Month: November 2013

by Sasha Cekerevac, BA

As everyone is celebrating the market at record highs, another record was just broken and no one appears to be celebrating it.

Of course, I’m talking about the fact that the U.S. government debt total has just exceeded $17.0 trillion.

No one should be really surprised, since we continue running deficits each year. This just means that our government debt will continue to climb, with no end in sight.

Government debt totaling $17.0 trillion is a staggering amount of money. That equates to almost $149,000 per taxpayer. Of course, this doesn’t include unfunded liabilities. When you add in Medicare, Social Security liabilities, and a vast assortment of other levels of government debt, the total is well over $100 trillion.

Again, this may not be much of a surprise to our readers, as most of you are aware of our government debt problem; what may be a surprise to many, however, is the continued global demand for U.S. bonds.

Because we have been able to sell U.S. bonds for so long to investors around the world, this has enabled us to keep spending and to procrastinate when it comes to getting our house in order.

However, I don’t believe this can go on forever. At some point, foreign investors are going to start getting worried that all those trillions of dollars they pumped into U.S. bonds might be worth a whole lot less in the future.

This political circus that we are witnessing in Washington just barely scratches the surface of how much work really needs to get done to solve our government debt problem.

Because the rest of the world is a mess, foreign investors continue to pile into U.S. bonds while hoping that our politicians can actually fix the problem. If you were a large foreign nation with hundreds of billions of dollars invested in our U.S. bonds, wouldn’t you at some point get nervous that you might not get your money back? I know I would be very nervous, especially at these low yields.

We’ve already seen China begin discussing moving away from the U.S. dollar as a reserve currency, and this would mean they could then begin shifting their investments away from U.S. bonds. Even a small, marginal shift would be massive for U.S. bonds.

What disturbs me is that none of these facts seem to worry politicians. They simply care about the next year or two. But piling on ever-higher levels of government debt just means that we are taking wealth from future generations.

If foreign investors do decide to diversify away from our government debt, selling U.S. bonds would mean higher interest rates. When a bond declines in price, interest rates increase (they move in opposite directions).

One type of investment to hedge and profit from higher interest rates is exchange-traded funds (ETFs) that move inversely with the price of U.S. bonds, which means they follow interest rates.

One such ETF is the ProShares UltraShort 20+ Year Treasury (NYSEArca/TBT). The chart of this ETF below also has the 30-year U.S. bond interest rate overlaid versus the price of this ETF. As you can see, from the summer of 2012, long-term interest rates moved from a low of approximately 2.46% to a recent high of 3.9%. During that time, this ETF moved from a low of $56.32 to a recent high of $82.80

            Chart courtesy of www.StockCharts.com

Just a note: many exchange-traded funds won’t move completely in sync, as there are lags and issues over a long period of time. The general idea is to look for ways to add assets to a portfolio that would actually move up if interest rates also increased.

The current $17.0-trillion government debt is just the tip of the iceberg. With over $100 trillion in unfunded liabilities and no real plan to fix this mess, over the next decade, I believe foreign investors will begin to sell U.S. bonds due to an ever-increasing government debt—meaning higher interest rates to come.

This article When Foreign Investors Pull Out of U.S. Bonds… was originally published at Investment Contrarians

Senior Strategist Ib Fredslund Madsen takes a look at the week ahead on the financial markets.

Thursday brings the big policy meeting in the European Central Bank. Will the ECB touch the interest rate or increase liquidity?

Friday brings the monthly employment report from the U.S. Can the report bounce back from last months dissapointment, after an october with 16 days of government shutdown?

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Video courtesy of en.jyskebank.tv

By WallStreetDaily.com

Let the great debate over whether or not the U.S. stock market is getting frothy begin!

Speaking at a recent conference in Chicago, longtime bull and BlackRock (BLK) CEO, Larry Fink, believes that we’re seeing “real bubble-like markets again.”

Meanwhile, Morgan Stanley’s (MS) CEO, James Gorman, disagrees. He recently told Bloomberg that the S&P 500 Index is “frankly not bubble-like relative to the year 2000, 2005, 1995 and so on.”

So who’s right? Don’t waste your time trying to figure it out. Seriously, it doesn’t matter.

Here’s why – and, of course, what you should be focusing on instead…

Market Timing is for Fools

Even if we determine conclusively that U.S. stocks are utterly expensive, it doesn’t matter. Prices could continue to rise even higher – for a lot longer.

Or as John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent.”

Given the Fed’s non-stop money printing, such a scenario is not only possible, it’s highly likely.

Add it all up, and there’s no reason to bother trying to predict the exact market top. It’s truly a waste of energy. (As long as you’re using trailing stops, that is. They protect our downside and make sure we keep profiting for however long the market ticks higher.)

What should we be doing, then?

Simple. Finding new opportunities that are undeniably cheap.

After all, Warren Buffett’s number one rule of investing is to “never lose money.” Naturally, the easiest way to adhere to his rule is to invest with a margin of safety – or buy assets on the cheap that can only go up in price over the long haul.

We’ve used this strategy twice in the last year, when stocks in Japan and Europe were trading at undeniable bargains. Fast forward to today, and shares in both countries are up by solid double-digit margins.

So where can we employ such a strategy today?

Warren Buffett’s Next Target

Well, it just so happens that seven similarly cheap, low-risk/high-reward opportunities exist in the market right now.

More specifically, stocks in Russia, Hungary, Poland, the Czech Republic, China, Taiwan and Turkey are among the cheapest in the world, according to BCA Research.

Take a look…

Mind you, the firm’s analysis isn’t based on a single valuation criterion. To the contrary, it took five metrics into account, including trailing and forward price-to-earnings ratios, price-to-book ratios and dividend yield.

Naturally, the cheaper the market, the more attractive the long-term opportunity, which means Russia and Poland should stand at the top of our emerging markets “Buy” list.

Bottom line: Instead of arguing about whether or not shares in the United States are expensive, spend your time finding cheap stocks in the seven countries listed above.

I wouldn’t be surprised to find out that Warren Buffett – and the almost $40 billion in cash sitting in the bank at Berkshire Hathaway (BRK.A) – is targeting opportunities in these countries, too.

Now, if you don’t have the time to conduct your own due diligence on individual opportunities, don’t fret.

Exchange-traded funds (ETFs) like the Market Vectors Russia Fund (RSX), the iShares MSCI Poland Capped Fund (EPOL) and the iShares China Large-Cap Fund (FXI) represent compelling options to gain quick exposure to these markets.

But don’t delay. The bargains never last long, and all three ETFs have already started to make a move higher in the last three months.

Ahead of the tape,

Louis Basenese

The post The Seven Cheapest Stock Markets in the World appeared first on Wall Street Daily.

Article By WallStreetDaily.com

Original Article: The Seven Cheapest Stock Markets in the World

By HY Markets Forex Blog

Asian stocks were seen trading mixed on Tuesday, extending its highly volatile session while investors awaits key figures scheduled for the second half of the week.

Asian stocks opened higher for the second straight session; however some of them dropped towards the market close, especially gauges in China and South Korea.

China’s Communist Party’s eighteenth Central Committee meeting is scheduled to commence from November 9-12, where members of the party are expected to discuss China’s economic agenda.

In the previous session, shares in the Asian-pacific region ended in losses, while the European and US session closed with gains.

Asian Stocks – Japan

The Japanese benchmark the Nikkei 225 advanced 0.17% higher to 14,225.37, while Tokyo’s Topix index eased 0.04% to 1,182.58. The country’s stock exchanges were closed due to a public holiday on Monday.

Nisan Motor saw its biggest decline in five years, dropping 10.4%, while Minebea Corporation gained 16.9%. Machinery producer, Kubota Corporation edged 7.9% higher, beating analysts’ forecasts.

Asian Stocks – China

Losses were seen during China’s trading session; with Hong Kong’s benchmark Hang Seng losing 0.45% to 23,088.40, while the mainland Shanghai Composite index climbed 0.32% to 2,154.68.

“Facing these conditions we didn’t panic. We stuck to the rule of neither loosening nor tightening liquidity. We required the People’s Bank of China and commercial banks to step up liquidity management and maintain appropriate money supply but we did not ease liquidity as a result of this. We chose to hold steady on fiscal and monetary policy,” China’s prime minister, Li Keqiang commented on the country’s banking sector.

China’s central bank is expected to launch a negotiable certificate deposit (NCD) later this month, according to a bank official from commercial bank.

China’s Prime Minister Li Keqiang also commented on the nation’s growth target, stating the country needs to grow at least 7.2% gross domestic product (GDP) to ensure a stable job market.

HSBC Holdings was the session’s top winner, jumping 1.8% higher after it released its upbeat third-quarter earnings in the previous session.

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The post Asian Stocks Mixed On Mixed Earnings appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By HY Markets Forex Blog

Crude oil prices were seen trading slightly higher during the late Asian trading session on Tuesday, while traders focus on the turmoil in Libya as oil production from the country dropped to 10% of its capacity.

The West Texas Intermediate crude oil advanced 0.13% higher, trading at $94.72 per barrel, while the European benchmark crude Brent gained 0.14% at $106.41 per share at the time of writing.

The American Petroleum Institute (API) is expected to release its report of the US crude oil inventories for last week and the US Energy Information Administration (EIA) will release its report on Wednesday.

Crude Oil Prices – Libya

Members of Libya Petroleum Facilities Guard shut down the eastern port and three other terminals earlier in July in order to demand more funds and equipments from the government.

The country said it was looking forward to resuming its oil exports from its Hariga port, but Libya’s current shipment level dropped to approximately 150,000 – 200,000 barrels per day from its capacity of 1.25 million barrels per day registered in the first half of this year.

Libya is a member of the Organization of the Petroleum Exporting Countries (OPEC) and a holder of Africa’s largest oil reserves according to the EIA.

Crude Oil Prices – Market movers

The Reserve Bank of Australia (RBA) left its benchmark lending rate unchanged at 2.5% on Tuesday, to boost the economy from its weak condition. Glenn Stevens, Governor of the Reserve Bank of Australia (RBA) said that “the economy has been growing a bit below trend over the past year and the unemployment rate has edged higher.”

Meanwhile, HSBC Purchasing Managers’ Index (PMI) for China’s service sector rose to 52.6 points in October, up from the previous record of 52.4 points in September.

Oil producer Andarko Petroleum Corporation posted a rise in its net income, up by 50% to $182 million in the fourth quarter of this year, climbing from $121 million, while the company’s revenue advanced by 16% to $3.9 billion in the same period on an annual basis.

Visit www.hymarkets.com  today and find out more on how you can how you can trade Energy products with only $50.

The post Crude Oil Prices Slightly Rises Amid Turmoil In Libya appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By www.CentralBankNews.info     Australia’s central bank held its benchmark cash rate steady at 2.5 percent, as expected, but is clearly concerned over the recent rise in the Australian dollar, describing the exchange rate as “uncomfortably high” and saying that a “lower exchange rate is likely to be needed to achieve balanced growth in the economy.”
    The Reserve Bank of Australia (RBA), which has cut its cash rate by 50 basis points this year for total cuts of 225 points since November 2011, acknowledged the recent improvement in household and business sentiment and expects private demand outside the mining sector to pick up speed, but added it was “still too soon to judge how persistent this will be.”

Source: Dan Lonkevich of The Gold Report

http://www.theaureport.com/pub/na/agnico-eagle-investment-validates-sulliden-golds-low-cost-shahuindo-project

Sulliden Gold Corporation Ltd.’s Shahuindo gold project in Peru was validated as a low-cost, high-return project by a strategic investment of $24 million by Agnico-Eagle Mines Ltd. last April. Sulliden’s president and director, Justin Reid, tells The Gold Report about the factors that have led to the company being one of the top performing mining stocks on the Toronto Stock Exchange this year. Sulliden has a balance sheet of $70 million, including a recently completed $40 million bought-deal financing, and Reid says the company is close to finalizing the funding package needed to complete the construction phase of the project in 2014 and begin the first full year of production in 2015.

MANAGEMENT Q&A: VIEW FROM THE TOP

The Gold Report: Sulliden Gold Corp.’s (SUE:TSX; SDDDF:OTCQX; SUE:BVL)September 2012 feasibility study on the Shahuindo project in Peru estimates an initial capital expense of $131.8 million ($131.8M) and operating costs of $552/ounce ($552/oz) to produce 90,000 oz gold for more than 10 years. The capital expense (capex) and operating costs seem relatively low. What makes this such a low cost operation?

Justin Reid: It’s a number of things. First of all, we are located in Peru. The northern Peruvian gold belt is one of the lowest cost producing gold districts in the world with the likes of Newmont Mining Corp.’s (NEM:NYSE) Yanacocha mine, Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) Lagunas Norte and others. There are more than 10 mines in the region that demonstrate these very low operating costs.

As far as the low capex, the $132M is a result of our mineral deposit. It is an open-pit, heap-leach operation that is not capital intensive. Our ore body is very simplistic. At the end of the day, our pit will be approximately 5 kilometers long, 500 meters (500m) wide and only 95m deep. Imagine it as a scrape along the surface. Being a heap-leach operation, we also have limited earth works and infrastructure to build. One thing to note is that the $132M capex was a result of our 2012 feasibility study. We’ve been working very hard since then to optimize that number as we move toward construction.

For example, our feasibility study considers an owner-operated fleet; however, because of availability of contractors in Peru right now, we’re likely going to be able to drop about $25–30M off that capex with a contractor model while keeping our costs about the same.

TGR: What is it about Peru that makes it so low cost?

JR: It’s actually the morphology of the ore deposit. Shahuindo is a highly oxidized sandstone. The gold is very fine grained and interstitial within the porosity, which allows for incredibly good leaching. As an example, in Mexico, the standard leach cycle is 120 to 180 days for an open-pit, heap-leach mine with about 65% recovery on the high side. Because of the fine grain interstitial nature of our gold, our ore leaches incredibly well. This is very common in northern Peru; it’s not unique to our deposit. At Shahuindo, we have a 40-day leach cycle during which we recover almost 90% of the gold. Eighty percent of that gold is recovered in the first 20 days.

TGR: In September you received approval from Peru’s Ministry of Energy and Mines for Shahuindo’s environmental impact assessment (EIA). What is the timeline for moving forward with construction?

JR: The EIA is the single most important permit we need in Peru. There are a number of other permits and authorizations needed, however they all funnel off of this main permit. It took our team over 18 months of work and they certainly did a great job. We’re now in the process of working through all the process permits, such as blasting, access, construction, extraction, etc. We expect to have the majority of these permits in hand by the end of the year, so in the next two months or so. We remain on track to be in construction in the first half of next year. We’re looking at a construction period of about 10 months and 2015 is targeted to be our first full year of production.

TGR: You already talked a little bit about the morphology of the ore deposit at Shahuindo; tell us about the workforce that Sulliden has in Peru and about the management team there.

JR: The majority of Peru’s GDP is resource based, specifically mining. The mining sector has an incredibly industrialized, educated and well-trained workforce, especially in the Cajamarca region where we are located. Most major mining companies are represented in Peru or have an operation in Peru.

We have seen delays with Newmont’s Conga project, and due to the current environment, a few expansions have been delayed as well, so a well-trained workforce is available. We’re going to need fewer than 350 people on site and I don’t believe we’ll have a problem filling that from the large group of trained professionals in the area. We will likely have very few ex-pats on site and we expect almost all of the workforce to be local Peruvians simply because of the high level of skill.

The management team of Sulliden is small, but we have a lot of experience in exploration, development, construction, operations and on the financial side as well. Peter Tagliamonte, Sulliden’s chairman and CEO, has more than 30 years of experience in the mining industry managing and building mines. He was head of Eldorado Gold Corp.’s (ELD:TSX; EGO:NYSE) Brazilian operations. He built Jacobina for Desert Sun, which was sold to Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE), and also built Central Sun, which was sold to B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX).

Peter has been able to keep the same operational and technical team together for more than 20 years. That team has moved with him. We’ve been very lucky at Sulliden that even though our current management team has only been working together since 2009, our operational and technical team has been together for more than 20 years and has a lot of experience both building and operating mines.

TGR: You mentioned that Newmont had suspended its Conga mining operations and there were some unutilized workers that you might be able to bring on. What caused Newmont to postpone the project?

JR: Conga has a $7+ billion ($7B+) capex and over the last six to eight months, we’ve seen a lot of major gold companies defer development costs of those large-sized projects.

Conga has been delayed because of economics and some social issues that are being worked through. In this environment a lot of these multibillion dollar development projects are being suspended or deferred. As such, there were going to be thousands of workers at that operation and a lot of that unused labor pool is available to us.

TGR: Sulliden’s feasibility study indicates that the resource could be expanded. Sulliden has suggested it could tap 40% of the resource with the $132M capex. What can we expect in the future and what’s the timing for the next catalyst?

JR: There have only been 150,000m drilled at Shahuindo to date. That is a small company’s average annual drilling. From the drilling we have conducted so far, we have uncovered 4 million ounces (4 Moz) of gold resources, 2.5 Moz of oxide. We haven’t drilled a single hole in two years. When we got to 2.5 Moz, we decided as a junior company to preserve our capital and move immediately to a feasibility study.

As we move into construction you can expect to see the drills start up again. We have significant extensions to our ore body, both along strike for kilometers and in a parallel zone, the north corridor, to the northeast of our deposit. We’ve barely touched the surface of this deposit. It’s open in all directions. The exploration potential of our deposit for adding material ounces very quickly was one of the key reasons that Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) made its strategic investment in our company.

We will get the drills turning again when we move into construction early next year. The upcoming catalysts for the company will be in the next two and a half to three months when we complete our financing, roll in all our permits, and then get the exploration going again as we move into construction.

TGR: Turning to your financing, on Oct. 11 Sulliden successfully closed a $40M bought deal co-led by National Bank Financial and Scotia Capital. Are these funds going toward construction? And how much more money will you need for the completion of construction?

JR: The deal was very well taken and in the current environment we’re very happy that it went so well. We have about $70M in the bank right now. We’re looking to bring on contractors in our mine operation, which will save another $25–30M on our capex. What you’ll see over the next couple of months is that we will roll in a debt package of between $50M and $60M, which will provide all the capital we need for construction.

We mandated Credit Suisse and Barclays last November for a $125M facility. Because of the optimization that we are doing and our current cash balance, we obviously won’t need $125M, but we’ll be able to finalize that over the next few months and bring in just enough to cover our development costs and working capital requirements during the construction and ramp-up phases. We are working through the due diligence right now and expect to have that finished very shortly.

TGR: What’s your view right now about the financing market in general? Do you have the impression that things are improving? Is it getting easier to raise money than it has been in the past few years?

JR: It’s still very, very hard in this market. The majority of midtier producers are currently trading below market value or below book value. We have yet to see a lot of new capital come into the market and that’s really what we need. It’s not a sector call right now for financing. It’s really name specific. We find ourselves to be one of the top three performing gold stocks on the TSX this year because our team has quietly delivered on everything.

Those who are looking to invest in this sector are looking for very specific things. In our case, we delivered on the feasibility study; we’re low capital intensity; we’re not a $350B company trying to fund a $3B mine. We’re a $300M market-cap company trying to fund a $100M project. We’re not overstepping our abilities from a marketing standpoint or a financing standpoint.

We have a very strong management team and a $70M balance sheet. We’re not going to have to dilute our shareholders materially to build this mine. We have a funding package in place that will have us fully financed and we’ve delivered on the permits. We’ve been able to execute on our story while keeping the balance sheet firm and we’ve been able to execute something that is within our scope.

I can’t speak for other companies, but our average peer group is down 45% on the year and it’s simply because of the market. There are great projects and great management teams out there, but unless there’s something near term and tangible to focus on, it’s tough to keep investors focused.

TGR: You were previously the managing director of global mining sales at National Bank Financial, as well as senior mining analyst of Cormark Securities. How has this experience helped with Sulliden’s capital raising?

JR: I have a good understanding of the global mining market. I know all our major shareholders and also the resource investors in general, especially the institutions. Going through as many cycles as I have, I certainly understand where the market is and how the timing works. Knowing the shareholders, the markets, the brokers and the bankers helps me put all the pieces together and know when is the time is right to complete a financing.

We want more than anything for the financing to be successful and we want our shareholders to make money. That’s why we’re all here. Sulliden has been very, very lucky that our major institutional shareholders—and we’re more than 70% institutionally held—are long-term supporters. As such they were very supportive of our deal, which certainly helped.

TGR: In April, Sulliden raised $24M for a private placement with Agnico-Eagle, which you mentioned before. Is a buy out from Agnico-Eagle a possible exit strategy once the Shahuindo mine is in production?

JR: Well, it’s tough to say. The main driver for us was that Agnico-Eagle is known as an incredibly conservative and technically astute company. The company is considered one of the best operators in the business. There was a significant due diligence period for Agnico before it made the investment and it involved all facets of our company.

The validation of Agnico’s investment was one of the most important things for us because it set us apart from a lot of our peers. Agnico has bought a lot of companies before and a lot of its growth profile has come from acquisitions, but at the same time it has also made investments and sold them. We certainly think that culturally we would be a good fit with Agnico and that’s why we are happy to have Agnico as a major shareholder, but from our standpoint right now our focus is solely on building and operating Shahuindo and then growing the project beyond the initial feasibility study. What Agnico does we have no control over, but certainly the validation and support that it has given us has been great.

TGR: Is there anything else you’d like investors to know about Sulliden?

JR: The one thing I’d like to stress about our Shahuindo project is the simplicity and economics of this asset. It is located in one of the lowest cost and most prolific gold belts in the world and has a very low capex of approximately $100M. We have a very strong balance sheet.

Technically this is a very, very simple, open-pit, heap-leach, 90-meter deep pit. The costs are going to remain very low especially when considering the leach kinetics of the deposit. At a $1,300/oz gold price, Shahuindo, without any consideration for expansion, will deliver a post-tax internal rate of return (IRR) in excess of 33%. If we go with contract mining, the IRR would be north of 40%. The economics of the project are great and the technical risk of this deposit is very low. It’s a very simple asset, which should give investors some confidence as we move forward.

TGR: One last thing, take out the crystal ball. Where do you see the price of gold going in the next year or so?

JR: If we look at the cost of production for gold right now, we are probably well below the marginal cost. In the next 8 to 12 months, we could see gold approach $2,000/oz again, which for Shahuindo and for our peers would be great. Our costs being sub-$550/oz and our all-in costs being below $850/oz, Shahuindo can make a great return for its shareholders even at $1,100/oz gold; however I certainly hope that gold isn’t going that low. I see gold going to $2,000/oz quite easily.

Justin Reid was appointed president and a director of Sulliden Gold in February 2013. He is a geologist and capital markets executive with more than 20 years of experience in the mineral resource business. In 2011, he was named managing director of global mining sales at National Bank Financial where he directed the firm’s sales and trading in the mining sector. Prior to that, he was named executive general manager of Paladin Energy in 2009. Before that, he was a senior mining analyst at Cormark Securities. He started his career as a geologist with SGS and Cominco Ltd. He has a Bachelor of Science degree from the University of Regina, a Master of Science degree from the University of Toronto and a Master of Business Administration from the Kellogg School of Management at Northwestern University.

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DISCLOSURE:

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

2) Sulliden Gold paid The Gold Report to conduct, produce and distribute the interview.

3) Sulliden Gold had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Sulliden Gold and not Streetwise Reports or The Gold Report or its officers.

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By MoneyMorning.com.au

I like to bang the drum for oil field service companies. This sector of the energy biz offers great long-term investment opportunity, for reasons I’ll detail below. The best of the service companies are solid and well run, with long, profitable histories.

You should buy selectively over time, certainly during "down" periods. The service plays are attractive as core long-term holdings in every energy portfolio.

Why? Let’s begin with an illustration…

The other day – a chilly, crisp Sunday morning – I was driving along an old two-lane road in Washington County, south of Pittsburgh. I rounded a bend and saw this new production pad built by Range Resources.

Click to enlarge

The photo shows separation and storage tanks. Also, behind what you see here are seven "Christmas tree" valve assemblies. These represent the topside equipment for seven directional fracked wells, at about $10 million each. So what does this photo represent?

Well, add up exploration, leasing, permitting, site development, drilling, completions and surface equipment. You’re looking at about $100 million of capital investment in this one field out in the middle of the woods.

Now multiply this scope of effort by several thousand across the U.S., from Washington County, Pa., to North Dakota or Texas and out to California. That’s a lot of capex. That’s a lot of work for companies to perform, for good money. Where does much of that money go?

The Oil Services Trifecta

That question brings me back to the oil service plays. Longtime paid-up readers know how much I admire the technical skills and business acumen of the oil field services "trifecta" of Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI).

These three companies have global reach. They work pretty much everywhere that people drill for oil and natural gas. The things these companies do are absolutely critical to global energy production. They’ve had an excellent quarter in terms of share price appreciation, certainly compared with other market metrics.

Click to enlarge

I won’t go deep into details of each firm in this note. But the quick summary is that SLB, HAL and BHI offer high-end goods and services to oil companies. Product lines include well drilling, drill bits and tools, down-hole chemicals, logging, well completion and much more — including pressure pumping (the more formal name for fracking).

In a collective sense, what the technical people of these great service companies don’t know or can’t do within the oil biz is likely not worth knowing or doing.

BHI Growing Revenues & Earnings

During recent earnings announcements, there was excellent news from all three companies, particularly Baker Hughes. Shares of BHI popped up over 10% a few days ago after the company announced that third-quarter revenue jumped 8%, to $5.79 billion, and net income rose 22%, to $341 million (77 cents per share — and after adjusting for one-time charges, the company made 81 cents per share).

It’s worth noting that it was not U.S. onshore demand that drove BHI earnings, despite the "shale gale" within North America that keeps the guys (and gals) in the field busy. This past quarter, the key driver for BHI was activity in the Middle East and Asia.

The story I told at the beginning of this note (and the picture from rural Pa.) helps illustrate the point.  In the U.S. and Canada, it’s easy to fixate on what’s happening literally down the road – in my case, the Range Resources play that I saw the other day, down in Washington County, Pa.

But there’s much more happening across the globe. There’s more demand, and for higher levels of services and technology. It reflects the increasingly complex geological challenge of extracting oil and gas from where it hides in the rocks. I’ll expand on this below.

HAL Coming on Strong

Then there’s HAL, with a 17% increase in third-quarter profits, to $706 million, or 79 cents per share (or 83 cents, absent one-time charges). This is up from $602 million, or 65 cents per share, a year ago. The bottom-line numbers are based on revenue rising 5%, to $7.47 billion, in the quarter.

According to Halliburton CEO David Lesar, the strongest revenue and profit areas were Russia, Saudi Arabia and Angola. ‘Our Eastern Hemisphere growth continues to lead our peer group,’ stated Lesar in a conference call. ‘Consistent with prior years, we expect the fourth quarter in the Eastern Hemisphere to be our strongest quarter of the year due to seasonal year-end software and equipment sales.’

One growing cost element for service companies is that international expansion comes with certain "buy in" costs. Service companies are morphing into technology companies, and many host nations want to see "prestige" projects from the vendors.

For instance, CEO Lesar explained how Halliburton has invested about $1 billion in recent years in a new Singapore facility as well as technology centers in Saudi Arabia and Brazil. These kinds of facilities perform useful work, to be sure. But they also come with certain costs associated with stroking local egos in terms of hiring national talent.

Strong Schlumberger

Schlumberger impressed the market too this week with a 20% increase in net income year over year, to $1.7 billion. Revenue grew over 11%, to $11.6 billion, up a healthy amount from last year’s $10.5 billion. Operating margins exceeded 20% across all four of Schlumberger business areas, with oil field services delivering excellent returns.

Things are good for Schlumberger’s North American business, which delivered a strong performance despite weakness in the pressure pumping/fracking market due to increased competition from other firms.

Overall, the best action for SLB was overseas, where revenues from markets outside North America jumped 12% year over year as margins expanded by 23%.

Improving on its North American numbers, SLB increased revenues in the Middle East by 25% over last year. Schlumberger enjoyed strong growth in Saudi Arabia, Iraq, Qatar and the United Arab Emirates. In fact, Schlumberger is currently moving equipment and personnel to Saudi Arabia, where demand continues to grow.

It causes me to recall a comment by a Schlumberger rep at the Offshore Technology Conference in Houston a few years back. ‘Oh, if only all of our clients were as good as Saudi Aramco,’ he said wistfully.

Other Schlumberger efforts in Indonesia, Malaysia and China also boosted profits. In fact, Schlumberger inked its first production management project in China during the quarter and will move personnel and equipment into the region during the fourth quarter.

More Money on Fewer Wells?

There’s a growing buzz across the service industry that indicates customers are tending to spend more funds on equipment and services in 2014, although it may not show up in the basic rig count. That is, customers are pushing to do more with less at well sites.

As for numbers, the Baker Hughes U.S. rig count should average about 1,750 active rigs for 2013, down 9% from 2012. Still, the industry has improved efficiency and is drilling about 6% more wells per rig. Internationally, BHI expects the rig count to average about 1,300 rigs in 2013, up 5% from 2012.

In a sense, the new makeup of service company earnings reflects the changing nature of demand in the oil fields of the world, as well as long-term supply dynamics. That is, in North America, the demand is growing for complex services associated with fracking. But elsewhere — even in regions where not a single well has ever been fracked — demand is growing for high-end services because the down-hole geology is more difficult.

How to explain this? We’re looking at a reflection of the Peak Oil thesis! Yes, yes, yes… I know that skeptics say Peak Oil is bogus and an idea that’s far beyond its shelf life.

Actually, that’s exactly the wrong way to think about it. Peak Oil was, and remains, a valid working tool — which I’ve been discussing for almost nine years in my work with Agora Financial. It’s possible to apply Peak Oil methodology to global numbers as well as to regions. Indeed, one can look at many sorts of oil plays — offshore, onshore and even fracking movements — using the basics of Peak Oil analysis.

Distilled to its essence, Peak Oil tells us that the "easy" oil of the olden days is long gone. Today, across the globe, the energy industry MUST look for the difficult hydrocarbons. Thus, complex "conventional" plays and super-complex "fracking" plays are the new norm.

It’s all very expensive technology whichever way you look at it. So we’re destined to have "$100 oil" and more over the long term, absent an economic crash that temporarily tanks the price of oil while the world falls off a cliff.

This large-scale idea is part of what makes the oil service guys so attractive. The profitability is there for the long haul.

So don’t just rush out and buy up oil service shares willy-nilly, of course. As I stated above – and as I’ve said over many years of writing to my paid-up readers – buy oil service shares judiciously, especially on dips. In the case of Schlumberger, the shares never get ‘cheap’ and seldom stay down for long. But over time, the oil service trifecta can deliver great gains with minimal downside risk.

That’s all for now. Thanks for reading.

Best wishes…

Byron King
Contributing Editor, Money Morning

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By MoneyMorning.com.au

Rick Rule is a smart guy.

When it comes to resource investing there probably isn’t another person on Earth who knows more about the sector.

After listening to him speak for an hour last Tuesday it strikes us that Rick eats, sleeps and breathes resource stocks.

So you could be forgiven for thinking Rick is a resource stock spruiker.

But he’s far from that. In fact, he says 800 Aussie resource stocks are probably valueless in this current market.

That’s a worrying and encouraging figure. Why encouraging? We’ll explain now…

During a bull market it’s almost impossible not to make money.

If you’ll pardon the expression, you really have to screw up not to make money during a bull market.

The task in a bull market is to make the most of the opportunity. That means picking individual stocks to help you get a better return than if you just invested in the index.

The only real way you can do that is to invest in stocks that are outside the biggest top 50 stocks. And if you want to really do better than the average investor then you need to look at some of the smallest stocks on the market – small-cap stocks.

Bet on Resource Stocks When Others Have Given Up

Trouble is small-cap stocks are risky.

If you get in at the wrong time, when stocks are at the top of a bull market then small-cap stocks can fall a long way when the market turns.

This is why we always recommend you don’t invest more than you can afford to lose. After all, the market can turn at any time. It’s only with hindsight that you know for sure when the market has hit the top (or bottom).

Now, you may expect us to say that the real skill is to make money from resource stocks in a falling market.

Experience tells us that’s hard, if not close to impossible. If your aim is to make money in a falling market you’ve got two options. One is to short sell stocks, the other is to be extremely picky over which stocks to punt on.

Because even in a bear market, some resource stocks can go up. That’s usually due to news driven events, such as a new resource discovery or a resource upgrade.

But the best time to punt on resource stocks to get the biggest bang for your buck isn’t during a bull market or in the middle of a bear market, it’s when most folks have given up on resource stocks. It’s also when you can identify the beginning of a new trend.

Put those two factors together and it spells a great opportunity for speculators to get into the market before the next bull market rally begins…

The Resource Sector is the BOOM Sector

We can’t think of any other industry quite like the resource sector.

It seems to have more booms and busts than every other sector combined – including technology and biotech.

Of course, you get a general resource boom. Examples include the periods from 2003 to 2007, and 2009 to 2010. But you also get commodity-specific booms.

These happen much more frequently. Over the past six years we can think of booms in gold, silver, iron ore, rare earths, natural gas, potash and graphene. And let’s not forget the many uranium booms over the past 20 years (Rick Rule explained how he made a lot of money from the 1990′s uranium boom).

These commodity-specific booms tend to happen in waves. Speculators jump from one to the next, looking for the next opportunity to clean up.

The thing to note about these booms is that it’s not just obscure never-heard-of commodities that can boom. Who hasn’t heard of gold, silver, iron ore and natural gas?

But in recent months it seems as though investors have competely lost interest in the resource stock story. We, for one, can’t think of a single commodity-specific boom.

In fact, investors have focused so much effort on dividend stocks and other booming sectors such as technology that they’ve forgotten about the moneymaking possibilities in resource stocks.

Our bet is that attitude is about to change and the trend will turn.

Spotting a Trend

In our view there are a couple of key factors to look for when trying to pick the next resource trend. It’s not fool proof, but it gives you the best chance of getting into the market ahead of other investors.

As it turns out, it’s pretty much the same simple technique Rick Rule uses to spot new trends.

First, you have to find a commodity that has taken a bigger beating than any other commodity. If the commodity has high inventory levels at warehouses such as the London Metals Exchange (LME) that’s even better. It suggests there’s a glut of supply and that producers are struggling to make money in a buyers’ market.

The second thing to look for is a key trend that could drastically change the demand dynamics. That is, is something happening somewhere in industry that could cause demand to skyrocket…more than enough to soak up the existing supply glut.

This is happening across the resource industry now. But there’s one specific commodity where we see this trend taking place now, and few others appear to have caught on.

As always with small-cap resource plays there’s no guarantee the bet will pay off. But with a low commodity price, high inventory levels, and multi-year low prices for the stocks involved, this is about as good as it gets for risk-hungry investors.

Cheers,
Kris+

From the Port Phillip Publishing Library

Special Report: Read This or Retire Poor

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By The Sizemore Letter

I love China stocks as an investment … for the next few years, anyway.

As I wrote recently, Chinese stocks are almost ridiculously cheap at current prices. Plus, the reorganization of the Chinese economy away from investment and export and into “Western-style” domestic consumption should create incredible opportunities for Chinese stocks, as well as for American and European firms selling to the Chinese consumer.

Opportunities to invest in major shifts like this only come around a couple times in a lifetime. I am currently long China and have no immediate plans to sell.

But as bullish as I am on China stocks at this time, investors need to keep the big picture in mind.

Demographics Will Hamper China Stocks

Chinese stocks are a great trade — and I believe a great multiyear trade — but they’re not something you should consider as a long-term investment. China is facing demographic collapse in the decades ahead, and I say this as a sober analyst, not a wild-eyed doom-and-gloomer.

When I speak of “demographic collapse,” I’m not talking about plague, pestilence or a scene from a Mad Max movie. I’m talking about a Japanese-style economic malaise, a prolonged period of slow growth, falling asset values and falling consumer prices.

Like Japan, China has a society that is aging rapidly. By the Chinese government’s own demographic estimates, the number of people above age 60 in China is projected to increase to 437 million, or 30% of the population, by 2050.

Last year, the number was 194 million, or 14.3% of the population.

I know, I know. Life begins at 40, and 60 is the new 30. People are living and staying active far longer than they used to. But underneath this cheery optimism is a far more grim reality. After the age of about 50, consumers in advanced economies tend to spend less of their income and save more, and China’s middle and upper classes will be no different than their Japanese and Western counterparts.

Once you reach a certain age, you already own the largest and most expensive home you ever plan to own, you’ve already paid off the mortgage, and you’ve already furnished it. You continue to spend money on basic necessities and simple luxuries. But your purchases of the large, big-ticket items slow to almost zero.

All else equal, an aging population will mean a stagnating domestic economy and a shrinking tax base … even while government expenditures rise. And as Japan is discovering now — and China will discover in the decades ahead — there is no obvious solution.

Few Answers for China & Others

I recently had a good-natured Twitter argument with fellow InvestorPlace contributor Aaron Levitt. Levitt took the view that, faced with an aging population, China will simply raise its birthrate.

@CharlesSizemore Didn’t Mao say that China “will make babies like it never did before” when threatened with nuclear war? Still applies.

— Aaron Levitt (@AaronLevitt) October 29, 2013

Alas, if only it were that simple.

Raising the birthrate requires young women of childbearing age. And as the following chart should make abundantly clear, potential Chinese mothers are about to be in increasingly short supply:

This demographic data comes directly from the United Nations. The number of Chinese women aged 20-24 is already in decline, and the number of women aged 25-29 goes into steep decline starting in 2015.

True enough, women in advanced countries are having children later in life, and Chinese women could follow this trend. But the population of Chinese women aged 30-34 and 35-39 go into steep decline in 2020 and 2025, respectively.

If there is to be a Chinese baby boom, it had better happen fast.

But it’s doubtful that will happen. There is the little problem of the one-child policy, which prevents most urban middle-class Chinese families from having more than one child. And there is the simple reality that, once a society adapts to having a low birthrate, it’s hard to turn that battleship on a dime. Living costs have risen in the cities to the point that large families are not economically viable for the vast majority of Chinese households.

Could the Chinese government implement strong pro-natal policies that economically incentivize Chinese women to have more kids? Maybe, but for several years Russia has been offering cash rewards of $10,000 to mothers for the birth of their second child, and the Russian birthrate is still well below the replacement rate.

And Chinese citizens, having experienced economic freedoms in recent decades, are not as pliant to government decrees as they once were.

Again, I am still wildly bullish on Chinese stocks for the next one to four years. But looking into the decades ahead, China will hit a demographic brick wall — and China stocks will react accordingly.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

This article first appeared on Sizemore Insights as China’s Demographic Collapse

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