A Crisis vs. THE Crisis: Keep Your Eye on the Ball

By Laurynas Vegys, Research Analyst

Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.

I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and emerging markets like China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.

If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?

More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.

There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off.

We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell off, ending up lower than where it began.

It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the U.S. and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)

In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.

You have to keep your eye on the ball.

The REAL Crisis Brewing

 

Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).

Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.
So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm of potential black swans?

The big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the US dollar.

The first parts of this progression are already in place. Consider this long-term chart of US debt.

Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.

Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.

Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.

Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, getting in line with the likes of…....

• Japan, “leading” the world with a 242% debt-to-GDP ratio
• Greece: 174%
• Italy: 133%
• Portugal: 125%
• Ireland: 117%

The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).

Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.

But let’s take a more conservative, 10 year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.

Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.

It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.

This ever-growing mountain—volcano—of government debt is a long-term, systemic, and extremely-difficult-to-alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid to long term, it’s just as dangerous to your wealth and standard of living.

Still think it can’t happen here? To fully understand how stealthily a crisis can sneak up on you, watch Casey Research’s eye opening documentary, Meltdown America.

The article A Crisis vs. THE Crisis: Keep Your Eye on the Ball was originally published at Casey Research

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Should You Invest in the Marijuana Boom?

By Dan Steinhart, Managing Editor, The Casey Report

I was planning to explore the investment landscape of the burgeoning marijuana industry today, but it looks like the party’s already over.


Appearing before the Maryland Legislature, Annapolis Police Chief Michael Pristoop testified that 37 people died in Colorado on the first day of legalization from overdosing on marijuana.

What a damn shame. With morbid stats like that, the government can’t possibly allow the legalization trend to proceed any further. People’s lives are at stake!

Except they’re not. Chief Pristoop got those stats from a tongue-in-cheek story in The Daily Currant, a satirical newspaper à la The Onion. He believed it to be legitimate, so he cited it during testimony. Despite the fact that exactly zero people in history have died from overdosing on marijuana.

As you surely know, Colorado and Washington recently became the first states to legalize marijuana for recreational use, joining 18 other states that have legalized it for medical use only. Legalization is gaining steam across the US, and that’s unlikely to change—if only because, other than citing fake facts, opponents of legalization have no argument.

Opposition to legalizing marijuana is dwindling for the same reason that opposition to gay marriage is dwindling: there’s no intelligent reason to oppose either one. Unless, in the case of marijuana, you’re concerned with its potential to cause more car accidents. But if those are your standards, we should criminalize beer, cellphones, and makeup, too.

One thing’s for sure: the investment world is enamored with the idea of a brand new green industry. As an illustration of exactly how hot this infant sector has become, take a look at this screen shot of an email received by a senior Casey Researcher this week. It’s a news release from a mining company, announcing its intent to “diversify” into the legal marijuana business:

An interesting business decision. I’m not sure what synergies exist between mining and marijuana, nor do I have any particular insight into how Next Gen’s management plans to enter the green business. But I applaud its forward thinking.

Apparently, so does the market. Here’s how Next Gen’s share price reacted to the announcement:

It soared over 300%, transforming from a penny stock into a dime stock in one day. Again, Next Gen didn’t grow earnings, discover a new gold deposit, or accomplish anything tangible. It tripled its valuation simply by announcing its entry into the marijuana business. That’s what I call a scorching industry.

So, should you put some speculative money into the hottest cannabis stock? Let’s take a quick tour around the burgeoning industry to get a picture of its investment prospects, focusing on five factors…..

1) Profits Will Plummet

 

Had Al Capone been born in any other era, he would not have amassed a $100 million fortune. It was Prohibition that allowed him to earn extraordinary returns in the otherwise standard business of providing alcohol to people.

Likewise, legal purveyors aren’t going to earn anywhere near the spectacular returns that criminals enjoyed when marijuana was illegal. Drug distributors can become filthy rich because dealing drugs requires taking extraordinary risks. One misstep and you go to jail. Or worse, the rival Mexican cartel mows you down. That risk premium is why illegal drugs are so expensive, and why marijuana costs $300-400/oz in the US. But it won’t for long.

How can I be so sure? Because we already have a glimpse into the future. Uruguay legalized marijuana in December, and an ounce of the stuff costs $28 there, less than 10% of what it costs to obtain it the US.
It’s true that the Uruguayan government controls the marijuana industry tightly and set that $28/oz price. But the cost to produce marijuana there averages just $14/oz. So $28/oz is a reasonable guess as to where the price of marijuana would settle if the market were allowed to clear.

Going forward, profit margins won’t be nearly as fat as they were in the past.

2) The Government Will Be Heavily Involved

 

At least one guy will unquestionably make a killing from marijuana’s legalization. His initials are “U. S.,” and he wears a star-spangled hat.

We’re just two months into legalization, and taxes are already hefty. In Colorado, marijuana is subject to a 2.9% sales tax, plus a 10% tax on retail marijuana sales, plus a 15% excise tax based on the average wholesale price. Washington is no better—it plans to exact a 25% excise tax, plus an 8.75% sales tax.

All told, taxes in these early-adopting states will be in the neighborhood of 30%. And that’s before the feds get their cut (more on that momentarily). Further, taxes are the one exception to the rule, “What goes up must come down.” Someday, tokers might look back longingly at that 30%. After all, the average tax on a pack of cigarettes in the US is 42%.

Last, the marijuana industry isn’t going to be the Wild West. Colorado is working to control pretty much every aspect of the market, as evidenced by its 144-page marijuana Rule Book. You can be sure that other states will follow suit.

3) It’s Still Illegal

 

Though marijuana is now legal in two states, it’s still illegal under federal law. The Obama administration has said it won’t enforce marijuana prohibition in states that legalize it, as long as those states keep it under control. The federal government maintains the same position on medical marijuana, which, somewhat surprisingly, is also still illegal under federal law.

The feds are moving in the right direction, albeit slowly. Two weeks ago, the Treasury Department issued new rules that open the door for banks to do business with legal and licensed marijuana dispensaries.
Of course, once the feds do get on board, they’ll want a piece of the action. So be ready for even higher taxes.

4) Unsavory First Movers

 

It’s an unfortunate fact that, because the industry was just decriminalized recently, those best positioned to jump quickly into the marijuana business are those who were already in the marijuana business. In other words: people who were classified as criminals just two months ago.

Not that they were necessarily doing anything wrong by growing and distributing marijuana before it was legal. I’m sure plenty of growers and sellers are good people trying to earn a buck, just like those who grow and sell any other crop.

But as with any emerging industry, the first movers will be those who already possess an intimate knowledge of said industry. And in the case of marijuana, that means people who were running illegal businesses. So if you invest in their companies, you’re entrusting your capital to someone who’s willing to break the law.

As an investor, that should give you pause. Tread carefully, and dial your skepticism up to maximum.

5) Weak Candidates

 

The investment options in this infant industry are, understandably, limited. We’re a ways off from being able to buy a bushel of hemp on the futures exchange. If you want to invest, you’ll have to go with one of a handful of public companies. And unfortunately, none of them looks compelling.

The six companies in the chart below are the purest plays in the marijuana space. Their performance in 2014 is the stuff of legends—the worst performer gained 243% in the last three months:

But dig into their businesses and you’ll soon find that their value comes from their scientific-sounding names, and not from actually making money.

First, the companies are tiny and only trade on the illiquid over-the-counter markets. Before the share price run-up, only one, CannaVEST, had a market cap above $60 million.

What’s worse, most of them don’t have any revenue. And the ones that do generate revenue spend much more than they earn. Not that this is surprising—hardly any business could become profitable in just two months, so we won’t hold that against them. The problem is their valuations: CannaVEST is worth a staggering $1.8 billion today, and most of the others are all in the hundred-million range.

Let’s put it this way: if an entrepreneur walked into the Shark Tank seeking a $1.8 billion valuation for a company that doesn’t make money, Mark Cuban would laugh him out of the room. Speculative money already took these stocks to the moon. By buying one now, your only hope of profiting is for a greater fool to come along and buy it from you at a higher price.

As I see it, because of sky-high valuations, the risks in this blossoming industry far outweigh the potential reward, at least for a retail investor. I’m sure there are some fantastic private deals out there, and if you’re willing to press the flesh and meet some marijuan-trepreneurs yourself, you could make money.

But for non-full-time investors, you’ll want to watch this trend unfold from the sidelines, waiting for either (1) the speculative bubble to pop, so you can pick up some shares for fractions of a penny; or (2) a leader to emerge and demonstrate it can turn a profit.

Here’s a tip, though: If you’re looking for an investment with potentially spectacular gains, I would like to point you to another drug, this one perfectly legal once it’s FDA approved. What I’m talking about is an impressive biotech startup my colleague Alex Daley, Casey’s chief technology investment strategist, has dug up.

The company is well on its way to launching a breakthrough Alzheimer’s treatment—which, if successful, is sure to be a game changer for the medical industry. Clinical trial results are due out in early March, and should they be positive, the stock could easily double on the news… so right now is a great time to get in. Find out more about the company and its revolutionary product in this report.

The article Should You Invest in the Marijuana Boom? was originally published here at Casey Research.

The Great American Wall Of Worry – U.S. Stock Market

Traders and investors all around the world are having trouble climbing over the wall of worry/fear with the US stock market, and rightly so. There is a lot of things taking place and unfolding that carry a high level of uncertainty. Let’s face it, who wants to invest money into the market when it’s hard to come by (high unemployment, banks are still extremely tight with their money, companies are nowhere near wanting to hiring new staff).

The hard pill to swallow is the fact that the stock market loves to rise when uncertainty is high. It’s almost doing it just to drive investor’s nuts who sold out near market bottom or recent correction. You must overcome the urge to short the market when the economy looks so bearish in the years ahead, and continue to trade with the trend.....Read the entire story and view the charts.



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Wednesdays market summary and a U.S. response. Wait for it, wait for it.

It's no surprise that yesterday's news that the U.S. was going to have a military response to Syria spooked the markets and sent the indices to their biggest loss in some time. Today, it looks like the markets are digested what they went through yesterday.

October crude oil closed higher on Wednesday as it extends this summer's rally. Profit taking tempered early session gains and the low range close sets the stage for a steady to lower opening when Thursday's night session begins. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near term. If October extends this summer's rally, weekly resistance crossing at 114.83 is the next upside target. Closes below the 20 day moving average crossing at 106.04 would confirm that a short-term top has been posted. First resistance is today's high crossing at 112.24. Second resistance is weekly resistance crossing at 114.83. First support is the 20 day moving average crossing at 106.04. Second support is the reaction low crossing at 103.50.

October Henry natural gas closed higher on Wednesday as it extended this month's rally. The high range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If October extends this month's rally, the 38% retracement level of the May-August decline crossing at 3.680 is the next upside target. Closes below the 20 day moving average crossing at 3.421 would confirm that a short term top has been posted. First resistance is today's high crossing at 3.628. Second resistance is the 38% retracement level of the May-August decline crossing at 3.680. First support is the 20-day moving average crossing at 3.421. Second support is August's low crossing at 3.154.

October gold closed lower due to profit taking on Wednesday as it consolidated some of the rally off June's low. The low range close sets the stage for a steady to lower opening when Thursday's night session begins trading. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If October extends the aforementioned rally, May's high crossing at 1489.00 is the next upside target. Closes below the 20 day moving average crossing at 1346.80 would confirm that a short term top has been posted. First resistance is today's high crossing at 1432.90. Second resistance is May's high crossing at 1489.00. First support is the 10 day moving average crossing at 1383.50. Second resistance is the 20 day moving average crossing at 1346.80.

The September Dollar closed higher on Wednesday. The high range close sets the stage for a steady to higher opening when Thursday's night session begins trading. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. Closes above the reaction high crossing at 81.99 are needed to confirm that a short term low has been posted. If September renews the decline off July's high, June's low crossing at 80.61 is the next downside target. First resistance is the reaction high crossing at 81.99. Second resistance is August's high crossing at 82.61. First support is last Tuesday's low crossing at 80.77. Second support is June's low crossing at 80.61.

And last but not least.....September coffee closed higher on Wednesday as it consolidated some of this summer's decline. The high range close set the stage for a steady to higher opening on Thursday. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If September renews this month's decline, monthly support crossing at 10.21 is the next downside target. Closes above the 20 day moving average crossing at 118.11 would confirm that a low has been posted.

Here's the Premier Trader University "Free Training Webinar" Schedule

Decoding the mystery behind Shell's shale write down

The Market Currents staff at Seeking Alpha is shedding some light on the huge write down by Shell this week. Is the U.S. oil boom over hyped?

Shell's (RDS.A) $2.1B write down on its North American shale oil exploration acknowledges some of its spending there will not prove economically viable, and that hitting its cash flow targets could get tougher. Adding to the mystery is Shell's refusal to identify which shale formation has taken the write down or to explain the charge.

Shale skeptics might take the write down as first evidence the U.S. oil boom is overhyped, but WSJ's James Herron thinks it more likely that Shell has "just failed to get lucky" - Eagle Ford, where Shell has significant operations, is well known for its “sweet spots,” which yield greater volumes of the prized liquids compared with gas.

Start trading crude oil today, here's where you start.

How Russia Is Creating the Contrarian Play of the Decade....Tuesdays can't miss webinar

Years from now analysts will look back at the end of 2013 as the beginning of a historic bull market. They’ll see that the harbinger of this run up was in plain view for anyone who bothered to look.

I’m talking about uranium, and the harbinger I’m referring to is the historic Megatons to Megawatts agreement between the U.S. and Russia. This agreement expires in December 2013. Its ending concludes an era of cheap nuclear fuel for America and opens the door for Russia to sell its uranium on the world market to the highest bidder.

This is creating a profit opportunity of such magnitude that Casey Research has called together a world class faculty of energy experts for an urgent discussion:

·   Spencer Abraham, former U.S. secretary of energy

·    Herb Dhaliwal, former Canadian minister of natural resources

·   Lady Barbara Judge, chairman emeritus of the UK Atomic Energy Authority

·   Amir Adnani, CEO, president and director of Uranium Energy Corp.

These experts, along with legendary natural resource speculator Rick Rule, will sit down with Casey Research's chief energy investment strategist Marin Katusa to discuss the nuclear power industry and offer their insights into what's shaping up to be the kind of speculative opportunity contrarians live for.

The event is free and premieres online Tuesday, May 21 at 2 p.m. – click here to save your seat.

See you there!




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Phil Flynn: Taking The Embassy By Storm!

Occupy Tehran? Iranian students, incensed with a new round of sanctions, stormed the British Embassy and added a new dynamic to a market already concerned about the rising tensions in the Middle East. The orchestrated take over from the government was a clear violation of international law and shows Iran's utter lack of respect for anyone else in the world.

The pillaging of the UK Embassy had to have the support of the government because it is unlikely that without the government looking the other way, it would be impossible for a rag tag bunch of students to take over the fortified British compound. Iran, the world's fifth biggest oil exporter, was trying to stir domestic public outrage after a vote by Iran's leaders to end diplomatic relations with the UK and expel the British ambassador and the UK slapped sanctions on Iranian banks and their petrochemical companies.

Obviously these sanctions have some bite as it raised the acrimony of the Iranian regime. The outcome means that more than likely the U.S. will follow suit and put more pressure on the known terror state as it is clear to everyone that Iran is on track to secure a nuclear weapon after a report from the International Atomic Energy Association.

The likely hood of more sanctions against Iran look to tighten supplies of distillate in Europe and will put even more pressure on the world's newest diesel exporter, the US, to keep up with global demand. The United States, Russia, France, Britain and Germany all expressed outrage at the Iran, yet China remained quiet as it desperately needs diesel supply. They are fearful that if Iranian supply is cut it could lead to shortages in China for the coming winter......Read the entire article.


Is This December Similar to 2007 & 2008 for Gold & Stocks?

What Everyone Should Know About Shale Gas

It's no secret that natural gas will play a big role in the U.S. energy needs in years to come. And we need to understand where these sources will come from to make money investing and trading the new sources of natural gas. One of those is shale gas. Shale gas refers to natural gas that is trapped within shale formations. Shales are fine grained sedimentary rocks that can be rich sources of petroleum and natural gas. Over the past decade, the combination of horizontal drilling and hydraulic fracturing has allowed access to large volumes of shale gas that were previously uneconomical to produce. The production of natural gas from shale formations has rejuvenated the natural gas industry in the United States.

Does the U.S. Have Abundant Shale Gas Resources?
Of the natural gas consumed in the United States in 2009, 87% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil, and the delivery system is less subject to interruption. The availability of large quantities of shale gas will further allow the United States to consume a predominantly domestic supply of gas.

According to the EIA Annual Energy Outlook 2011, the United States possesses 2,552 trillion cubic feet (Tcf) of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 827 Tcf of this resource estimate, more than double the estimate published last year. At the 2009 rate of U.S. consumption (about 22.8 Tcf per year), 2,552 Tcf of natural gas is enough to supply approximately 110 years of use. Shale gas resource and production estimates increased significantly between the 2010 and 2011 Outlook reports and are likely to increase further in the future.

Where is Shale Gas Found?
Shale gas is found in shale "plays," which are shale formations containing significant accumulations of natural gas and which share similar geologic and geographic properties. A decade of production has come from the Barnett Shale play in Texas. Experience and information gained from developing the Barnett Shale have improved the efficiency of shale gas development around the country. Another important play is the Marcellus Shale in the eastern United States. Surveyors and geologists identify suitable well locations in areas with potential for economical gas production by using both surface level observation techniques and computer generated maps of the subsurface.

Check out this EIA article for facts on Shale Gas Formations in the U.S.

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