Occasionally an investment book comes along that is not replete with gimmicks; but instead offers cogent insights gathered from careful and knowledgeable analysis of markets, corporate infrastructure, and global energy trends. Dr. Stephen Leeb's The Coming Economic Collapse: How to Thrive When Oil Costs $200 a Barrel is one of those rare books (as was his first book, The Oil Factor). Dr. Leeb's prevailing thesis is that the United States is on the most dangerous economic precipice in its history. As the economies of China and India expand at record rates, pushing oil demand beyond production capacity, permanent energy shortfalls will result. Anticipating and planning for this crisis, Leeb says, will make all the difference....
Here are some excerpts from his excellent book:
The Only Bonds Worth Owning from Now On
One type of bond that is worth holding as inflation rises is Treasury Inflation-Protected Securities (TIPS). Unlike with most bonds, the value of TIPS is protected from rising inflation. The principal and interest payments on TIPS automatically increase or decrease according to the inflation rate. The higher the inflation rate, the higher the payments. TIPS also have a built-in protection against deflation. You are guaranteed to get back your principal on maturity.
If you want steady income over the coming years, you can buy TIPS directly from the U.S. Treasury at auction four times a year (January, April, July, and October). Keep in mind that as the consumer price index rises your principal expands, and you will be taxed on the increase.
Another option is to buy units in a TIPS mutual fund, such as the Vanguard Inflation-Protected Securities Fund.
Eventualy, we hope the coming wave of inflation wil peak, just as it did in the early 1980s. That will be the time to buy long-term bonds heavily, when interest rates on bonds are beginning to fal. But until then avoid all bonds but TIPS.
Gold and Gold Shares
Gold has always been a hedge against inflation, because the federal government cannot increase the nation's supply of gold at whim, the way it can paper or electronic dollars. So as the value of dollars declines, the price of gold rises.
...God will regain popularity once people recognize that inflation is on the move. ...gold today would have to trade at about $2,800 to be on a par with its relative value to stocks in 1980. This would be equal to a sevenfold gain.
...today, a new option has become available for those who want to own bullion: exchange-traded funds (ETFs). For example, one of our favorites is the streetTRACKS Gold Trust (GLD), which invests in actual gold. ...each Gold Trust share represents one-tenth of an ounce of gold, less the trust's modest expenses of just 0.4 percent annually. The trust is not actively managed so its expenses should remain very low....
Today, the best-known major oil companies are British Petroleum (BP), Chevron (CVX), ExxonMobil (XOM), and Roya Dutch Petroleum (RDPL)> They are huge corporations that engage in both upstream operations (exploring for oil and extracting it) and downstream (refining petroleum into gas and producing other products from it).
As oil prices rise, big oil companies earn higher revenues. And when oil prices drop, they still do well, because one of the major costs of their refining operations has fallen. (Lower prices are not always passed on to the consumer.) So if our predictions regarding oil are correct, you will make excellent returns from the majors. And if we are wrong and prices fall, you will have some downside protection. Big oil companies also offer excellent yields, typically twice that of the market.
Of course, independent oil producers made higher gains than the majors in the 1970s, with an average real return for the decade of 205.1 percent. And they probably will again. One of the eading companies in this subsector is Devon Energy (DVN). As one of the most dynamic independent producers of both oil and natural gas, Devon will benefit from price increases in both commodities.
Why Oil Service Companies Will Soar
...Wall street--fixated on the idea that oil prices are due to plunge--has not given them the respect they deserve. At some point, when Wall Street finally bows to reality, gains in oil service stocks will start to accelerate dramatically.
How dramatically? To match gains in oil, the services stocks would have to climb more than 60 percent. That is if oil stays where it is. If, as we expect, oil continues to rise, the gains in oil services will be even greater.
...Five [Chindia--China and India] stocks we think will do extraordinarily well in the next few years are 3M (MMM), Coca Cola (KO), Intel (INTC), Proctor & Gamble (PG), and Texas Instruments (TXN). Each has already established a powerful beachead in Chindia. Each is a dominant company in its industry. And each has the financial, marketing, and distribution channels to support continued rapid growth.
...GE offers solid near-term growth that is likely to accelerate, perhaps sharply. With an unmatched combination of quality and growth, it is a one-of-a-kind company that represents one of the best chances we have of successfully negotiating one of the most difficult periods we are likely to face.
Capitalizing on Liquefied Natural Gas
The alternative energy source that could make the most immediate contribution to energy supplies is liquefied natural gas (LNG). When natural gas is liquefied, importing it becomes a lot more feasible. We estimate that over the next fifteen years it could add the equivalent of 5 to 6 million bpd (barrels of oil per day) to the world's energy supply. Much of this supply will compensate for falling natural gas production.
...LNG will not solve our energy needs but will be a critical supplement. The development process will require perhaps $50 billion to $100 billion in expenditures, on everything from liquefaction processes to terminal construction. Many companies will win big.
General Electric, for example, is in the forefront in turbomachinery, products vital to the liquefied gas industry, as well as in the storage and transmission of energy sources such as natural gas. Two other companies we like are Chicago Bridge & Iron (CBI) and Air Products and Chemicals.
Based in the Netherlands, Chicago Bridge & Iron is the engineering and construction firm most leveraged to the world's growing need for new energy supplies. About 80 percent of its business is concentrated within the energy sector. The company's expertise ranges from building LNG terminals to constructing new refineries and retrofitting older ones.
Chicago Bridge & Iron's backlog, revenues, and profits are expanding by about 30 percent a year, mostly from its North American operations. Recently, though, the company has established a position in China, which could further accelerate its already torrid growth. In that event, our long-term estimates of 20 percent annual growth for the company could well prove conservative.
Air Products and Chemicals (APD) is best known as a supplier of industrial, medical, and specialty gases such as oxygen, nitrogen, argon, hydrogen, and helium, and of chemicals such as performance polymers, additives for coatings, lubricants, and corrosion inhibitors. However, it also has a thriving equipment business serving the chemical process, electronics, basic steel, oil, power generation, food, and institutional health care industies. This is the group that will drive the company's growth in the years ahead.
Specifically, Air Products makes heat exchangers used in converting natural gas into a liquefied form that can be stored and shipped....
If you had to put all your money on just one oil service company, we would recommend Schlumberger (SLB), the hands-down leader in well discovery and management and seismic services. Its clear technological edge is reflected in profit margins far higher than those of its competitors.
Emerging economies like China and India have little choice but to increase their reliance on nuclear energy, sharply boosting Uranium demand. The world's only significant uranium producer is Canada-based Cameco. It stands to benefit from both this tighter market and its own aggressive expansion plans. Trading at nearly twenty times forward earnings, the stock is not cheap for a mine. However, it is cheap for a company likely to grow by better than 20 percent a year for the next five years.
Copyright © 2006 by Stephen Leeb
To read the first chapter of The Coming Economic Collapse, go to TWBookMark.com