Agora Financial’s Rude Awakening

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Laguna Beach, California

• Tracking energy investments around the globe,
• Betting on inflation by hedging against it,
• The rollercoaster of volatility and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Most of us investors lost money during January. But very few of us realize
that we’ve been losing money for several years already. Inflation is costing
us dearly.

Let roll the videotape…

The first month of 2008 did not provide very many “warm fuzzies” for
investors. The S&P 500 Index slumped 6% in January, and has dipped another 3%
during the young month of February. Overseas, every major Asian and European
stock market is nursing double-digit losses. Amidst the carnage, the
financial markets have provided very few hiding places…other than gold and
Treasurys. 

What about those “smart” hedge fund guys? Didn’t they make money in January?
On average, no. It seems the well-heeled whiz kids who run billion-dollar
hedge funds forgot to hedge. Goldman’s brand new $7 billion hedge fund,
Goldman Sachs Investment Partners, dropped 6% during its inaugural month. The
average long-short equity fund lost 4.3% in January.

Blame volatility…and a wee does of hubris.

The U.S. stock market had been delivering tranquil, positive returns for so
many years, that very few investors thought to prepare for either volatility
or negative returns…much less both at once. Volatility returned with a
vengeance. The S&P 500 moved up or down by more than 1% on 14 out of 21
trading days in January. By comparison, The S&P moved by 1% only one time in
January of 2007.

These gut-wrenching price swings and devastating selloffs can bring even
seasoned investors to tears…or cause them to long for an earlier, simpler
time when stock prices mostly went up…even though the dollar’s value mostly
went down. We investors weren’t really getting any richer during those
halcyon days, but at least we had bigger numbers in our brokerage accounts.

As the nearby chart illustrates, the S&P 500 has produced a total return of
roughly zero since the end of 1999. That’s the good news. After adjusting for
the effects of inflation, the S&P has LOST more than 25% of its value over
these last eight years. In other words, stock market investors have to do a
lot of winning, just to make sure they aren’t losing. And now that the global
markets have become noticeably unfriendly, losing has become the path of
least resistance.

Meanwhile, gold, oil, wheat and most other commodities have been delivering
winning results for several years…even after inflation. That’s what
commodities are supposed to do, of course; they’re supposed to provide a
hedge against inflation. In the modern supply-constrained world, however,
commodities seem likely to deliver much more than mere inflation insurance.
They seem likely to deliver (more) long-term capital gains.

The investment rationale is simple: Demand is soaring, supply is not. In
fact, in some cases, supply is falling. The South African platinum industry
provides a timely example…

——– Energy & Scarcity Investor ——-

A California Energy Site So Secret, You Can’t Even See it Without a Top-Level
U.S. Navy Clearance…

But a former Navy ‘insider’ is now ready to disclose the names of five
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The Navy has already collected $194 million from this discovery.

And CNNMoney.com reports that ‘Investments in [this 'secret' energy sector]
jumped nearly four-fold over the last two years, to about $100 million last
year… Because it’s [still] so small, there’s large growth potential
here…’ Read Byron’s Report Right Here.

——————————————–

The South African Butterfly
By Eric J. Fry

When a butterfly flaps its wings on one side of the Pacific, according to
chaos theory, a tidal wave can result on the other side. And when an electric
utility on the southern tip of Africa decides to stop producing electricity,
the share price of a platinum miner in Montana can rocket higher. Precious
metals investors, therefore, might want to freshen up their understanding of
the “butterfly effect”…and also keep a close eye on the headlines coming
out of South Africa.

We’ve never really believed that a butterfly could cause a tidal wave, but
recent events in South Africa are eroding our skepticism. Ever since Eskom,
South Africa’s nationwide electric utility, reduced the “juice” it supplies
to the country’s mines, the price of platinum has been soaring. Granted,
ESKOM is no butterfly and platinum is no tidal wave, but a seemingly
insignificant event in a distant land has indeed produced a significant
consequence worldwide.

According to the “butterfly effect” of chaos theory, “small variations in the
initial condition of a nonlinear dynamical system may produce large
variations in the long-term behavior of the system.” South Africa’s
electricity crisis certainly makes the point. After ESKOM reduced electricity
supplies to the mines by “only” 10%, the price of platinum soared $300 to
$1,840 an ounce. The $300 price jump is certainly a “large variation” in
behavior. The question before the investing world is whether rising platinum
prices will become a “long-term” variation.

“When South Africa electricity producer Eskom shut off the power,” our
resident natural resources expert, Byron King, explains, “all major South
African underground platinum mines closed.  Since South Africa controls about
70% of new mine output for platinum group metals, the prices of all the
platinum group metals soared, as industrial users and speculators panicked
over security of supplies.”

Yesterday, platinum touched a new all-time high of $1,851 an ounce, while
rhodium reached a new all-time high of $7,410 per ounce. Unless South African
production resumes soon, these spikes could become somewhat permanent.

“Almost no mine in South Africa is continuing any large-scale extraction or
processing operations, except for the coal mines,” King observed in last
Friday’s edition of the Rude Awakening. “BHP and AngloAmerican are still
operating to supply coal to Eskom. Even coal-to-liquid (CTL) pioneer Sasol
had to scale back on production of liquid fuel. (Most of the jet fuel in
South Africa comes from CTL, so this will soon impact air travel in the
region.)” [Editor's note: A couple days later, South Africa did, in fact
announce that jet fuel supplies had dropped to precariously low levels – yet
one more unintended consequence of that butterfly known as Eskom.]

Since the South African platinum companies have not been able to maintain
production, they have received very little benefit from the soaring platinum
price. But several thousand miles to the Northwest, a Montana mining company
has been enjoying a windfall. Stillwater Mining (NYSE: SWC), America’s only
producer of platinum group metals, finds itself in a very enviable position:
lots of platinum in the ground, no power shortages above ground. That’s why
the company’s share price has been on a tear.

Unfortunately for the South African mining industry – but fortunately for
Stillwater – Eskom seems incapable of satisfying the nation’s power needs any
time soon. The decrepit electric utility has a program in place to construct
new generating facilities. But these new plants won’t be on line until 2012
or 2013.

“Nearer term,” says King, “Eskom is promising to supply 90% of the mines’
normal needs.  But when the power managers say, ‘We are only cutting power by
10%, to 90% of normal consumption,’ that is disingenuous. There is some
baseline level of power that just has to flow.  For example, in the mining
biz, the deep mines require 50% of the power just for absolutely basic
stuff… pumps and air supply.  The ‘other’ 50% of power is what moves the
workers and the ore.  So a nominal 10% cut is really at least 20% of the
useful power, from the standpoint of digging rock.  And that is just a linear
approach to viewing things. The 10% cut could cause much more than a 20%
decline in productivity.”

“Thus,” King concludes, “the electricity crisis in South Africa is a serious
problem for the platinum sector over both the medium- and long-term. 
Virtually all the world’s new platinum mining projects are in South Africa.
If power needs to be rationed (and it looks like this will be the case until
the next decade) then new mining projects will likely to be at the bottom of
the priority list. Considering South Africa’s huge supply dominance, this
means that platinum and rhodium will probably be in continuing short supply
until 2013 or later.”

Pull up a chair, this bull market in platinum might last a while.

[Joel's Note: Tracking energy investment themes around the world just like
these is exactly what Byron King of the Energy & Scarcity Investor relishes.
Byron examines the chokepoints of the global energy supply and roots out
where the corresponding investment opportunity will pop up at the other end.
Right now, you can get in on a very specific alternative energy play that
Byron has identified in California. At the very least, it’s worth a few
minutes of your reading time…at best, you could be looking at bagging some
very nice profits. Check it out here and see what you think: California’s
Slow Volcano.

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Creating what could be the most persistent and reliable market boom in a
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Here’s the catch: As this flood of new money pours in, only a few “lifeboat
stocks” will benefit. Wouldn’t you like to know which ones? Find Out Here .

——————————————-

[Rude endnote: Thanks to everyone who wrote in with comments on Eric’s
commercial real estate two-parter. We’ve received opinions from across
America with regards to the subject and will  be publishing a selection of
these writings throughout next week’s columns. If you wish to have you say,
take a look at The Echo-Bust, Part I and Part II and send your comments on to
us.

Cheers,

Joel Bowman
Rude Awakening