Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Financial’s rally! Time to don the party hats?
• Streamlining profits in an energy-intensive sector,
• Investment tips from the alternative party scene and more…   

Joel Bowman, reporting from Dubai in the Persian Gulf…
 
Investors enjoyed some respite yesterday from the lashing of recent weeks. The Dow posted a welcome 276-point gain, driven by the largest ever single-day gain for financials and the continued selloff in the oil pits.
 
So, is it party time yet?
 
To be sure, triple-digit rallies are worth a cheer. A 276-point rally is probably worth two cheers. Hey, were it not for the 1,029 points belted out of the index during the previous 30 days, we might even feel inclined to reach for a bottle of bubbly…or a glass…or maybe just a beer.
 
But before we raise our pints for a toast, we might pause to consider just how surefooted our new not-quite-two-year-low close is.
 
The nostalgic investor may recall similar feelings of elation when the Dow leapt 224 points back on April 18. CitiBank Inc. and Caterpilla Inc. were the toast of that particular occasion after the two bettered analysts’ earnings expectations to cap off the best week for stocks since February.
 
Alas, the party was short-lived. Two days later the Dow was slumping anew. Shares of Caterpilla and CitiBank have since dropped around 20% and 30% respectively, even after yesterday’s sparkling performances.
 
Barely had the jilted partygoers picked up their top ‘n tails from the drycleaners when they were summoned to yet another soirée. Talking heads couldn’t wait to call the bottom when stocks rallied 216 points just last month, June 5. Unfortunately, the bubbly had to be re-corked and the revelers sent home early after the Dow fell 393 points the following day.   
 
Don’t get us wrong. We love a good cause for celebration as much as the next fellow. It’s the unnecessary trips to the drycleaners that really annoy us. 
 
Nevertheless, we’re sensitive to the fact that, aside from a few premature jubilations, most of the news of late has been pretty grim. We’re faced with tumbling stock markets, skyrocketing energy and food bills, bank runs and financial fiascos of all stripes. It’s enough to send even the most optimistic of investors racing for the window.
 
With that in mind, we thought we’d present some cheery news from a slightly more “alternative” party scene. In today’s issue you’ll find a few insights from Chris Mayer about the scintillating world of cobalt.

— Your Guide to “Blue Gold” Investing — 

What’s the one investment that’s crushed every major index… beaten most major stocks… and doled out 49 times better gains than the S&P 500?

Nope, not oil, gas, gold, or silver. Not Google, not Microsoft. Nor tech or biotech. Instead, says Lehman Brothers, it’s the one investment with a market destined to “grow 500% over the next 10 years.”

But I’m ready right now to give you three of the world’s best ways to get in… plus, a full year of more “special situation” stocks like these… absolutely FREE and backed by my absolute “300% payoff” guarantee… Read On Here

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Superalloys and You
By Chris Mayer

In investing, the prospect of crisis has always been a sort of summons for me. It’s like when I was a little boy and the ice cream truck’s jingle sent me running for loose change on a hot summer day. These days, I’m just trying to get at goodies of a different sort — profitable investment ideas, instead of ice cream bars.

And today’s aviation industry has a big crisis on its hands. As a percentage of airline costs, fuel is now about 35% of the total — up from only 13% at the start of the decade. It is the airline industry’s No. 1 expense. The cost of fuel puts enormous pressure on the industry. At the same time, regulators are pushing for cleaner planes with fewer emissions.

“The price of oil has challenged and changed all realities for the aviation industry,” says Tim Clark president of Emirates, a Dubai-based carrier. “This is the greatest crisis in aviation’s history — bigger than the Gulf wars, Sept. 11, SARS and past oil shocks.”

If oil prices stay where they are and nothing else changes, the airline industry will lose about $6 billion this year, compared with a profit of $5.6 billion last year. Many airlines will be taking that familiar stroll into the bankruptcy courts. Globally, 24 airlines have already filed in just last the seven months.

The industry is trying – and will try – lots of different tactics to fend off elimination. One of these is to push for more fuel-efficient aircraft. And that is the opportunity for investors to cash in on this crisis.

It starts with the jet engine. Today’s Wall Street Journal published “Jet Engine Makers Launch New War” – all about the drive for new fuel-efficient engines. The piece notes that airlines worldwide want to replace their existing fleets with next-generation planes, not the current oil-guzzling models. The goal of the jet engine makers – or rather, the mandate put to them by their customers – is to deliver at least double-digit gains in fuel-efficiency.

As the WSJ reports: “Developing fuel-efficient engines requires the use of exotic alloys and ceramic coatings that can cope with internal engine temperatures that would be above the melting points of untreated metal components.”

Enter cobalt. It’s a tough metal with a high melting point of 2,700 degrees Fahrenheit. This higher melting point allows it to maintain its strength at higher temperatures than other metals can. Cobalt alloys have higher melting points than either nickel or iron alloys.

As a result, one of the main uses of cobalt is in superalloys such as those that jet engine makers need. In fact, the making of superalloys consumed about a quarter of global cobalt production, of which about 75% wound up in aircraft.

Cobalt would seem to have a nice backdrop of long-term demand. But it doesn’t stop there. Defense spending is also on the rise globally. A Financial Times report on aerospace notes that India, China, Brazil and certain Middle Eastern countries are all upping their defense spending. India alone may spend $40 billion in 2009.

Cobalt is an important part of all that, too. In fact, the U.S. and the Soviet Union used to stockpile cobalt for defense purposes. Those stockpiles are long gone, but the role cobalt plays in defense still exists.

As exciting as the aerospace angle is, a potentially bigger market could be batteries for hybrid cars. As I pointed out in the last issue, there are 5-10 pounds of cobalt in a typical hybrid car battery. Hybrid car sales will probably hit 500,000 cars this year. And that is growing rapidly.

Kitco recently noted that cobalt holds an electric charge better than almost any other metal. That makes it hard to replace, even at $50 per pound. “And the current electric batteries work so well,” Kitco notes, “[that] there is little incentive to change their structure (and other metal prices have skyrocketed, as well as cobalt – nothing is cheap anymore).”

With the failure of banks and the troubles of big financials such as Fannie Mae, cobalt seems a nice place to be. A while ago, I recommended a “cobalt play” to the readers of my investment service, Mayer’s Special Situations. The name of the stocks is OM Group (NYSE: OMG). I should warn you that the stock is a bit speculative. But let me share a few of the particulars…

OMG carries a seemingly absurd valuation. It’s not often that you find profitable and growing companies with no net debt trading for big discounts to book value. The specialty chemical industry – a tribe to which OMG belongs – is undergoing heavy consolidation. Companies are getting bought out left and right. Dow Chemical bought Rohm and Haas for a 74% premium. And then Ashland came along and bought Hercules for a 38% premium.

Companies that make low-margin chemicals are looking to beef up on companies that make high-margin, or specialty, chemicals. Because OMG is cheap and very profitable, it has to be on someone’s radar. I hope that it doesn’t get bought out. I think we’ll do better holding the stock. But the deal-happy scene in the chemical business is another potential backstop of value here.

Hard to believe that anyone could buy all of OMG for anything less than at least book – which is $36 per share. And even that would bring howls of protest. After all, the stock was in the $50s for much of the past year. We will see.

In any event, let’s bring this back around to the aviation crisis. A familiar theme in the pages of my letters over the years has been this Templetonian notion of focusing on the opportunities that problems present. The late great John Templeton made this idea a key component of his investment – and life – philosophy.

The high price of oil is a big problem for many industries.

So if you have a good way to mitigate the high price of oil, you have a business. I think the big winners over the next few years are going to be those companies that have a solution to the high price of oil. Those companies have products that other people will pay up for, because fuel-efficiency is a must. The aerospace industry must become more fuel-efficient.
 
Cobalt alloys will be a big part of that trend.

[Joel's Note: When I caught up with Chris in Vienna recently, we got to talking about his investment service, Mayer’s Special Situations. I asked Chris how he manages to keep delivering winners even as the broader markets slump. Chris reminded me of his Blue Gold investment report we helped launch a while back and the remarkable gains his subscribers enjoyed off the back of it. “We’re not looking where most people look,” Chris told me. “Like with the Blue Gold report…nobody was really focusing on that sector as a viable investment theme, and we discovered a lot of upside potential and got in
early.”

If Special Situations investing is something you’d like to learn more about, here’s a link to Chris’ updated Blue Gold investment report to get you started.

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Did You Notice – Selling Naked!

You may have heard that a couple of days back, the leader of the SEC announced a ban on the “abusive short selling” of troubled financials. Just to clear up any confusion, here are a few comments Dan offered to the 5-Minute Forecast with regards to the ruling.
 
“I think ‘naked’ short selling must be stopped,” writes Dan Amoss, editor of the Strategic Short Report. “This practice gives legitimate short selling a bad name. Stock should be located and borrowed before it is sold short, not the other way around. If your broker cannot locate shares to short, the short seller should move onto another idea or use put options.
 
“But the hysteria about ‘rumors’ bringing down financial companies has gone too far, I think. This is the defense of CEOs who are looking to blame someone for their own incompetence - incompetence that put their firms in vulnerable positions in the first place. Short sellers did not conspire to force Wall Street firms to enter the business of securitizing dodgy debts. Firms like Bear Stearns ruined their own companies with the poor strategic decisions they made.
 
“Short selling is beneficial for the overall market. It provides liquidity at market bottoms as shortsellers buy to cover their positions. Shortsellers are often the first to discover and put an end to accounting frauds and stock promotion schemes that siphon capital away from legitimate businesses.”
 
As Dan’s Strategic Short Report readers know well, Shortselling can also be beneficial to individuals. There’s just as much profit to be made on the way down as there is on the way up…provided you have an astute guide to help you figure the way.
 
Here’s what a couple of satisfied readers had to say after they cashed out of Dan’s short-side bet against Lehman Bros.
 
Dear Mr. Amoss –
 
I have only been a subscriber for less than 6 months, but I have to say that I couldn’t be happier with your service. I thoroughly enjoy reading your rationale for your recos and, even though I only have a small account at this time, it is growing. I constantly look forward to your emails. And, by the way, my profit on your Lehman Put reco was 327%!!! Wow!!!

- Bob Martin, Calgary, Alberta
 
Hi Dan –

I just sold 10 contracts of LESMH for $26.45 which I purchased for $4.47 for a total gain $21,980!! This is very exciting stuff…keep em coming like that if you can. I really appreciate your hard work, in depth research and thorough detailed coverage. Awesome trade Dan! You are the man!

- David Yarbrough
 
Right now, Dan’s got his eye on a few companies that are on the precipice of revealing some “embarrassing” results. To learn more about this tool, take a close look at Dan’s Bear Market Strategy report here.

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[Rude Endnote: We’re off to pick up some clothes from the drycleaners. But you can still reach us at the address below.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com