Global Market Commentary

The Market Wave & How We’re Riding It

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As we explained in detail last week, the global markets are being flood-ed with expanded liquidity. The sources of this liquidity are the usual

 

suspects: quantitative easing (QE), interest rate declines, bond purchases, equity purchases, and other means. As the number of countries all over the world that are lowering their interest rates and printing money climbs, QE continues full steam ahead. With tongue in cheek we call this phenomenon QE-E, or QE everywhere.

 

This liquidity expansion is the underlying driver for our bullish posture. We remain bullish on U.S. and emerging market stocks, technology stocks, gold, wheat, and select currencies. Today, we are adding a new high-dividend-paying stock to our recommendations; you’ll find it below in our Recommendations section.

 

 

This unparalleled expansion of liquidity will eventually lead to much higher prices for gold, commodities, commercial real estate, and stock markets in many corners of the world. The Euro, U.S. dollar, and many other currencies will decline in value. So in order to protect ourselves, we work to own assets that can either grow in value, or maintain buying power as the dollar and Euro are devalued.

 

In our opinion, many of the world’s stock markets are temporarily over-bought, so we are holding back. When the market corrects its overbought status, which we expect could happen soon, we expect we’ll have more recommendations. We believe that any market consolidation we see will be temporary and small in magnitude.

 

This liquidity is the biggest issue facing investors in the U.S., Latin America, Europe, and Asia. This past weekend, China lowered bank reserve ratios again, freeing up new money for investment. The Chinese mar-ket rallied.

 

 

 

The U.S. Oil & Gas Production Renaissance — A Key Development for Economic Growth

 

The U.S. is ramping up its production of oil and gas, creating an increase significant enough to lower en-ergy costs for Americans. This will have a profound effect on global GDP growth. We’ve been monitor-

 

ing this exciting trend that we anticipate will have a great impact on investment opportunities, both now and in the future.

below are eight main points that investors should understand in regards to this — and which we recommend keeping a close eye on.

 

 

  1. Natural gas prices have fallen in the U.S., Canada, and Australia…and look like they’re staying low for the

 

next several years

 

The peak oil thesis of a few years ago, which predicted rising oil prices as oil grew scarcer, has been one reason why oil prices have remained pretty strong from 2000 to today. However, today’s U.S. oil market shows some shift from this thesis, as there have been tremendous efforts to find and commercialize oil deposits. Technology has been the key to this shift. Technological advancements have allowed companies to lo-cate and tap into massive new discoveries of oil, natural gas, and natural gas liquids that are found in shale rock throughout North America. The

 

high oil prices of the last 12 years have spurred these advancements by providing the impetus for huge amounts of research and development to find and produce oil. Rising oil prices have helped make new U.S. shale oil and gas reserves economically practical. Instead of simply succumbing to dwindling supplies of oil, U.S. companies have created more oil and gas reserves.

 

When producing oil, natural gas and natural gas liquids are often produced as well. Even though natural gas is oversupplied (and cheap) in North America, natural gas continues to be produced as a by-product of oil drilling. The natural gas drilling continues in spite of the market being oversupplied, in large part because at the well-head there is usually a mixture of natural gas and natural gas liquids produced. These liquids, such as ethane, propane, butane, and natural gasoline sell at prices closer to that of oil than the cheap prices of “dry” natural gas.

 

In addition to the oil and gas discoveries, the lower cost for natural gas is constructive for U.S. economic growth. The U. S. is not alone. Canada, Australia and Argentina have exploited shale deposits and the results have been positive.

  1. Oil production in the U.S. and Canada has risen substantially, reversing a 40 year decline.

 

According to research by Citigroup and others, the U.S. could be energy self-sufficient by 2020.

 

Increased energy availability is making U.S. energy costs are more stable. Businesses prefer stable energy prices…consumers do too. In the U.S. we expect:

 

  • Upward pressure on energy prices in U.S. will be moderated by new discoveries.

 

  • S. GDP growth will be enhanced.

 

  • S. balance of payments and balance of trade will benefit as U.S. oil imports decline, and exports of coal and more refined fuels rise.

 

  • Lower natural gas prices in the U.S. will cause electric utilities and industrial corporations to consume more natural gas and less coal.

 

  • Within 5 to 8 years the U.S. will become a sizeable Liquid Natural Gas (LNG) exporter.

 

-The U.S. is a winner.

 

Citi Investment Research and Analysis breaks it down by shale

 

  1. Canada will remain a major player in world oil and gas production. Canada already supplies a great deal of energy to the U.S. As these exports slowly diminish over the next few years they will be more than replaced by very large exports of oil and LNG to Asia. Canadian energy consumers will also benefit from lower energy costs. 

    -Canada also wins.

    1. Australia and Indonesia will continue to grow and exploit their gas resources.

     

    They will produce massive amounts of gas which will be sent to Asia, especially Japan, South Korea, China, and India as LNG.

     

    -Australia and Indonesia win.

     

    1. Shale development in Europe, Latin America, Asia, and Africa will yield large quantities of oil and gas for decades into the future.

     

    The world has watched as new drilling and production techniques have been pioneered in past decade by in-ternational, U.S., and Canadian oil and gas companies and their suppliers. Horizontal drilling and hydraulic fracturing are going global. They have proven to be efficient and effective technologies for increasing energy production, making it possible to reach hydrocarbon deposits that were discovered decades ago, but were deemed too expensive to produce.

     

    The increased production has already had far reaching effects in Australia, Canada, U.S., and Argentina, and will have more far reaching effects worldwide. This will lower the cost of energy and increase economic growth for many regions of the world over time.

     

    -Long-term, the global economy wins.

     

    1. The political and economic influence of the Middle East and Russia will be diminished.

     

    The energy production increases around the globe will be immense and long-lasting. These trend changes will lead to major changes in military, political, and economic alliances. Energy self-sufficiency will dawn on vari-ous new countries and traditional suppliers will lose power.

     

    -The Middle East and Russia lose influence.

     

    1. New infrastructure will be required

     

    The world will need to invest in new infrastructure for: oil and gas gathering post-production, transportation by pipeline, train, or ship, storage and processing, and refining of the into LNG, gasoline, and other products.

     

    -Infrastructure suppliers flourish.

     

    1. Investment opportunities will be plentiful:

     

    We expect many new stock offerings and investments in current technology providers will take place to finance the drilling and infrastructure phases mentioned above. This will create many new investment vehicles which will benefit from the above trends.

     

    -In general, investors will benefit…but investors in certain industries will not. It would appear that the move towards a much greener planet is being postponed.

    The Guild Investment Guide:

     

    The Planet’s Shifting Energy Production Profile has the Potential to Reshape the World Economy — How Will You Profit from it?

     

    As investment professionals this is how we approach the situation:

     

    Step 1- Analyze the macro environment to determine attractive investment areas. In this case, the macro analy-sis is completed and has been partially explained above.

     

    Step 2 – Look for investable companies that produce oil and natural gas in areas of current shale exploitation: Canada, U.S., Australia and Indonesia are the most obvious beneficiaries. Next, look for other locations where shale is known to be located but is not yet exploited. Western Europe has a lot of shale, but is currently unwill-ing to exploit it. Argentina has good shale properties, but also has a confiscatory government. In our opinion, Argentina’s reward/risk profile is not attractive.

     

    Step 3 – Keep an eye out for new shale investment areas as they develop Eastern Europe, Asia, etc. Do research when development starts in new shale areas.

     

    Within the strong shale producing areas we have identified some good exploration and production companies over the past several years. However, we believe that these companies are too extended to recommend at this point. We will wait for price declines before recommending. Stay tuned.

     

    Our Open Position in Energy Transportation

     

    Our open positions include an energy transportation company, the LNG ship-per, Golar LNG [NYSE: GLNG]. Golar, a Norwegian headquartered company, is the 2nd biggest LNG shipper worldwide. The company is well situated to make money as more LNG is shipped from Australia and Indonesia to other parts of Asia and from Qatar and other nations to Asia and Europe.

     

    LNG shipping day rates are rising, and in a few years, we see additional shipment patterns emerging, for example LNG ship-ments from Canada to China.

     

    Our Newest Investment Recommendation is a Beneficiary of Increasing U.S. Energy Production

     

    Today, we are making a new recommendation that combines high yield and appreciation potential while using low priced natural gas to produce nitrogen based fertilizers. We believe that natural gas prices will stay lo

    the U.S. for a number of years. The excess natural gas from all of the oil drilling will be sold at low prices and Rentech Nitrogen Partners (NYSE: RNF) will benefit while producing their fertilizer products. According to the prospectus from their initial public offering last fall, the company is expecting to pay about $2.34 per share in distributions this year. Strong demand for fertilizer and low natural gas prices make this dividend paying stock attractive. (See Recommendation Tracker.)

     

    Rentech Nitrogen Partners — Earn dividends while benefitting from growing food demand

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Source: Bloomberg

     

    Want More Recommendations?

     

    We are carefully examining industries such as pipelines, rail transportation for energy, oil field services, oil field clean up, shipping of LNG and crude oil, equipment for energy processing, oil and gas production, oil and chemical refining, etc. We are researching to identify the sectors with immediate and rapid growth prospects and determine which investments are undervalued.

     

    In coming letters we will provide some insight into how we research these companies…and will try not to be too dry and boring. Remember to review coming letters for more recommendations.

     

    Revisiting Our Currency Recommendations

     

    Our open positions include two currencies, the Canadian dollar and the Singapore dollar.

     

    Canadian Dollar

     

    Canada produces many commodities, including farm and forestry products, oil, gas, and minerals. The country supplies a great deal of energy to the U.S., and precious metals, base metals, food, and forest products to the rest of the world.

     

    Canada has also been able to boast of its strong banking system. During the U.S. and European banking crises of 2008 and 2011, the country maintained greater economic stability due to its more conservative and sober bank regulations. The Canadian government did not allow the financial system excesses that both the U.S. and European bankers indulged in, and which later returned to haunt them.

    However, no economy is perfect. The primary chink in the Canadian armor is that their economy is not broad based. Commodities and banking make up a huge percentage of their economy. A period of prolonged weak-ness for commodity prices could be negative for Canada. We don’t foresee a prolonged period of weakness in commodity prices for the next several years. Lower interest rates and money printing from many sources — or as we like to joke “QE-E” will lead to continued global demand for hard assets and commodities; thus offering many benefits for the Canadian economy. When QE-E proliferates, investors seek shelter in commodities and commodity-oriented stocks. Good news continues for the Canadian dollar.

     

    Singapore Dollar

     

    We struggle to name a more coherently-managed and financially well-run country than Singapore. Singapore continues to serve as a major financial, shipping, and trade center for a region of the world that is growing steadily in global importance, Asia. Wise corporate governance combined with wise national governance make Singapore a great place to invest and do business. Capital from around the world, especially wealth seeking an escape from autocratic or difficult environments continues to flow into Singapore, boosting its business pros-pects and causing continued accumulation of the Singapore dollar.

     

    Cost Of Living: Watch The Price of Basic Needs

     

    Politicians and policy makers in the developed world seem to be unconcerned about rising inflation. On the contrary, they have been actively trying to generate a higher level of inflation since the financial crisis and

     

    ensuing de leveraging began in 2008. Inflation, the biggest long-term consequence of QE-E, is low in the devel-oped world, and started to decline in much of the developing world last year, so we understand their dismissal of it.

     

    What About This Year and Beyond? Is High Inflation Coming? The Data Says…Not Just Yet

     

    Last week, the U.S. Bureau of Labor Statistics (BLS) released its monthly inflation data. Their Consumer Price Index (CPI) showed an increase in prices of 0.2 percent in the month of January. This published inflation data represents the rate of change in prices of goods and services for the previous month, i.e. it’s backward-looking. Of course we recognize that publishing future inflation data is mere guesswork. Our Guild Basic Needs Index TM (GBNI) also tracks historical prices, those of essential basic needs. Can backward-looking data predict the future? No, but there are ways to look at historical numbers to help bring the future into better focus.

     

    For example, this weekend’s Time magazine discusses last week’s BLS inflation data. While the monthly CPI data points like January 2012’s 0.2 percent may not sound the inflation alarm, a look at the figures in six month increments provides more clarity. In his article titled “Is it time to start worrying about inflation again?”, long-time business columnist, Michael Sivy, discusses the government data, calling it “worrying.” He writes that the data shows a “more worrying pattern if you look at the same measure at half-year intervals since the start of 2009. The (inflation number) series goes: minus 0.6%, minus 0.1%, 2.1%, 1.2%, 2.8%, 3.5%. With only one interruption, that trend shows inflation on the rise.”

     

    Watching the monthly government data will yield clues, but without doing deeper analysis the clues could be too few and too late to help you in your investing. To spot a trend, and more accurately predict the future, in-vestors should analyze the data to see if inflation is accelerating or decelerating. Looking at the rate of change of the rate of change (also known as the second derivative), can offer a glimpse into how inflation can feed upon itself…and create even more inflation. The data does not necessarily show acceleration yet, but we will be watching it.

    When Looking for Inflation Trends,

     

    Don’t Forget to Pay Attention to Prices of the Essentials — Basic Needs

     

    In addition to digging deeper into the numbers, we suggest you pay attention to the costs of basic needs that are pervasive and tend to trickle through the entire economy. To help you do that, a couple of times each month we will be publishing our Guild Basic Needs IndexTM (GBNI).

    A Special Comment for Guild’s Clients

     

    If you are an investment advisory client of GIM who is receiving this newsletter, please note that the fact that a general recommendation is made of a particular security, commodity, or investment area to its newsletter sub-scribers does not mean that investment is suitable for you or should be purchased by you. For example, GIM may already have purchased such securities on your behalf or purchased securities in the same industry (and an increase in the position for you may represent too much concentration in one security or industry), or GIM may believe the investment is not suitable for you based on your risk tolerance or other factors. If you have ques-tions about the recommendations in this newsletter in relation to your account at GIM, please contact Monty Guild or Tony Danaher.

     

     

     

    GIM and its principals have certain conflicts of interest in its relations with its investment advisory clients and its newsletter subscribers resulting from GIM or its principals holding positions for its clients or themselves which are also recommended to its clients. GIM may change the positions of its clients or GIM’s principals may change their positions (increasing, decreasing, and eliminating them) based on GIM’s best judgment at any given time, including the time of publication of the newsletter. Factors that lead GIM to change or eliminate its positions may include general market developments, factors specific to the issuer, or the needs of GIM or its advisory clients. From time to time GIM’s investing goals on behalf of its investment advisory clients or the personal investing goals of GIM’s principals and their risk tolerance may be different from those discussed in the newsletter, and the investment decisions made by GIM for its advisory clients or the investment decisions of its principals may vary from (and may even be contrary to) the advice and recommendations in the newsletter.

     

    In addition, GIM or its principals may reduce or eliminate their positions in an investment that is recommended in the newsletter prior to notifying the newsletter subscribers of such a reduction or elimination. The publication by GIM of a “target price” or “stop loss” for a particular security or other asset does not necessarily represent the price at which GIM intends to sell or will sell any such assets for its advisory clients or the price at which GIM’s principals intend to sell any such assets.

     

     

     

    As a consequence of the conflict of interest, GIM’s clients or principals may benefit if newsletter subscribers purchase assets recommended by GIM since it could increase the value of the assets already held by GIM’s investment advisory clients or GIM’s principals. On the other hand, GIM’s principals and clients may suffer a detriment if they seek to acquire additional shares in securities that have been recommended and the price of the securities has increased as a result of purchases by newsletter subscribers.

     

    To help mitigate these conflicts, GIM seeks to avoid recommending the securities of individual companies where GIM or its principals have an ownership position and where the issuer is small or its securities are thinly traded−that way sales by GIM in advance of possible sales by newsletter subscribers would not be likely to cause any significant decrease in the sale price to newsletter subscribers. GIM has a fiduciary relationship with its investment advisory clients and cannot agree on behalf of such clients to refrain from purchases or sales of a security mentioned in the newsletter for a period of time before or after recommendations for purchas-es or sales are made to its newsletter subscribers.

     

    GIM encourages you to do independent research on the securities or other assets discussed or recommended in the newsletter prior to making any investment decisions and to be especially cautious of investments in small, thinly-traded companies, which are usually the most risky investments that you can make.

     

    Disclaimer of Liability

     

    GIM disclaims any liability for investment decisions based upon recommendations, information, or opinions in its newsletters. GIM is not soliciting you to execute any trade. Nothing contained in GIM’s newsletters is intended to be, nor shall it be construed as an offer to buy or sell securities or to give individual investment ad-vice. The information in the newsletter is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject GIM to any registration requirement within such jurisdiction or country.

     

     

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