Agora Financial’s Rude Awakening

Jump to Comments

Laguna Beach, California

• The cold hard reality of $100 oil,
• Commodities have gone crazy…so how can you play them?
• The winds of investment opportunity – one company set to take off and
  more…

Eric Fry, reporting from Laguna Beach, California…

$100 oil has arrived…give or take a dollar…and so has $800 gold…and $9 wheat.
These shocking price tags do not merely reflect robust demand, they also
reflect a runaway supply…of dollars.

One year ago, $100 oil seemed like a crazy idea. But you know the saying:

Truth is stranger than fiction. And the stone, cold truth is that crude oil
supplies are depleting, while U.S. dollar supplies are increasing. When you
combine these two trends, you get a much higher oil price…even a “crazy” oil
price like $100 a barrel. We would not be surprised to see even crazier
prices over the next few years…because we would not be surprised to see a
much weaker dollar.

In other words, the skyrocketing oil price is as much a monetary phenomenon
as a geophysical one. It is as much a story of dollar weakness as commodity
strength.

For example, commodity prices have been climbing sharply in U.S. dollar
terms, but NOT in Canadian dollar terms. In fact, when expressed in Canadian
dollars, the CRB Index of commodity has actually FALLEN over the last few
years.

Notwithstanding this fact, we expect commodity prices to climb against all
the world’s currencies. The commodity bull market is very real, because
supplies are limited. Planet Earth is not producing any more crude oil, for
example, as Byron King, editor of Outstanding Investments, explained in last
Friday’s edition of the Rude Awakening (”Scary Stuff“):

“I attended the convention of the U.S. branch of the Association for the
Study of Peak Oil & Gas (ASPO), held in Houston. The news was, as you might
expect, pretty bleak. Slide after slide, chart after chart, speaker after
speaker told the tale of the world’s oil fields peaking in output and, in due
course, going into irreversible decline.

“From the North Slope to the North Sea, Saudi Arabia to Siberia, Canada to
China, Iran to Indonesia, output of oil greatly exceeds new discovery. Many
of the world’s largest oil fields and provinces, such as Saudi Arabia’s
Ghawar, Kuwait’s Burgan, Russia’s Romashkino, Mexico’s Cantarell and others,
are decades old, with no real replacements anywhere on any horizon.

“Yet despite the declining output from the world’s principal oil provinces,
worldwide demand is creeping upward. For example, about 50 million new motor
vehicles hit the world’s roads and highways every year. Every one of these
new sets of wheels comes with a gas tank. You do the math.

“At the ASPO conference, one of the speakers was legendary Texas oilman T.
Boone Pickens. Mr. Pickens has been in the oil business since 1951 and has
pretty much seen it all. One questioner asked Mr. Pickens when he expects
world oil output to peak. The answer was fast and firm. ‘We peaked last
year,’ said Mr. Pickens. ‘We are pulling about 85 million barrels per day out
of the world, and that’s about as good as it is ever going to get. It is only
going to go down from here on out.’…

“And Mr. Pickens had more to say along these lines. ‘Now we are in the
decline phase. From here on out, the question is what will the decline phase
be? That’s the only real question going forward, isn’t it? If it’s a shallow
decline rate, then overall we might be able to conserve and substitute for
energy use, to stay ahead of it. But if it’s faster than we can conserve and
substitute, then we are going to have some serious problems.’

“Someone asked Mr. Pickens if there is some way to control demand for oil. He
replied, ‘The only way to kill demand is with prices. Much higher prices.
Looking ahead, higher prices will allocate the available supplies.

“Higher prices might kill some of the demand for crude oil, but
not before spurring demand for alternative energy sources. We’re looking at a
long-term trend here folks…a very long-term trend, which is why the time is
ripe to identify the companies that will thrive in the coming era of energy
scarcity. In fact, I’m launching a new investment service dedicated to this
exact pursuit. The service is called “Energy & Scarcity,”

“Keep an eye out later today to learn how you can be among the first to join
my new service. In the meantime, I’ve got a Rude issue all ready for your
enjoyment. Read on below for today’s column…

—- Bulletin Board Elite: Remaining Positions —-

The first time, I called it beginner’s luck…

When it happened again, I called it a coincidence…

But after 9 stocks in a “secret” market one ace analyst was screening JUMPED
to major exchanges - and major profits - in just a 12-month span, I knew he
was hunting in the right place for huge gains.

In just the first six months of 2007, the AVERAGE top-tier stock in this all-
but-unknown universe of securities gained 25,498%! Just $100 invested in the
best of these on New Year’s Day would’ve handed lucky shareholders gains of
$409,900 before the Fourth of July…

RIGHT NOW, I’m offering those who respond a discounted chance to turn even a
small investment into a small fortune on this ace analyst’s best picks in
this overlooked market.

But you must act quickly: Only a few spots remain in this revolutionary
services ranks. Details Here.

——————————————————-

Energy: The Next Generation
By Byron King

In today’s edition of the Rude Awakening, we are going to take a look at a
company that sells precision-engineered products into the demanding market
for energy resource exploitation, where – it is not too strong to say –
design or mechanical failure is simply not an option. The company also sells
components to the wind energy industry. The company’s name is Kaydon Corp.
(NYSE: KDN)

To set the stage, let’s think about how a drilling rig, whether onshore or
offshore, is similar to an electricity generating windmill farm. Both kinds
of structures tend to reside in environmentally harsh and inaccessible
locales. Therefore, both kinds of structures must possess the durability to
resist the elements – from saltwater, to blazing sun, to extreme temperature
to hurricane-force winds to rogue waves. Drilling rigs and windmills must
both support rotating machinery for many hours per day, amidst many different
kinds of conditions. And if the critical machinery does not rotate, then both
drilling rigs and windmills are worse than junk. They are junk that is
costing the owner or operator a lot of money.

Day rates for the big, offshore drilling rigs can be as high as $500,000…or
even more for the real behemoths.  Do the math on that.  Figure that the rig
lessee is paying more than $20,000 per hour, whether the rig is running or
not.  So if you are an operator that has a very costly drilling rig under
agreement, down-time is immensely expensive.  You will simply not accept
down-time that is caused by mechanical failure, no matter what the
explanation.  Your instruction to the rig manager is, “Don’t let anything
break.”  Another way of saying it is, “Use the very best equipment. Pay
whatever it costs.”

And now let’s consider a windmill, perched, often as not, atop a 250-foot
tower that is constructed on some remote mountaintop or in some distant
prairie, far from the nearest machine shop. Its massive blades may be
spinning thousands of revolutions per hour, 18 or 20 or more hours per day,
every day of every week, every week of every year, generating megawatts of
electricity that are flowing into the power grid. But consider the rigors of
that environment. The wind may gust from a very low speed to powerful blasts
within a matter of seconds, and then the wind may die down, and soon
thereafter repeat the process all over again. So the mechanical workings of
the windmill have to absorb and transmit immense stresses, with the rotating
machinery gearing up and gearing down, again and again, over the very long
haul. But the windmill is almost never attended by a human maintenance
worker.

So the windmill system must be designed and built to tolerate the rigors of a
high-wind environment. And the customers for that electricity, the electric
utilities, are under legal mandate from numerous regulatory bodies to keep
their electric grid powered up. So again, the instruction to the windmill
operator is, “We need consistent levels of power from your windmill farm, so
don’t let anything break.” And not uncommonly someone is also saying, “Use
the very best equipment. Pay whatever it costs.”

Now, let me introduce you to a company that makes that “very best equipment”
for these extreme kinds of applications. This company manufactures products
for which people are more than willing to pay “whatever it costs.” The name
of the company is Kaydon Corporation (NYSE: KDN) of Ann Arbor, Michigan.

Kaydon, incorporated in 1983, is a world-leader in the design and manufacture
of custom-engineered, critical-performance products, to include bearing
systems and components, filters and filter housings, as well as custom rings,
shaft seals, linear deceleration products, specialty retaining rings,
specialty balls, fuel cleansing systems, gas-phase air filtration systems and
replacement media, industrial presses and metal alloy products. And this
product line is far more than what you might buy down at your local auto
parts dealer. These products are used by high-end, mostly high-tech,
customers in a wide range of critical machine-positioning applications,
instrumentation systems, material handling devices, aerospace and defense
systems, security applications, high-tolerance construction efforts,
electronic and even medical applications.

As for the wind energy industry, Kaydon generates less than 10% of its 2006
sales from this business segment. But the company’s sales to the wind energy
industry are growing very rapidly. As the nearby chart illustrates, Kaydon
expects to quadruple its sale to the wind energy industry over the next three
years.

At the current quote of $53 a share, Kaydon’s stock is selling for less than
20 times estimated 2008 earnings. There are about 28.2 million shares
outstanding, giving the company a market capitalization of about $1.5
billion. Last February, when I recommended the stock to the readers of my
investment letter, Outstanding Investments, Kaydon was trading around $45. So
it has had a nice rise over the past few months. But then again, the stock is
rising for a lot of good reasons, and those reasons appear to be continuing
into the future…especially in the wind energy industry.
 
In remarks earlier this year, Kaydon President and Chief Executive Officer
Brian Campbell referred to “the strength of Kaydon’s proprietary product
positions and disciplined strategic direction. We believe our strong order
intake during the year, combined with increased current incoming order rates
and customer product availability inquiries, lay the foundation for increased
operating performance in the current year.”

One of Kaydon’s strengths going forward is, as mentioned above, its sales
into the wind turbine market, particularly the critical bearings components
of windmills. This is because the windmill sector of the market is growing at
near breakneck speed, and the company is expanding its capacity and sales
efforts in this line of business. In 2006, investment in windmill systems in
the U.S. was second only to investment in new coal-fired power plants for the
production of electricity. So Kaydon is positioning itself into the sweet
spot of a fast-growing market.

The key problem in developing windmill systems at the present time is the
availability of windmill turbines, and this puts the investment spotlight
squarely on one of Kaydon’s most profitable new business lines going forward. 
“We would love to build more wind farms,” says John Hofmeister, president of
Shell Oil Company. “We have the real estate and the permits. We certainly
have the funds to construct these facilities. But our biggest problem is just
the availability of windmills. We are experiencing a two to three year delay
in delivery of windmill systems.” 

“Two to three year delays?” And this from a large, well-capitalized company
like Shell that can pretty much buy what it wants? Sounds to me like a growth
story for a precision-maker of a critical product – the kind about which
people say things like, “Use the very best equipment. Pay whatever it costs.”

[Joel's Note: As mentioned above, Byron is all set to launch his
revolutionary new service: “Energy and Scarcity.” We’re putting the finishing
touches on it right now, so we don’t have a sign-up link for you just yet. As
members of the Agora Executive Series, you’ll get first crack at it when
details are released this afternoon. Keep your eyes out…

—— Ride The Falling Dollar to $2,000 Gold ——-

From Hulbert’s #1 Ranked Advisory Letter of the Last 5 Years, Our Most
Shocking Forecast Yet…

Gold $2,000

“I’m so sure gold will soar higher, I’ll even make you a guarantee …plus
I’ll give you 5 entirely new ways to play the trend…”

“Including one way to own gold that comes with ‘ zero-downside’ risk…”

(But you have to jump on this before November 13th, 2007…or the doors on
this could slam shut to you forever…) Read on Here For Details.

———————————————————–

Rude Endnote: That’s all for another week of Rude reading. We’ve had
rampaging commodity prices, new lows for the dollar and, to top it all off, a
guest appearance by a Brazilian supermodel.

Check out your five, on the way shortly, and we’ll catch you next week.

Cheers,

Joel Bowman
Rude Awakening