Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Mr. Market: “About to heal America’s collective amnesia,”
• The not-so-smart road from Washington to Wall Street,
• Plus, how to take advantage of a kind offer and plenty more…

Eric Fry, reporting from Laguna Beach, California…

“It’s almost worth the Great Depression,” humorist Will Rogers reportedly remarked, “to learn how little our big men know.”

Apparently, the big men of Will Rogers’ day didn’t know all that much…or at least not enough to avoid the Great Depression. But that was then and this is now. Today’s big men are much, much smarter…Everybody knows that.

Barak Obama: Sharp as a tack
Ben Bernanke: Brilliant
Timothy Geithner: Pure genius
Goldman Sachs: MENSA Chapter, Downtown Manhattan

These are just a few of the “big men” who are winning accolades for rescuing the economy…or for profiting from the economy’s apparent recovery.

Thanks to the stock market’s dazzling 40% rally, and to the recent spate of less-bad-than-expected economic data, a spontaneous folklore is developing around the federal government’s response to credit crisis.

“Wicked homeowners, aided and abetted by wicked mortgage lenders, borrowed more money than they could afford to repay,” the folklore begins. “When the wicked homeowners stopped making payments on their mortgages, trillions of dollars worth of mortgage-backed securities plummeted in value. This event caught many investors by surprise, including many big American banks.

“Therefore,” the folklore continues, “many big American banks began to suffer big losses (through no fault of their own, by the way, because they never could have imagined that so many wicked homeowners would stop making payments on their mortgages). These big losses frightened the big banks, causing them to withdraw credit from their customers. The ensuing credit crisis threatened to destroy the entire American financial system.

“The stock market plunged. Job losses soared. And home prices plummeted. All hope seemed lost…until the federal government intervened. Faster than you can say, ‘quantitative easing,’ the government flooded the banking sector with trillions of dollars worth of bailouts, subsidies and guarantees.”

“At first, the public scorned and mocked the government’s noble efforts,” the folklore concludes. “But the government persevered. Within just a few months, the stock market rebounded and the green shoots of recovery sprouted from coast to coast.”

Nice story…Perhaps the most entertaining American folklore since Paul Bunyan.

No one would deny that America’s big men are riding high – very high. Bernanke and Geithner are riding high on a friendly wave of public adulation. Goldman Sachs and the other government-coddled financial institutions are also riding high…on a wave of resurgent profitability.

Why wouldn’t they be?

The big financial institutions, courtesy of the Federal Reserve, may borrow money at very, very low rates of interest and reinvest the proceeds in higher-yielding instruments. This tactic is simply a reincarnation of the old “carry trade,” but with two critical differences: the Fed is subsidizing the carry, AND guaranteeing that the trade won’t be company-killing.

Unfortunately, subsidizing private enterprise is an expensive activity, which is one of the reasons America’s federal deficit will soar to nearly $2 trillion this year. That’s a bad thing for us taxpayers. But, ironically, that’s a very good thing for the large Wall Street firms who are the “primary dealers” of Treasury securities. The larger the quantity of notes and bonds that Uncle Sam issues, the more money the primary dealers make.

So it’s true; everywhere one looks these days, the big men are looking pretty darn smart. But we don’t think they’ve learned as much as they think they have. The big men have learned how to game the game…for a while. But they haven’t learned how to cultivate an enduring recovery…or how to build a failsafe financial structure.

Don’t take our word for it; just pull up a chair and watch. Enduring economic vitality doesn’t sprout from massive debt-issuance and currency debasement. And economic vitality certainly doesn’t sprout from handing out favors to coddled companies, while increasing the tax burden on the rest of the population.

No, the big men haven’t learned that much, which is why this crisis isn’t over yet. When big men actually learn things, there’s pain. When big men actually learn things, everyone knows it. The evidence is undeniable…

When Louis XVI, one of the big men of his day, finally understood that the peasants weren’t happy, his head was rolling on the cobblestones of the Place de la Concorde; When General Custer finally learned that Indians could mount successful counterattacks, he was lying on a grassy knoll at the Little Big Horn with a bullet hole through his temple; And when Bill Miller, manager of the Legg Mason Value Trust, finally learned that stocks sometimes go down, his investors were yanking their capital even faster than he could lose it for them.

When big men actually learn things, everyone knows it.

While awaiting the fruits of their real-world educations, we little men must try to continue our little lives in ways that maximize contentment and minimize hardship.

In today’s edition of the Rude Awakening, Chris Mayer, editor of Mayer’s Special Situations, explains why investing in natural gas stocks might introduce a little joy into our little portfolios.

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To Do: Buy Natural Gas
By Chris Mayer

Now that the stock market has soared 40% from its March lows, almost no one can seem to remember what they were so worried about. By contrast, now that the price of natural has collapsed 40% in the last seven months, almost no one can remember why they ever worried about an energy shortage.

Mr. Market is about to heal America’s collective amnesia.

Investors will once again remember why they were selling stocks last March, and they will also remember why they used to invest in natural gas.

Share prices have gained a lot of ground during the last few months, even though the economy has not. The major averages have rallied about 40%, but many stocks are up a whole lot more than that. Seventeen of the thirty-three stocks I have recommended to the subscribers have gained more than 50% since those March lows. Eight are up more than 100% and one is up more than 200%.

Robust rallies like these are not uncommon, even in the worst of markets. By now, you’ve probably read about how the stock market rallied 41% in early 1930 after the crash of 1929. Yet that rally fizzled and the stock market tumbled to even lower lows, and had years of hard slogging ahead of it.

I’m not saying this is 1930, but I would caution against overconfidence. Investors should be looking to hedge their bets after this recent rally… and should be looking for a margin of safety. I believe natural gas might be a great place to hide.

Natural gas is, simply put, super cheap. As most other commodities – including oil – have rallied, natural gas has remained stuck in the mud. In fact, the ratio of the price of crude oil to the price of natural gas topped 18-to-1 recently, which is a ratio we have not seen since 1990.

The spike in this ratio is due to two very simple facts: oil prices are rising, gas prices are not. The prices of these two energy sources tend to loosely track one another. But as the chart below illustrates, the prices of oil and natural gas have diverged dramatically during the last six months.

This trend has not been pleasant for natural gas producers, nor for the folks who have been investing in natural gas stocks. In this market, where nearly everything is rallying, the shares of most natural gas companies have been conspicuously sluggish. But the past is not necessarily prologue. I have not seen a better opportunity in many years to buy natural gas stocks.

Let me lay it all out for you before you click “delete” on this e-mail.

There are two reasons why natural gas prices are likely to rise from their current depressed level:

1. Natural gas exploration efforts are dropping rapidly, which will lead to a drop in supply.
2. Government initiatives will create significant new demand for natural gas.

Let’s begin by acknowledging that the price of natural gas fell because there was too much of it. We are in a recession, after all. Industrial demand for natural gas has fallen through the floor and into the basement. But the best cure for low prices is low prices.

Producers are cutting back, thereby reducing supplies. The rig count has collapsed. It has fallen much faster than in the 1981/82 collapse, the worst drop since the Great Depression, and one that still makes old-time natural gas men cringe to this day. Meanwhile, the decline rates on shale gas plays (which helped contribute so much gas to supply during the last few years) are 60-75% – meaning that the flow of gas from these wells will drop by this percentage in the first year.

Another point: The marginal cost to produce natural gas for the vast majority of natural gas companies is somewhere around $6-8 per thousand cubic feet (mcf).

Production costs are an important guide to natural gas prices, as the nearby chart illustrates. The natural gas price usually bounces off the “cash cost” of production. No producer makes money below cash costs. So supply drops. Conversely, when gas prices gravitate toward the marginal cost of production, supplies increase, thereby putting pressure on prices.

Right now, the spot price of natural gas is under $4 – sitting right on the industry’s cash costs, but well below marginal costs. In short, natural gas supply is going to start to dry up here really soon.

Meanwhile, the war on so-called greenhouse gases is officially under way. As this war progresses, clean fuels like natural gas will attract growing demand. Each passing month brings us closer to capping, taxing or cutting the gases thought to cause global warming.

I don’t think investors appreciate how far-reaching such efforts could be. And there will be definite winners and losers as a result. Some of these are far from obvious and some are in plain sight.

The first obvious big loser is American coal, from which we get half about of our electricity needs. Already, you see companies reacting to this news. Consol Energy, a big coal company, said it halted two big mines in Appalachia because of uncertainty over the costs of pending new regulations. If you own a U.S. coal miner, I’d fold the hand, so to speak.

Coal-fired power plants look like big losers, too. And the utility AEP, the biggest user of coal in North America, is looking to shutter some of its coal plants. It is also looking at how high rates would have to go to comply with possible rule changes. In some places, rates could rise as high as 50%. It is no sure thing that AEP could get such rate increases. Natural gas-fired plants, by contrast, may be one winner relative to coal. Natural gas, in general, looks to be a winner.

Beat the rush; buy your natural gas stocks now.

Eric’s Note: Chris thinks he has discovered a potential four-bagger in the natural gas sector. This stock has jumped a bit last Friday, when word surfaced that one of the company’s properties could contain a lot more gas than the company was expecting.

What’s more, the company is a debt-free and low-cost producer that is profitable, even with today’s low natural gas prices. And the company’s stock trades for half the value of its proven and probable reserves. Add in the huge acreage for its other prospects and you could get a price more than four times what it is today. Unfortunately, for the sake of Chris’ paying customers, we cannot divulge the name of the company.

Why are we engaging in such a flagrant (and annoying) sales tactic, you may be asking yourself? Simply because we think you will thank us later for annoying you now.

Here’s the deal: For one solitary dollar, you may sample Chris’ terrific investment service, Mayer’s Special Situations, for 30 days. If you don’t like what you see, cancel.

By paying one dollar, you would, of course, obtain the name of the promising natural gas stock Chris recently recommended to his subscribers. And you would also gain access to the entire list of stocks Chris has recommended, as well as access to the entire archive of Mayer’s Special Situations.

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After you examine Chris’ amazing body of investment research, we think you’ll want to stick around for a while. By the way, the $1 offer expires tonight, at midnight.

Click Here to proceed directly to the order form page.

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[Rude Endnote: Markets in the U.S. finished higher yesterday. The Dow closed 90 points higher pushing it into positive territory for the month. The S&P 500 and the Nasdaq moved in similar fashion.

Japanese and Australian measures followed suit today, both rounding out the session 1.8% higher. Hong Kong’s Hang Seng finished down by 0.8%.

European markets turned lower a few moments ago after, according to Bloomberg news, “U.K. Economy Shrinks More Than Estimated in Biggest Contraction Since 1958.” London’s FTSE and Germany’s DAX were down 0.25% last we checked. France’s CAC was off by 0.4%

Commodities provided little entertainment for the punters overnight. Oil inched higher by a few cents to sit around the $71 per barrel mark. Gold is up two bucks at $939 an ounce.

Emails from you go to the address below. Our next one will be out in 23 hours.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com