In this week’s bumper issue, we tell you exactly who to blame for the high petrol prices, and what you can do about it.
We also exclusively reveal a way that George W Bush can befriend the American people, AND leave a memorable lasting legacy…for the right reasons.
Finally, we give you details of 3 cheap small resources stocks we think could be set to fly higher in the days, weeks and months ahead.
Dear Fellow Tax Payer and Stock Market Investor,
The end of the 2007/8 tax year is just around the corner.
It’s been a tough 12 months for stock market investors, with the All Ordinaries index down around 13% since the end of June last year.
The last weeks in June are always a good time to review your tax situation. Everyone’s individual circumstances are different, and you should take tax advice where necessary and appropriate, but here are 3 things you could potentially do to reduce your 2007/8 tax bill…
1. Minimise your capital gains tax liability by either selling some winners to offset against capital losses, or selling some losers to offset against capital gains.
2. Prepay interest on margin loans.
3. You may be able to claim subscription costs against your tax.
Public Enemy Number 1 Raises Its Ugly Head
Meanwhile, back on the general economic front…
Can you feel the economic headwinds whistling down your computer screen?
We can.
Inflation is on the rise, not just here in
Yet at the same time, economic growth is slowing.
The traditional cure for a slow economy is to lower interest rates.
But lower interest rates lead to higher inflation. And world central bankers have long made inflation public enemy number 1, so they are reluctant to lower interest rates.
In the US, to counter the growing threat of inflation, economists and central bankers alike are now making noises about raising interest rates – not long after they’ve just slashed them from 5% all the way down to just 2%.
But higher
Can This Be George W Bush’s Lasting Memorable Legacy?
But wait…there’s more. As part of George Bush’s “farewell and thanks for the memories” world tour, some people are suggesting the
- to save them
- to save the
- to save their houses
- to save banking stocks
- and to give George W Bush a legacy other than to be remembered for the
Our opinion since the whole sub-prime crisis first surfaced back in August last year has been the US government and economists will save the economy first, and deal with the consequences later.
Lowering interest rates and the sending cheques to many financially challenged
Whatever happens, and especially if the
And, as we’ve been telling you for some time now, increased inflation is good for oil and gold.
Gold spiked above US$1000 an ounce back in March. It’s off the radar a little right now, but gold is the natural hedge to rising inflation, so we think it will be back above US$1000 an ounce in the not too distant future.
As an aside, as this email goes to press, we are feverishly researching the entire gold sector, hunting for yet more hidden gems of gold mining shares. We expect to update our thousands of Members in the coming weeks.
Gold Price Up 20%, Gold Shares Up 100%
Why buy shares in gold miners rather than just buy a few gold bars?
It’s all about leverage. This occurs when production costs rise at a slower pace than the revenue received from gold sales. This effect is known as operating leverage and results in profits growing at a faster rate than revenue.
As an example, a company selling gold at $500 per ounce with costs of $400 will earn $100 for each ounce sold. If costs remain fixed and gold increases by 20% to $600 per ounce, then the company’s profits will rise to $200.
In this case, a 20% rise in the price of gold has translated into a 100% increase in profits.
In such a scenario, the share price performance of the gold miners should substantially exceed that of the gold price.
Voila.
The Small Gold Miner We’ve Just Re-recommended As A Buy
With that in mind, just last week we recommended our Members BUY more of one of our very favourite small gold explorer shares.
· We first began following the company’s progress more than two years ago. We’ve been greatly impressed by their ability to deliver on their exploration and development goals.
· The final piece in the jigsaw puzzle is now almost in place, as the company moves towards production of its first gold bar – the commissioning of their initial Brazilian gold mine, well below budget, a major feat considering the current environment of delays and cost blow-outs right across the resources sector.
· This is NOT a speculative resource play. We firmly see the company as a long-term generator of wealth for shareholders. The company is run by what we consider to be one of the resource sector’s most highly regarded boards and management teams, which have a goal of building a high quality and growing mid-cap gold producer.
· We believe the rewards for shareholders will be in the form of sustainable capital growth and dividends driven by long-term production and exploration success, rather than many of its peers with a short-term focus on chasing whatever commodity might currently be ‘hot’ to generate short-term share price appreciation.
· We have every confidence in the company’s eventual ability to reach its annualised production target of 35,000 ounces. With the gold price at around A$950 and their anticipated production costs of around $A450 an ounce, we’re very confident the company will generate robust cash flows, and we think that should ultimately be reflected in a sharply increased share price.
· We concluded our report of last week by saying we think the recent share price weakness provides an astute buying opportunity, even for existing holders. Accordingly, we recommend the company as a BUY to all Members around 60 cents.
The good news is the shares still trade at around the 60 cent mark they were at when we recommended them as a BUY just last week.
As The Oil Price Rises, The Gold Price Looks Set To Follow
The other piece of potentially good news is the fact that the gold-to-oil ratio has fallen to its lowest level in some time, pointing to an oversold position in gold relative to crude oil.
In recent years, the price of gold has been at a ratio of more than 9 times the price of oil. Following oil’s meteoric rise however, the ratio has slumped to around 7 to 1. We would expect the ratio to return to longer-term levels in the years ahead, as gold resumes its upward trend.
All in all, we are confident in the future prospects for this Brazilian emerging gold producer and the gold price itself. We think the company itself is worth significantly more than the $90 million it is currently valued at, even with gold prices where they are today.
But the real excitement for this company could come with an increasing gold price. If, as we expect, the gold price exceeds US$1000 an ounce again in the not too distant future, we could expect some serious share price excitement to closely follow.
Who You Can REALLY Blame For High Petrol Prices
Oil remains firmly in the headlines.
A Nielsen poll published in the Sydney Morning Herald this week said 78% of Australians want the government to cut fuel prices, and 56% were unhappy with Prime Minister Kevin Rudd's handling of fuel prices.
Yawn.
It’s like asking turkeys if they’d vote for Christmas.
Of course turkeys don’t like Christmas and of course the majority of Australians don’t like high petrol prices.
But don’t blame Kevin Rudd for high petrol prices. There are a host of other people and entities you can blame, for example…
· OPEC, for not pumping significantly more oil, presuming they could, which is a big assumption. Let’s blame them regardless.
· Various governments around the world, for not granting sufficient oil exploration licenses for years previous.
· The falling US dollar. OPEC has previously said that for every one percent decline in the dollar, the oil price rises by US$4.
· Oil speculators, for punting on a rising share price, hence sending it yet higher still.
·
If you want to get annoyed about high petrol prices, pick one of the above, print off a picture of
Hopefully it might make you feel a bit better.
But we suspect it won’t make you feel better for too long.
The Oil Price Was Supposed To Fall – But It Rose Instead
For example, this week, the oil price was supposed to fall.
On Monday, Reuters reported…
“The world's top oil exporter Saudi Arabia will boost output next month to the fastest rate in decades to help keep pace with demand and tame what it sees as unacceptably high fuel prices.”
Later on Monday, after the European markets had closed, the Financial Times of
“Oil surged to a record near to $140 a barrel on Monday as traders brushed aside reports that
So much for that idea then.
We’re not surprised. In fact, we were one of the first mainstream organisations to predict oil would hit US$100 a barrel.
We like to keep it simple. To us, high oil prices are largely a result of the falling US dollar coupled with very tight supply versus demand dynamics.
We’re not the only ones who think that.
The Scary Truth About Oil – It’s Running Out Faster Than You Think
This week, as reported in the Australian Financial Review, the world’s 2nd largest energy company, Royal Dutch Shell, said it sees it as a certainty that oil and gas supplies will not match demand by 2015.
2015 is not far away.
It takes years and decades to discover and bring into production new oil fields.
2015 suddenly feels very close.
If something is not done now about either curbing oil demand and/or increasing oil supply, you can forget about the petrol price falling back below $1.50 a litre.
Expect to pay $2.50 to $3 a litre for petrol in the not too distant future.
It’s a scary thought.
You’ll have to car-pool. You’ll have to catch public transport. You’ll have to do more walking. You’ll have to learn to ride a bike again.
Very scary.
But there is hope. Humanity has successfully evolved, changed and innovated over the centuries. It will do so again. Where there is a will, there is a way. We just need a few more people to be willing, like the
We’re no saints here in
Oil To Hit US$200 A Barrel
Through all this uncertainty, we think one thing is certain – the oil price will keep rising.
Oil’s current climb to around US$140 a barrel is just part of a strong upward trend in price that has been underway since 1997.
In fact, we have just made our boldest ever oil price prediction…
“Over the longer-term we believe oil can trade at much higher prices, although over the short-term it could be vulnerable to some profit-taking. Over the next few years however, we believe oil could easily trade as high as US$200 per barrel.”
So what’s a stock market investor to do, apart from driving less, walking more and generally reducing our energy needs?
Buy oil stocks of course.
But there is a catch.
The 6 Large Commodity Companies We Like Today
You must buy the right oil stocks.
As we’ve said here on many previous occasions, you could do a lot worse than just buying a large company energy company like BHP Billiton. In fact, last week we named BHP as one of our top 6 large-cap commodity companies today.
Whilst we think these 6 large cap commodity companies offer investors the prospect of solid long-term returns, it’s the smaller end of the market that we usually find our biggest winners.
Last week, we also said…
“At the smaller end, we anticipate the recent volatility will provide some additional buying opportunities.”
In the past few months, we’ve seen an almost unprecedented level of stock market volatility. The economic headwinds we mentioned earlier mean that one day the stock market is all gloomy because it can’t see an end to the credit related woes. The next day, the market is euphoric as suddenly it can see the light at the end of the tunnel.
Smaller companies often get hit the hardest on the down days, and then, perversely, don’t benefit as much on the up days. Even more bizarrely, we’re often seeing the share price of smaller oil companies fall on the same day the oil price hits yet another record high.
Two Even Cheaper Small Commodity Stocks
But that sort of stock market activity doesn’t faze us. On the contrary, we like it when some our very favourite smaller companies see their share price fall, because it gives us the unique opportunity to recommend them as a BUY to all our existing and our brand new Members.
For example…
A Cheap Small Oil Stock
The small Thai-based oil producer and explorer we recommended our Members BUY just last month at 76 cents is now trading at around 60 cents. New buyers today can pick up the shares at a 20% discount to the price a month ago.
An Even Cheaper Small
A couple of month’s ago we met with this company’s Chairman and CEO, taking comfort from their vision of building upon and expanding the company’s existing Northern Territory based iron ore business.
They have just shipped their first boatload of high-grade iron ore to Chinese customers. As you probably know, iron ore is currently just about the hottest commodity on the planet at the moment, yet this junior iron ore producer is still only capitalised at less than $200 million.
Back in April, we recommended our Members hold the company when the shares were priced at 93 cents. Today they trade around 77 cents, a 17% discount to their price of just a couple of months ago.
Some Great Big Winners
These are just two small examples of the types of companies we prefer – small, cheap and largely undiscovered.
But simply finding a small, cheap and undiscovered commodity company does not guarantee stock market success. The Australian Stock Exchange is littered with ‘penny dreadful’ companies with dubious management, tenements in inaccessible places, little cash, and almost no hope of long-term share price appreciation.
That’s where we like to think we make a difference. We can get access to the management of many promising smaller resource companies.
We find there’s nothing better than kicking the wheels of a company to establish if it’s the real deal or just another fly-by-night pumped up ‘penny dreadful’.
For example, each of these companies was initially recommended to Members when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…
Terramin
Platinum
(Share prices taken on Monday 16th June 2008. Gains don’t include dividends.)
Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.
“I am more excited about the next 12 months than I have been in the last two or three years.”
We wish you happy and profitable long-term investing.
P.S. More than one respected source has recently suggested the oil price might be headed towards US$200 a barrel. If that happens, the stock prices of some of the small companies above could potentially soon be heading into the stratosphere.
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