scared to death because your stocks can’t catch bids, you have to bid. They say the market was desperate for asks, but this market is desperate for bids.

Myth: The Commodity Super Cycle is Over

TGR: Some have said this the end of the commodity super cycle. Is that a myth? And is it more or less of a myth in some sectors than others?

RR: The narrative that existed in 2009–2010, when the commodity super cycle was the currency of all financial thinking, is unchanged. The first part of that narrative was founded on the idea that world population growth was taking commodity consumption higher. World population growth is not over.

The second part of the narrative was that as poor people gained more freedom, they got richer and consumed more. Political liberalization in emerging frontier markets has continued and people are wealthier and are consuming more.

A third part of the narrative was that Western consumers had lived beyond their means and as a consequence were debasing the denominators, the fiat currencies. If you debase the denominator, the nominal value of stuff would go up. We have not stopped debasing the denominator.

The entire narrative associated with the resource industry bull market is intact. Nothing has changed except the price.

A cyclical decline in a secular bull market is a different way of describing a spectacular sale for people who understand that the narrative hasn’t changed.

TGR: Are there some sectors that still feel as if it’s a commodity super cycle?

MK: Definitely. Look at oil.

RR: But your readers don’t want to look for hot sectors, because they are overpriced. They want to look for cold sectors. They want to find the sector, management team or the company that’s going to be hot.

TGR: If oil is hot right now, what is going to be hot?

MK: From the energy side, I think within three years uranium will be hot.

TGR: Why the three-year timeline?

MK: There are three major catalysts. First is the end of the U.S.-Russia Highly Enriched Uranium Purchase Agreement (HEU). The last shipment will happen at the end of 2013.

Second is the transitional agreement, in which the Russians will provide up to 50% of the uranium on a new pricing metric than the HEU agreement. Only this time, the Russians have new dance partners: Saudi Arabia, China, India, Korea, even France. The reality is the Americans will have to pay more for uranium from the Russians.

Third, nuclear reactors are not all being taken down; they’re being built. Japan plans to bring its reactors back on-line, just not on the timeframe the junior resource sectors wants them to. The Japanese cannot afford to pay the most expensive electricity prices in the world and stay competitive. They have no choice but to move forward with nuclear power.

TGR: Is the end of HEU already priced into uranium?

MK: Yes, both because the market is determining what it’s worth today and because Japan shut down 40 nuclear reactors. That’s a black-swan game changer that shifted everything.

Yet, the long-term price is 50% higher than the spot price and more than 90% of the uranium being consumed and traded is based on the long-term price. That’s the equivalent of saying gold today is $1,300/ounce ($1,300/oz), but if you want to take delivery in three or four years—which is what nuclear utilities do for uranium—you have to pay $1,900/oz. Or copper at $4.50/pound if you want delivery in five years. That’s the situation in uranium today.

TGR: Louis, which sector are you looking forward to?

LJ: There’s talk on the streets about helium, although I’m not sure I want to move in that direction. I’m happier focusing on something right in front of me and that I understand. Finding a company that has a multimillion-ounce, high-grade deposit and is on sale at half-price is similar to going into the supermarket and finding the thickest, most beautifully marbled T-bone steak, fresh cut today, on sale for half-off. Why bother with hamburger of unknown quality?

Myth: The Market Has Hit Bottom

TGR: We keep hearing that we’ve hit a bottom, which would imply that the market is moving up. However, Rick, you have described it as a bifurcated market in which the bad stocks will continue to sink, which would be a good thing. How do we know which companies will sink and which will revive?

RR: That’s a critical question. Before your readers classify stocks, they need to classify themselves. Are they the type of person who will put enough time and attention into securities analysis to compete on their own? Or do they need other people to help them compete?

While securities analysis and stock selection in the junior market is imperfect, it can be done. It requires understanding the stock. If you’re not willing to understand the stock, you need an adviser.

TGR: How many hours does that work take? What questions should investors be asking?

RR: Speculators running their own portfolios without advice should limit the number of stocks in the portfolio to the number that they can spend two or three hours a month working on. That means reading every press release, proxy, quarterly and annual report. Read the president’s message and measure it against what he said the company would accomplish over the year.

Speculators unwilling to do that need to hire somebody who will. That may mean subscribing to one of the trading services offered by Casey or hiring an organization like Sprott to be a broker or a manager.

Getting to bifurcation and stock selection, if 15% of the stocks are moving higher, 85% are moving lower. You won’t be able to concentrate 100% in either camp, but if you get more right than wrong you’ll make so much money that the outliers will be irrelevant. If you get it wrong, you’ll lose so much money that you ought to be in some other business.

TGR: Are there fewer brokers walking the streets of Vancouver these days?

MK: Definitely, also fewer analysts and fewer corporate development positions and many fewer investor relations people.

There are more BMWs, Mercedes and Ferraris on sale, and, now, more offices becoming vacant.

TGR: Does that mean only the best are left?

MK: Not necessarily.

RR: But it does reduce the population. To be a responsible analyst, you once had to look in a cursory fashion at 4,000 companies. Today, having only 3,000 companies to look at is an advantage.

The three of us look at data in a summary fashion to try and dispose of a company. You look for something to kill your interest. The good news is that the population of timewasters is down by at least a third. That’s unfortunate for their shareholders, but that’s their problem not ours. Our job is to look after our subscribers or clients.

Myths: Region, Sector and Price as Destiny

TGR: Let’s talk about regions. Is it true that the Yukon is remote?

LJ: It’s no more remote now than it was last year. You can’t write off the Yukon or anywhere without looking at and understanding the specifics of individual opportunities. Miners with remote projects that have high enough margins are able to barge or truck diesel fuel in and run gen-sets, etc. If Canadians can mine diamonds in the Arctic Circle, they can mine gold in the Yukon.

Remoteness by itself is not the issue. The issue is margin. If you’re in the Yukon and you’ve got something low-grade, with low recoveries and complex metallurgy—don’t call us, we’ll call you. If you have something high-grade, open pit, that leaches, tell me more.

TGR: Rick, in your presentation you talked about platinum and palladium. Is that an area where the super cycle needs to whip things up?

RR: I don’t think it even requires a super cycle. With platinum and palladium, I can look empirically at simple supply and demand. On a global basis, the platinum and palladium industry doesn’t earn its cost of capital. That means one of two things will happen: The price of platinum and palladium will increase or there won’t be enough platinum and palladium to supply current demand.

In the context of supply, you don’t have to worry about investor inventories because there are almost none. The world supply of existing, finished platinum and palladium is less than one year’s fabrication demand.

The consequence of the industry not earning its cost of capital is that production has fallen by 19% over six years. New mine supply is falling. South Africa itself accounts for 70% of world platinum production and 39% of world palladium production.

In South Africa, the industry has deferred $5 billion in sustaining capital investments; workers are dying and infrastructure is more and more decrepit.

A skilled worker crouching 7,000 feet underground in 105 degree heat, in two inches of water, makes $700 per month. An unskilled worker who mucks the material on his hands and knees 400 meters from the mine face to the adit makes $200 a month. A migratory worker sustaining a family in the homeland is probably sustaining another family at the mine face. Wages have to go up, but they can’t because the companies don’t earn their cost of capital.

According to the majority of South Africans, social take—taxes and royalties—has to go up, but can’t because companies don’t earn their cost of capital.

Prices have to go up. Platinum and palladium prices can go up because their utility to users is so high. It goes into high-carat jewelry. Platinum goes up a smokestack. Mostly, it goes out a tailpipe.

It costs $200—the cost of a catalytic converter in a new car—to give us the air quality we enjoy today. There’s a social consensus in favor of stricter air quality standards. If the price of platinum and palladium doubled, the catalytic converter would cost $400 in a $27,000 new car; the demand impact would be de minimus.

LJ: We all know the often-quoted phrase that most of the gold ever mined in the world is still sitting in purified form on the surface in one form or the other. Platinum and palladium are different; they are consumed. I agree with Rick.

I would go one step further regarding South Africa. It’s not just the economics that don’t work; it’s the country itself. It’s a balloon resting on pins. I see platinum and palladium as speculation on South Africa going up in flames, which is an easy bet to take now. I’m sorry for the South Africans, but it’s a bad situation with no easy way out.

The Myth of NextGen Talent Supply

TGR: There’s been a lot of talk about the dearth of young, qualified people coming up to take their place in management teams. Has the next generation of managers, and investors for that matter, left the sector? If so, what will happen?

MK: There’s a significant age gap in our industry. When I was taking geology courses at university our professor would ask why we were taking this class. There are no jobs. He recommended we go into computers, and a lot of people did.

Unfortunately, good management teams are very difficult to come by. Only 1 in 3,000 projects ever becomes an economic mine and I’d say investing in the right people is more important than any other factor.

LJ: This scarcity makes the investor’s job a little easier. Just type the CEO’s name in Google and look up his history. Has he done this before? Has he succeeded? Was he an accountant or a used car salesman? Google is one of our primary triage tools.

People is the first of Doug Casey’s famous Eight Ps. If I hear about a story that fits our general criteria, the first thing I look at is management directors. If I recognize the name of someone who has lied to me or whom I don’t trust, I don’t even look at the project.

TGR: New people coming up need to get experience by being in a successful project. Are there enough successful projects that they’re learning how to do it?

LJ: I don’t necessarily agree with that angle. All experience is good experience. A person can learn a lot from working for a company that does something wrong. It’s having lots of experience, both good and bad, that is so important. The problem is that, unless you get very lucky, you need to have experience to really call shots well, and there are not enough people out there with the decades of experience needed.

On the bright side, because there is money in the field now, geology departments are no longer shutting down; enrollment is up. Supply is improving, but it will be another 5 to 10 years before the supply of highly experienced personnel really improves.

RR: Let’s personalize it for your readers. There are three analysts in the room: an old one and two young ones.

I guarantee you that, as a consequence of the bear market they just experienced, the two younger analysts will make their readers more money with less risk in the next bull market.

Youth isn’t enough. You need to have a decade under your belt so that you have lived through the changes. Marin and Louis just lived through the kind of challenges I lived through in the 1980s. They now have the two things needed to survive in this racket: legs and scars.

MK: He’s not joking about the scars.

RR: The transfer of the mantle from the Doug Caseys and Rick Rules of the world to the Marin Katusas and Louis Jameses is underway. The batons are being passed.

TGR: Is the bear market making a better generation of investors? Will they be more patient, have more perspective given what they’ve been through?

MK: If they stick with it. It’s all about timeframe and perspective. The bear market will wash out a lot of investors; do not allow yourself to become a victim. But, as Rick said, investors have to mitigate risk to stay alive until the next leg in the bull market.

RR: You’re wrong there, Marin. You have to thrive. The year 2000, which was the market bottom, was one of the best investment years of my life. And 2001 was even better, as was 2002.

A bear market is when you make your money. You don’t get to put it in your pocket until things turn, but you make your money by thriving in bear markets. You don’t thrive in bull markets. You cash the checks. It’s very different.

LJ: I expect this will be a painful experience for a lot of people. Some will learn a lesson, but it will be the wrong lesson. The lesson will be: Don’t invest in commodities; they’re too risky. That lesson will stick until the prices go bananas again, when they’ll give it another try and get taken to the cleaners again.

To buy low and sell high, investors have to be able to sell high, which means they are expecting people to act irrationally when prices are very high—which means they didn’t learn the lesson. It’s unfortunate for our world that human nature is so, but it is so, and investors who ignore the opportunities this creates don’t do anyone any favors.

Myth: The U.S. Is Reaching Energy Independence

TGR: Marin, going back to energy, there’s been a lot in the media about the International Energy Agency (IEA) report about energy independence in North America. Will we be the Saudi Arabia of natural gas?

MK: North America is already the Saudi Arabia of natural gas. Unfortunately, so are the Russians.

The report said that if these eight assumptions happen the way we hope, America will become almost energy independent. The media forgot about the eight assumptions and they got rid of the word almost.

The U.S. has done a great job of bringing North American innovation to the shale industry, but the industry has many other challenges to work through.

TGR: Is Saudi Arabia still the Saudi Arabia of oil? Its wells are getting long in the tooth and the country is building nuclear plants for domestic use.

MK: We’re all asking that question. The Ghawar oil field has been producing oil since before Elvis hit the scene and today produces about half of Saudi Arabia’s oil. There is significant risk in relying on these old elephant deposits that have been producing for more than 50 years.

RR: I agree. What has happened in the U.S., and to a lesser degree Canada, is unique because our competitive markets still work. For example, 50 or 60 competitors at Eagle Ford tried and failed using various completion techniques, each time getting better and better. Ultimately, Eagle Ford was an extremely messy success.

In most of the world there’s one quasi-state oil company looking at a basin. There’s no competition trying different solutions. Exporting American or Canadian technology doesn’t work without exporting the messiness of the North American energy exploration business.

Marin, would exporting technology from Eagle Ford work in Argentina’s Vaca Muerta Shale?

MK: It would take billions of dollars to make it work at Vaca Muerta. A junior company with a $10 million ($10M) market cap and $500,000 to make management’s salary and payment on their BMWs will never be able to develop this billion-dollar shale potential. It will require a big company, like a Chevron.

Myth: Crowdfunding Is the Future

TGR: We heard a lot about the potential for crowdfunding to save the resource sector by funding more companies. True?

MK: I’d like to make sure that all of your readers stay the hell away from crowdfunding for the resource sector. I’ve heard it works OK in the tech sector and among the let’s-make-a-movie crowd, where all that is needed is to raise $150,000 for something that may or may not work.

In the resource sector, real exploration cannot be done for $2–3M. If people want to invest in the sector, go to someone with a track record, someone who knows what he’s doing. Subscribe to Louis’ newsletter and educate yourself. Stay the hell away from crowdfunding for the resource sector.

RR: The last thing the sector needs is more companies. The idea that the crowd would invest $3M in a de novo project when there are companies out there that have spent $80M on an existing project, yet have a $6M market cap, is the most counterproductive activity that one could imagine. If there are 3,000 public companies doing exploration on a global basis, we don’t need another 300. We need 2,000 fewer.

LJ: It’s one thing to go directly to the masses with an art project that some snob at the National Endowment for the Arts turned down, but entirely another to do so for a mine project no knowledgeable investor will touch.

The Mythbusters’ Choice

TGR: What myth would you want our readers to stop believing in?

LJ: I would like to dethrone the “grade is king” myth. It’s not grade; it’s margin. You can have an exceptionally high-grade deposit in an exceptionally expensive, difficult or kleptocratic jurisdiction, and it won’t work. You could have a water table that’s so fluid that you spend more money pumping water than mining. There are so many things that can go wrong or add to costs. Too many people believe if a project is high-grade, it has to make money. No, it doesn’t. High margin is paramount, not grade.

MK: I think the myth that the commodity bull market is over is insane. We’re nowhere near being over. This is the opportunity of a lifetime. This is when you start doing your homework and investing money.

RR: The idea that bear markets are bad and bull markets are good is bullshit. It’s the other way around. Bear markets are good. Bull markets are bad.

LJ: Bullshit is a technical term.

TGR: I enjoyed talking with the three of you. Thanks.

Audio recordings of the Casey Research 2013 Summit are available here.

Louis James is the master of metals at Casey Research, where he’s the widely read and well-respected senior editor of the International Speculator, Casey Investment Alert and Conversations with Casey.Fluent in English, Spanish and French, Louis regularly takes his skills on the road, evaluating highly prospective geological targets and visiting explorers and producers at the far corners of the globe and getting to know their management teams.

With a background in mathematics, Marin Katusa left teaching post-secondary mathematics to pursue portfolio management within the resource sector. He is regularly interviewed on national and local television channels in North America such as the Business News Network (BNN) and many other radio and newspaper outlets for his opinions and insights regarding the resource sector. Katusa is the chief investment strategist for the energy division of Casey Research. He is the editor of the Casey Energy Report, Casey Energy Confidential and Casey Energy Dividends newsletters. A regular part of his due diligence process for Casey Research includes property tours, which has resulted in him visiting hundreds of mining and energy producing and exploration projects all around the world.

Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries.

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DISCLOSURE:

1) JT Long conducted this interview for The Gold Report and provides services to The Gold Report as an employee.

2) Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Louis James: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Marin Katusa: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

5) Rick Rule: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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USDCHF – Although the pair triggered a corrective recovery the past week, its broader medium term downtrend remains intact. If its present attempts on the upside fail, look for USDCHF to return to the 0.8967 level. Further down, support lies at the 0.8900 level with a turn below here leaving the pair targeting the 0.8850 level followed by the 0.8800 level. Its weekly RSI is bearish and pointing lower supporting this view. On the other hand, the alternative scenario will be for the pair to retake the 0.9278 level followed by the 0.9454 level. Further out, resistance resides at the 0.9496 level with a break paving the way for a run at the 0.9750 level and subsequently the 0.9838 level, its Jun 2013 high. On the whole, the pair remains biased to the downside on further bearishness.

By fxtechstrategy.com

Article by Investazor.com

Apparently, the case of the Republic of the United States of America becoming the largest oil producer in the world, overcoming Russia, is getting more attention because is adding more and more evidences.

On the strength of the shale revolution, the U.S. is now playing an important role among the OPEC countries. In the second half of 2014, the U.S. is estimating to become the largest non-OPEC oil producer, overcoming Russia, which now is constrained to make large investments in new pipelines. This fact may contribute to the stabilizing of the price of oil in the long term as the supply will definitely increase.

The International Energy Agency has been observing the fact that the production of oil among the non-OPEC countries has been steadily increasing while the OPEC countries are in danger to register a lower demand. Likewise, the disputes present on the Arabic territory lately are unbalancing the normal pace of the process of producing and exporting oil.

In its recent report, the IEA upgraded its demand growth forecast, especially when it comes about the Euro zone which is believed to have overcame the crises and register an increase in the demand of oil. Likewise, the main importer of the European area may become the U.S., disadvantaging Russia and the Arabic countries.

Apparently, oil prefers now a more calm and stable zone as the Middle East makes it a sensitive commodity.

The post What You Don’t Know About the U.S. appeared first on investazor.com.

By MoneyMorning.com.au

Technology:
This is Simply Lazy Innovation

I need someone to slap me hard in the face. It might wake me up from this bizarre dream I’m having. It’s like I’m dreaming yet I feel completely awake. In my dream I feel like I’m back in the year 1994.

Maybe it’s not a dream. Maybe I’m actually back in 1994…back to the future perhaps? Stick with me on this one while I explain why we’ve gone back to the future.

Recently I watched a few old episodes of Beyond 2000. If you don’t know the program, it used to air on Channel 7 through the late 1980′s right up to 1999. It stopped there because After 2000 didn’t really have the same kind of vibe…

Anyway the premise of the show was all about future technologies and science. From Travtek (c.1992) an early GPS system, to crazy cars and an entire collection of telephone books…on a ‘compact disc’!

After spending some down time looking back at some of the technologies they covered I came across one that I found to be remarkably modern. Back then, in the early 1990′s all the rage was about this new kind of gaming technology. It was coined ‘Virtual Reality‘ or VR for short. With polygon rendered graphics, it was destined to take the world by storm.

Well VR never really took off…until 20 years later when innovation merely coughed up an idea decades old. Oculus Rift is the latest attempt to bring VR back to life. There’s real buzz about Oculus Rift, and there’s a fair chance it’ll last as long as VR did in the 90′s too.

Sometimes there’s a lag with technology. Occasionally it can take a long time for something to be widely accepted. It usually takes real innovation to create something that completely redefines the industry.

Unfortunately Oculus Rift doesn’t do that. The graphics are nicer and there’ll be more games to choose from. But that’s as bout as far as it extends. Oculus rift will likely come and go much in the same way as VR did. It seems they’ve just reinvented the wheel; it’s really just lazy innovation.

And it seems lazy innovation has caught on at Apple. One of the biggest consumer product releases in the last month has been Apple’s iPhone 5S. In short it’s pretty much exactly the same as the iPhone 5. And that was pretty much the same (but a tiny bit bigger) as the iPhone 4S. And that was pretty much the same as the iPhone 4. So in four generations of iPhone…not much has changed.

But the new iPhone has a fingerprint reader. Concealed within the home button is a fingerprint reader that you can use to unlock your phone and…and…umm use for security stuff?

I purchased a Toshiba Satellite P105 laptop in late 2006. It had a built in fingerprint reader. To me it seemed pretty advanced tech. In fact seven years ago, it was pretty advanced tech.

Let me tell you how fingerprint readers’ work. You register your fingerprints into the system. For novelty purposes I also registered my second toe to see if it’d work. It did.

But as a backup to the fingerprint reader I also had to register a password in case my fingerprint reader didn’t work properly. Hence completely defeating the purpose of a fingerprint reader to start with.

Now Apple has a fingerprint reader in their phone…and a password backup to boot. It’s a sure sign that innovation has ceased when the best thing you announce is tech that’s about a decade old, and useless.

At some stage biometrics will perform a legitimate function in society. I tend to think it’s more in line with how you interact in a world of immersive technology, not how you interact with your phone.

Real Biometrics would be simply walking into a clothing store which 3D scans your height, weight and shape to direct you to the most appropriate fitting clothes section. Or perhaps runs a diagnostic of your current state of health to suggest appropriate meals at a restaurant.

A device that reads your thumbprint to access your phone, to then punch in a password anyway, isn’t innovation. It’s just being lazy.

Health:
Is There any Industry Google Won’t Touch?

They’ve got the size, the scale, the cash and the smarts to do whatever they want. Google will perhaps create a legacy as the most influential company of the 21st century. Nothing is outside of their reach.

Health and the wellbeing of people around the world are obviously on their list of priorities. Late last month they launched a new company, Calico, to tackle exactly that issue.

Trademark issues aside Calico’s goal is simply to improve human health. On Google’s official blog, Larry Page had this to say about the new venture,

‘Illness and aging affect all our families. With some longer term, moonshot thinking around healthcare and biotechnology, I believe we can improve millions of lives. It’s impossible to imagine anyone better than Art-one of the leading scientists, entrepreneurs and CEOs of our generation-to take this new venture forward.‘

‘Art’ is Arthur D. Levinson. And he’s going to be a busy man. Aside from being CEO of Calico, he also serves as Chairman of Apple and Genentech.

Calico is yet to officially come out with any groundbreaking work. But there’s no doubt that you’ll be hearing more from them over the coming years, so watch this space.

Energy:
This Battery Hack Will Save You Money

I was browsing through the Dark Web the other day. If you’re unsure of what I’m talking about, it’s the anonymous internet. It’s the internet that’s about 500 times bigger than the internet you browse every day.

You can find some amazing things on the Dark Web. There’s also plenty of information you don’t want to know about. I’ll cover more about the Dark Web in a video next week for Revolutionary Tech Investor subscribers. But until then here’s a nifty little ‘Life Hack’ I came across in one of the forums.

You can buy a two-pack of A23 Batteries for about $6. What’s interesting is if you pry open the case of the battery you’ll find eight 1.5V button-cell batteries inside.  All up that’s close to $40 worth of button-batteries in one A23. And remember, you buy A23′s in a two pack.

This might only be just one simple ‘hack’ but it’s bound to save you some dollars in the long run. Particularly when it comes to replacing the little button battery in your watch or torch.

The point of this is no matter what your opinions of the Dark Web might be, it’s a breeding ground for ideas and technological creativity. There are numerous blogs and forums with thought provoking information. They cover everything from the conventional to the not-so-conventional.

As I delve deeper into the Dark Web over the coming months I’ll bring you some of the good and the plain outright crazy. Because who knows…one day those crazy ideas might actually become reality.

Sam Volkering
Technology Analyst, Revolutionary Tech Investor

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By MoneyMorning.com.au

Today’s Money Weekend will leave behind the US government standoff that ruled the airwaves this week. Instead, we’ll focus on the development that will shape the world for decades.

With all eyes on America, you might not have noticed it, on the other side of the Pacific. Our mate Dan Denning flagged two years ago that it was on its way.

At the time he told his readers that one of the biggest things to watch in markets was the new energy superhighway developing between Beijing and Riyadh. He released a report about it. In fact, at the time he said the most important energy alliance for the next fifty years would be between China and Saudi Arabia.

So exactly what happened this week?  

Big Shifts in This Key Market 

China overtook the USA as the world’s largest oil importer. As the Financial Times says, it’s a historic milestone.

Here’s some more from the FT:

‘The implications for international relations and global security are profound. The predictable element in the equation is the inexorable growth in Chinese oil demand, as the world’s most populous nation slowly approaches the standard of living of Europe, the US and its more prosperous Asian neighbours. The surprise has been the spectacular revival of US oil production over the past half-decade.’ 

Dan pointed out at the time that the increased US oil production would allow the US to reshape their security strategy away from the Middle East. With more production at home, there’s less need for imports. That’s thanks to technology opening up previously inaccessible resources across North America.

To give you an idea of just how big this shift has been, in 2001 it was thought likely that in twenty years the US would be forced to import nearly two-thirds of its oil.

Now it’s even considered possible it will import next to nothing.

That’s a big pivot. The Saudi-US alliance has been a fundamental link in global geopolitics since King Ibn Saud granted the American company Socal a concession to look for oil in Saudi Arabia in 1933.

Now China is already Saudi Arabia’s largest trade partner.

So that leaves a natural fit to grow between the biggest consumer (China) and the biggest producer (Saudi Arabia).

The Saudis won’t mind a new security ally. And China doesn’t have much choice but to look for foreign oil supply, preferably overland.

According to the latest release from the International Energy Agency, China is the fourth largest oil producer in the world. But its domestic fields are maturing and demand is outgrowing supply. And they know it.

Take this from the Australian this week:

‘China’s primary offshore oil company has invited foreign companies to bid on an unprecedented number of deep water blocks off its shores as the country attempts to firm up domestic oil output, which has grown slowly over the past decade, even though China’s energy demand has surged.‘

Deep water wells don’t come cheap, either.

Big Energy and Australia

Of course, China as a whole can’t afford to be as profligate as the US with its oil use per capita. 

China has chronic pollution in its major cities. We touched on that the other week (and the innovative way companies are trying to address the problem). 

On Monday, the Australian reported that pollution levels in Beijing were nearly eight times the level considered safe by the World Health Organization.   

But here’s the key part of the story: ‘It was revealed on the weekend that the capital’s four coal-fired power stations would be replaced by natural generators.‘

Not only that, natural gas in America is delivering cheap energy to its manufacturing base and the potential for LNG exports.

In fact, The Wall Street Journal reported last week that the US is set to overtake Russia as the biggest producer of oil and natural gas combined.

With oil prices high and major fields in decline, and coal the dirtiest source of power, cleaner-burning natural gas is trending to be the key resource for the next hundred years. In his report, Dan called it a transition from the Age of Oil to the Age of Gas.

Dan argued that it wouldn’t be long before energy majors showed interest in Australia’s natural gas reserves.

He’s three energy punts are already up 51%, 115% and 168%.

Finally though, the big moves might still be ahead.

The big energy companies are eyeing off assets in Australia’s Cooper Basin. This was in The Australian on Friday:

‘Central Australia’s shale gas potential is drawing growing international interest and could lead US energy giants to sharpen their focus on the country after presiding over an extraordinary gas boom in North America. A leading energy investment bank in Houston, Texas, this week branded the Cooper Basin one of the best shale gas prospects outside North America.‘

Dan might be picking a recession  for the Aussie economy as a whole, but of all the dreary stories about the US debt ceiling, it’s nice to know there’s an investment story out there where you can still bag some big gains. It’s part of what he calls his recession strategy. You can check it out here.

Callum Newman
Editor, Money Weekend 

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Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years  

By The Sizemore Letter

After one of the best market days this year on Thursday, my recommendation of Daimler (DDAIF) in the Best Stocks of 2013 contest finally popped above the 50% mark for the first time this year, including dividends.

For a stodgy, old German automaker, that’s not a bad return at all.  It’s proof that you don’t necessarily have to take wild risks or dabble in illiquid microcaps in order to generate high returns.  Buying an undervalued blue chip at the right price can deliver attractive returns…without the heartburn.

Of course, the key words here are “at the right price.”  Daimler has been able to deliver market-crushing returns this year because it entered 2013 trading at 8 times earnings and sporting a dividend yield north of 5%.   But this barely scratches the surface.  When I recommended Daimler back in January, it had €46 billion in cash and short-term investments…against a market cap of just €44.  The cash in the bank was worth more than the entire company!

All of that is great.  But what about now?  Is Daimler still a buy?

Absolutely.

I should be clear that I do not expect the next three quarters to give us comparable returns.  We’re not getting the crisis pricing we enjoyed a year ago.  But I do expect Daimler to at least match the S&P 500 and probably outperform it by at least a small margin.  Let’s take a look at the numbers.

Trading at 1.6 times book value, 0.54 times sales and 9 times earnings, Daimler cannot be considered expensive.  It’s broadly in line with the valuation given General Motors (GM).

Yes, these are cyclical stocks, and the “E” part of the P/E ratio has a way of being volatile.  And yes, the company just announced its best sales month in history in September, based on strong demand from China and the United States.  But earnings would hardly appear to be near a cyclical peak given that Europe is only now emerging from recession.

And on this side of the Pond, Daimler is actively mulling expansion in the United States.  The company is already bumping up against capacity constraints at its Tuscaloosa, Alabama plant.  This follows plans to set up a new plant outside of Sao Paulo, Brazil as well.

All of this expansion spending will probably take a toll on margins in the coming 1-3 years.  But I would consider that a high-quality problem!

Will Daimler take the crown in this year’s Best Stocks contest?  That remains to be seen, and we still have two and a half months left in 2013.  Anything can happen.  But I continue to recommend Daimler in growth portfolios and highly recommend buying it on any dips.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long DDAIF. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.” 

This article first appeared on InvestorPlace.

This article first appeared on Sizemore Insights as Daimler Firing on All Cylinders—And it’s Not Too Late to Buy

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By The Sizemore Letter

For an ETF dedicated to companies with sustainable competitive advantages—or “wide moats” to borrow a term from Warren Buffett—you might expect relatively low turnover.  After all, moats don’t dry up overnight.

Yet in its annual reconstitution last month, the Market Vectors Wide Moat ETF (MOAT), which is based on the Morningstar Wide Moat Focus Index, replaced 9 of its 20 holdings.  Sizemore Investment Letter favorite Kinder Morgan (KMI) was a new addition, as was longtime Buffett holding Coca-Cola Co (KO).  And rounding out the newbies were Spectra Energy Corp (SE), Sysco Corp (SYY), CSX Corp (CSX), Allergan Inc (AGN), Covidien PLC (COV), ITC Holdings (ITC) and Medtronic (MDT).

Getting booted off the list were Expeditors International (EXPD), Qualcomm (QCOM), National Oilwell Varco (NOV), Schlumberger (SLB), Vulcan Materials (VMC), Maxim Integrated Products (MXIM), Amgen (AMGN) and Caterpillar (CAT).

But there was one removed holding that really stood out: social media darling Facebook (FB).

What exactly is going on here?  Last I checked, Facebook still had an unassailable moat in its particular niche of the social media world, which consist of photo sharing and social networking.  Its “competitors” have businesses that only overlap at the edges.  Twitter (TWTR) has evolved into primarily a news aggregation and announcement service, and LinkedIn (LNKD) is a place to swap résumés.  And it has one of the strongest network effects in place of any company in existence. (Network Effect is one of Morningstar’s five competitive advantages.  The other four are High Switching Cost, Cost Advantage, Intangible Assets—i.e. powerful branding—and Efficient Scale. )

Likewise, while I can make a strong case for the quality of the moats of any of the new entrants, I could just as easily make a strong (or stronger) case for most of those exiting.  For example, Qualcomm technology goes into virtually every smartphone, and Amgen has size and scope that few of its competitors in biotech can match.

So what gives?  Why the high turnover in a portfolio of wide-moat businesses?

It comes down to Morningstar’s index methodology.  Having an unassailable moat isn’t the only criteria; the stocks must also be attractively priced.  And on this count, Morningstar uses a discounted cash flow model with a twist.  Based on their assessment of the strength of the company’s moat, the Morningstar analysts forecast its return on invested capital relative to its cost of capital (the wider the moat, the bigger the spread between the return on capital and the cost of capital).

If that last sentence made your eyes glaze over, don’t feel bad.  Academic finance has its own language, and Morningstar is being a little wonkish here.  In plain English, Morningstar makes a list of the 20 cheapest stocks that it classifies as having a “wide moat.”

Facebook and the eight others were not booted off the list because their moats shrank. They were simply replaced with stocks that, in Morningstar’s view, were more undervalued.

What are we to take away from all this?

The MOAT ETF doesn’t have a long trading history (less than two years), but over its short life it has outperformed the S&P 500 by about 10%.  Of course, this is before taxes, and with a turnover ratio of 45%, MOAT will generate its fair share of capital gains taxes in non-IRA portfolios.

With only 20 holdings, MOAT’s portfolio is also pretty undiversified by ETF standards.  It’s heavily weighted towards healthcare and technology (at least until its next reconstitution) and has very little exposure to consumer-focused sectors.

And if you’re buying MOAT for its “Buffett-like” investing style, the high turnover and short holding periods are a little inconsistent.  Yes, Warren Buffett actively trades, and not all of his holding periods are “forever.”  But Buffett would never hold to a fixed reconstitution schedule, and it would be rare for him to unload nearly half of his portfolio every year.  (Interestingly enough, Buffett’s Berkshire Hathway (BRK_B) is one of MOAT’s holdings.

My advice?  Use MOAT’s holdings as a stock screener for quality stocks trading at a reasonable price.  Morningstar’s analysts have done excellent research here, and you can essentially piggyback on it for free by following the ETF’s trading moves.

You don’t have to buy every stock in its list—and you certainly don’t have to sell a good stock simply because MOAT sold it.   But I consider MOAT one of several good screeners to get you started in your research. Some others I like as well are the Shareholder Yield ETF (SYLD)and Greenblatt’s Magic Formula.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long KMI and SYLD. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”  This article first appeared on InvestorPlace.

This article first appeared on Sizemore Insights as The MOAT ETF: Not How Buffett Would Invest, But a GREAT Stock Screener

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London Gold Market Report
from Adrian Ash
BullionVault
Fri 11 Oct 09:10 EST

WHOLESALE and futures prices for gold dumped 1.8% inside 2 minutes Friday lunchtime in London, extending the week’s losses to $50 per ounce at a 3-month low of $1265.

The move came on suddenly heavy volume in the gold futures market, which had previously been quiet after Thursday’s fall through $1300.

Silver also fell hard on Friday, and also on a sudden jump in futures trading, hitting a 1-week low at $21.04.

US crude oil contracts lost $1.60 per barrel to $101.40, heading for the fourth weekly loss in five according to Bloomberg data.

 “With the US equity markets seemingly giving the prospect of a US debt deal credence by the magnitude of the rally,” said Thursday night’s closing comment from derivatives exchange the CME Group, “a large portion of the [gold futures] marketplace bought into ‘hope’ of a deal.”

 New York stocks closed yesterday more than 2% higher, with Asia and European shares gaining some 1% on average on Friday.

 Bondholder insurance on US debt meantime became cheaper, notes Reuters, as credit default swaps on 5-year US notes slipped to 0.3% and 1-year note CDS to 0.6%.

 Even with gold below $1300, “Physical buying is fairly non existent,” said broker Marex Spectron Friday morning.

 “[Investment] funds are staying clear and even the most die-hard bulls are having problems coming up with a reason to buy gold, given its totally lacklustre performance as of late.”

 Thursday saw the SPDR Gold Trust – the world’s largest exchange-traded fund by value in late 2011 – shed a further 1.8 tonnes, taking the volume of gold bullion needed to back its shares to a new 57-month low beneath 897 tonnes.

 “The path of least resistance appears to be lower for gold,” says a note from investment bank HSBC.

 “There is a very well defined bearish trend line with five touches,” said fellow London market maker Scotia Mocatta overnight, “which comes in at 1322 today.”

 New data today meantime showed Japan’s money-supply growth ticking higher to 3.7% per year in September.

 Consumer prices in Italy and Spain fell last month, official indices said this morning, and were unchanged from August in Germany.

 Gold premiums in India – the world’s largest consumer market until anti-import rules hit supply this year – jumped sharply this week, rising 8-fold to $40 per ounce above the London benchmark according to the All-India Gems & Jewellery Trade Federation.

 Bank of Nova Scotia said today it is in talks with both the Federation and India’s central bank to try and attract existing household gold holdings into bank deposits, enabling jewelers to meet demand with domestic supplies.

 As it is, however, “There is no official gold available,” said Sudheesh Nambiath at Thomson Reuters GFMS, noting the start of India’s heaviest gold-buying season, culminating with Diwali next month.

 “People are not willing to sell their old jewellery” at current prices, he added. “Availability is largely unofficial [ie, black market] metal, which is being sold into market at a lower rate than the prevailing premium.”

Adrian Ash

BullionVault

Gold price chart, no delay | Buy gold online

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich for just 0.5% commission.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By  Insideouttrading.com

Are you finding that your trading results are not as consistent as you’d like? Do you want to confidently repeat when you hit winners? Of course you would! Goal #1 in trading is profits. Goal #2 is then making money consistently. Third is steadily making greater profits.

Your trading profits are primarily the result of what YOU do, much more than what the markets do. There are traders profiting every day, so blaming the markets is just an excuse. If you want to profit consistently, then get more consistent in what you do in your trading.

A good starting point is to realize is that trading is a repeated activity. That’s why having a proven trading system is so important. If you truly desire to make improvements in a process, and especially when your goal is achieve greater consistency, the three steps below are ones you can take to dramatically improve your consistency.

Step 1. Clearly define and document your system. One of the biggest mistakes made by traders, particularly regarding consistency is that they don’t take the time to make sure their system is well-defined and written down.

If you often engage in an activity that isn’t written down, there will probably be inconsistencies in how the task gets performed. The reason the military is so big on procedures: they want things to be done in a uniform, reliable and predictable manner. The same is true for your trading.

Step 2. Analyze your system’s critical aspects. A wise man once said that in order to improve anything, you have to start with first measuring it. How else are you to know if you’re making progress? Your trading system has several measurable aspects that make the bottom line what it is, in addition to the all-important account balance at the end of the month.

Businesses in all industries have certain aspects that determine the profitability of the business. Savvy business owners know to monitor those aspects and assign metrics to them. The reason that these are so important is because by measuring each of them, you can then see specifically where to focus your efforts to make specific improvements.

Step 3. Tweak your system through meticulous actions. Once you have an analysis of your system, you can now focus on specific facets of your system to make improvements. By utilizing system analysis, you can make changes to the system and test – with zero risk – either through back-testing or in a demo account and see if the change improves or hurts the system’s performance – and if there are any trade-offs.

As an example, suppose you run the metrics on your system and find that your winning percentage is currently 48 percent. You come up with an idea on how to improve it to 53 percent, which you “think” would increase your overall returns. You then run the analysis on your newly modified system on real market data. Evaluating the results, you can see if this change indeed did what you expected, but also if there were trade-offs in other aspects of your system performance, such as a reduced number of trading opportunities. It will be clear now whether you should incorporate the change or not.

Summary. Trading is a process from which you want consistent – and reliable – results. Trading your system is an activity that you repeat on a regular basis, so if you want consistent results, focus on making your actions consistent.

Step 1 is to make sure that your system is clearly defined and written down. By clarifying your system and then documenting it, you are more likely to repeat what you do consistently.
Step 2 is to run the metrics on your trading for a baseline of where you are now versus your desired goal. This also let’s you see your opportunities for improvement.
Step 3 is to track your metrics and make improvements in a controlled manner and without risking money un-necessarily.

There are several metrics in your trading system that directly determine your profits. Through analyzing your system’s performance and purposefully focusing on these measurables, you give yourself the quickest way to increase your profits. Also, this will dramatically improve your ability to consistently produce profits.

Did you know that it takes most traders an average of more than 7 years to become consistently profitable? Can you afford to wait that long? Acquiring the skill to correctly systemize your trading can allow you to forego years of unnecessary losses and money spent jumping from one trading system to another. Discover the proven way to watch your confidence dramatically increase by going here => http://insideouttrading.com/go/consistent/

Source: Peter Byrne of The Energy Report (10/10/13)

http://www.theenergyreport.com/pub/na/lng-exports-the-35-billion-bull-invading-canada

In a remarkable interview with The Energy Report, Jason Sawatzky reveals the hottest new thing happening in the North America oil exploration and production space: the rush by major oil and gas firms to build LNG export facilities on Canada’s West Coast. The AltaCorp Capital analyst points out that major oil and gas firms are not the only way to play west coast LNG development, and investors should look very closely at Canadian oilfield services. The capital flowing into west coast LNG is pumping up growth in the oilfield services industry too, with plenty of black gold to spread around.

The Energy Report: Jason, how will the rush to export West Coast liquefied natural gas (LNG) affect the Canadian oilfield services space?

Jason Sawatzky: There is no other oilfield services market in the world right now that has growth in front of it like Canada does, thanks to the development of west coast LNG. Planning for Canadian LNG projects is now in motion. There are three projects that have received export approvals. Three more have applied for gas export licenses, and two more have not yet applied. These projects are going to require enormous amounts of spending on export terminals, pipelines, drilling, fracking, field development and also accommodations. Activity should begin in early 2014 and ramp up over the next five years.

TER: Who is backing the three approved projects?

JW: The three LNG projects that are advancing the fastest (in our opinion) are the Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE)/PetroChina Co. Ltd. (PTR:NYSE; 857:HKSE) project; the Apache Corp. (APA:NYSE)/Chevron Corp. (CVX:NYSE) project and the Petronas (PETRONAS) Progress project. The combined capital cost to buildout all three of these projects is in the range of $30–35 billion ($30–35B). That is why we expect to see significant amounts of capital spent in Western Canada, which will positively impact Canadian service companies.

TER: Are these companies leveraging this mammoth investment with debt or is the government participating in any way?

JS: The companies are putting their own cash into developing reserves and building out the LNG-related facilities in Western Canada.

TER: The companies must be expecting a really big return.

JS: Yes, absolutely. The way LNG development plays out in Canada should be very similar to what happened in Australia with LNG. There are significant natural gas reserves in Canada, and the foreign markets, particularly in Asia, are looking to tap into it.

TER: Please define what you mean by “oilfield services.”

JS: Oilfield services include everything from drilling to fracking to servicing the well after the well has been fracked. There are also ancillary services like providing various rental products and production testing services, etc. A number of different technical skills are required to drill the well, bring it into production and maintain it over time.

TER: What firms are best positioned to provide these services?

JS: With respect to LNG development, we would highlight Essential Energy Services (ESN:TSX) andCanyon Services Group Inc. (FRC:TSX). First, Essential provides coiled tubing services used for completions, workovers and well cleanout operations. In general, the advantage of using coiled tubing over, say, regular jointed tubing in a service rig or a snubbing unit is the increased speed at which the coiled tubing string can be run in and out of the well. Also, coiled tubing operations can be performed on a live well, meaning that operators do not have to kill the well, as they have to do with service rigs, which can lead to formation damage.

With respect to LNG development in Western Canada, we think that deep coil is going to play an integral part in servicing the deep, long-reach wells in the Duvernay, the Montney and the Horn River plays. Looking forward, Essential is currently rolling out ultra-deep, generation 3 and 4 coiled tubing rigs. Theses rigs will be ideal for servicing the long-reach, LNG-type wells.

JS: Canyon is a Canadian pure-play fracker and has a brand-new 225,000-horsepower fracking fleet. We believe the Canadian fracking market today is slightly oversupplied, but by 2014, our expectation is for the Canadian market to be undersupplied due to increased LNG activity. Of note, Canyon has been increasing its LNG-focused, large-cap, exploration and production client base, working for companies like Petronas and Exxon Mobil Corp. (XOM:NYSE). It is also on the bid list for other senior producers.

Interestingly, prior to Q1/13, Canyon was not working for any seniors, so this is all incremental work for the company going forward. It is well positioned to take advantage of the ramp-up in activity in the Duvernay and the Montney to support West Coast LNG development. The company’s balance sheet shows $23 million ($23M) in net cash and a $100M undrawn facility as of the end of Q2/13. We believe Canyon has lots of dry powder to respond to potential LNG opportunities.

On the valuation side, Canyon is reasonably valued for a high-growth, emerging fracker. It trades at about 9.2x 2014 price:earnings on our numbers versus our midcap group average of about 10.1x. There is definite upside with Canyon.

TER: What other promising companies are involved in oilfield services?

Canadian Energy Services and Technology Corp. (CEU:TSX) sells specialized drilling fluids for use in drilling longer-length horizontal wells in Canada and in the U.S. Its chemical fluid mix substantially improves the penetration rate of drill bits, and raises the overall productivity of oil and gas wells. The operators ultimately benefit from a reduction in drilling and completion costs. Canadian Energy Services has experienced strong customer adoption of its drilling fluid products, including its main product Seal-AX (reduces wellbore seepage). The company also offers synthetic oil-based muds, ABS 40 and EnerDRILL, which enhance the rate of drill penetration.

Canadian Energy Services is not as leveraged to LNG development as some of the other service companies, but it has very strong fundamentals and growth prospects for providing drilling fluids and production chemicals in Western Canada and the U.S. In terms of drilling fluids, the company is already the largest provider in Canada, with about a 30% market share; in the U.S., it has 8% market share. Of note, the company recently acquired Venture Mud LP in the Permian Basin, a small private drilling fluids company, giving it exposure to the most active basin in the U.S. (note – drilling in the Permian continues to shift from vertical to horizontal drilling). Going forward, we believe Canadian Energy Services will continue to make small acquisitions in the U.S., and will likely grow organically as well. We think the company can grow its U.S. market share to about 10–12% over the next three to five years.

On the production chemicals side, Canadian Energy Services recently acquired a U.S. company called JACAM Chemical for $240M. JACAM provides production chemicals throughout the U.S. and into Canada. Interestingly, its main production chemicals facility in Kansas is operating at a throughput of 20–25%. We believe there is tremendous upside in that business as it ramps up throughput and expands into plays in the U.S. Northeast, the Eagle Ford and elsewhere in Canada. Of note, when the JACAM facility operates at 100% throughput it can generate about $500M in revenue and about $125M in earnings before interest, taxes, depreciation and amortization (EBITDA), so lots of potential future upside. We really like this company.

TER: What kind of dividends are we talking about with these three service firms?

JS: Canyon pays a 3.4% yield right now. Canadian Energy Services pays a 4% yield. Essential Energy pays a 4.2% yield.

TER: Do you have target prices?

JS: On Canyon Services, we have a $15.50 target price and Outperform rating. For Canadian Energy Services, we have a $22 target price and an Outperform rating. On Essential Energy, we have an Outperform and a $3.50 target price, and we just recently increased that from $3.25 due to the company’s expanding coiled tubing business.

TER: Do you view these companies as acquisition candidates or are they standalones?

JS: Of the three, we believe Canyon and Essential are potential acquisition candidates for a larger, U.S. service company that needs exposure to the Canadian fracking and coiled tubing markets. Canyon, in particular, is an ideal acquisition target because it is 100% focused on the Canadian fracking market and it is not too large. As Essential Energy is the largest deep coiled tubing provider in Canada and has a growing service rig fleet, it should also attract a larger Canadian or U.S. service company looking to expand into those businesses. It is worth noting that Western Energy Services Corp. (WRG:TSX)recently paid a solid premium to acquire a service rig company called IROC Energy Services Corp. in Western Canada.

TER: What are the mechanics of coiled tubing that make it special?

JS: It is steel tubing than can enter a well while it is flowing and under pressure and is mainly used for completions work. The benefit of coil is the operator does not have to kill the well and risk damaging the formation. The fourth-generation coil rigs can plunge to about 6,400 meters with 2 5/8-inch coil. Coiled tubing technology has been around for a while, but the new development is that the ultra-deep coils are being built to service the really deep LNG-related wells, for example those in the Montney and Duvernay.

TER: What is the proposed lay of the land and infrastructure for the three big LNG projects?

JS: All three are designed to facilitate export of gas from the Western Canadian shales in the Montney, Duvernay and Horn River plays that straddle Alberta and British Columbia. The majors plan to build the LNG terminals in Kitimat and various other places on the West Coast. They will need to build a network of pipelines to feed gas from the fields to the terminals.

TER: Are the companies going to share the new infrastructure?

JS: A lot of the infrastructure will be project specific, but each project is shared by two or more large companies, including Apache-Chevron, Shell-PetroChina and Exxon-Imperial. In the Canadian oilfield space, we believe LNG development is the 800-pound gorilla in the room. It’s all going to start happening in early 2014, and that will be a real growth driver for the whole sector.

Some other companies on the frontlines of the LNG buildout are deep drillers, including Precision Drilling Corp. (PD:TSX), Trinidad Drilling Ltd. (TDG:TSX) and Akita Drilling (AKT:TSX). Those firms have the ultra-deep, high-spec rigs that are ideal for drilling LNG wells in the Montney, the Duvernay and in the Horn River. Trinidad and Akita have already been awarded contracts for ultra-deep, $40M rigs.

We also see the Canadian frackers as being on the front lines of LNG development. Calfrac Well Services Ltd. (CFW:TSX) is working for Petronas Progress—as is Canyon—and Calfrac currently has three to four spreads working for Petronas Progress.

A little further down the line, we are watching Horizon North Logistics (HNL:TSX) and Black Diamond Group Ltd. (BDI:TSX). They provide the pipeline camps that will be required for building the West Coast pipelines. There are also assorted compression, pipe-coating companies and the deep coil specialist that we mentioned—Essential Energy.

TER: Great, Jason, thanks for your insights and names.

JS: You are welcome, Peter.

Jason Sawatzky is Director of Institutional Equity Research at AltaCorp, where he focuses on oilfield services. Prior to joining AltaCorp, Sawatzky was an associate analyst covering oilfield services at Stifel Nicolaus from 2009 to 2011. Prior thereto, he worked at Cormark Securities covering oilfield services and E&P companies for four years. Sawatzky holds a Bachelor of Commerce degree in finance from the University of Alberta and a Bachelor of Arts degree in sociology/psychology from the University of Calgary.

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1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

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