LOOKING FORWARD
115 E Snow King Ave., Jackson, WY 83001,
Published for clients of Friess Associates and Brandywine Fund Shareholders.
Analysts expect Veritas to grow
earnings 24 percent this fiscal year
"With oil prices low for much of the 1990s, there was little incentive for investments in finding new oil and gas reserves. The search is now on in a big way amid unprecedented global demand and an accompanying surge in energy-company profits. Veritas DGC's technology lets customers see what's hidden below the surface.
Employing more than 3,000 workers in 19 countries on six continents, NYSE-listed Veritas DGC is a leading provider of advanced geophysical technologies used to manage exploration risk and enhance drilling success. The company either sells data from its extensive library of surveys or is contracted to "shoot" or acquire the data for specific fields by oil companies. Six marine research vessels capable of processing 2-D and 3-D data and more than a dozen land data acquisition crews gather information, which is then processed at sites around the globe.
Current industry conditions favor Veritas DGC as exploration companies increase their budgets to find increasingly scarce hydrocarbons. April-quarter earnings grew 18 percent, topping estimates by 11 percent. Reserve replacement initiatives pushed backlog for all the company's marine vessels well into 2006 at a time when pricing is up substantially.
The Friess associates recently spoke with Chief Executive Thierry Pilenko regarding the strong outlook for higher-margin, library sales. Oil companies will need to explore aggressively on their current lease portfolios before they expire between 2007 and 2010. Veritas DGC's extensive marine library includes surveys in the North Atlantic, Gulf of Mexico and offshore West Africa, Brazil, Canada and Southeast Asia.
The Friess Associates bought Veritas DGC at 13 times current estimates for the fiscal year ending July 2006. Analysts expect the company to grow earnings 24 percent this fiscal year, followed by 43 percent growth in fiscal 2006."
THE PRIMARY TREND
700 N Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.
Lower oil prices, not higher
Barry Arnold: "The lead energy analyst at Goldman Sachs created quite a buzz in late March when he laid out his "super spike" scenario for energy prices where he predicted crude oil would trade between $50 and $105. That was when oil was $55 per barrel. At that time, we disagreed with Goldman analyst, Arjun Murti, and expected oil to trade under $40 before it even came close to $100 per barrel. Mr. Murti has been on the right side of the momentum, however. Since the spring, crude has spiked to a recent $70 per barrel, only to pull back in the past few days. In financial circles Mr. Murti is treated "like a rock star," according to a Wall Street Journal article. In fact, many of the energy analysts are getting the "VIP treatment" these days, not unlike the Internet "rock stars" whose popularity soared in the late-90s, only to fizzle out soon after during technology bust. (Does anyone know where Henry Blodget is?)
We are not predicting that the energy arena is going to follow in the footsteps of the infamous sockpuppet.com, but the ebullience that is so prevalent us more cautious on oil and gas stocks rather than attracted to them. We still see $40 oil and lower, not $100 and higher."
Richard E. Band's PROFITABLE INVESTING
9420 Key West Ave., 4th Flr, Rockville, MD 20850.
Monthly, 1 year, $199.
Canada's safest energy trust
Richard Band: "With the explosion in energy prices, we're hearing a lot about Canadian oil-and-gas royalty trusts. I've already recommended one such trust, ARC Energy (AETUF) which trades south of the border in the over-the-counter pink sheets.
I recognize, though, that many investors don't care to put up with the disadvantages of stocks listed in the pink sheets - poor liquidity, outdated price quotes, lack of analyst coverage, etc.
Accordingly, I want to share with you another Canadian trust, arguably the safest of them all. It's traded on the NYSE, so you've got an active two-way market. The name is Enerplus Resources Fund (NYSE ERF).
Why Enerplus? Like other Canadian royalty trusts, ERF constantly acquires new properties, in addition to sinking new wells on properties it already owns. (U.S. royalty trusts generally are prevented from adding properties to their portfolio once the trust is set up.) Also in common with its Canadian brethren, Enerplus pays monthly distributions, which are remitted to you in U.S. dollars.
What distinguishes ERF from the pack, however, is that this trust operates on sounder business principles than some of the other outfits you hear touted in the frantic "oil is going to $100" tipsheets. Enerplus keeps its debt low. The trust also retains a fair amount of cash for expansion (during the first half of 2005, ERF paid out just 74% of its cash flow). Besides enhancing growth, a modest payout ratio makes the dividend more secure.
Finally, ERF maintains a long-lived portfolio of properties. At current production rates, the trust's proven and probable reserves of oil and gas will last for approximately 14 years - considerably longer than the industry median of about 10 years. Greenhorn investors often gravitate to the shorter-lived trusts, which offer higher current dividend yields. But what good is a high yield if the oil and gas will vanish in a few years?"
Louis Navellier's BLUE CHIP GROWTH LETTER
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $299.
Louis Navellier: "My favorite energy bets remain natural gas, refineries and oil service, especially after Hurricane Katrina. Companies in these industries should continue to post record earnings in the third quarter, and for at least a few more quarters after that.
Ironically, oil prices have fallen after Katrina. This is due to a variety of factors. First, the International Energy Agency (IEA) made 60 million barrels of oil available almost immediately, which initially included 30 million from the U.S. Strategic Petroleum Reserve. Second, U.S. gasoline demand topped 4% immediately after Labor Day and may decline further. Third, the rest of the world is even more sensitive to energy prices than the U.S., so demand may continue to drop worldwide. And finally, U.S. and world oil inventories are still high and are expected to rise in the upcoming months. As a result, oil prices may not rise much above their recent peaks, and might even fall back below $60 per barrel.
Natural gas is a different story. The U.S. has been overly dependent on production from the Gulf of Mexico for some time. Prices are expected to remain near record highs as 40% of the natural gas output in the Gulf region was disrupted by Katrina. An oil service expert with 35 years of experience in the Gulf of Mexico stated that he has never seen such a mess on the seabed. Last year, Hurricane Ivan damaged the underwater pipelines, but it appears that Katrina made the biggest mess ever - including the disabling of multiple drilling rigs.
Unlike oil and gasoline, it's very difficult for the U.S. to boost its natural gas imports due to a lack of Liquefied Natural Gas (LNG) terminals. People don't want refineries and LNG terminals in their "backyard," and that's now coming back to haunt us. One of our stocks, however, Occidental Petroleum (OXY), did get permission to build an LNG terminal in Corpus Christi, Texas, but the U.S. would need at least 10 new terminals to replace the production that has been disrupted in the Gulf.
It's still not known just how long it will take to get natural gas production in the Gulf of Mexico back to pre-Katrina levels. With the mild fall weather that is now embracing the U.S., natural gas storage will be rising for the next couple of months. However, if it gets colder than normal this winter, demand will soar and take prices right along with it. As a result, I remain especially bullish on natural gas stocks like Burlington Resources (BR), BG Group (BRG), EnCana and our new buy, EOG Resources.
The oil service industry continues to be a big beneficiary of the worldwide exploration for more oil and gas, as well as the hurricane clean up. Halliburton and Transocean have record order backlogs that will ensure record earnings for the next several quarters. The damage in the Gulf of Mexico after Hurricane Katrina means that the oil service business will remain especially busy for at least the next couple of years.
At one of our best refinery companies, Valero Energy (VLO), the board recently approved a 2-for-1 stock split and recommended increasing the dividend by 20% - both indications that management expects strong earnings well into the future. VLO is already up 228% for us, and the news keeps getting better! I'm raising the buy limit to $122."
THE COMPLETE INVESTOR
P.O. Box 248, Williamsport, PA 17703.
Monthly, 1 year, $72.
In gold we trust:
How and why to buy it
Stephen Leeb: "First, a basic question: Why invest in gold at all? The answer: gold is an essential hedge against both inflationary and deflationary threats - and in our view, we're facing increasingly rocky economic time in which both threats will be rearing their ugly heads.
Next up is the question: what's the best way to invest in gold? Up to now we have been recommending selected gold mines. That's because until recently, if you wanted to invest in the metal itself, as opposed to gold-mining companies, your only choice was to buy gold coins or bullion, take physical possession of them, and stash them someplace safe. This isn't an appealing or feasible option for most investors. Thus the only real choice for would-be gold investors was to take a chance on individual mining stocks or to buy shares in gold funds that owned a collection of such stocks.
Within the past year, however, a new option has become available: an exchange traded fund (ETF) called streetTRACKS Gold Trust that owns actual gold. By investing in the fund, you, too, own gold directly. We think this approach makes a lot of sense. We have sold the two gold stocks in our portfolio - Barrick Gold and Newmont Mining - and replacing them with streetTRACKS Gold Trust. We consider it an important hedge for just about all investors and recommend that it constitute 5 to 10 percent of your overall holdings - probably closer to 5 percent for most of you.
Here's why we prefer the fund to individual mines. While it's often thought that mining companies, with their fixed operating costs, are a leveraged play on gold itself and thus outperform the metal when gold is rising, this isn't necessarily the case. In fact, during the inflationary 1970s gold bullion outperformed gold stocks.
Moreover, individual mining companies are riskier investments than the metal, since they can run into unanticipated operational problems. Higher energy prices in the years ahead, for instance, will increase operating costs and put pressure on profits. Tougher environmental regulations also may hinder results. By way of example, Newmont Mining is embroiled in a lawsuit regarding toxins in a bay near a now defunct mine in Indonesia. While the company may ultimately prevail, the uncertainty puts a cloud over the stock.
With streetTRACKS Gold Trust, by contrast, what you see is what you get. Each Gold Trust share represents one-tenth of an ounce of gold less the Trust's modest expenses of just 0.4 percent annually. The Trust isn't actively managed so its expenses are expected to remain very low. To cover those expenses, the Trust will sell gold on an as-needed basis.
Similar trusts have traded in London, Sydney, and Johannesburg but they're relatively new to U.S. investors. As noted, the streetTRACKS Gold Trust has been around for less than a year; a similar vehicle, the iShares Comex Gold Trust (IAU), was launched a few months later. While the two ETFs should track each other closely, the volume on the iShares Comex trust is still just a fraction of streetTRACKS Gold Trust's daily average volume of 1.6 million shares over the past six months, making the latter the preferred investment as of this time.
Note that while we're dropping Barrick and Newmont in favor of the streetTRACKS Gold Trust, we're continuing to hold another mining company, Apex Silver Mine, in our Fast Track Portfolio. That's because Apex is uniquely positioned to add substantially to its reserves in the next few years as it develops its massive San Cristobal project in southern Bolivia. Meanwhile, the market is valuing Apex well below the true worth of its proven reserves."
INVESTOR'S DIGEST of Canada
133 Richmond St., W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
Michael Popovich: "China, we're told, is where the action is these days. And Inco Ltd. (N-TSX, $54.98, 416-361-7511, www.inco.com), Canada's premier nickel miner, has wasted no time in getting there.
In July, it opened a joint venture in China to make nickel foam, an ingredient used in rechargeable batteries. And since China is now a leading producer of such devices, Inco is sitting pretty.
The company also stands to benefit from a deal it inked earlier this year to supply Noranda with 230 to 270 million pounds of semi-processed copper over the next decade.
Meanwhile, Inco is well-positioned to meet increased world nickel demand. Not only is its new mine at Voisey's Bay, Labrador up and running, but its facility at Goro in New Caledonia is on track for startup in late 2007.
"Inco has one of the best production profiles among its peers in 2006," note Brian MacArthur and Craig West, analysts with UBS Investment Research.
Both analysts, who continue to rate the nickel miner a "buy," have raised their 12-month target price to US$53.50 from $48 a share.
With Inco digging up so much potential cash flow, its sudden popularity with our market mavens is no shock. Of the 13 analysts we surveyed, six rate it a buy; four, a buy/hold and three, a hold, vaulting Inco into third spot in our list of top-10 buys."
ECONOMIC ADVICE
3910 NE 26TH Ave., Lighthouse Point, FL 33064.
Monthly, 1 year, $129. www.economicadviceinc.com.
James Rapholz: "I recently came across a very optimistic gold forecast: It calls for gold reaching $1,200 per ounce within ten years and it should be noted that it was made by a very celebrated economist, Dr. David Davis of South Africa, the analyst at the financial management firm of Andisa and published in the prestigious South African Mining News.
He predicts that gold will rise to $700 per ounce by 2008, then to $800 by 2010 and then gain roughly $100 per year over the next four years.
Dr. Davis notes that new supply is already falling behind demand and that new discoveries are not keeping up with the ongoing consumption of proven reserves. After gold peaked at worldwide production of 2,621 metric tons in 2001, David observed that current production had declined to about 2,100 metric tons and expected this to fall steadily to about 1,790 metric tons by 2010. These problems are compounded by the fact that many mines used up their blocked out high grade ore during the (lean price of gold times) of the past decade in an effort to keep costs low at the same time - refused to spend any funds on exploration.
Dr. Davis also predicted that the U.S. Dollar would continue its decline and that decline will continue for another ten years - which will trigger a quantum upward change in the price of gold. He claims that the size of the U.S. projected trade and budget deficits would cause the Euro to rise to US$1.40 by the end of 2005 and that the dollar will fall further as China moves away from tie-ins with the greenback."
THE FINANCIAL REPORT CARD
P.O. Box 7173, Kensington, CT 06037.
Monthly, 1 year, $129.95.
Dr. Robert Valuk: "Yes, oil has rhythm. What does that mean? We compacted 50% of all our oil stocks, trusts, and mutual funds in the last issue. The greedy did not follow our advice and got caught in a nasty downturn. When oil surges, we sell into the rush. When oil tanks, we buy into the decline. We are not concerned with selling at the top or buying at the bottom, we simply want to make money. When oil was at $67 per barrel, we bailed out on at least 50% of our holdings. When oil is at $58, we start to buy and if it drops lower we buy more. The author also writes covered calls on his oil trusts and oil stock selections. A typical scenario is: on a down oil day, the author bought 100 Enerprlus. Oil was at $59 and change per barrel. The author sold the ERF November 40 call option for $130 (a 39% annualized gain). The stock goes ex-dividend in November and yields around 10%. If Enerplus drops to 37, the author will buy 100 more and write another option. If the stock drops below 35, the author will buy another 100 shares and write the 35 option. The author stops at 300 shares. Now we have three options written and a 10% yield. We use DCA for our purchases (only $24 in commission on the stock and about $27 on the options at Fidelity). We now have downside protection (three option premiums in our account) and a high yield going ex-dividend in November. If you track oil's rhythm, after awhile you know when to buy and when to run! We see oil going as low as $50 a barrel and as high $70 per barrel over the next year. Watching the rhythm and dancing to it can be a real moneymaker."
INTERINVEST RVEIEW & OUTLOOK
P.O. Box 51462, Boston, MA 02205.
Monthly, 1 year, $125.
Gold in ratcheting up process
Dr. Hans Black: "Gold spent most of October trading at what appears to be a new-short trading range between $455 and $480 an ounce. Despite the volatility in currency markets - particularly the weakness of the yen - gold seems to be an asset class of choice for many investors who wish to escape the uncertainty of particular national economies, especially those in Asia. We continue to believe gold is in a ratcheting up process, although pullbacks may occur at any time. As we near the end of 2005, we will likely emerge into another period of rising prices next year, which should propel gold well above the $500 area. It now appears that in time gold will tackle the lofty prices achieved at its previous high in 1980.
As with the bullion, we continue to favor purchasing gold stocks on weakness and would also advocate not chasing any of them at this time. We remain pleased with the price action of them at this time. We remain pleased with the price action of Newmont, Eldorado, Cambior and Southwestern Resources and would again mention junior stocks such as Orvana and Gabriel Resources."
Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
Monthly, 1 year, $129.
Roger Conrad: "As if losing its largest city to Hurricane Katrina wasn't enough, Entergy Corp. (ETR) now faces $400 million to $550 million in damages and lost sales from Hurricane Rita. The company's decision to place Entergy New Orleans in Chapter 11 bankruptcy has had little impact on its overall credit rating or dividend flow.
It's restored power to virtually everyone in the region who can take it, including all major refineries. And Entergy won kudos from national consumer groups for "realistic and humane model policies" for lower-income customers.
Entergy desperately needs the strong cooperation of regulators, particularly in Louisiana. Strong response in the initial wake of the disaster is a giant step toward achieving that objective, and Bayou State officials have responded positively.
Overall, corporate liquidity is solid and spiking oil and gas prices around the country have left Entergy's unregulated fleet of nuclear power plants - the nation's second-largest behind Exelon's - more profitable than ever.
Uncertainty about recovery of Rita Damages has induced S&P to put Entergy's overall ratings on creditwatch, and Moody's has placed the Entergy Gulf States unit on watch. That point hasn't been lost on management, which has just named former US Congressman Billy Tauzin (R-LA) - a consummate Washington insider on energy issues - to its board of directors.
Entergy will recover, but until there are hard numbers for financial aid, there will be uncertainty and potential downside. For patient, volatility-tolerant investors, Entergy is an attractive buy up to 72."
WALL STREET WINNERS
1750 Old Meadow Rd., McLean, VA 22102.
Monthly, 1 year, $149.
Ivan Martchev: "There are two simple reasons for coal's popularity and continued use: cost and vulnerability.
Even if natural gas prices were to fall to $5 per million BTUs, roughly a third of today's levels, gas-fired power would remain less economical than coal-fired power.
And the US isn't energy independent when it comes to either oil or natural gas. The US has been importing increasing quantities of crude since the early '70s. US domestic oil production peaked in 1972 but demand continued to rise inexorably.
Natural gas is more plentiful. But make no mistake about it, North American natural gas production has either peaked or is close to doing so.
Meanwhile, the construction of scores of new gas-fired power plants in the '90s spells higher demand. The EIA projects that the country will bridge this gap by importing more gas in the form of liquefied natural gas (LNG). The US is projected to import more than 6 trillion cubic feet of LNG by 2025, accounting for roughly 75 percent of total gas imports.
But the US possesses copious quantities of extraordinarily high quality coal. Based on projected coal demand in 2025, the US has sufficient reserves to cover more than 160 years of consumption. And most US coal is what's known as bituminous coal, which is well suited for use in power plants.
The top concern mentioned when it comes to coal-fired power is the environment. There's no denying that burning coal to produce power releases harmful pollutants, such as sulphur dioxide and mercury. And coal is more polluting than natural gas.
But characterizing coal-fired plants as pollution-belching industrial dinosaurs is more than a little unfair. Utilities have found that by using low-sulphur coal, emissions of sulphur dioxide can be cut by as much as 80 percent. And new advanced scrubbers can reduce emissions of sulphur dioxide and other pollutants by as much as 90 percent.
Low-sulphur coal occurs naturally. And the US has some of the world's largest and most easily mined low-sulphur reserves located in the giant Powder River Basin (PRB) in the Western US.
Coal in that region averages less than 0.4 pounds of sulphur per million BTUs of coal, compared to more than 2.5 pounds per million for some eastern coal types. Better still, this coal lies close to the surface - miners can use cheap surface mining techniques to recover the coal.
The mining company most leveraged to low-sulphur PRB coal is Peabody Energy (NYSE BTU). Peabody is the largest coal company in the US with over 10 billion tons of domestic reserves and another 200 million tons in Australia. More than 300 million tons of those reserves are located in the PRB, far bigger than any other coal mining concern.
The company also has exposure to further upside in PRB coal prices. Unlike many miners, Peabody still has a good chunk of its 2006 and 2007 production unsold; it hasn't yet contracted with a utility company to supply its coal.
With inventories of coal low at America's power plants, coal prices are rising. Peabody should benefit from these higher prices."
Dr. Mark Skousen's FORECASTS & STRATEGIES
Eagle Publishing, One Massachusetts Ave, NW., Ste. 600, Washington, DC 20001.
Monthly, 1 year, $199.
Increasing position in gold
and natural resources
Dr. Mark Skousen: "I see three major reasons why gold and natural resources are making a comeback and offer excellent investment opportunities now:
1. More inflation is on the way.
2. Foreign central banks are now buying non-paper assets.
3. Government spending is out of control.
I am increasing our position in gold and natural resources from 10% to 15%. Half of the 15% should be in energy shares and half in mining.
I recently attended the Las Vegas Gold Show, where the big debate on the "bulls vs. bears" closing panel was whether commodities are in a long-term secular bull market or a cyclical bull market.
A secular trend means that prices are likely to head higher and higher over the long run. An upward secular trend is great news for "buy and hold" investors; they can buy on dips and dollar-cost average without the fear of losing money.
A cyclical trend means that prices will fluctuate up and down without any long-term trend over time. Thus, investors who buy into a cyclical market can lose a fortune if they buy at or near the top. Recall the collapse of the Internet bubble in 2000-01.
Commodities are like rising a roller coaster...
I was the only one on the panel who argued that the commodities are inherently "cyclical," that what goes up can also come down, sometimes hard. As an economist, I pointed out that commodities are inherently volatile because they are farthest away from final consumption. The same holds true for housing and tech stocks, all of which are "early stage" producers and well known as "cyclical" performers.
The history of Newmont Mining (NYSE NEM) proves my point. While the Dow and S&P 500 have grown pretty steadily since 1985, Newmont has gone from $3 to $40, back down to $20, then up to $60, fell to $18, and is now around $44. Now, admitted, you would have made a fortune buying Newmont at $3 and holding it through thick and think until today (over 1,200% profits). But few investors could have weathered the 50-70% declines that Newmont suffered along the way. And what if you had purchased at $40, or $60, or even $20? Doubling your money in 20 years isn't that great of a return.
In sum: "Buy and hold" is not a good strategy for mining shares. Virtually all gold and commodity stocks are far more volatile than consumer/industrial shares, as reflected in the S&P 500 or Dow Jones Industrial Average.
You would be wise to buy when commodities are in an uptrend and use protective stops to lock in profits, or minimize losses. That's what we do here at Forecasts & Strategies."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $279.
Two top picks in strong sectors
Richard Moroney: "While the market averages remain range-bound, several sectors have rallied to new highs on strong September-quarter results. Two stocks from two such leading groups, both recent additions to our Buy List, are reviewed below.
Freeport-McMoRan Copper & Gold (NYSE FCX $50) mines copper, gold, and silver in Indonesia. The company also runs a smelting and refining operation in Spain. The primary Grasberg mine is the second-largest copper reserve and the largest gold reserve in the world. High copper grades at Grasberg mean Freeport needs to process less ore to extract the copper, keeping production costs low. The copper in the mine is mixed with significant amounts of gold and silver, creating additional revenue.
Strong demand from China, supply disruptions, and falling inventories have spurred a two-year bull market in copper prices, which hit an all-time high in October. In the September quarter, copper prices improved 29% compared to the year-earlier period, while gold prices increased 12%. Freeport's copper production grew 34%, and gold production jumped 40%. Revenue climbed 64% to $983 million. At 12 times expected 2005 per-share earnings of $4.10 and 17 times expected 2006 per-share earnings of $2.90, the stock seems reasonably valued. Estimates for 2006 should continue to rise if copper and gold prices stabilize near current levels, as the company appears likely to sustain healthy volume growth.
Metal prices are volatile, as is the political and economic environment in Indonesia, making Freeport an atypical addition to our Buy List. The stock is somewhat aggressive, given the nature of the mining industry and the company's concentration in a volatile region. But Freeport brings some diversity and inflation protection to our Buy List, and the stock holds superior 12-month potential. In November, Freeport raised its dividend 25% and declared a special $0.50 dividend payable Dec. 30. Freeport-McMoRan is a Buy.
Norfolk Southern (NYSE NSC $41) provides rail service in the eastern U.S., transporting a wide variety of goods. The high cost of fuel, highway congestion, and a shortage of truck drivers are causing more business to shift from trucking to rail. After three years of weak growth, revenue jumped 13% in 2004. Because of high natural-gas prices, utilities are using more coal. Coal, along with coke and iron core, accounts for about one-fourth of Norfolk's operating revenue. In the September quarter, coal volumes increased 6%. Because of heavy traffic at West Coast ports, intermodal shipments are increasingly being routed through East Coast ports served by Norfolk. Intermodal shipments, which require transport via ship or truck as well as rail, account for 21% of operating revenue. Intermodal shipments rose 9% in the September quarter.
For the first nine months of 2005, operating revenues rose 17% and per-share earnings jumped 36% excluding special items. At less than 14 times estimated year-ahead earnings of $3.04 per share, the stock trades at a discount to its peer-group average of 16.
Like many railroads, Norfolk Southern is benefiting from greater demand for rail service. But unlike many of its peers, Norfolk has a track record of consistent, reliable service, enabling it to attract more business. Volume gains and price increases should continue to drive revenue and profit growth. Norfolk is a Buy."
InvesTech Research PORTFOLIO STRATEGY ADVISOR
2472 Birch Glen, Whitefish, MT 59937.
1 year, 17 issues, $295.
Keeping a toehold in gold sector
Catherine Hetrick: "While gold stocks have had a strong 5-year run, we've pulled some profits off the table by reducing our position in Newmont Mining to 2%. Gold prices have historically been closely linked to changes in the dollar, and that's why we've held Newmont as a dollar hedge. However, as discussed in the last issue of the InvesTech Market Analyst, rising interest rates tend to stabilize a weak dollar rather quickly. So, we'll keep a toehold in the gold sector as a hedge against possible geopoliticial shocks, but we're putting gold stocks on a back burner until the Fed has finished its current tightening cycle.
We've also exited some of our more cyclical and vulnerable positions, like Liz Claiborne and Applebee's in the Consumer Discretionary sector. Even though the holiday season lies just ahead, we have to wonder how exuberant shoppers will be in light of high winter heating costs and rising interest payments on their credit cards. Regardless of the answer, this isn't a sector we want to hold if a bear market is imminent.
Likewise, positions that have remained persistently weak are an added liability. Hence, we've also stepped out of Pfizer and ConAgra Foods, where the latest earnings reports have been disappointing. In the Alternate Mutual Fund Portfolio, we've reduced our overall invested allocation by cutting back the position in T. Rowe Price Equity-Income Fund (PRFDX). This large-cap fund is still ahead of the major indexes year-to-date, but the mid-cap group has performed better over the past six months."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153rd St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Fording Coal is a great buy
Richard Lehmann: "Last month I recommended metallurgical coal producer Fording Canadian Coal (FDG), which had just split its stock 3 for 1 and doubled its dividend. At that time, the price was at 42.57 and the indicated yield was 14.36%. Since the beginning of October, the stock has declined to as low as 32.14 before recovering to a recent 34.09. You can thank Jim Kramer's Mad Money TV show for making this an even better buy today. The price decline is based on a fear that they will not be able to sustain the new dividend level. My point is, so what? With a current yield of 17.9%, even if the dividend were cut in half, it would yield 9% taxable at only 15%. Income investors who can ignore short-term market fluctuations should see this stock as a very attractive natural resource diversification apart from oil and gas.
Steel is still being produced in record amounts and Fording is a major supplier to that industry. The Canadian tax uncertainty will probably drag on for a while, and will likely result in little change in tax laws. We think Fording is a great buy and made it a pick of the month again. Recommendation: Buy."
FREEMARKET GOLD & MONEY
P.O. Box 5002, North Conway, NH 03860.
1 year, 20 issues, $260.
Gold and silver look
ready to climb higher
James Turk: "Gold and silver sold off at the beginning of this month, but their drops were limited. Both metals subsequently bounced back quickly, which attests to their strong underlying demand.
Both gold and silver look ready to climb higher, but I am uncertain as to whether we may see more 'backing & filling' first. From their low, both metals are now up five days-in-a-row, which is an unusual occurrence. So it would be normal to expect that we will see some more testing of support before gold and silver eventually head higher.
This testing, however, may be brief. The platinum group metals are at or near record highs. Copper looks poised to soar in a massive short squeeze. These metals for now are leading the way, and I expect that gold and silver will not be far behind, with silver leading gold.
Gold is trading near 17-year highs, and appears ready to break into new high ground at any moment.
The same technical position also applies to silver. It's near the break-out point, but so far has failed to push into new high ground. Nevertheless, silver's trading pattern in recent weeks bodes well for the immediate future.
So in summary, from a long-term point of view, both metals remain in strong uptrends. We can in time expect much higher prices.
From a short-term point of view, the picture is less clear. Gold and silver still have some overhead resistance that they are working through. So it may be another week or two before they again start climbing higher.
Nevertheless, I am still looking for gold to reach $500 before the end of this year. And given silver's recent strength, it can be expected to rise even faster.
If the ratio of the metals drops to 55, which I think will be a reasonable target if gold touches $500, then silver will be trading around $9.10 before year-end.
If the ratio of the metals drops to 55, which I think will be a reasonable target if gold touches $500, then silver will be trading around $9.10 before year-end."
THE DINES LETTER
P.O. BOX 22, Belvedere, CA 94920. 1 year, 17 issues, $195.
Will there be an inflation or deflation
James Dines: "During America's Prohibition era against liquor, starting in 1920, cowboys often concealed a bottle of homemade booze in their boots, which is how the English word "bootlegger" came about. Oftentimes, the illegal hooch was homemade and deadly poisonous, just as some drugs are today, but people consumed them anyway.
For many years we have looked back at the 1980 peak of inflation in America as the commencement of "The Coming Great Deflation," whereas virtually every other leading commentator in the world has described it as "Greenspan controlling inflation." We are so alone in our prediction of a deflation that it is easy to brush our position aside as "impossible," but we are as deadly serious about this one as we ever are. Especially now, with a rising gold price knocking at the door of $500/oz inciting renewed talk of "inflation." But even those who are worried about inflation cannot seem to explain why the core inflation rate for consumer spending, one of Fedhead Greenspan's favorite indicators, is only growing at 2% a year. Proponents of more inflation have no explanation for this startling disparity, but we do.
Stepping back a moment, every nation in the world is printing as much paper money as it wishes - completely disregarding its relationship to the true wealth being actually produced - and has created oceans of paper and credit back by nothing. It is required reading for all TDLrs to obtain the book. Extraordinary Popular Delusions by MacKay (written in 1837 and available in paperback, but not from this office) to understand that the world is another "fiat money bubble," but for the first time in history of such international proportions. That is why we have described the current international currency system as so totally corrupt that it is doomed to collapse at some point and, although we will try to warn you when it seems to us to be approaching imminently, we cannot give any guarantees that we will be able to detect it and so we have requested that all TDLrs (except professionals) maintain a permanent holding of precious metals just as they would buy fire insurance, for prophylactic protection.
Many individual currencies have imploded around the world in recent years, which confirms for us the underlying danger, and we have called them "Vesuvian tremors." Some day gold will get up to between $3,000 and $5,000 an ounce, believe it or not, as those oceans of paper money are hurdled at a finite supply of that ultimate money. Silver will share in this bonanza, so they will both move together, by DIWPAT (The Dines Wolfpack Theory).
Another Fundamental point is the maddening misuse of the word "inflation" as a synonym for higher prices, which is definitely is not. A brief visit to your dictionary will confirm that inflation is correctly defined as an expansion of the money supply and credit, the result of which is usually - but not always - higher prices. Oil for example, in limited supply and with soaring demand, will show irregularly higher prices in coming decades no matter what. On the other hand, deflationary price crashes are already evident in automobiles, personal computers, wages and many other areas, confirming our deflationary hypothesis. While a deflation is inevitable, depending on how unwise the world's monetary authorities become, there might first be an always ruinous hyperinflation, which we can only hope never to see because of the way they end. An example is Germany's catastrophic hyperinflation of 1920 to 1923, as that country still suffers from its tortured aftereffects going on a century later.
With those semantic terms defined correctly we can now understand what is puzzling our leaders. They assume that higher petroleum prices will lead to higher prices for products derived from it, such as plastics, chemicals, synthetic rubber and so on; the assumption is correct, but that is not "inflation," which continues its pernicious work in areas other than raw-material shortages! Having misunderstood the problem, their remedy of forcing interest rates higher will not help the shortage of petroleum, although it will cause an unnecessary recession that diminishes demand sufficiently to knock prices down temporarily. Misdiagnoses are doubly dangerous because the real remedy is thus evaded.
America's Federal Reserve of course is well aware that gold is in an Uptrend, although they do not link silver's comparable Uptrend with it because it is not in their paradigm, and they mistakenly assume that the rising gold price signals an inflation ahead. As already noted, there is an outside chance of a hyperinflation, but we regard a deflation as much of a probability as when we predicted one for Japan in 1989, when the Nikkei was 38,000, after their serious inflation of the 1980s.
Government economists at America's Fed have thus bootlegged their theory of inflation, based on higher gold prices, along with the synonymous expectation of the impact of higher petroleum prices, conjuring up a witches' brew that could be poisonous hooch for the stock market. It simply does not dawn on them that the strength in gold bullion could be the result of a flight from the dollar, by Venezuela perhaps, Iran, or other countries fearful of having their funds seized by the American government. Dollar holders such as the central banks of China and Middle-East oil producing nations, understandably grumbling about the plunging dollar's impact having created losses in their reserves, are also switching to gold bullion, perhaps some silver also.
Here's another mystery puzzling investors these days: why are gold bullion prices up yet gold-mining shares languishing? The obvious answer is that people who buy commodities have very different emotions and Mass Psychologies from those who usually buy stocks, and the two generally do not mix their respective arenas. Thus bullions and stocks do not always move in mathematically precise harmony. Another possibility might be that mining companies use energy, so their expenses are going up faster than the price of gold is rising, but that theory will be tested during the next and inevitable short-term downturn in oil prices. In all of the above we have set the stage for the underlying realities that some TDLrs simply do not have enough time to work for themselves.
Fedhead Greenspan has been so surrounded by his coquettishly fawning, groveling sycophants that he has failed to answer why interest rates are not set by free markets, as his Objectivist philosophy would dictate. Even he admits to consternation that he cannot seem to push long-term interest rates higher, without grasping that in a deflation interest rates decline (except when there is a possibility of failure by the debtor to pay). Indeed, when short-term rates get above long-term rates, that is called "inverting the yield curve," and is a highly-reliable indicator of an oncoming recession manufactured by Fedhead Greenspan and his lackeys to prick what he calls a "real-estate bubble" that they fear might bring opprobrium down on their heads.
So what happens next? Recently, Ben S. Bernanke was named to replace Fedhead Greenspan on his retirement. Superficially, it seems that there will be little change, as the Fed still mistakenly calls low inflation its primary goal without realizing that such activities will only aggravate what we call "The Coming Deflation."
But one new element has been injected, and they call it "inflation targeting." What they mean by it, in their simplistic way, is that deflation could be cured by adding just a little inflation!. They assume that the complexities of Mass Psychology could be reduced to toggling between the simply arithmetic of adding either a little more inflation or deflation, as if making a soup. In reading MacKay's book Extraordinary Popular Delusions it can be seen that this remedy has been tried in every inflation, and was the basis of our old prediction that the Fed would someday switch from fighting inflation to becoming its ally! This specific prediction was made for example in my second book The Invisible Crash and, in the Mass Psychology book, and many other times over the years. That seemingly-outrageous forecast is coming true before your very eyes.
Considering the above, we predict that Fedhead Bernanke will try to neutralize the lower prices of deflation (when he finally recognizes them) with more inflation by running the printing presses to produce more dollars. We made a comparable prediction, starting in 1989, that Japanese central bankers would try to cure Japan's own deflation that way, and they did, yet its deflation rages on to this day. It's not as simple as economists think because they have been imprisoned by the delusion that they can control the economy better than the Mass Mind, which inscrutably mocks their impotence.
We sense a brooding, smoldering currency crisis that many look at but do not see, its very invisibility meaning that we are early in the move, based on Mass Psychology's "invisibility of new trends." Ultimately, this will be lifesavingly bullish for your gold investments, although we still hew to our guests that gold stocks are in the early stages of their own short-term Consolidations that we expect to end early in 2006 - more on that in our upcoming 2006 Annual Forecast Issue.
Serious market student are well aware of our DIWPAT, so if we are bullish on gold and silver it follows that platinum and palladium should rise in hot pursuit. And indeed they are. The latter two metals have a somewhat different Mass Psychology behind them, specifically their use as anti-smog devices in automobiles. We have long included platinum and palladium in our DIESA Energy Average as newly-emerging countries such as China and India begin to struggle with the gagging pollution resulting from soaring automotive demand. Our most-favored palladium recommendation is North American Palladium (TSX PDL; AMEX: PAL) (in Supervised Investment List #3), which we recommend holding long term regardless of fluctuations because it is the only pure palladium play in the world and is therefore destined to be acquired by a mining giant intelligent enough to seize this unique asset.
Platinum is interchangeable with palladium in automotive catalytic converters, depending on relative price, so we are likewise bullish on platinum. Our last TDL included a chart of platinum along with Anglo Platinum, which has already burst into new all-time high ground and everybody who ever followed us into that stock today holds it at a profit. We are always deeply satisfied to see all-time highs for just that reason. African Platinum (Afplats) (AFRPF), a dirt-cheap, brand-new, completely unknown-in-America platinum startup in South Africa. Afplats is difficult to purchase because it is not yet listed in the United States, but by the time it is easy to buy we expect the price to be much higher; any international stock broker should be able to acquire it for you, probably in London. Afplats already has a resource of an impressive 50-million ounces of 4E (the three platinum groups metals, plus gold) which management believes is only the beginning. Its pre-feasibility study envisaged a 300,000 ounce-per-year mining and concentrating operation, with a mine life of over 20 years. We very rarely recommend start-up operations, which is why we ourselves bought into it, and could have held it for ourselves because start-ups are always risky, but we decided to share it with those who are looking for a cheap and high-value situation that could be held for at least two years."
In the worlds of Phyllis Diller, "The way we know the kids are growing up is when the bite marks are higher"!
THE MORGAN REPORT
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David Morgan: "Although this month has appeared strong for the precious metals, a look over the month provided some interesting facts. Gold closed down $8.00 on October 31, 2005, at $465, and it ended September 30 at $468.70. Silver ended September at $7.42, and closed October 31, 2005, at $7.52; it was off 25 cents on the day. So on a month-to-month basis, the metals appear to be flat. Comex warehouse stocks continue to build in silver, and this may have something to do with the silver ETF, but we cannot be certain at this point.
Investors must condition themselves for this type of volatility moving forward. The swings up and down will be large at times. Five-hundred-dollar gold is an interim target. Gold has come within $25 of that target already. Five-hundred-dollar gold may represent what eight-dollar silver represents, meaning it will prove to be a resistance point, but we find it difficult to think that gold's new secular bull market will end after only five years. Gold stocks remain historically undervalued from a long-term perspective, and the juniors have been spotty. Some of the silver juniors have actually performed rather well recently, while others continue to struggle.
Our sources indicate that strong physical demand appears any time silver is at or below the seven-dollar level. Physical gold demand remains strong in the Middle East and India. Indian government silver sales is said to be supplying very small quantities of silver at this time. This should continue to be the case, and all readers should factor this into their thinking. Normally, the equity sector responds more slowly than the commodity sector, meaning that gold and silver may shoot down temporarily and the stocks do not follow immediately. If the sell-off continues, then the stocks normally do reflect the correction.
Now that the overall stock market appears to be topping, the gold stock sector has become one of the strongest. This confirms the historical tendency for gold to trend inversely to the general stock market. Gold does best when investors lose confidence in stocks, and this is doubly true when investors (individual and institutional) lose confidence in bonds. Our work suggests that the gold/stock ratio broke a 22-year downtrend line in 2002, signaling a major shift has taken place. Do not let any bad days, or weeks, shake you out of this market. If anything, the precious metals market will only gain more strength over time.
Bear in mind, however, that the major reason for weakness in metals prices at any time is short-selling with dealers, bank proprietary traders, and a few fund manager types seeking to "push" the market lower to trigger stop-loss sell orders, which tends to move the market even lower. We do not see this scenario changing, but the overall major trend will not change either. So again, buy on weakness."
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