Money and Markets: Cry Havoc!
Dear Subscriber:
The peace between Israel and Hezbollah is crumbling before ink is dry on the treaty. But this is no surprise to anyone who read my friend and colleague John Burke’s report, “The Rising Tide of War,” hot off the presses last week.
John laid out a case for a worsening spiral of conflict in the Middle East, and flare-ups in other hot spots around the world. I expect that will prove true, and I’d like to add my own twist to this: We are already fighting World War IV – a war over natural resources.
World War III was the cold war between the US and Russia. It could be the last conflict to be based primarily on ideology for decades to come. I expect the primary force driving World War IV to be commodities; oil, natural gas, metals … even water.
Like the US-Soviet stare-off, World War IV doesn’t have to be a “hot” war all the time. Much of the time it could be defined by struggles between corporations and the nation-states that back them in a quest for resources and accompanying global hegemony.
I touched on this back in my February 15 Money and Markets, “The Three-Way Race for Energy.” At the time, the big players in this conflict seemed to be the US, China and India. But now two more players are emerging on the stage: Iran and Russia, which seems eager to regain the prestige it had as the Soviet Union.
In his report, John gave you a list of defense stocks that will do well in the Rising Tide of War. I see there’s already been good news for some of those stocks …
- One made a couple of smart acquisitions that give it an even deeper product line to bring in more of those big defense bucks.
- One received a sweet analyst upgrade that praised the stock’s potential and send it higher. Nice to see other analysts are jumping on the bandwagon that John already got rolling.
- One made a righteous bounce off support that looks as bullish as the running of the bulls at Pamplona!
I don’t want to give away too much about the great picks in John’s report, but I definitely think there should be much more good news to come.
And defense stocks aren’t the only stocks that will do well.
This five-sided conflict could send the stocks of select natural resource companies through the roof. And by buying those stocks now, you can build a financial fortress to protect your portfolio from the economic fallout to come … and potentially profit handsomely.
What do I mean by conflict? Here are some of the more recent maneuvers in World War IV…
Russia: The Big, Bad Bear Returns
Russia’s nationalization of assets of the oil company Yukos was a real blunder; it scared off foreign investment. Still, Russian President Vladimir Putin seems determined to restore Russia to the superpower status it held when he was a KGB officer. This time, it will be as an energy superpower, and it will enrich the small circle of billionaire friends that Putin keeps around him.
- During the depths of last year’s harsh winter, the Kremlin forced the Ukraine to strike a deal by turning off its gas supply. The Ukraine isn’t the only one affected; Hungary gets 85% of its natural gas from Russia; Germany gets 40%. Other European nations also depend on Russian gas.
- Now Russia is putting the squeeze on Lithuania, claiming that pipelines are worn out (the Lithuanians say that’s a lie) in what seems to be an attempt to either bankrupt or force a merger on Lithuania’s big energy and pipeline company, Mazeikiai. The Mazeikiai refinery is the only refinery in the three Baltic states and largest economic entity there. It is also Lithuania's top taxpayer.
- Putin awarded a contract to a Japanese company to build a 2,361-mile pipeline from Angarsk on the southern edge of Lake Baikal to the port of Nakhodka -- a port from which petroleum could easily be shipped to the Japanese coast.
Now, the Russians have agreed to huge natural gas shipments to China and may allow the Chinese to build another pipeline off of the Japanese pipeline. This frightens European nations which are counting on that Russian gas.
China: The Rip-Roaring Tiger
China currently uses about 7 million barrels per day of oil (importing about half that), but that’s only going to up. The world average car ownership is 123 cars per thousand. In China, it is 15 per thousand. Chinese car ownership will likely accelerate – it is expected to increase FIVE-FOLD in the next 15 years -- which will drive up Chinese oil demand enormously.
In fact, China’s oil demand is expected to more than double by 2020. China’s government is determined to control its energy future. With $1 TRILLION in currency reserves, it has plenty of shopping power…
- Since the beginning of the year, China has signed deals worth more than $7 billion for stakes in oil and gas fields in Kazakhstan, Nigeria and Syria. A state-controlled company is reportedly considering a $2 billion bid for yet another Kazakh property.
- China has signed an oil exploration deal with Cuba. Now, China’s state-owned oil company Sinopec has moved huge deep-sea drilling platforms to the Gulf of Mexico, less than 50 miles from the Florida Keys – an area where US oil companies can’t drill thank to America’s Outer Continental Shelf (OCS) Moratorium. The US Senate passed a bill that would open 8.3 million acres for new energy development in the Gulf of Mexico, but it still has to get through the House of Representatives. Don’t hold your breath.
- The Middle East provides about 45% of China’s imports. A big chunk of that comes from Iran which is forming much closer ties with Beijing.
- China has spent over a billion dollars developing oil assets in Sudan, a country that is off-limits to US companies because Sudan’s government practices genocide against its own people.
As much as China spends on oil, it’s also spending enormous amounts on other vital materials, particularly metals, as it buys up mines by the score. As a result, 40% of China’s direct investment goes into South America. However, thanks to recent treaties, Chinese money should start pouring into the Australian resource sector. And Chinese money is already making waves in Canada. A Chinese oil company bought Canada’s PetroKazakhstan for $4 billion last year.
China’s economy is growing (over 11%), and its defense spending is growing even faster. Spending has been closely targeted at developing missiles and buying submarines, with the specific aim of constraining the US Navy off Chinese waters.
When the US recently expressed concerns about China’s growing military spending, Sha Zukang, China's ambassador to the United Nations, told reporters that “It's better for the U.S. to shut up.”
India: The Hungry Elephant
By 2035, India will be more populous than China. That will make things even tougher for a country that already has to import 70% of its oil
- The energy-hungry subcontinent is rushing to establish bi-lateral deals with Bhutan, Nepal, and Sri Lanka to buy hydropower from those countries. It’s also trying to buy power from Pakistan; that’s one of the reasons India is willing to sit down at the table with a government that sponsors terrorists inside India.
- India has negotiators in Tehran discussing a strategic pipeline. It’s trying to keep up with China, which closed a $70 billion deal with Iran in fall 2004.
- India has made other deals with China. In December, Indian and Chinese energy firms joined to buy Petro-Canada’s 37% stake in Syrian oil fields for $573 million. And India’s state-run Oil and Natural Gas and China’s Sinopec jointly won a bid for 50% in oil company Omimex de Colombia.
- But these two rivals also stab each other in the back. Two Indian companies are co-proprietors of rich natural gas reserves in Myanmar. So both they and they Indian government were stunned to find that Beijing had struck a deal with the Myanmar government for the exclusive rights to those reserves.
The US hopes to develop India as a regional counterweight to China. But as India becomes more powerful … and hungry for energy … we’d better watch our backs.
The US: Eagle Running on Empty
The US is finally starting to wake up and play this game. It blocked the sale of US oil company Unocal to China last year because of “national security” concerns. We should be concerned. The US is the market for between 25% and 30% of the world’s oil – in April, we imported over 13.3 million barrels of oil per day!
http://www.economagic.com/em-cgi/data.exe/doeme/paimpus
Our own oil fields are tapped out or falling apart. And once reliable suppliers like Kuwait and Mexico are seeing their own major oil fields go into irreversible decline. So, we’re making deals with some of the most unsavory characters this side of a Star Wars cantina…
In Azerbaijan, US negotiators held their noses to strike a deal with a corrupt and brutal government to build a $3.6 billion pipeline that goes through Georgia to Turkey. The US is very keen on this pipeline because Russia, China and Iran can’t touch it.
The US is also making energy deals in next-door Turkmenistan, a country where the leader is enforcing a personality cult that Kim Jong Il would envy. He has boiled at least one political opponent to death; his crimes are too horrific and numerous to detail. Occidental Petroleum and another US company Oil Capital, have struck multi-million-dollar deals to develop Turkmenistan’s rich Burun oil deposit and the Turkmen part of the Caspian Sean.
And the US adventure in Iraq was basically about oil, but hasn’t paid off. Iraqi oil production is still only ¾ of what it was before the invasion and occupation. Iraq is one of the few places where World War IV has actually broken out into a shooting war. I don’t think it will be the last.
Iran: Peacock Is Picking Fights
Iran is rich not only in oil but in natural gas. Iran and Russia have the largest natural gas reserves in the world. When it comes to crude, Tehran is the fourth-largest oil exporter in the world, but Iran’s aging and decrepit oil fields can’t keep up with the demands of a growing population. It desperately needs investment in its oil and gas fields and is turning to the Chinese and Indians to do it. Iran has adventurous plans of its own, starting with Iraq.
- Iran has coerced the Shiite population of Iraq, funneling arms to insurgents and stirring up anger against the US occupation. The Shiite majority government of Iraq is falling more and more into Iran’s sphere of influence. In the latest deal, Iran agreed to supply Iraq with refined petroleum products in return for crude oil.
- Tehran is also a major supporter of Hezbollah, helping feed the conflict with Israel. More chaos in that part of the world is to Tehran’s advantage; it drives the Muslim countries into alliances with Iran.
- Iran has also become the unlikely ally of Venezuela. The two countries are bonding through their mutual hatred of the US, and Iranian money and expertise is now helping develop Venezuela’s heavy oil projects.
Don’t think for a minute, by the way, that the pending UN sanctions against Iran for its nuclear activity will ever get passed. China won’t allow it; it has too much riding on Iran’s economic development. China is one of Iran’s biggest oil customers, it inked a deal to buy $20 billion worth of Iranian natural gas over 25 years, and its China’s state-owned oil company Sinopec has a 50% stake in the development of Yadavaran, Iran's largest undeveloped oil field.
What the US will do when the UN sanctions fail … well, that might be another chapter in World War IV.
There are some who say the Israeli attack on Hezbollah in Lebanon was a test-run to see how strategic bombing might work in Iran. It seems to have failed, but failure hasn’t stopped this White House before. Indeed, the track record shows failure is rewarded.
In any case, Iran has shown repeatedly in the past that when oil prices get too low, it will find some way to inject fear in the market and get prices back up. Meanwhile, consumption is rising rapidly in China and India, and US gasoline US keeps rising year over year. Sure, we may see short-term pullbacks, but the long-term trend should be much, much higher. And as resources dwindle, World War IV will start to heat up.
You can hide under your desk as it happens. Or you can invest now to protect your portfolio … and potentially profit enormously. It’s not war profiteering. It’s smart investing.
My Red-Hot Canadian Small-Caps and Red-Hot Asian Tigers subscribers are already well positioned for the next wave. But if individual stocks aren’t your style, consider these fine funds…
Two Ways to Enlist in The
Coming Energy Showdown
U.S. Global’s Global Resources (PSPFX) doesn’t have a load and its expense ratio is a low 1.3%. Its holdings include Petrobras, Valero, Tesoro, and the Canadian Oil Sands Trust, so it should make the most of the next flood of money into global energy.
I also like the Guinness Atkinson Global Energy Fund (GAGEX). It was best of its class last year, and is truly a global energy fund, with top holdings including Sasol, Petrochina, Royal Dutch Shell, EnCana, and Repsol. The fund has an expense ratio of 1.45%. It has no load, but charges a 1% fee if you redeem it in the first 30 days.
Yours for trading profits
Sean Brodrick
P.S. It’s not too late to get John’s full 16-page report, "The Rising Tide of War: Five Defense Stocks Set To Soar," click here. Sure, the stocks recommended in it are starting to ramp up, but they should have a LO-O-O-NG way to go. John’s report includes his picks, price targets and recommended stop-loss levels. It's only $39, and Money and Markets readers can download it right now.
posted by Sean Brodrick @ 2:04 PM
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