Agora Financial’s Rude Awakening

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Annapolis, Maryland

• Dow collapses 344 points – what to do when s*** happens,
• Your next “global investment megatrend,”
• 6 FREE months of Chris Mayer’s best research, kitty cat goes under the knife and much more…   

Eric Fry, reporting from Annapolis, Maryland…

As feared, your editor’s kitten went under the knife yesterday to reconstruct his badly injured hind leg.

Oh yeah…and the Dow Jones Industrial Average plummeted 344, for readers who care about that sort of thing. Now, back to the kitten…

An orthopedic veterinarian surgeon, flanked by a team of vet students, delivered the grim news, as your editor cradled the wounded kitten in his arms: “If you want this kitten to use its hind leg again, surgery is really the only choice.”

Your editor merely sighed.

“Now for the bad news,” the surgeon continued. “the operation will cost about $3,000, all in.”

“So are you saying that you are absolutely certain this cat won’t walk again without surgery?” your editor inquired, mentally weighing his financial security against his kitten’s lifetime mobility.

“There’s a slim chance this leg could magically heal itself over time,” the surgeon replied. “But that’s not likely.”

“Well, I really don’t see any great choice here,” your editor grimaced, as he handed the kitten over to the surgeon and his team. “So, le ‘er rip.”

In most circumstances, your editor would not have given as much thought to this unexpected expense as he did in this instance. But this particular invoice took on disproportionate gravity, thanks to the recent series of disproportionately large invoices that have been landing in his mailbox.

$3,000 to replace his stolen laptop; $4,000 to repair a car; $5,000 to pay the deductible for his daughter’s ankle surgery…and the list goes on.

But weep not for your editor; he continues to nourish himself with pricey calories and to quench his thirst with even pricier libations. His savings account may be groaning in agony, but his body and mind are suffering no ill effects.

Your editor mentions his modest financial adversities merely to illustrate what so many T-shirts have been trying to tell us for so many years: “Shit Happens.”

S*** happens in all facets of life - in both surprising and unsurprising ways.

Successful investors understand this universal truth. And because they do, they possess a healthy respect for the kind of s*** that makes bad things happen to investment portfolios. The investor who continuously contemplates potential risks can often avoid the “surprising” risks that derail most other investors.

But successful investors also understand that some surprisingly bad events produce surprisingly superb buying opportunities. The trick, of course, is to differentiate between the bad investments that deserve to fall and the good investments that don’t. The follow-up trick is to determine when to step in and buy the good investment that does not deserve to fall.

During yesterday’s trading session, a lot of bad stuff happened to a lot of stocks - the bad and the good alike. The Dow plummeted 344 points, while most foreign markets fell 3% or more. Commodities also slumped.

So in the midst of all this bad stuff, which investments are good and which investments are bad?

Your editor cannot answer this question with certainty. But he’d guess that commodities, in general, are offering a more attractive buying opportunity than stocks…in general.

At least one very successful investor agrees with your editor’s from-the-hip assessment…and this investor has actually done some homework on the topic.

Chris Mayer provides the details in the column below.

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When Bad is Good
By Chris Mayer

Frank Holmes is the CEO of U.S. Global Investors, a money management firm honed in on the commodity bull market. I had dinner with him recently at the Blue Water Cafe in Vancouver. Over salmon and flying squid, as well as an excellent local ale, we again hashed out the big-picture themes of today’s markets.

Investors are always on the lookout for the next big thing. You know the sort, a big-picture idea so powerful and long-lasting that you can confidently ride your investments through the ups and downs that market life presents. Holmes calls these “global megatrends” - “sustainable and substantial growth in capital expenditures in any country or sector.”

Holmes offered a couple of past examples. There was the massive growth of infrastructure in the ’50s and ’60s, which included the postwar rebuilding of Europe and the massive highway system build-out in the U.S. There was the 1990s megatrend, which led to massive growth in information technology and data communications. And there is the present megatrend: “Unprecedented change in global growth driven by globalization, urbanization and wealth creation, [which] leads to a global infrastructure boom on a massive, intractable scale.”

That’s quite a mouthful, but I believe Holmes is right. Holmes also cites numerous studies - one by Booz Allen Hamilton, as well as ones by World Energy Outlook, the U.S. Department of Transportation, the OECD and a host of other official-sounding places. But the total bill, give or take a few trillion, is about $41 trillion out to 2030 - for water, power, roads and bridges, as well as marine and seaports.

This is your next megatrend. Don’t miss it. We have some ideas at work here, but before we get too ahead of ourselves, let’s look again at some of the key points of the thesis.

First, some mega population shifts. By the end of 2008, half of the world’s people will live in urban areas. Leading the way are some 500 million Chinese and another 540 million Indians. The world’s cities are getting a lot bigger. Beijing alone grew from 12 million to 16 million in the past decade. Plus, there are a lot more souls on the orb than ever - 6 billion of us. Next year, the world’s total urban population alone will exceed the total world population in 1965.

This helps drive economic growth. Asia as a whole, for example, is building five times more homes than the U.S. Incredibly, China alone is constructing 80% of them. This, in turn, drives consumption of many commodities, including things you may not think of immediately - like cement. Asia - excluding Japan - uses about 14 times as much cement as the U.S. Asia ex-Japan has also overtaken the U.S. in steel production by a country mile. Asian steel production is more than six times the U.S.’ Electricity consumption is 32% more than the U.S.’

I could go on like this for pages… the stats are simply amazing. But I think you get the idea. The industrialization of Asia’s enormous populations has unleashed a torrent of demand for the basics.

There was a lot of discussion at the conference in Vancouver about just how much of Asia’s economic growth begins with U.S. consumers. The answer isn’t clear, as you might expect. But it is clear that trade routes in Asia are flourishing. I’ve talked about the New Silk Road before. It’s one of my favorite themes - the opening of old trade routes that stretch across the Middle East through India and into China. Holmes had a chart that showed that the Asian stretch of that old road is still healthy - despite an economic slowdown in the U.S.

Asian trade is ticking up, even as U.S. exports take a dip. It’s not the only data point, either. Asian retail sales are also trending higher as U.S. retail sales head lower. I think it’s a bit arrogant on the part of some analysts to say that China exists to satisfy our needs for rubber toys and cheap underwear. In their view, a U.S. slowdown dooms most of Asia’s export-driven economies. Plenty of evidence shows that’s not the case, at least not yet.

In fact, Asian demand is on the rise for a whole host of goods. In 2008, vehicle sales in Asia ex-Japan are set to exceed those in the U.S. First time that’s ever happened. Sometime in 2008, also for the first time ever, there will be more Internet subscribers in China than in the U.S. I suspect that’s one top spot that the U.S. will never claim again. There are also four times the number of mobile subscribers in Asia than in the U.S.

All of these points come from Holmes presentation, which I think painted an amazing panorama of the truly historic shifts in the global economy.

As fast as the Asian economies are growing, their demand for power is growing faster. You can also expect to see increasing use of aluminum, copper, iron ore, coal and nickel - all basic infrastructure materials.

Holmes offered that to satisfy the global demand for copper, the world would need to mine as much in the next 25 years as it has up to this point in history. These predictions may prove wildly inaccurate. But even if they are only directionally correct, it points to a long bull market in the basics.

I have recommended stocks that are deeply involved in the megatrend of infrastructure. Companies like ABB Ltd. (ABB:nyse), the world’s largest builder of power grids, and Astec Industries (ASTE:nasdaq), a leading manufacture of road-building equipment. Plus, I have also recommended companies that own the basic commodities the world will need - copper, oil, natural gas and more.

As we come to learn early in our investing careers, the market seldom moves in a straight line. Years can separate cause and effect. One of the great megatrends in the market today is this idea of infrastructure and all that it entails. So don’t let the recent volatility in the stock market blind you to long-term investment opportunities.

These are the moments to enter the fray, not to run from it.

[Joel's Note: We mentioned yesterday that you can now grab six (6) FREE months to Chris’ research service, Mayer’s Special Situations. This offer is only open until next Wednesday OR (and this is very important) until the available 2,000 spots are filled. It pays to note here that Chris has the
highest reader retention rates of all the Agora newsletters. Simply put, when people sign up to invest with Chris, they stick with him. That means a long waiting line if you miss this offer.

As a taster, Chris has prepared a report for us on a new opportunity he calls the “Chaffee Royalty Program.” Basically, it’s a portfolio he’s amassed over the years, chock full of royalty investments in the ultra-profitable resource sector. Now that he’s done all the legwork, all you have to do is sit back
and collect the checks. It’s a pretty sweet deal actually; one we recommend you take advantage of if you can.  To find out more about this limited-time offer, read on here

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[Rude Endnote: We’d love to hang around a chat about stock markets and kittens and all the other things that make the world go around, but we have only a short time left to complete our visa run over the Omani border. If we are allowed back in the country, we’ll write to you from Dubai tomorrow. If not…well, we’ll cross that border when we come to it. Wish us luck!

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com