Daily Dispatch: Weekend Edition – Oct 31, 2009

October 31, 2009 | www.CaseyResearch.com Weekend Edition

Dear Reader,

Welcome to the weekend edition of Casey’s Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.

Black Gold… Green Oil
By Michelle Burgess

This summer and early fall, there’s been a flurry of new green announcements from the world’s major oil firms. ExxonMobil, Chevron, Valero, Statoil, Marathon, and Sunoco have all thrown their hats into the green ring.

According to a recent article in Newsweek:The list [of Big Oil investors] goes on. And this time it’s the real deal. It’s not just that these projects involve bigger money, …it’s that companies are actually beginning to think about alternatives not just as a tool for greenwashing (throw up a few solar panels here, sponsor a conference on wind energy there) but as real businesses that might turn real profits—or at least help make fossil-fuel production more profitable. The catalyst is that governments are moving to force industry to cut carbon emissions, creating a new “long-term regulatory reality” that favors alternative energy, says PFC Energy chairman J. Robinson West.

Meanwhile, President Obama’s green-stimulus efforts and China’s massive investment in alternatives have created a serious market for green technologies.
The fact that nations like Russia and Venezuela are pushing out big oil companies also gives CEOs an incentive to consider green alternatives. So does the fact that oil companies are among the world’s biggest energy users, and will ultimately need to offset emissions. “I believe the large integrated oil firms will eventually become major players—perhaps even the dominant players—in alternative energy,” says Don Paul, a former Chevron executive who now runs the University of Southern California’s Energy Institute.

Big Oil is taking a closer look at how [renewable energy] might be used to increase efficiency internally, or to free up increasingly profitable fossil fuels, like natural gas, for commercial sale. When you consider that the top 15 oil and gas companies have a market capitalization of $1.9 trillion, it’s clear that these firms themselves have the potential to be major renewable customers.
Oil companies are also taking a harder look at how to make their own business models work in the alternative sector. Companies like Chevron are capitalizing on geological expertise to build large geothermal businesses.

Big Oil is going to be an increasingly important investor in alternative energy. Venture-capital money has dried up. But with oil at $70 a barrel, the internal venture arms of the major oil firms are increasing the amount and percentage of investment going to alternatives. Historically, when Big Oil spends a dollar on research, it will spend many hundreds more to bring a product to market. If the new projects coming online this summer are any indicator, alternatives may soon be awash in black gold.
U.S. government subsidies into renewable energy are forming a green bubble. One that’s steadily inflating. But the catch is: only one alternative energy is currently economically viable before subsidies… and that’s geothermal.

That would explain the interest Big Business has in the sector.
Another member of the oil community, Statoil, has formed StatoilHydro, to focus on advanced geothermal development.
Google.org — the charitable wing of the search engine giant — has become the largest funder of enhanced geothermal research in the country, outspending the U.S. government.
Alcoa, the world’s largest producer of aluminum, is actively participating in the geothermal Iceland Deep Drilling Project (IDDP).
And then there’s the mining industry.
Lihir Gold has already used geothermal resources to build a power plant, which today provides green electricity for their mining operation in Papua New Guinea.
BHP Billiton is currently investigating the potential for using geothermal heat in the Olympic Dam region of Southern Australia.
The smart money likes geothermal.

To learn how you profit from the growing green bubble, sign up for a 3-month trial subscription to Casey’s Energy Report by clicking here now.

Why Gold Has a LONG Way to Go
By Jeff Clark, Casey’s Gold & Resource Report

A couple weeks ago, I had my TV tuned to a business show that loves to give predictions on the markets and the economy. On that day, one of the program’s regular guests declared it was time to “short” gold, that it had reached its top, and that the precious metals bull market was over. I’ll try to be nice in my rebuttal.
So, what was his reasoning: technical analysis of wave counts? falling demand? a telling ratio? sun spots? No, he noted that upscale department store Harrods in London began selling gold bullion and coins “over the counter,” ergo, the top was in. Nice try, “Bert,” but this is amateurish. You really shouldn’t be playing with the big boys if that’s the basis of your call.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals. But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early1942. To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

And here’s why Bert looks equally silly today…

If the top were in, we’d be in the midst of an all-out Mania. Are we? Do you get the impression there’s a rush into gold by the greater public right now? Are headlines blazing on the covers of major magazines pronouncing gold as the new investment king? Has Wall Street gone gaga over gold and silver? I ask because these are the true signs that a trend has entered its final blow-off top and would signal it’s time to get out.
I decided to put Bert’s prognostication to the test, and I invite you to play along.
First, I struck up casual conversations with my friends, neighbors, relatives, acquaintances, my wife’s co-workers heck, even my seatmates on airplanes angling to learn how much gold they were hoarding, about the killing they were making in gold stocks, and how they were getting rich from all their precious metal investments. (In fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the only one.)

I found no one not one person who is actively investing in anything gold or silver, let alone rushing to buy or hoard the stuff. I had two people who confided that they did own gold, but in both cases it was inherited. A few were curious how they would go about doing such a thing, and fewer asked if I thought they should. Most everyone looked at me blankly when I asked; they didn’t seem to know what I was talking about. When I got a reaction like that, it was pointless to ask about gold stocks. Of the handful I did ask, most had never heard of Barrick Gold, the world’s largest gold producer.
Now ask yourself the same thing: how many of your family, friends, neighbors, and co-workers are buying gold and silver coins? Are any of them giving you hot stock tips about a fantastic gold producer, or telling you about the latest gold discovery made by a company in China? Have any fellow investors told you they’re dumping their brokers because they can select gold stocks better on their own? Anyone telling you they’re going to night school to learn the gold mining business?

Next, I surveyed a large sampling of print media looking for some of these signals that Bert must have spotted. Over the past couple weeks, not one of the major business magazines I reviewed had anything on the cover about gold or silver. Further, there were no articles on precious metals, such as the best ways to buy or store all this gold everyone is buying that surely signals the top is in.

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even mentioned! I did see an ad from the U.S. Mint in another, along with a couple small ads in the back that said they had the best prices on bullion (right beside the teasers for buying a Russian wife), but that was it. Even the portfolio allocation models recommended in the articles made no specific mention of precious metals (one recommended a “resource” fund, but their discussion of it was centered around energy investments).
Other than the articles you seek out, how many mainstream magazines do you see extolling the virtues of gold and silver on their cover? How many bestsellers are prominently displayed at your nearest bookstore that scream at you to buy gold stocks? Are you getting fed up with all the junk mail you get about gold and silver?
Last, I went out of my way to look for stories on gold and silver on TV and radio. About all I could find were the same ads that popped up after last year’s Super Bowl commercial by Cash4Gold. A couple programs quote metals prices, and I was able to find another that actually used the word “gold” in a sentence. It might just be me, Bert, but I can’t find any news anchors talking about the latest gold discovery or that “must own” gold stock. No in-depth special reports from investigative journalists on the hot Canadian junior mining sector. Nothing on my radio about the best ways to store all the silver every smart investor has been buying.

How about you are you feeling bombarded by TV and radio ads and segments on precious metals? Do you have the clear impression gold and silver are the hot new investing trend around the world? Are you Tivo-ing certain TV shows because of all the great info they provide about picking the next great gold stock?
If we were in a Mania, Bert, all of this would be happening. But it’s not. Those who buy gold coins in the U.S. are still largely viewed as members of a fringe group. There is no public discussion on gold, no insider tips on the latest hot gold stock, no special reports on how to store all the bullion you’ve collected. The psychology isn’t on our side yet. One signal does not a Mania make.

Last and perhaps most important, Bert, are you sure the dollar is done falling? You’re absolutely convinced we won’t see price inflation? Our current debt load won’t pose any future problems? No more worries about foreigners buying all that debt? Obama and Bernanke really have saved the day?

Bert, send me your shorted gold positions, I’ll buy them from you. And although the gold price could see a correction in the near term, and several more along its journey to “the top,” remember that battle in early1942 and all that had yet to occur before the war was over.

And one more thing: when you finally become breathless to buy gold stocks, I just might be ready to sell them to you.

Are you convinced you have the right gold and silver investments for what lies ahead? For just $39/year, you can be sure you have the best gold and silver stocks, along with specific recommendations on the best places to buy bullion. Check out Casey’s Gold & Resource Report.

Who Owns Your Mortgage?

The New York Times ran an interesting story a couple days ago, citing a federal bankruptcy court case in which the judge wiped out a $461,263 mortgage debt on a property because the lender hadn’t proved its claim to the delinquent borrower’s home.
That seems kind of strange. Why would the lender not prove its claim to the property in question? Simple answer: It couldn’t, because the note had gone missing.

To quote the article:The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.
So, the judge in this case ruled that the homeowner’s mortgage debt was canceled because there was no hard proof that anyone actually had title to it.
Is this a trend that could actually pick up steam?

Real estate entrepreneur and friend of Casey Research, Andy Miller, weighs in with some other thoughts for us:This is happening in an isolated way. It isn’t very significant at this point. However, there are many other pitfalls for lenders today. The difficulty in being a lender today is in trying to proceed against your collateral. Courts are not very sympathetic to lenders, and the entire system is overloaded and being tilted toward the borrower.

This is having an impact in the land of unintended consequences. Private lenders are now finding it too risky to make mortgage loans, and as a result, they have contracted. This happens, of course, at the worst possible time. This is the time when we need private lenders to enter the market, not exit the market. Fannie, Freddie, and FHA are responsible for 80%-90% of the origination of new U.S. residential mortgages.

Effectively, the home mortgage market has been nationalized. This is the reason that I am very bearish about the home market. If the government withdrew its support for home mortgages, the entire mortgage market would implode. Values would crater, and private money would rush in to fill the void albeit at large discounts and higher yields.

Are Fannie, Freddie, and FHA at risk of being curtailed? No, not at this moment.
One must remember, though, that the entire U.S. mortgage market is dependent on bond buyers purchasing mortgage-backed securities. Right now, bond buyers are focusing on bonds backed by the full faith and credit of the U.S.A. Fannie bonds, Freddie bonds, and GNMAs. No one wants the junior bonds created by uninsured private mortgages.

If the dollar continues to weaken, or if inflation begins to take its toll on purchasing power, then buyers of mortgage-backed securities will most certainly rethink their purchasing strategy.

This would be catastrophic. However, I think it is inevitable.
The Fed has sponsored the purchases of “agency securities” to the tune of $1.5 trillion. That, if you recall, was part of their strategy in “quantitative easing.” It sounds just like the Treasury markets. It is. When Treasuries lose their luster, which is highly likely, then the agency market will collapse as well. This will happen at the worst possible time, when the government bond market becomes tenuous. Yields will have to increase, which means that mortgage rates will increase, and the vicious cycle will be initiated in the home market and the attendant mortgage market.
Thank you, Andy. Very interesting and, as always, much appreciated.
If you want to read more of what Andy Miller has to say on all things real estate, sign up for a risk-free three-month trial of The Casey Report and access his exclusive interviews in the archives.

A Look Behind GDP
By Kevin Brekke

Yesterday the Bureau of Economic Analysis (BEA) released the advance GDP numbers for 3Q09, and they showed the economy grew at an estimated annual rate of 3.5%. But, like the saying goes about drowning in a lake with an average depth of three feet, it’s what lies beneath the surface that requires our attention. And so it is with GDP announcements. I took a look at the full report and charts, and here’s what they reveal:
Motor vehicle output added 1.66 percentage points to the Q3 change in real GDP. The report concedes that the jump in output is the result of the Cash for Clunkers program. For the previous quarter, motor vehicle output added just 0.19 percentage points to the second-quarter GDP change.
The change in non-farm inventories added 0.91 percentage points to the third-quarter change in real GDP, the largest amount since 4Q05. This figure is way above the historical Q3 trend for inventory change, and reflects inventory replenishing after the last three consecutive quarters saw hefty declines.
Personal consumption expenditures added 2.36 percentage points to the Q3 change in real GDP.
Personal consumption expenditures increased 3.4% from the prior quarter.
Personal income (wages and salaries) declined slightly from the prior quarter.
The first two items above are one-offs and will not likely be repeated next quarter. Just for fun, let’s see what the number would have been without these extraordinary events. Reducing the 3.5% advance GDP number by the approximately 1.47% artificial boost from the Clunkers scheme (1.66% – 0.19%), and 0.66% for inventory build-up (third-quarter trend is roughly 0.25%), gives us a rounded figure of 1.4%.

But wait, the BEA shows in another impressive chart that the average revision from the advance GDP (what was just reported) to the final (what will be reported in two months) is ±1.3%. So the “un-juiced” number we just calculated is almost within the margin for error. One guess not subject to error is that 4Q09 GDP, unless Washington rolls out some other spending-inducing programs, is almost certain to be far lower.

The personal consumption figure indicates that consumer spending accounted for 67% of GDP down from the bubble years’ high of 70%, but still lofty nonetheless.
How are consumers maintaining their spending in the face of high unemployment? Look at the last two items above: Personal consumption climbed while personal income fell. The only way to fill that gap is to borrow more debt. Old habits do indeed seem hard to kick.
So although the headlines are filled with glee and government leaders are walking with a little more spring in their step as they approach the dais to announce the corner has been turned, we remain unconvinced. One suspect quarterly number does not a trend make. We’ll continue with our finger on the pulse of all things economic in The Casey Report and keep our subscribers armed with reality-based facts.

And that, dear reader, is that for this week. See you on Monday!
Chris Wood
Casey Research, LLC