Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Friday, February 29, 2008

Cotton Update

One of my charts this morning was on cotton. Let's take a look and see how it did today ...
I'd say that's a pretty good day. Can it go higher? Yes.


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TGIF -- News and Charts

The Ethanol Bust
...plans for as many as 50 new ethanol plants have been shelved in recent months, as Wall Street pulls back from the sector, says Paul Ho, a Credit Suisse investment banker specializing in alternative energy. Financing for new ethanol plants, Ho says, "has been shut down."Dollar Declines to Lowest in Three Years Against Yen on Fed `Indifference' The dollar fell to the lowest level in almost three years versus the yen on signs the Federal Reserve sees a weakening dollar as helping the U.S. economy.

Australian Dollar Rises to Highest in 24 Years; New Zealand Dollar Gains The Australian dollar rose to the highest level in almost 24 years and the New Zealand dollar headed for a third weekly gain on speculation the two nations' interest-rate advantage over the U.S. will keep widening.

Nigeria May Oppose Any OPEC Output Cut as Prices Rise, Oil Minister Says Nigeria may oppose any plan by OPEC to cut oil production when the group meets next week because prices are rising, Minister of Petroleum H. Odein Ajumogobia said.

India's Economy Grows at Slowest Pace Since 2005 on Reduced Winter Crops India's economy grew at the slowest pace since 2005 last quarter after dry weather conditions curbed winter plantings of food grains.

Wheat Futures Rally, Heading for Biggest Monthly Increase for 34 Years Wheat futures in Chicago rose and were heading for the biggest monthly gain in 34 years, as investors speculated the previous day's decline was overdone and a weaker dollar will boost exports.

Chicago Soybean Futures Rise to Records on Weak Dollar, Gains in Crude Oil Soybean futures climbed for a second day to a record, heading for the biggest monthly gain in three years on speculation the weaker dollar will boost exports and record crude oil prices will lead to increased demand for biofuel.

Nickel Rallies to Three-Month High on Steelmaker Buying, Strike; Tin Drops Nickel rose to the highest in more than three months in London on expectations of increased buying by stainless-steel makers and as workers at a Colombian mine owned by BHP Billiton Ltd. went on strike. Tin and copper fell.

Cotton Rallies to 4 1/2-Year High as Wheat Surges, Dollar Falls.
Cotton's 18 percent gain this month is ahead of the Standard & Poor 500 stock index, which is little changed. Still, it trails wheat's 31 percent increase, boosting speculation that U.S. farmers will plant less of the fiber in favor of grains.

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Thursday, February 28, 2008

Turning Bullish on Uranium Again!

That's right, you heard it here first. I'm turning bullish on uranium again. I think we could be in for a 20% rise this year at least.

First, let's look at the chart ...
The Uranium Participation Corp. holds physical uranium and therefore closely tracks the price. It jumped over 9% today. I think we could see it rally back to $14, which would be a 22% rise from present prices.

Here are some of the reasons why ...


Canada's Uranium Participation Corp said today (Feb 28, 2008) that it would issue C$65 million worth of shares to fund the purchase of 900,000 pounds of uranium. Thehe purchase would represent about 5% of the whole 2007 spot market activity in uranium.

Uranium Participation Corp is the smart money. If they’re buying it now, they think the spot price of uranium is cheap.


About 6% of US uranium needs comes from its own mines. That's even worse than our domestic supply/demand situation in crude oil, where we produce over 20%.

The United States' 104 nuclear power plants get roughly 85% of their uranium from other countries, including the Russian "Megatons for Megawatts" program, which expires in 2013.

The US has a strategic interest in seeing more uranium mines come online.

Many small US miners and near-term miners are undervalued. If the US dollar continues its downtrend, their mining costs will fall compared to miners elsewhere in the world.


More than half the world’s uranium-mining production comes from Australia, Kazakhstan, and Canada. Experts say Kazakhstan is on track to becoming the largest producer of uranium in the world.

One uranium miner after another has come forward to announce disappointing results. Uranium One’s 32% cut in its production forecast is just an example. Another is Cameco's big project at Cigar Lake, which has been pushed back to 2011 as they try to drain the flooded mine. It could be pushed back longer than that. There are many other examples. 25% of all mining projects are delayed, and that holds true for uranium miners as much as anyone else.

Costs – labor and energy – are rising, which will make marginal projects impossible without a big rise in uranium prices. The corporate credit crunch will also mean the end of the line for some junior explorers. This is better for those companies that survive.


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Bushels of Profit Potential

Soybeans Surge to Record on Increased Global Demand for Food, Animal Feed Soybeans and soybean oil surged to records on speculation that inventories in the U.S., the world's largest producer, will slump because of increased global demand for food, animal feed and biofuels.

Robusta Coffee Advances to Highest Since 1995 on Investment Fund Buying Robusta coffee in London climbed to its highest since 1995 for a second day as funds sought to diversify their investments from stocks. Cocoa also gained while white sugar fell.

Gold takes hold of new high
Futures soar to a record $970 as weakness in the dollar further boosts the yellow metal's appeal.

Copper Futures Climb to Highest in 21 Months as Metal Inventories Dwindle Copper jumped to the highest price in 21 months as dwindling inventories signaled growing demand for the metal used in pipes and wires.

Crude surges above $102 a barrel
Crude-oil futures rallied nearly $3 to a record closing level of $102.59 a barrel Thursday, as investors' voracious appetite for oil shows no sign of abating.


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News You Can Use for Thursday

The $3 Trillion War
n 2005, a Nobel prize-winning economist began the painstaking process of calculating the true cost of the Iraq war. In his new book, he reveals how short-sighted budget decisions, cover-ups and a war fought in bad faith will affect us all for decades to come.

Is Greenspan now trying to sink the dollar?
"Bubbles" Greenspan, the man who did more than anyone on the planet to ensure that there would be inflation on a global scale by bringing interest rates down to insanely low levels and flooding the markets with cheap credit is now trying to con Americans one last time by engineering a de facto default by the US on its foreign obligations, via devaluation.

U.S. Economy Grew 0.6% in Fourth Quarter, Less Than Economists Estimated
Payrolls and consumer confidence have dropped and the housing slump has intensified so far in 2008, raising the odds that the world's biggest economy will tip into a recession.

XX As my friend and expert currency trader Boris Schlossberg wrote early this morning: "Today’s US GDP numbers could provide some fireworks in today’s North American session. The market expects an upward revision to 0.8% - still a paltry rate of growth - but slightly better than the initial 0.6% read. If the data surprises to the upside, it may quell some of the doom and gloom forecasts of an imminent recession that dogged the greenback. If, however, the news is even worse than the bears believe, the greenback could come under fresh selling pressure stoking fears that the recession is already here."

Australian Business Investment Rebounds on Demand From China for Iron Ore Australian business investment rebounded in the fourth quarter, after falling the most in eight years, as mining companies such as Rio Tinto Group expanded to meet Chinese demand for iron ore.

Crude Oil Advances on Reports of Production Disruptions in Nigeria, Iraq Crude oil rose to $100 a barrel on reports of a further production loss in Nigeria and that a technical fault is blocking shipments from northern Iraq.

Rogers Says Agricultural Commodities to `Explode,' Led by Sugar, Cotton Jim Rogers, who predicted the start of the commodities rally in 1999, comments on the outlook for sugar, cotton and other commodities.

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Wednesday, February 27, 2008

Is Oil on the Way to $112?

The US Department of Energy Petroleum Report shows a build in crude inventories of 3.23 million barrels. Analysts were expecting a build of 2.58 million barrels. It's the 7th week in a row that we've seen a build in inventories.

Despite all that, oil prices are only down around 31 cents a barrel and are still over $100 per barrel at this writing. If the market doesn't sell off on bearish news, that's actually pretty bullish.

Now, for something more interesting. What if crude closes the week at these levels? Here's a chart grab I made earlier this morning, when oil was a bit higher ...

A weekly chart of oil shows crude in the process of making a breakout, and it could be big. If oil completes the breakout by closing above $100 on Friday, a technical forecast puts the next price target at $112.

Some of the forces driving oil higher …

The US dollar is tanking. The greenback sank to a record low against the euro after Tuesday’s release of three U.S. economic reports – wholesale inflation, consumer confidence, and falling US home prices -- that show that the economy is slowing as prices for consumer goods rise. Since oil is priced in dollars, as the dollar slides, oil generally climbs.

In 2008, the world will hit an important milestone -- using oil at a rate of more than 1,000 barrels PER SECOND! According to the International Energy Agency, global oil demand will average 87.8 million barrels per day (bpd) in 2008, up from 85.7 million bpd in 2007. At 87.8 million bpd, we'll use 1,016 barrels per second — a sonic boom of energy use.

America is the world's largest consumer of oil, guzzling more than 7.5 billion barrels per year. We import more than half the oil we use, and that amount is rising, despite the build in inventories.

The world consumes an astonishing 173 billion barrels of oil every 2.4 years. At the same time, we find enough new oil to supply just 3% of that. So, just to keep prices stable over the next decade, we're going to have to find a couple more fields the size of Ghawar — the biggest oil field in Saudi Arabia ... and the world.

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The Iceman Cometh

My latest column is up...

The Ultimate Liquid Asset
by Sean Brodrick
Wednesday, February 27, 2008 7:30 AM
Two centuries ago, people in New England were harvesting a resource for practically nothing and selling it at a fat profit in such distant locales as Calcutta, Martinique and Havana. As the wheel ... [More...]

UPDATE: My mother writes, "We used to harvest ice when we lived on the farm. It was covered with sawdust and it lasted in our ice house. Never could figure out how. And living in Boston, we used to follow the ice man down the street, hoping for chips of ice. Reading the article made me thirsty.

"I'll have to ask my elders when we got the refrigerator. I just remember the drip pan was always over flowing and it was a pain. I do remember even in MA the ice man coming in, lugging a huge piece of ice held by a giant ice hook."

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Tuesday, February 26, 2008

News You Can Use for Tuesday

Just in case you've been watching too much CNBC and thought the crisis in financials was over ...

FDIC Readies for a Rise in Bank Failures
"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

In related news ...

Citigroup facing $12 billion in additional writedowns:
Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.

And let's hear from the President of the Optimists' Club ...

Bernanke's recession is here: 11 reasons it will last till 2011
Here are 11 critical factors for your timing equation, things that could make this bear-recession shorter or longer. You tell us. Add a comment. What's your prediction: How long before the next bull?

Meanwhile in the REAL bull market (commodities) ...

Wheat Breaches $12 for First Time After Biggest Gain Since 2002
Global wheat stockpiles will probably fall to a 30-year low this year, while corn inventories are headed for the lowest since 1984, the US Department of Agriculture said

Soybeans, Corn Rise to Records on China Demand, Crude Oil Rally
China's soybean imports, the world's biggest, may more than double this month to about 2.5 million metric tons compared with the same period last year, the state-owned China National Grain and Oils Information Center said in an e-mailed report today.

Grain boom drives farmers' income to record high
Canadian farmers posted record high revenue in 2007, thanks mainly to higher grain and oilseed prices, Statistics Canada said Monday. Total cash receipts -- from crop and livestock revenues, as well as program payments -- reached $40.4-billion last year, up 9.5% from 2006 and 11.8% above the previous five-year average.

India May Buy 2 Million Tons Wheat This Year, Bolstering Prices
India, the world's biggest producer of wheat after China, may import the grain for a third year after dry weather cut output, supporting prices that are at a record. Imports may total 2 million metric tons in the year starting July 1, the Foreign Agricultural Service at the U.S. embassy in New Delhi said in a report dated Feb. 20. The country bought 1.8 million tons a year earlier.

Yunnan Tin Says 2007 Profit Triples on Prices, Demand (Update1)
China's tin demand may rise 12 percent a year to 190,000 tons by the end of the decade, Cui Lin, chief tin analyst at Beijing Antaike Information Development Co., said last May. Tin is used to solder electronic equipment

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Monday, February 25, 2008

Why Gold is Slumping Lower Today

I think market technicals are being overwhelmed by the colossal stupidity of government bureaucrats ...

STOCKS Gold drops on report US backs IMF gold sales
David H. McCormick, under secretary for international affairs at the Treasury Department, said Monday that the Bush administration considers the plan to sell 12.9 million ounces of gold as "probably the most viable" option to ensure the long-term funding of the IMF, Dow Jones Newswires reported Monday.


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Chart of Ugliness

Angry Bear credits Dean Baker with this chart showing our debt to GDP ratio.Then we get the moneyshot quote ...
As has been widely publicized, the Bush era deficits reversed the effects of the deficit reduction from the Clinton years. We will almost certainly end the Bush years with a higher debt to GDP ratio than we had at the start of the Clinton presidency. That is not a disaster, but the next administration will not have the luxury of allowing the debt to increase in the same way.
Well, maybe the debt won't increase, maybe it will. If the next President continues the Bush Administration's stupid math tricks -- and abysmal and costly war in Iraq -- you'd be surprised how long we can keep this up!

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Monday Is Chart Day

Is gold going higher? Well …

Gold Fields May Eliminate 6,900 Jobs as Power Shortages Reduce Production Gold Fields Ltd., Africa's second- biggest gold producer, will eliminate as many as 6,900 jobs, or 13 percent of its South African workforce, as the state-run utility fails to provide enough power for the company's mines.

As Commodities Soar, How Should Investors Bet on Stagflation? With few exceptions, commodities are rallying again, breaking records and keeping inflation pressures on the boil. For investors, the resurgence in commodity prices has made for excitement and relief from an otherwise gloomy financial market. The Reuters/Jefferies CRB Index, which tracks a broad range of commodities, has surged 11% year to date, pushing through new record highs. By contrast, the S&P 500 Index (SPX), measuring blue-chip stocks, is down 8% in the same period.

Copper Trades Near Two-Year High on LME on Supply Speculation; Tin Rallies Copper traded near a two-year record in London on speculation that supply disruptions will drive prices higher. Tin rose to the highest since at least 1989.

OPEC May Agree to Cut Production Next Month as Demand Slips, Khelil Says Organization of Petroleum Exporting Countries President Chakib Khelil said he expects oil demand to decrease in the second quarter and that the group may agree to cut production at its next meeting.

News You Can Use ...

Bernanke, Bush Fail to Build Stronger Economy With Rate Cut, Stimulus Plan Even if Ben S. Bernanke, George W. Bush and Congress win the battle to avert a recession this year, they risk losing the war to strengthen the economy for the long term.

Auction-Rate Bond Failures Saddle States, Cities With `Predatory' Yields U.S. municipal borrowers from Camden, New Jersey, to Sacramento, California, may face a third week of higher interest costs as failures in the auction-rate bond market persist.

Honda Aims to Boost India Sales 32% Next Year on Plant Expansion, Economy India's passenger car market has doubled in the past five years and may further triple to 3 million vehicles a year by 2015, according to government estimates.

Northern China's Dry Winter May Harm Spring Grain Planting, Xinhua Reports China's northern grain-growing regions have received little snow and rain this winter, and the reduced soil moisture may harm the planting of crops in the spring, the official Xinhua News Agency reported.

Soybeans, Soybean Oil Rise to Records in Chicago on Demand; Corn, Wheat Up Soybean and soybean oil prices in Chicago surged on speculation that global demand for food, animal feed and biofuels will exceed production this year. Corn also reached its highest ever, and wheat surged.

2 New Commodity ETFs Debut Last week, Lehman Brothers listed Opta Lehman Brothers Commodity Index Pure Beta Total Return ETN (RAW) and Opta LBCI Pure Beta Agriculture Total Return ETN (EOH) the broad commodities ETN provides exposure to energy, metals, agriculture and livestock. The agriculture note follows grains such as corn, soybeans and wheat, as well as "soft" commodities like coffee, cotton and sugar.

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Sunday, February 24, 2008

Weekend Chart Action

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Friday, February 22, 2008

Friday Chart Fiesta

Last week, I was keeping an eye on a potential head-and-shoulders reversal pattern in gold. However, gold did not break the neckline and instead pushed higher. One more niggling worry is that RSI (a momentum indicator) is making a lower high as gold makes a higher high. This is worrisome, so exercise caution. But gold is more bullish now (technically speaking) than it was last week.

I added a gold position in Red Hot Resources yesterday and may be doing more of that this next week. $1,000 an ounce should draw gold like a magnet now.

Meanwhile, the US dollar is looking weaker ...

Perhaps the higher price of oil is weighing on the US dollar ...

Natural gas is looking more bullish than oil ...

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News You Can Use, TGIF Edition

Chinese Steel Mills Reject Rio's Push for 71% Increase in Iron Ore Price Chinese steelmakers, the largest buyers of iron ore, will reject Rio Tinto Group's demand for a minimum 71 percent price increase in the raw material, two people familiar with the negotiations said.

XX Sean's note -- you should really read this story on Rio and the Chinese steel mills. The mills are stubbornly holding the line at paying "just" a 65% increase in the price of iron ore. Rio would be "disappointed with 65%".

Get a clue, Rio! Talk about potentially killing the goose that lays the golden egg.

Uranium One Cuts Production Forecast 32%; CEO Resigns

A slower-than-expected rate of underground development at the Dominion mine in South Africa was the main reason for the revision, the Toronto-based company said in a statement to Johannesburg's stock exchange today. Uranium One now estimates production this year at 3.15 million pounds, and cut its 2009 forecast 15 percent to 6.8 million pounds.

XX Sean's note -- The Uranium One news hurt because that was a position in Red-Hot Resources. On the other hand, uranium stocks across the board are perking up because 1.5 million pounds of supply has just been removed from the market.

Iran May Get 10 Percent of Gas Market by 2028 with Second Largest Reserves Iran could supply 10 percent of the world's natural gas demand within 20 years as the country ramps up production at new fields, according to Seyed Reza Kasaeizadeh, head of the National Iranian Gas Co.

Sugar Surplus Will Be Twice Previous Estimate Next Season, Kingsman Says The global sugar supply surplus in the 2008-09 season will be more than twice as big as previously estimated because a gain in prices will encourage more production in Brazil, Societe Kingsman SA said.

Ethanol Demand Boosts Food, Fertilizer Costs, May Add to Carbon Emissions U.S. plans to replace 15 percent of gasoline consumption with crop-based fuels including ethanol are already leading to some unintended consequences as food prices and fertilizer costs increase.

Gold Heads for Biggest Weekly Gain in London in 19 Months; Platinum Drops Gold, little changed in London, headed for its biggest weekly advance in 19 months as lower U.S. interest rates may revive investor demand for the metal as an alternative to the dollar. Platinum dropped from a record.

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Thursday, February 21, 2008

Profiles of 3 Stocks

I'm talking about three stocks on the radio this morning. The stocks were picked by the radio station -- Goldcorp, Potash and Exxon. They asked me to send them writeups on all three (I know! Like I have nothing better to do!) Anyway, since I wrote them up, I thought I'd share them with readers. These are not official recommendations. Just be aware this is what I'm talking about and this is what's on my radar screen.

My writeups follow ...
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Stock #1 -- Goldcorp


Macro Picture:

Global gold production fell to a 10-year low of 2,444 metric tonnes in 2007, according to Gold Fields Mineral Service. This year, production will likely drop again. While China is producing more gold -- up 12% -- South Africa's output is falling off a cliff, down 8.1%.

Gold miners are exploring frantically, but the mother lodes are getting harder to find. This should drive consolidation in the industry going forward as the big companies gobble up the smaller fish to replace their reserves.

The most active gold ETF, the streetTracks Gold Shares (GLD) , held 630 tons of gold at the end of January -- more than the European Central Bank or China's central bank. What's more, a new gold ETF in India is planned for this year.

In the short-term, we are seeing consumer demand in India, the world’s biggest gold buyer, pull back because prices are too high. However, the longer prices stay high, the more people get used to paying high prices. I think most gold buyers would consider anything below $900 cheap for gold – an excellent environment for a gold producer like GoldCorp.

Company Fundamentals

For my money, Goldcorp is one of the best gold producers in the world. It is certainly one of the lowest-cost producers, and one of the fastest growing multi-million ounce gold producers. It has 42.82 million ounces in proven and probable gold reserves – all of which is unhedged.

Big Reserves. Goldcorp has 1 billion ounces in proven and probable silver reserves, 1.5 billion pounds in copper reserves, 5.9 billion pounds in lead and 13.8 billion pounds of zinc! Whew!

The company probably produced 2.2 million ounces of gold in 2007. That should rise to 3.5 million ounces by 2011 – an increase of 59%.

The company has a history of finding more gold and silver than it mines. Its gold reserves and resources have tripled in the last year. Its silver reserves and resources have increased 10-fold!

Low Costs. Its cash costs are some of the lowest in the industry. However, over the next five years, the company estimates its cash costs will rise to an average $200 per ounce – still very low by industry standards.

Pipeline of Great Projects. Goldcorp already has 13 world-class mines and a pipeline of great projects. One new project, Los Filos, starts production very soon. Another, Penasquito, starts production late this year, and is possibly one of the best major development projects among the senior gold producers.

I think a trader could buy GoldCorp on the dips. It currently trades at $39.11, and my target is $58.

UPDATE: And then there's this just out this morning ...

Goldcorp posts record fourth-quarter profit
Vancouver's Goldcorp Inc. posted record fourth-quarter earnings and a 9% improvement in revenue, driven by higher realized gold prices and increased production. The gold mining company earned $256.5 million or 36 cents a share in its latest quarter, up from $66 million or 11 cents a year earlier. Earnings from continuing operations jumped to 28 cents a share from 9 cents.


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Stock #2 -- Potash

Potash Corporation of Saskatchewan

Macro Picture:

There is a dietary shift taking place in India and China. Their combined populations of 2.4 billion people are eating better. They want to eat America’s lunch. This is putting a strain on global grain supplies. Farmers want to grow as much as possible – and this is sending demand for potash fertilizer soaring.

Potash CEO Bill Doyle commented in January that the growing world appetite for protein-rich diets amid dangerously tight global grain stocks would continue to push record crop prices higher, spurring fertilizer use.

"That switch (in diets) is so fundamental that it would take a global depression to upset the apple cart. And that's what a lot of people don't understand," Doyle told Reuters.

Then on Tuesday, Doyle told Bloomberg Television that people and livestock are consuming more grain than ever, draining world inventories and increasing the likelihood of shortages.

“If you had any major upset where you didn't have a crop in a major growing agricultural region this year, I believe you'd see famine,'' Doyle said.

Global grain stockpiles fell to about 53 days of supply last year, the lowest level since record-keeping began in 1960, according to the U.S. Department of Agriculture.

Three importers dominate global demand for potash, and none of them can produce its own supply. Chinese consumption is at 11.5 million tonnes per year growing at 12%; India’s demand is at 4.5 million tonnes, growing at 9%, and Brazil consumes 5.8 million tonnes with growth at 11%.

Globally, potash demand is growing at 3% to 5% per year. Even at 3% growth, you’d need 2 million more tonnes of potash, or the equivalent in volume to the start-up of a new mine, to feed that need. Now for the really good news: The province of Saskatchewan, where PotashCorp operates, possesses approximately 40% of the world's known reserves of potash. While potash is only 35% of PotashCorp’s business, that business should continue to boom for PotashCorp for a long time to come.

Company Fundamentals

Potash Corp is the world’s biggest producer of potash fertilizer – it produced 12.9 million tons of potash last year, more than 20% of the world's supply. Potash Corp focuses on North America, but reaches all over the Western hemisphere. Its PCS Nitrogen unit makes its nitrogen products. The company’s value has more than doubled in the past year, but it could go higher.

Rip-roaring revenue growth: Fourth-quarter sales for the Saskatoon, Saskatchewan-based company were $1.43 billion, up 40 percent from $1.022 billion for the same time last year.

Earnings look great: The company has more than doubled net income in the past two years to $1.1 billion and expects gross profits from potash to expand to $8 billion within five years from $912 million in 2007. Doyle has described his company’s earnings potential in 2008 as “sensational.”

It’s Cheap! Earnings are growing so fast that price-to-earnings growth is 0.53 – anything under 1 is considered cheap. PotashCorp trades at very low multiples compared to both the S&P 500 and its industry. It beat estimates, recently raised its earnings forecast, and I wouldn’t be surprised to see it do so again. And yet, Wall Street is shrugging off this stock’s potential. That disconnect won’t last long!

I expect this stock is going much higher. Potash is currently trades at $156. My target is $222. Buyers of my agriculture boom report will remember that this was one of my picks in that report.


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Stock #3 -- Exxon Mobil


Macro Picture

This is the year that the world starts using crude oil at a rate of more than 1,000 barrels per second. The International Energy Agency Feb. 13 forecast global oil use may gain by 1.7 million barrels a day in 2008 to 87.6 million bpd. What’s more, IEA, the adviser to 27 oil-consuming nations, predicts that Chinese and Indian oil imports will almost quadruple by 2030, creating a supply crunch as soon as 2015.

It may come sooner than that. Consider …

  • Surplus world oil capacity has been declining since 2001. Current surplus capacity is one million barrels a day — down from more than five million barrels a day.
  • Output from the world's existing oil fields is declining at a rate of about 5% per year. New production is coming online, but not fast enough to keep up with growing demand. Exploration can't keep up with production, either.
  • The U.K.-based Oil Depletion Analysis Centre recently reported that 60 of the world's 98 oil producing countries have already hit peak oil production.

The oil that is found is more expensive. In fact, onshore drilling costs in the U.S. have jumped nearly 20% in recent years. Offshore drilling costs have jumped nearly 38%, to $70 per barrel.

All in all, it’s a great time for oil producers.

Company Fundamentals

Earnings Bonanza. Exxon recently reported the highest ever quarterly and yearly earnings for a US company. Fourth-quarter net income rose nearly 14 percent to $11.66 billion, or $2.13 a share, from $10.25 billion, or $1.76 a share, in 2006.

The company's full-year earnings of $40.61 billion set a new record for U.S. profits -- beating out its own previous mark for 2006.

Reserves are growing … or are they? Exxon says it replaced 101% of its production in 2007. The US government disputes this, saying Exxon replaced just three out of every 4 barrels it produced.

Exxon’s worldwide proved oil and gas reserves totaled 1.6 billion oil-equivalent barrels. Exxon’s 10-year average replacement ratio is 112%, and it has found more oil than it has pumped for 14 consecutive years.

Production and other problems: Quarterly production rose just 1 percent. Exxon also lost oil from assets that were taken over by Venezuela. What’s more, despite its record earnings, Exxon reports that ikts downstream earnings were off sharply from a year ago -- $622 million in the most-recent quarter versus $945 million in 2006.

Refining margins -- the difference between the cost of crude and what the company makes on refined products such as gasoline -- have been squeezed in recent months as spiking oil prices outpaced increases in gasoline prices and other refined products.

Exxon is the big enchilada of oil, and my price target is $103, a nice move from its current level of $88.10. However, I find more value in other companies – for example, any of my picks in my recent oil report, Running on Fumes.

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Wednesday, February 20, 2008

News You Can Use for Wednesday

Mortgage Applications Drop 23%, Most in Four Years, as Loan Rates Increase Mortgage applications in the U.S. dropped by the most in more than four years as the highest mortgage rates in two months weakened demand for home buying and refinancing.
Also ...
Housing Starts May Remain Near Lowest Level Since 1991 as Slump Persists Housing starts in the U.S. remained near the lowest level since 1991 in January, a sign the deepest real-estate recession in a quarter-century will weigh on the economy for a third year, economists said before a report today.

XX Sean's note -- and what about the bear market in massage chairs ...
Sharper Image Seeks Bankruptcy Protection After Sales Fall, Margins Widen Sharper Image Corp., the seller of massage chairs and vacuuming robots, filed for bankruptcy protection, citing declining sales and profitability.

Famines May Occur Without Record Crops This Year, Potash Chief Doyle Says Grain farmers will need to harvest record crops every year to meet increasing global food demand and avoid famine, Potash Corp. of Saskatchewan Inc. Chief Executive Officer William Doyle said.

Oil Has Decoupled From Equities, Chance of Pullback Closing, Goldman Says Oil prices have ``decoupled'' from equity markets with this week's surge above $100 a barrel and a window of opportunity for a retreat is closing quickly, Goldman Sachs Group Inc. analysts said.

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The Moon Shot Metal

"The Moon Shot Metal" was my original title for today's column. However, my editor had other ideas ...

Platinum Goes Ballistic; Gold to Follow?
by Sean Brodrick
Wednesday, February 20, 2008 7:30 AM
Natural resources markets exploded higher yesterday. Crude oil closed above the $100-a-barrel mark for the first time. And platinum's move was even more dramatic ... the price soared to a record high ... [More...]

Who's to say which is right. Well, me, actually. I still like my original title better! LOL!


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Tuesday, February 19, 2008

Ding-Dong, the Witch Is Dead!

That seems to be the reaction in the markets as Fidel Castro steps down as Cuba's President. Certainly it cracks the door on a whole array of investing opportunities. We aren't there yet. Still, optimism seems to pervade the market, and bank and credit write-offs seem to be last week's news.

Here is some news that caught my eye ...

Bauxite Rises 30 Percent, Double Last Year's Gain, on China's Ore Demand Bauxite prices have risen as much as 30 percent since January, twice as much as last year, on rising demand in China and dwindling exports from Indonesia, the Asian nation's main supplier of the aluminum-making material.

Soybeans, Soybean Oil Rise to Records in Chicago, China on Higher Demand Soybean and soybean oil prices extended gains in Chicago and Dalian to records on demand for the commodity and as higher crude oil prices boosted the appeal of the oilseed used to make alternative fuel.

Platinum Advances to Record on Concern Supply Shortage Will Deteriorate Platinum rose to a record in London for a 14th consecutive day on concern that power cuts in South Africa will worsen a supply short

Copper Rises Past $8,000 in London on Expectations China Imports Will Grow Copper rose beyond $8,000 a ton in London to a four-month high on speculation that China, the world's largest user, will import more of the metal. Aluminum and lead also climbed. Palladium climbed to the highest since 2001 and rhodium reached a record.

Crude Oil Advances to Five-Week High on OPEC Outlook, U.S. Refinery Fire Crude oil rose to its highest in more than five weeks on speculation OPEC will curb production and refinery disruptions may limit fuel supplies.

ABB's Indian Unit Says Profit Rises 38%; Electricity Shortage Spurs Demand ABB Ltd. India, the unit of the world's biggest builder of electricity networks, said fourth- quarter profit rose 38 percent as local companies expanded capacity to help meet power shortages.

Equity Trading Defies Bum Economy as Wall Street Transformers Proliferate The biggest surprise on Wall Street this year is proving to be the record $16.3 trillion of shares traded in the U.S. as stocks show no sign of rebounding from the first bear market since 2002 and the economy teeters on the brink of a recession.

If Exxon, Corning, Lilly Are Making So Much, How Can the S&P 500 Be Cheap? Exxon Mobil Corp. earned more in 2007 than any public company ever. Profit at Eli Lilly & Co. this year may climb by the most this decade, while Corning Inc. is forecast to make more per dollar of sales than at any time in 20 years.

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Monday, February 18, 2008

Have a Rock 'Em, Sock 'Em President's Day!

Happy President’s Day! US markets are closed today.

Today, among the many notables who have held this office, let’s pay special tribute to Andrew “Old Hickory” Jackson. The 7th President of the United States was a boy soldier in the Revolutionary War.
Captured, he nearly starved to death, and still had the gumption to refuse a British officer’s order to clean his sword.The irate Redcoat used that sword to slash at Jackson, leaving him with scars on his left hand and face, and a lasting, intense hatred for the British. As an adult, Jackson paid back the Brits many times over with a stunning victory at the Battle of New Orleans.

Jackson regularly took part in duels, with his “affairs of honor” numbering in the double digits. Jackson was wounded so frequently in these duels (and the resulting musket balls and bullets left in his body for medical reasons) that it was said the 6-foot-1, 140-pound Jackson "rattled like a bag of marbles." The first President to be targeted by an assassin, he survived because both of the would-be assassin’s pistols malfunctioned. Enraged, Jackson promptly used his hickory cane to beat his attacker within an inch of death.

If there was ever a President man enough to trade in today’s wild markets, this old wampus cat is the one.

Today’s big news …

Pound Declines on U.K. Plan to Nationalize Northern Rock Mortgage Lender The pound fell against all but one of the 16 most-traded currencies tracked by Bloomberg after the U.K. government said it plans to nationalize Northern Rock Plc.

XX Sean’s note – this is fueling a US dollar rally

And a dollar rally would weigh on the price of gold. Check out the potential head-and-shoulders pattern in gold …

The green lines are trend lines. The top green line is a broken uptrend that now serves as overhead resistance. It would not be surprising to see gold fall to the next uptrend line, or even lower to around the 850 level. This may seem scary, but as long as your investment horizon is longer term, it could actually be an opportunity to buy at lower prices. The longer-term uptrend in gold remains intact.

In other news …


Chavez Says Venezuela Won't Stop Oil Exports to U.S. Unless It's Attacked Venezuelan President Hugo Chavez, who threatened to cut off oil sales to the U.S. a week ago, said the government won't do so unless the South American nation is attacked.

Oil Rises a Fourth Day After Iran Says OPEC May Cut Production Next Month Crude oil rose for a fourth day after Iran's oil minister said OPEC may reduce production when it meets next month.


Asian Steelmakers Agree to Pay 65% More for Iron Ore, Setting Benchmark Asia's three largest steelmakers agreed to pay Cia. Vale do Rio Doce 65 percent more for iron ore, setting a global benchmark for prices that's less than some analysts estimated.

Copper Rises to Highest in Four Months in London as Chinese Imports Grow Copper advanced to the highest in almost four months in London after China, the world's largest user, said imports grew 6.6 percent in January from the previous month. Zinc and lead also climbed.


China's Foreign Investment More Than Doubles in January to $11.2 Billion Foreign direct investment in China more than doubled in January from a year earlier, adding to the flood of cash that threatens to overheat the world's fastest- growing major economy.

China's Inflation May Jump to 11-Year High After Snow Disrupts Food Supply China's inflation probably surged to an 11-year high in January, ratcheting up pressure on the government to rein in prices without derailing the world's fastest-growing major economy.

Bernanke's Rate Cuts Force Asia to Turn Back to Price Controls, Subsidies Ben S. Bernanke, the champion of free markets, is driving Asia's governments back to controlled economies.


Qatar Buys Credit Suisse Shares, May Spend $15 Billion on U.S. Bank Stock Qatar is accumulating shares in Credit Suisse Group and plans to spend as much as $15 billion on European and U.S. bank stocks over the next year, the Gulf state's prime minister said in an interview.

Will news of ANOTHER injection of investment cash by people we don’t like send US bank stocks (and the broader market) higher?

Meanwhile, in Canada

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Saturday, February 16, 2008

Saturday Energy Bonanza!

CERA sees a dozen reactors under way by 2015 in US

HOUSTON, Feb 15 (Reuters) - Challenges facing a nuclear revival in the United States seem only to increase, but industry experts at the CERA conference expect to see a dozen new reactors under construction in the next decade, they said Friday. "It's execution time," said Jone-Lin Wang, a senior director of Cambridge Energy Research Associates, host of the annual conference in Houston. "There's a strong possibility we will see a dozen reactors under construction by 2015," said Christopher Hansen, CERA associate director of global power.

BUT ... Because of escalating costs of steel, concrete and other basic commodities used in nuclear plants, CERA's cost estimate for nuclear reactors has risen from $2,000 per kilowatt three years ago to $3,500 per kw, Hansen said.

China Energy Factoids
  1. Last year, 3.4 gigawatts (GW) of wind energy were added to China's electrical grid, making the country the fastest-growing market for wind power in the world. And by 2020, China will quadruple its nuclear capacity from 10 GW to 40, again the fastest rate of growth globally.
  2. The government has announced plans to add an astonishing 1,300 GW to its electrical generation capacity by 2020. (The U.S. is currently capable of generating 1,000 GW.) The goal is for 25-30% of this to come from clean and renewable technologies. But even if these ambitious targets are achieved, some 70% of China's electricity will still come from coal-fired plants in 2020. That's down from about 78% today.
  3. According to a forecast by policymakers at Beijing's Sustainable Energy Program, electricity demand from air-conditioners purchased by Chinese in 2008 alone will exceed the total capacity of Three Gorges Dam.
Peak Oil Models Forecast China's Oil Supply & Demand
Peak oil models show a widening gap between China's oil demand and production. The generalized Weng model predicts a peak oil production in China of 196 million tonnes in 2026 and the Hubbert model indicates a peak oil demand in 2034 of 633 million tonnes.

The BP Statistical Review of World Energy 2007 says that China's oil demand growth is one of the fastest in the world, increasing by 7.4%/year in the recent decade. China's oil demand has reached 350 million tpy in 2006, second only to that of the US. oil demand because of the fast growing economy still has a potential to grow rapidly. At the same time, China's oil production is growing slowly, only by 1.5% in the last decade. This gap between demand and production has reached 166 million tpy, and it seems that the gap will become larger in the future.

Asia's Tigers Eye Nuclear Future
East and Southeast Asia is the only region of the globe where nuclear power generation is growing significantly. According to the Nuclear Issues Briefing Paper, the region boasts 109 operational nuclear power plants, with 18 more under construction and around 110 in the planning stage. In addition, there are 56 research rectors in 14 countries.

Rising Oil Prices Trigger Food Crisis
A WFP official, for example, recently showed me the red plastic cup that is used to dole out daily rations to starving Africans – and then explained, in graphically moving terms, that this vessel is typically now only being filled by two-thirds each day, because food prices are rising faster than the WFP budget.

The asymmetry of economic war

The ability of extreme movements to undertake mass casualty attacks is already formidable; so also is their developing capacity to strike at the vulnerable underpinnings of advanced industrial economies - in short, economic targeting. This was seen in the attack on the world's largest oil-processing plant, the Abqaiq facility in Saudi Arabia, on 24 February 2006. The Saudi response to the Abqaiq attack has been rapidly to develop a new 35,000-strong security force devoted entirely to protecting the country's energy infrastructure; this decision is paralleled by one to allow the United States fifth fleet to guard the world's largest oil export terminal, at Ras Tanura.

It may be too early to call this a global trend, but the example of earlier periods and contexts of armed insurgency or guerrilla warfare suggests that "economic warfare" could become a potent weapon in the armory of a new generation of militants.

In addition to Iraq and Saudi Arabia, events in Mexico and Sri Lanka reflect this broader tendency. The coordinated attacks on six oil and gas pipelines in Mexico on 10 September 2007, causing explosions and fires, is a prime example.

The door to Iraq's oil opens
Iraq's proven reserves of oil are only smaller than those of Saudi Arabia and Iran - and Iraq is only about 30% explored. Experts are generally of the view that Iraq's actual oil reserves could well turn out to be at least double the 115 billion barrels of proven reserves. Beyond that, it is anybody's guess as to the scale of Iraq's as-yet-untapped gas reserves.

According to the International Energy Agency, the world demand for oil is set to increase from the current level of 85 million barrels a day ( mn b/d) to 116 mn b/d in 2030. Three quarters of the world's oil reserves (1,200 billion barrels) are located in the OPEC countries, with the Persian Gulf countries accounting for 62%. But the Persian Gulf countries are disinclined to raise their oil production sharply enough to meet the increase in global demand. Saudi Arabia, which has the world's largest oil reserves, for instance, is only planning to increase its oil production by 1.5 mn b/d over the next several years.

Department of Defense: More Fight -- Less Fuel
Among the implications for DoD are that after peaking, prices for fuel will be even higher than today. The Task Force did not discuss the geopolitical, economic or national security implications of peak oil, but the recommendations in this report regarding reduced fuel demand would help mitigate its effects.

OPEC Hints At Output Cut If Supply Rise Continues
The Organization of Petroleum Exporting Countries said Friday weakening world economic growth and demand prospects and ongoing increases in U.S. and European crude and gasoline inventories could soon force the producer group to pare back its own production to avert a drop in crude prices ... The group, whose output meets about four out of every 10 barrels consumed globally every day, shaved its forecast for 2008 global oil demand growth by 100,000 barrels a day to 1.2 million barrels a day, representing a rise of 1.4% from 2007. Total crude consumption globally this year is expected at 87 million barrels a day.

The group said daily consumption of OPEC oil this year was now forecast to be 375,000 barrels less than in 2007, compared with an expectation for a drop of 307,000 barrels a day in its January report. Total demand for OPEC oil is expected to average 31.53 million barrels a day in 2008.

OPEC Lowers Its Oil Demand Projections for 2008

The Organisation of Petroleum Exporting Countries in its February report said demand would likely grow by 1.43 percent this year rather than its previously estimated 1.52 percent. The cartel said average daily demand growth would come to 1.23 million barrels, taking demand to 86.99 million barrels a day. In January OPEC put the overall figure at 87.07 million barrels.

Peak Oil: The Next Five Years
Overall, the chart implies ample supply in 2008, a possibility of pinched supply in 2009, a squeeze in 2010, and a serious shortfall thereafter.

Siberian field to produce cheaper oil than Saudi crude - Rosneft
Rosneft has already invested 70 billion rubles ($2.8 billion) in the Vankor deposit, located some 150 kilometers (93 miles) west of the river port city of Igarka with production at the oil field expected to start in August 2008. Vankor crude will be pumped to the Eastern Siberia-Pacific Ocean pipeline, an ambitious multibillion-dollar project to send Russian hydrocarbons to the energy-hungry Asia-Pacific region countries.

Crunch Time for Mexican Oil
Mexico's oil industry is in decay and production is falling. But it doesn't appear the country is going to do anything about it anytime soon ... Mexican oil output has declined steadily from its peak of 3.4 million barrels a day in 2004 and is expected to fall to 2.8 million barrels a day by the end of this year. If that continues, Mexico will likely stop exporting oil within seven years. The country relies on oil exports for about a third of government revenue. And Mexico is the third-largest supplier of oil to the U.S., behind Canada and Saudi Arabia.

Mexico Congress Won't Take Up Oil Plan
Mexican President Felipe Calderon's party probably won't send congress a bill to open the state oil industry to foreign and private investment this session because support for the plan is lacking, the speaker of the house said ... Daily crude output could drop to 2.1 million barrels by 2016 from about 3 million barrels now unless Pemex gets the money it needs to explore in waters deeper than 5,000 feet in the Gulf of Mexico, where much of Mexico's oil is located, according to a government study.

Top Oil Firms Spend More But Get Less Crude

Exxon Mobil Corp. , Royal Dutch Shell Plc and BP Plc posted falling 2007 output, even though they upped capital spending to over $60 billion and some expect a further rise this year.

In a February 4 report, Citigroup said there are over 175 large new oil projects due to start up by 2012 worldwide, although it remains to be seen whether they will be enough to counteract declines elsewhere. "The fear remains that most of this supply will be offset by high levels of decline, pointing to genuine difficulties in building net production levels, particularly after 2012," the bank said.

Mankind Can't Afford More Oil Drilling -- Ex-BP Executive
The oil industry may be wasting $50 billion annually searching for new fields, said Jan-Peter Onstwedder, formerly BP's most senior risk manager. He left BP in December ... He calculated potential carbon emissions from proven oil, gas and coal reserves at around 700 billion tonnes, compared with about 500 billion tonnes which can be emitted this century and keep temperature increases within less dangerous bounds.

Canadian Oil Firms See Record Year
The Canadian oil industry is poised for another gusher of a year with 2008 profits rising 18 per cent to nearly $23 billion, the Conference Board of Canada says. However, the Conference Board warned Thursday that the oilpatch is likely to hit a bump in the road in 2009 because of rising costs and because world oil production is being ramped up, which will eat into prices.

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