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The Daily Reckoning | Thursday, April 21, 2011 Goldman's conspicuous absence from the latest rally fanfare, Silver is on a tear lately...but have you considered this other white rock? Plus, Bill Bonner with more tales from the ranch and plenty more... ------------------------------------------------------- External Advertisement More than a Trillion Barrels The biggest oil reserve ever discovered isn't in the Middle East or Russia... It's just a few hours north of the U.S.-Canada border. And it's chock-full of 1.7 trillion barrels of crude - enough to keep America running at full speed for more than 50 years. The catch: just one company holds the key to this reserve. Find out its name right here. The Curious Case of Goldman Sachs Making Sense of Gold’s Strength and Goldman’s Weakness Eric Fry Reporting from Laguna Beach, California... The stock market "rallied huge" yesterday...and it continues rallying today - lifting the Dow Jones Industrial Average to a new three-year high. But the shares of market leader, Goldman Sachs (NYSE:GS), haven't been doing much of anything. The conspicuously feeble performance of GS is not the only curiosity of recent trading action... In no particular order: Gold has jumped decisively through $1,500 an ounce to new all-time highs, silver is on a moon-shot that won't quit - rising to new three-decade highs almost every trading day, the dollar is imploding faster than a Tokyo sidewalk, and sovereign financial conditions - from Athens to Lisbon to Washington - remain disasters-in- progress. Your editors have no idea what these freakish macro-economic juxtapositions portend. But if forced to guess, we would guess that the strongest trends in the marketplace are the most important trends...and the ones most deserving of attention...and investment. The strongest trends on the planet right now remain what they have been for more than a decade: "precious metals up." A related trend - and almost as strong - would be "oil up," followed closely by an all- encompassing "commodities up." These robust trends are both chicken and egg to a very strong, offsetting trend: "dollar down." As these strong trends interact with one another, a variety of other financial markets thrash around in the resulting crosscurrents. Stocks, for example, are probably as much a "dollar down" trade as anything else. We have suggested this idea numerous times here in The Daily Reckoning. In a world of near-zero interest rates and a rapidly declining dollar, coincident with rising inflation and rising inflationexpectations, the precious metals are the most obvious refuge for capital. Oil and the rest of the commodity complex offer similar appeal. But commodities are not the only game in town for dollar-phobic investors. Stocks provide a different kind of refuge. While inflation tends to punish stocks over the short term, stocks do "re-price" to inflation over longer time frames. Furthermore, stocks, as partial shares of capitalistic enterprises, provide growth potential that commodities do not. Net, net, a great, big ugly bear market in stocks does not seem very likely very soon...as long as you are measuring the performance of stocks in dollars. Year-to-date, the Dow is up a robust 8.7% in dollar terms, but up only 2.5% in Brazilian reals...and down 1% in Norwegian kroner terms. Heaven forbid, you conduct this calculation in terms of gold or silver! Since the end of 2009, the Dow has chalked up a hefty total return of 24%...in dollar terms. But in gold terms, the gain flips to a 10% loss, and in silver terms, a 50% loss! However, since most folks count their stock market winnings or losing in dollars, we'll do the same. Thus, in dollar terms, an imminent, great, big ugly bear market in stocks seems unlikely...at least not until and unless Ben Bernanke discontinues flooding the financial system with dollars. However, a series of small, annoying bear markets seems very plausible. From a technical standpoint, the shares of Goldman Sachs seem to portend stock market weakness. The shares of the market-leading, world- beating financial wizard have been conspicuously weak lately. According to a variety of Wall Street analysts, the stock is weak because of "earnings-sustainability concerns." But the analysts here at The Daily Reckoning offer an alternative analysis: the stock is weak because the stock is weak. The growth profile of Goldman Sachs has been taking a beating for months, and yet the stock continued rising. No matter that widespread public contempt for the firm arose from the ashes of the 2008 crisis, and that the SEC sued the firm for a variety of fraudulent activities and that the Dodd-Frank law forced Goldman to divest extremely profitable operations and/or discontinue extremely profitable corporate activities, no matter that various banking reforms have forced the firm to reduce the leverage that contributed to its strong results, the shares of Goldman Sachs continued rising...day after day. But now that the shares are falling, everyone's got a reason why. We say the stock is falling because it is falling. And the only other thing we would say is that when market-leading stocks fall for no reason - or for any reason - while the rest of the stock market is continuing to rise, bad things often happen. America 2012: Main Street in Ruins, Wall Street in Ashes Congress won't admit to this. The president won't talk about it on television. A shocking stealth threat could derail the American economy at any moment... Act before midnight Sunday, May 1 and get SIX ways to protect your family - and potentially profit - as America's economic chickens come home to roost. All the details - right here. The Daily Reckoning Presents The “Other” White Rock Chris Mayer The silver market has been on a tear, no doubt about it. The price of this shiny white rock has soared 50% in 2011, alone. There's good reason for this huge move (Hint: His name is Ben Bernanke). But I want to tell you about a different white rock - one that's also quite precious. The rock is called phosphate. There is no substitute for it. It is crucial to the world's food supply, for which it serves as a fertilizer. And most of the world's mines are in decline. Foreign Policy magazine recently called it "the gravest resource shortage you've never heard of." Demand for the rock is growing as demand for food rises. As I write, food prices are surging. Wheat is up 110% over the last 12 months. Corn is up 87%; soybeans, 59%; and sugar, 22%. Soaring food prices helped set off protests in Tunisia and Egypt, toppling regimes and threatening to spread similar uprisings to other poor countries in the region. There is no quick remedy. Many of the trends that created today's situation have been long in the making. The world population continues to grow. The amount of arable land per person continues to fall. Gains in crop yields have slowed. And more people around the world are eating a more calorie-rich diet. Prosperity in China, India, Brazil and other places have added millions of middle-class consumers eating more meat and processed foods. Plus, let's not forget biofuels, which place energy and food in direct competition. These happenings are no secret. I've written about them for the last couple of years. Now these things are on the front pages of newspapers and magazines. And - not surprisingly - the stocks of many agricultural firms have soared. But there is still one story that has gotten little play from investors so far. It's about a rock called phosphate, a key ingredient in making fertilizers. It is one of the three main nutrients for crops (nitrogen and potash being the other two). It's hard to overstate the importance of these fertilizers right now. About 40% of the world's food supply depends directly on the application of these three nutrients. Yet the world still applies far less than the scientifically recommended rates. Phosphate itself is important for root development and water efficiency. But most critically, like all fertilizers, it boosts crop yields. You get more per acre using it than not. In a world where arable land per person is falling and food consumption per capita is rising, crop yields are key. Plus, consider the path of phosphate prices. In the last food crisis of 2008, the price of phosphate rock soared to nearly $400/tonne. Then it crashed, like everything else. But it's been making its way back up. Today, it's about $150/tonne. With all that's happening right now, doesn't it seem reasonable to think we'll see another test of that peak? I think so. The price of many commodities spiked in 2008, and then crashed in 2009, only to subsequently recover. Oil was over $140 per barrel, and dropped below $30, only to rebound strongly. As with oil, long-term demand and supply issues created phosphate's spike too, and remain unresolved. When I ask myself what's changed from 2008, my answer is not much. In fact, the oil analogy is not a bad one. As with oil, phosphate production is concentrated. Whereas some 75% of the world's oil reserves are in the hands of OPEC, about 90% of the world's phosphate is in the hands of just five countries: Morocco, China, South Africa, Jordan and the US. As with oil, more and more countries need to import it, and it is getting hard to find big, low-cost supplies. The US is the largest consumer of phosphate and has long been an importer. Mosaic is one of the big producers down in Florida, which is the main source of phosphate in the US. But Mosaic has had trouble lately expanding that mine. They've actually had to stop mining from their Fort Meade facility over permitting issues. The US ought to import for many years to come. Latin America imports even more. And Asia imports even more still. India, for example, doesn't have any phosphate and will become a major importer in years ahead. Hence, the world begins its scramble to find more sources of phosphate. We've already seen a flurry of activity among the fertilizer companies last year. For example, Vale (the big Brazilian fertilizer and iron ore company) picked up phosphate mines and processing facilities from Bunge and Fosfertil. Mosaic took a 60% stake in a Peruvian phosphate project, Bayovar, with Vale the other partner. Vale bought Bayovar, an undeveloped phosphate deposit, for $300 million in 2005. The 2010 deal valued it at $1.1 billion. Still, based on what we know today, there is no significant new supply coming until at least 2014. All of the above will make phosphate a hot commodity in the next few years. Therefore, buy phosphate. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Readers do well to remember that resources - any resource - remain a non-value until they're pulled from the ground. It is the efforts of men (and women) that bring oil...or silver...or phosphate to market. And, it is the companies these men and women work for which deserve our praise and attention. A value hunter at heart, Chris seeks out the best of these companies and helps his readers identify when - for whatever reason - they begin trading at meaningful discounts. These occurrences he calls "Special Situations." As such, his Mayer's Special Situations investment service has unearthed some truly magnificent opportunities for his followers in recent years in everything from mining companies to water and piping outfits and beyond. Right now, Chris sees two tiny stocks that fit the bill. Both are junior gold miners. One is working territory next to one of the most lucrative ore zones in history. The other is still finding gold in lands where the conquistadors first laid claim hundreds of years ago. Both have the potential to multiply your money many times over. Chris provides a few more details in his brand new presentation, here. Do You Stay or Go? Most will agree that while stock markets across the globe have been rallying to pre-recession heights, many underlying economic indicators remain perilously unstable... However, wherever there is crisis, there is always opportunity. Right now there is a technological renaissance occurring with rapidly advancing developments... The world stands on the brink of more science and tech breakthroughs than ever before. Every day, little-known companies come a step closer to creating things that could define the future. These people have chosen to stay and innovate... and to fight. Which will you do? Which path will you take? Those are exactly the kind of big-picture issues that we will explore at the 2011 Agora Financial Investment Symposium. You can join us at the Symposium in Vancouver. Just click here to read more. Bill Bonner The Low-Down on Producing High Altitude Wine Bill Bonner Reckoning from Buenos Aires, Argentina... All we know is that gold has gone over $1,500...and America's ability to repay its debts has been put in doubt by the credit agencies. That's all the news that worked its way up to us in Salta province. But, after a week on the high plains, that's all we need to know... ..the show goes on, in other words... ..with the feds desperately pumping up the money supply...and investors desperately trying to protect themselves by buying gold. Nothing has changed since we've been away. And our guess is that nothing much will change...except that the markets and the economy will continue bouncing up and down, generally downwards, all the way to Hell. That's where you end up when you try to fight a surplus of debt by adding more debt and dollars to the system. You get ups and downs. You get plot twists and surprises. But as long as the feds continue to add to the world's supply of debt and dollars, the last infernal act is inescapable. So, let's get back to our report on life in the Andes. We told you about the cattle business yesterday. It's a terrible business up in the high Andes. Too cold. Too dry. Too far away. Every cow is a four-legged cost center. Today, we'll tell you about the other business we don't want to be in - wine. But let us pick up where we left off. Our little crowd had gathered in the main casa as the replacement padre was just about to bless our new statue of San Miguel. It is a statue carved from a single tree trunk, ordered from sculptors in Ecuador and shipped down the ranch. About 6' tall...in a light, yellowish wood...a bit like blond mahogany. It turned out very well...with a beatific St. Michael, handsome in a feminine way, with a curly hair and fine features. It is about as nice as any statue of San Miguel we've ever seen. So we put it in the living room. When the backhoe arrived last year, the priest had come over and blessed it. That seemed to work out fairly well; we figured we had nothing to lose by letting his replacement do his magic on the new statue. San Miguel is supposed to protect you from evil. And with all the powers not just of a saint but of an archangel, he ought to be able to do a fair job of it. He is seen in the wooden version with his foot on the devil's head. The padre admired him. Then, he took out some holy water...and small card with notes, underlined and ragged from years of wear and tear. He sprinkled water on the statue and then said, "Let San Miguel take all the people of this house and this ranch under his protective wing. Let him cast out evil. Let him bring the devil under his control and crush him beneath his foot. You can see him doing that in this statue. Let San Miguel help this ranch and help all those associated with it prosper and flourish in the love of Jesus Christ. Amen." We were beginning to doubt that even an archangel could bring prosperity to this outpost. The wine business came to us like a head cold. There was a vineyard on the property when we bought it, unbeknownst to us. It was less than 2 acres...and hidden away in a remote valley, about a two-hour ride on horseback from the main house. The place is beautiful, but not at all efficient nor especially productive. But when we actually made some wine, we found that it was very good. High altitude malbec, they call it. "Ecological," Jorge adds, since we don't know anything about using chemicals and can't get them up there anyway. So, we decided to plant more vines - mostly to give the gauchos something to do and to make the valley look better. Now, we've got almost 5 hectares planted. Like it or not, we're in the wine business. Of sorts. What an awful business for a dilettante! We hired a consultant to explain it to us. Giving us a look of pity, mixed with disapproval, a look normally reserved for alcoholics or syphilitics, he began: "Well, when I started playing golf a few years ago, I practiced and practiced. I spent a lot of time and money on it. I was thinking maybe of doing it professionally. And then, when I played with a real pro, I asked him what he thought I should do. "He said - 'take two weeks to think it over...and then throw away your clubs and never play again.' That was good advice. That's what you should do with your grape business. "Look, there are three parts to the business. There's growing the grapes. There's making wine. And then, there's selling it. Anyone can grow grapes, if you're in the right place. And anyone can make wine. This country is flooded with the stuff. But it takes a real genius to sell it. And that's the problem. If you can't sell it, you might as well not plant the vines or crush the grapes or make the wine. And I tell you frankly it is not easy to sell wine. "Look at the numbers. No matter where you are, it costs a minimum of about $5 to produce a bottle of wine. That's just the cost of labor...materials...bottle...cork and so forth. It's hard to get the cost much lower - unless you're operating in huge quantities...and very efficiently. "Where you are, on the other hand, everything will be much more expensive. Because it takes three hours to get to your place from Cafayate, which is where all the wine expertise and supplies are. "Each bottle will probably cost you $6 or $7...or maybe even $10...before it is shipped somewhere for sale. And then the distributor will want a big cut...and then the importer (if you're selling outside of Argentina) will need a cut...and then the retailer or restaurant will also want a large part of the retail price. And you'll have no bargaining power whatsoever. Because you are tiny. And because you are new to the business. There's no way you're going to make any money selling at mid-range prices. But unless Parker or someone will give you a rating over 90...you won't be able to go much beyond mid-range pricing. "It's like anything else. You can compete on price...or you can compete on quality. If you go low price, you will be competing with huge vineyards producing millions of liters of wine. They make pennies on each one - if they're lucky. "There's no way you can do that - not with your production and your costs. "But if you compete on quality, you need a good story to tell...and then you need a way to tell it. And that won't be easy, either. Everybody's trying to tell a story. And they've all got much better contacts...and much more experience than you do. "Some of these families around here have been in the wine business for three or four generations. Believe me, they know how to sell wine a lot better than you do. "The 'story' up here is what they call 'high altitude wine.' Or 'high altitude malbec.' Apparently, it's a story that sells wine. The wine is supposed to be more intense, like the sun up here. And the cold nights seem to fix more sugar onto the skin. The wine is stronger than wine grown at lower altitudes. Many people like it better. After they drink it for a while, the regular French wines seem weak and lifeless by comparison. "So, you've got a good story point at your ranch. A tiny, protected valley. And it's about the highest wine around. But even if you could tell your story, you wouldn't be able to sell your wine, because you don't produce enough to interest a real distributor. There's not enough money in it for them. And it's not worth spending the money to do the PR and the marketing - you just don't have enough scale. The only way you could get scale would be to get seriously in the wine business...and produce much, much more wine...hire real professionals to produce it...and real professionals to market it. "You'd have to spend millions. Let's say that now, you might have the money. But the real pros have the know-how. And if you want to get into the business seriously, you'll have to transfer a lot of your money to the people who know more than you do. And - if you keep doing it long enough - when you are finished, you'll be as broke as they are. "Seriously, I'll tell you what to do. Produce a little bit...ship it up to the US...and give it away to your friends. You'll be happy. And you won't lose too much money." That seemed like good advice. But what to do? If we get out of the cattle business and the wine business...what business is left? What will the gauchos do? Why does the farm even exist? "Don Bill," Jorge, the ranch manager approached us just before we left. "Thanks for getting the backhoe. It has been a big help to us. And thanks for investing in the farm. You know, the previous owner didn't put any money into the place. We didn't have any machinery. It just felt like we were going downhill. But now, we all feel like we're making progress. The grapes look good this year. The valley is green, thanks to all the rain. Our new reservoirs will be in operation soon. The place is finally becoming what it ought to be. It's very beautiful...and we're very happy to have you here." Hmmm..... Regards, Bill Bonner for The Daily Reckoning