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The Daily Reckoning | Wednesday, February 24, 2010 Breaking It Down to Macroeconomics Foregoing the pretense of minute market moves Joel Bowman Markets in the US ended yesterday’s session in the red. The Dow was off by 100 points, or around 1%. The broader S&P 500 fell a bit harder, down 1.3% at the close. Gold slipped, too. The yellow metal sunk below the $1,100 mark and now trades for about $1,095 per ounce. Oil gained a smidge, to just shy of $80 a barrel. What do these single day data points tell us? On their own, probably not much. Put together...still not much. Stick your nose close enough to the computer screen and pretty soon the daily numbers begin to lose their meaning. Journalists report only after the facts, making up their reasons for this and that move as they go. “Investors shrug off concerns about XYZ, display confidence in recovery,” one paper might read after the Dow jumps half a point. “Investors remain sidelined as concerns over XYZ dampen recovery hopes,” another might read on the same day. On a daily basis it is simply impossible to know what goes on in the hundreds of thousands of minds operating hundreds of billions of dollars in the global markets. Maybe some hedge fund manager’s wife just left him...causing him to lose focus for a moment and to liquidate his position in XYZ instead of ABC. Maybe he got some inside information, which then turned out to be false. In that case he might be back in the office first thing tomorrow morning to buy the stock back. In reality, there are so many variables, so many separate and distinct inputs, that it is virtually impossible to draw a straight line between cause “A” and effect “B” in such a short timeframe. With neither the patience nor the inclination to study such micro-term trends, we turn our attention today to those on a somewhat longer timeframe. One thing we can know with a reasonable amount of certainty is that we cannot consume a finite resource indefinitely. This applies to natural resources, like oil, just as it does to things like the patience of foreign creditors. Much ink has been spilled on the subject of Peak Oil over the past few years. Although the issue has been more recently shelved in favor of global financial crisis headlines, the situation is hardly less serious than it was back when crude hit $147 per barrel a couple of years ago. In fact, despite the temporary downturn in global energy demand, the outlook may be bleaker now than it was then. Last year the International Energy Agency reported that worldwide decline rates were roughly twice what they had forecast just one year earlier. (The previous figure of 3.4% was revised to 6.7%.) New, comprehensive research led the IEA’s chief economist, Fatih Birol, to estimate that supplies of conventional oil could begin to plateau as early as 2020...and that’s, he said, “assuming that OPEC will invest in a timely manner.” In today’s column, Byron King, editor of Outstanding Investments, brings us some thoughts on the resurgence of a once unpopular alternative energy source...one he believes will shine in the coming months and years... The Daily Reckoning Presents Go Nukes Byron King The “No Nukes” era has been replaced by the “Go Nukes” era...and uranium stocks are a great way to play the trend. The nuclear industry is about to experience a breakout, and it’s going to be a major investment opportunity. Lately, I’ve been talking with people in the nuclear business, from uranium miners to reactor designers to government minders and check signers. Everything I’ve heard leads me to believe that 2010 will be a good year – finally – for the nuclear industry. Whether you want to look just at home in the US or all around the world, the nuclear story is good and getting better. The main use for nuclear power is to generate electricity. Let’s start with a look at how the world generates its electricity. There are 436 operating reactors in 30 countries around the world, 104 of which are in the US. These reactors produce just shy of 15% of the world’s electricity. The best data are that 50 reactors are currently under construction. There are 137 more being formally planned, and another 295 reported proposals seeking construction approval. And what about China and its nuclear ambitions? According to an article in the Dec. 16, 2009, edition of The New York Times, “China is preparing to build three times as many nuclear power plants in the coming decade as the rest of the world combined.” According to the Times, China’s “civilian nuclear power industry” (and rest assured there’s a Chinese military nuclear power industry as well) has 11 operating reactors, with as many as 10 new reactors per year planned for the next 15 years. That’s 150 new reactors just in China. So where will the world nuclear industry obtain the uranium fuel for all these new reactors? That’s a darn good question. Just in the US, annual uranium use for the nuclear power industry is about 55 million pounds. The US produces less than 4 million pounds of this fuel – about 7% – and imports the rest. But despite the large US demand for uranium imports, the world uranium mining industry lacks adequate capacity to meet demand. A large amount of the nuclear fuel imported into the US comes from decommissioned nuclear warheads from Russia. The warheads trace their origins back to the Soviet Union. If you thought the US had a problem with imported oil, now you know that there’s an issue with uranium fuel as well. Of course, I’m not the only one who knows this. It’s a national security issue, and I can tell you that things are about to change in a very big way. So let’s discuss the fuel, uranium, which is priced and traded as an oxide, U3O8. (It’s a yellow powder, often referred to as yellowcake.) The price of uranium oxide peaked in June 2007, at about $135 per pound. The price declined from there, and plummeted in late 2008 with the global crash and stock market meltdown (no pun intended). Uranium oxide currently sells in the mid-$40s per pound. This price is about as low as it can be, according to the people with whom I’ve discussed the matter. One producer told me, “At current prices in the $40s, I can barely pay the overhead to keep the plant open. Below these prices, I’ll shut down and let other people lose money. But if prices recover, any increase goes straight to my bottom line. So I expect to make money in this business, and soon.” What did this fellow mean? Both the mining and purchasing communities agree that the price of uranium is headed upward in 2010. The reason is that the Russians are running out of old warheads and utilities are back in the market for more supply. The near-term viewpoint is that we’ll see uranium oxide prices in the mid-$60s during 2010. Prices will trend even higher over the medium term, with some forecasters predicting $250 and higher over the long term. All indications are that there is a great investment play here. It’s time to get in, and I believe we’re getting in near the bottom. Here’s what to do. Take a position in the Market Vectors Nuclear Energy ETF (NYSE:NLR). As the name implies, this is an exchange-traded fund. It tracks the DAXglobal Nuclear Energy Index. It’s oriented toward growth, and includes global companies from uranium miners through electrical generators. The ETF includes common stocks and a variety of depository receipts that are listed for trading on major stock exchanges around the world. Thus, you can “participate” in many foreign stock plays that you would not ordinarily buy on US exchanges. The ETF rules are that all companies it owns derive at least 50% of their total revenues from the nuclear energy business. Most of the holdings of NLR are on foreign exchanges. Thus, it’s a great way to play nuclear on the New York Stock Exchange, yet obtain exposure to the international nuclear market without the hassle of foreign trading. This nuclear ETF has been around since August 2007, and has generally gone down with the declining fortunes of the nuclear industry in the past two years. Still, despite the recent doldrums of the nuclear industry, NLR returned 20% in 2009. NLR is currently trading in the range of $22 per share. As the nuclear industry recovers in 2010 – from uranium mining to equipment building to power generation – the component stocks will rise and the ETF will benefit. If you’re going to go nuclear, now is a good time and NLR is a great way to do it. Regards, Byron King for The Daily Reckoning