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The Daily Reckoning Monday, November 16, 2009 Markets to and fro around history's "bounce range," "WAGE" investments and opportunities in the water-energy nexus, How popcorn-like polymers are helping the oil industry and more... ------------------------------------------------------------ Eric Fry, assessing the markets from Montevideo, Uruguay... As the financial markets charge into another week of trading, the US stock market keeps staking its flag at ever-higher levels...sort of. The Dow Jones Industrial Average ended last week at 10,270 a new 13- month high for this high-profile index. But most of the broader failed to keep pace. In fact, they slumped lower! Options expert, Jay Shartsis, founder of the Shartsis Options Alert in New York, calls this development a "very serious negative divergence." "The new Dow highs have not been confirmed by the widely-based Value Line (over 2300 stocks)," Shartsis points out, "and divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead. "Traders should also note that a head-and-shoulders top is building on the Value Line Index," Shartsis continues, "with the right shoulder top lower than that of the left - an extra bearish element. At the current 2,138, the Value Line is about 4% from a new high and it doesn't look like it is headed back to that level any time soon." Armchair technical analysts might also find it intriguing that the NYSE Financials Index (which has been leading the stock market since last March) is tracing out a head-and-shoulders formation that closely resembles the Value Line's. These bearish auguries do not guarantee that the stock market will retreat, of course, but they do provide some modest cause for concern. --- Important Message from Newsmax --- Recently, Steve Forbes and an esteemed panel sat down to discuss the dying dollar, a future with hyperinflation, and how to protect your prosperity in these uncertain times. If you are concerned that inflation and the devaluation of the dollar is destroying any gains you are realizing in stocks, CDs, bonds, and money markets, you need to view this webinar right now. You can view this revolutionary Internet broadcast and learn how you can grab a potential $137,000 (or more) payout in the next year alone by clicking here. --------------------------------------------------------------- And over to Bill Bonner, reporting from back in London... We got back from South America on Friday...ready for a rest. So, we spent the weekend reading...and occasionally, thinking. What we've been thinking is that the dollar is dead meat in the long run. But in the short run, it might have enough life in it to bite investors on the derriere. The US stock market rose 73 points on Friday, to bring the Dow just 30 points south of the 10,300 mark. Why is this level important? It's not really. But it reminds us that this is still just in "bounce range." Big drops in stock prices are followed by bounces - always. A bounce of 50% of what was lost is not unusual. That's what happened after the Crash of '29, for example. So, there's nothing exceptional about what we're seeing on Wall Street. Our comrades over at The 5-Minute Forecast provided this sobering chart in Friday's issue. But here at The Daily Reckoning we're not smart enough or fast enough to play the countertrends. We want investment positions that we can ignore for years... We want to be able to go on a long trip...say, down the Inca Road or over the Hindu Kush. And when we come back, we want to find that we have at least as much money as when we left. If stock market buyers - in the US - have more money a year from now than they have now, we'll be surprised. The private sector is still more than 2/3rds of the economy. And the private sector has begun de- leveraging. Nothing that has happened in the last 8 months makes us think that that trend is going to reverse any time soon. There are 70 million baby boomers who need money for retirement. They've got to save. That means cutting back on spending. And that means less income for business. Are stock prices really going to go up when business income is going down? No. We leave our "Crash Alert" flag flying, here at the worldwide headquarters. We don't know when...or IF...stock prices will crash. But the downside risk is not worth the possible upside. Daily Reckoning readers should be out of all US stocks, except those they wouldn't mind holding through a 50% correction. The other thing we mistrust - aside from politicians, stock promoters and tap water - is the dollar. But here the story is more complicated. Because the next downswing in stocks could push the dollar up! Everyone is betting against the dollar. And most think it is a one-way gamble. But it's not like Mr. Market to grant investors a one-way bet. He's got something up his sleeve. Last week, The Financial Times reported that a group of IMF economists had made a "Plea to reduce demand for dollar reserves." That is another way of saying: find something else to put in your vaults rather than dollars! Why? Because a world money system that uses dollars as a reserve currency is fragile and vulnerable. It makes the whole world hostage to America's financial problems. "The US, at the center of the system, was under pressure to run large current account deficits in order to supply the world with the dollar assets it wants, they said, while there was no effective discipline on either the US or countries such as China that have big external surpluses to adjust their policies." This move by IMF economists is only the most recent effort to reduce the world's reliance on the dollar. Everyone can see the dollar is weak. And everyone with any sense wants to protect himself from it. On Friday, the price of gold moved up to $1,116. Gold is the obvious choice for those who wish to protect themselves from the dollar. But readers are cautioned: that doesn't mean the price of gold is going up. Over the long run, sure. All paper currencies eventually go to their intrinsic value, which is zero. And gold always goes to its traditional value too - at a level where a man can take an ounce of it and get himself a suit of clothes, about 30 bottles of good whisky...one horse...or a trip across the Atlantic in economy class. But things that ought to happen do not always happen when you think they should. It could take many years - of long, drawn-out recession...a la Japan - before the Bernanke Fed gets its helicopters revved up. In the meantime, all those hot shots who borrowed dollars from the Fed in order to bet against the greenback are going to be in trouble. They'll have to unwind their carry trade positions at a loss...and pay back more expensive dollars. The process could take years. More news below... --- Introducing the Options Hotline Guarantee --- Our readers could have turned $5000 into $1 million in just over 5 years "Each week, I tell my readers to make just 1 investment buy. And since November of 2006, not one pick has lost value! It's no wonder our readers could have turned $5,000 into $1 million in just over 5 years! Now, we're quickly closing in on $2 million - currently at $1,892,043.04! "Read on to find out how to start making huge gains!" - Steve Sarnoff, editor, Options Hotline --------------------------------------------------------------- And back to Bill with more thoughts... The US now has the highest unemployment rate of all major economies. Even France - historically, an economy with high jobless rates - is at 9.5% unemployment, while the US is 10.2%. As for inflation, the lowest inflation rate among the world's larger economies is in - you guess it - Japan. After 20 years of on-again, off-again deflation, it's on again in Japan...with inflation at NEGATIVE 2.2%. But inflation is negative in the US too - at minus 1.3%. Both Japan and the US claim positive GDP growth, compared to Europe, which is still in recession. But throughout the world - except perhaps for the BRIC nations - growth is weak and hesitant. The US and the UK are both consumption economies. No consumption; no growth. But how do you get people who've consumed too much to consume even more? They know they can't afford to keep spending. And they know that going further into debt just makes the situation worse. What can you do? You bribe them! You give them more money, say, in unemployment assistance. Or, you give them a tax credit when they buy a new house. Or, you give companies a big tax break. In the most recent stimulus bill, for example, the feds do all three - including giving Pulte Homes a $450 million tax refund. Here at The Daily Reckoning we never met a tax cut we didn't like. But with the deficit at 13% of GDP, we might make an exception. One way or another, someone's going to have to pay for the feds' big spending stimulus efforts. Taxpayers. Bondholders. Dollar holders. All of the above. President Obama told the crowd in Singapore this weekend that he would make sure Ben Bernanke stayed away from his helicopters. The Chinese are the biggest holder of US bonds in the world. The Japanese are next. Between the two of them they fund a big part of America's current spending. Naturally, America's president is eager to keep the cash coming his way. So he has had to reassure the nation's largest creditor that their loans to the US will be repaid in good order...and good currency. China alone has $2.3 trillion in reserves...most of it in dollars. Of course, the Chinese want to diversify out of greenbacks. But they're caught in a trap of their own making. If they turn away from the dollar, they undermine its value...and the value of their own reserves. What's more, America is still China's number one customer. They need to sell to America. And for that they need to keep their own currency from rising too much against the greenback. A higher yuan makes their products relatively more expensive compared to other exporters. So, the infernal system continues...America creates dollars. The foreigners take them as though they had value. And they will have value...as long as they take them. In the '90s and '00s the newspapers were full of stories about what a great place America was. Its economy was so dynamic...its entrepreneurs were so clever...its financial system was so highly evolved and flexible. What could go wrong? Everything! And now we're going to read a lot of claptrap about what an awful place it is. "The American dream needs repair," is forerunner of the genre. In today's Financial Times, it focuses on the rigidities of the US system. The time was when a young American could start at the bottom and work his way up. Luck and pluck was all that it took. But now, according to scholars at the Brookings Institution, people stay put. If you're born poor in America you're more likely to stay poor than if you had been born poor in Britain, Denmark, Sweden or dozens of other countries. What happened? The authors do not say. So we will. Success breeds failure. As a society becomes rich, more and more people find ways to game the system. The elite get tax credits, tariffs, and protective regulations. Every layer of bureaucracy makes it harder for new competitors to get ahead. And every new tax on income makes it harder for upstarts to join the ranks of the rich. The poor get their parasitic benefits too. Welfare, unemployment compensation, child tax credits, medicare, food stamps, social security - all of these programs give the poor an incentive to stay poor. More below but first, here's today's essay... --- Triple Your Gold Gains With "Slingshot Options" --- Every time gold goes up $1, this "slingshot option" could pay you $3 or more...with gains as high as 620% by June 2010. A Special Opportunity Report by Byron King, Senior Analyst "[Slingshot Options] are the investment opportunity of a lifetime." - Moneyweek --------------------------------------------------------------- The Daily Reckoning PRESENTS: We received a few emails over the weekend about the Mighty Mogambo Guru (MMG). Mr. Guru is currently taking a well-earned rest, but we'll be sure to keep you up to date on his whereabouts over the coming weeks. In the meantime, Chris Mayer of Capital & Crisis shares with us a few astute observations about WAGE investment opportunities...specifically the "W" and "E" components. Please enjoy... A Few Words About Nalco By Chris Mayer Gaithersburg, Maryland Over the coming decade, I strongly believe that most of the best investment opportunities will emerge from the four following natural resource categories: Water, Agriculture, Gold and Energy...or what I call the WAGE group. And some of those opportunities will feature a combination of these resource categories. One of the most intriguing combinations is what I call the energy-water nexus. It takes water to produce energy and energy to produce clean water. That nexus creates a number of profit possibilities. Sometimes, they are not so obvious. But often, a company that possesses expertise in water treatment will possess a related expertise in the energy field. The connection between water and energy is at least as old as the process of pumping water into old oil fields to boost production. But the connection between these two precious fluids is changing quite a bit. Let's take a look at one of the less-obvious connections... You may not realize this, but two-thirds of oil discovered stays in the ground. The average recovery rate is only about 35%. What if we could recover more of the oil we've already discovered? If the recovery rate improved to 50%, the world's recoverable oil would increase by 1.2 trillion barrels. It would double today's proven reserves, says the IEA. That much oil makes even a cynical old oilman catch a gleam in his eye and starts his heart aflutter. Indeed, lots of big brains churn away at this problem day and night. "It's the prize for the next half century," says Howard Mayson, vice president for technology at British oil giant BP, quoted in this morning's Wall Street Journal. BP relies heavily on enhanced-recovery methods. These methods aim to improve that oil recovery rate. As The Wall Street Journal reports: "Enhanced recovery is a lifeline for the biggest oil companies, such as Exxon Mobil Corp. and BP, which are under intense pressure from shareholders to keep ramping up production and gaining access to fresh reserves. But that's hard to do when the companies are shut out of the oil-rich Middle East and places like Russia. So they rely more and more on existing fields, some of which have been producing oil already for decades." It is like squeezing a sponge ever tighter to extract the most of what you can get. The old method is to simply flood the reservoir with water. The idea is to create enough pressure to make it easier to pump the oil out. It is not very efficient, but it works for a time. It is also becoming a bigger problem to secure the water supply. That's why we see oil companies buying water rights out West. Currently, the shale oil plays consume a lot of water. Instead of using water, some companies will pump the reservoir with carbon dioxide. Companies used to store carbon dioxide in old unused reservoirs. Using this method of enhanced oil recovery, they put that carbon dioxide to work. BP uses this method out in its Prudhoe Bay reservoir, to great effect. Recovery rates there are 60%. Now Prudhoe Bay, which people in the 1980s once thought would cease pumping oil in 30 years, looks to be good for another 50 years. The WSJ describes another method BP uses: "flooding reservoirs with polymers that expand like popcorn when they come into contact with hot rocks, thus flushing more oil out of difficult-to-reach nooks." The name of that polymer is BrightWater. One company has a patent on this material and makes it for a profit. That company is Nalco Holding (NLC:NYSE), a company I recommended several months ago to the subscribers of Capital & Crisis. BP uses BrightWater in Argentina and Pakistan. "BP says the additional oil the new technology will produce over the next 20 years is roughly equivalent to finding a major new field," reports the WSJ. "Nalco," you say, "but isn't Nalco is one of the world's largest water purification companies for industrial companies?" This is what we mean by energy-water nexus. The two are related. And Nalco sits right in the middle of that nexus. Last year, Nalco's energy services segment was a bright spot. Sales grew 17% organically for the year. In the fourth quarter, sales were up 23% despite the steep oil price decline. In that segment is Nalco's enhanced oil recovery (EOR) business. CEO Erik Fyrwald commented on this business in a quarterly conference call. "We are in with a lot of oil companies explaining and talking to them about it," he says. "We believe as oil prices come back up, [EOR will be a] really big growth opportunity, just delayed for a period of time." The delay stems from the fact that many oil companies slashed their exploration and production budgets last year, when oil and gas prices were falling. But it seems inevitable that as the big oil reservoirs dwindle, the EOR business will be big down the road. Of course, EOR is only one of the many valuable things Nalco does in the energy-water nexus. It is no wonder why Warren Buffett's Berkshire Hathaway is the biggest shareholder. Nalco is a long-term buy. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Mr. Mayer, considered required reading among editors here at DR H.Q., produces the inimitable Capital & Crisis - a kind of rolling guidebook for value investors searching for rock-solid stocks with compelling outlooks that trade at real discounts. Now, Capital & Crisis is not Chris's premium service (that one sells for quite a considerable amount more), but it is a great place to start if you're looking for risk-averse investing strategies over the coming years. His newest report, for your perusal, can be found here. --- Bet You Didn't See This Coming... --- Have You Heard About The "Cattle Farmer's Secret?" Did you hear about the cattle farmer who made $140,000 watching daytime TV? Sounds like a load of baloney (or beef), but this is a true story! What's more, you can use this simple strategy yourself and become $79,500 richer this year. Other readers like you are using this strategy to make their own life-changing profits. This farmer's story will blow your mind! --------------------------------------------------------------- And finally today, Bill shares this parting thought... We spent the weekend reading. One of the books we read was Malcolm Gladwell's Outliers. Typically, Gladwell tells a good story, makes some interesting comments, and misses the point. Outliers is no exception. He describes how some groups came to America as immigrants and made successes of themselves. The Jews, for example. They arrived penniless in New York. The first generation started small enterprises. The second generation turned them into big enterprises. And the third generation became lawyers, judges, doctors, and Nobel Prize winners. He cites this example with approval. They made good, he seems to say. We're not so sure. What we see is a class of people switching from freewheeling enterprise to highly regulated, status-oriented professions. The next thing you know, they're on Wall Street. Instead of adding value as merchants and manufacturers, they're subtracting it with mortgage-backed derivatives. Until tomorrow, Bill Bonner The Daily Reckoning   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.