When Larry and I analyzed the initial damage reports from Hurricane Rita on Sunday, we were both greatly relieved and intensely skeptical.
Our relief stemmed from the fact that the loss of life was virtually nil. Since pre-storm evacuations had been early and thorough, this made sense.
Our skepticism, meanwhile, was directed at the notion that damage to oil facilities was minimal. Since oil rigs, pipelines and refineries were directly in Ritas path, this made no sense whatsoever.
The reality: Rita smashed the Louisiana-Texas border area, where four of the nations largest refineries are now shut down Valero Energys huge facility in
Port Arthur
, Shell Oils Motiva Refinery also in
Port Arthur
, and Cononco Phillips refinery in
Lake Charles
.
Right now, 14 refineries in
Texas
and
Louisiana
are still closed … 78% of the
Gulf of Mexico
s natural gas production is suspended … 100% of its production from rigs and platforms is offline.
Wont production be restored? Yes, but when?
And if refineries first have to scramble to replace depleted gasoline inventories, when will they be able to build up urgently needed inventories of heating oil, diesel, jet fuel and kerosene?
New and Bigger Supply
Disruptions Coming
Looking ahead, although meteorologists are predicting five more hurricanes in September and October, were optimistic that this seasons big Gulf of
storms are largely behind us.
Unfortunately, we cant say the same about new, bigger disruptions to supplies now emerging overseas.
For example, yesterday, I told you how
s foreign minister has just issued a shocking warning to President Bush, Condoleezza Rice and anyone who would listen.
His main point:
is tumbling uncontrollably into civil war. And the conflict could drag the entire region into the melee.
But even without a worsening of the Iraqi conflict, its oil production is already on the brink of collapse.
Just last Wednesday it suffered still another blow when insurgents set ablaze a knot of pipelines north of the oil-rich city of Kirkuk, sending up huge plumes of fiery smoke, and overwhelming the few engineers who struggled to contain the fire.
Even more worrisome: A growing proportion of the Iraqi population is now cheering on even praying for all those who dare attack its few remaining pipelines and refineries.
Meanwhile, Issam al-Chalabi, a former Iraqi oil minister, said it will take several years before the country can hope to return to its 1979 production peak … and probably a decade before it can pump the amount suggested by its reserves.
He said that
would be LUCKY to just MAINTAIN its current production level of about 1.5 million barrels a day.
If that number sounds eerily familiar to you, its just a sad coincidence: Its precisely the same amount thats been cut off here in the Gulf of Mexico .
The difference: The wind and water damage to our production facilities in the Gulf will take weeks, or at worst, months to repair. The destruction of Iraqi facilities by bombs, fire, insurrection and, ultimately, civil war could endure for many years.
We see a similar pattern in Nigeria, along the Niger River, where rebels have also blown up critical pipelines … where 100 armed militants shut down oil flow stations just last week … and where they are threatening further attacks on ALL oil installations in the region.
We see an even greater threat from
, where President Hugo Chavez has so far refrained from using his massive oil exports to the
as a political weapon … but if pressed … could do so at a moments notice.
Most important, we see no sign whatsoever of a decline in demand anywhere in the world today.
Big Profits for Investors Holding
Oil Stocks and Energy Options
While oil prices suffered a correction last week, oil stocks held up very nicely. And yesterday, while oil prices recovered moderately, oil stocks jumped sharply.
Clearly, smart investors are not buying the notion that the impact from Katrina is old news or that the damage from Rita is not that bad.
Theyre aware of the reality on the ground and under the water in the
Gulf of Mexico
.
They also see the threats to oil supplies in
,
,
and elsewhere.
They know how resilient demand is and will continue to be.
So whenever they see a price dip, they promptly and deliberately buy more.
Thats why, regardless of the oil-price ups and downs youve seen in the wake of the two Gulf hurricanes, oil stocks have continued to march higher.
And thats why, Oil Service HOLDRs (OIH), which Ive been tracking regularly here in Money and Markets, is still moving sharply higher in the long term … and also in the short-term.
Yesterday was a case in point: Up 3% to 123.47 late last night.
My recommendation:
If you own OIH, hold. If not, buy now. Youve had a dip. The dip failed to change the trend. And now youre already on the way back up to new highs.
If you own call options on some of those stocks, also hold. If not, now is an ideal time to jump in. Theyre still cheap. Theyre already on their way to large profits. And the move has barely begun.
Larry will give you all the specific instructions in his Energy Options Alert but he now has only 227 slots left in the entire service. Call Cheryl at 877-719-3477 for details.
Schizophrenic
Stock Market
by Tony Sagami
Never before have we seen a market so evenly and sharply split between …
- sectors that are strong like oil, gold and natural resources, and
- sectors that are weak like airlines, home builders and banks.
This is exactly what Martin has been warning you would happen. Now its here in aces and spades.
Consider, for example, the cracks and fissures now appearing in the housing market.
Yesterday, the real-estate-cant-go-down crowd initially loved the better-than-expected report on existing home sales. According to the National Association of Realtors, they rose by 2% in August to the second highest level on record.
The real estate bulls were even more impressed with the news that the national median home price increased to $220,000, a 15.8% increase from 12 months ago and the largest annual increase since July 1979.
But as always, the devil is in the details:
- If home sales are so hot, how come the inventory of homes available for sale jumped by 3.5% to 2.86 million homes?
- Even if realtors could keep selling these homes at the current breakneck pace, it would still take 4.7 months to move them off the market, the worst since November 2003.
- And in terms of the sheer number of unsold homes, the total glut on the market today is the largest in the history of the world. If theres even a slight decline in sales, and if some realtors begin to unload, it could quickly become an avalanche.
- The condo bubble looks like it has already bust … or is on the verge of doing so. The supply of condos for sale is up by thirty-one percent over the last 12 months.
Meanwhile, heres confirmation of the same trend from two entirely different sources:
Source #1: Last Friday, New Century Financial, one of the largest mortgage lenders in the country, warned that its full-year 2005 earnings would be 13% below expectations. In their own words …
Recent trends in interest rates, coupled with concerns over housing prices, energy costs and other inflationary pressures, have caused a significant deterioration in the secondary market for loans, causing our projected operating margins to fall to unanticipated levels. We are lowering guidance today based on this tougher-than-expected environment for our industry.
Tougher than expected? Significant deterioration? Operating margins to fall? These are hardly the kind of words that describe a gangbuster real estate market.
Source #2: Alan Greenspan! Just yesterday, he explained the data by declaring …
This suggests that speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past.
This may not be a shocking statement for readers of Money and Markets who have been following our warnings for quite some time. But for most stock investors, it was devastating.
Early in yesterdays stock market session, they bought up home building stocks like Toll Brothers (TOL) and KB Home (KBH), driving their prices upward. But as soon as they took a closer look at the bulging home inventories, the stocks stalled. And as soon as they heard Mr. Greenspans speech, the stocks plunged.
The clincher: Sure, yesterday we learned that existing home sales were up. But now, this morning, we got the far more reliable report on NEW home sales down by 120,000 units!
Instead of the minor drop Wall Street was expecting, theyve plunged by nearly 10%! And instead of a diminishing or stable supply of new homes, supplies have exploded to 4.7 months. Its a disaster for builders.
My advice: Get out of home building stocks NOW, while you still can. And with your real estate property, consider one of the cardinal rules that governs the way I run my own financial life:
Assets are contingent; liabilities are forever.
My point is that you should never spend paper gains until they are converted into cold, hard, realized cash.
Sadly, most Americans dont follow that rule. And for many, it looks like their paper gains in real estate could disappear sooner than they dream possible.
Investor Optimism Plunges
Apparently, the majority of investors are stuck on the wrong side of this schizophrenic market and are very unhappy. Either that or theyve just got burned and are now getting out. Thats the only explanation I have for two contradictory facts:
Fact #1. The Dow, the S&P and the Nasdaq have been going essentially nowhere for many months.
Fact #2. Investor sentiment is sinking. Thats evidenced by the UBS Index of Investor Optimism which dropped by 27 points in the month of September, to 34.
To put that drop into perspective, just eight months ago, this index was sitting all the way up at 82.
It seems to me that if investors were holding the surging oil, gold and natural resource stocks Larry has been recommending in his Real Wealth Report … of if they have been following Martins advice to buy stocks like OIH, Enerplus (ERF) or Royal Gold (RGLD) … they would be a heck of a lot happier.
The fact that investors are turning sour on the market is just one more sign that you should heed very carefully to keep most of your money safe, get away from the sectors that are beginning to fall, and stick with the sectors that are rising.
Best wishes,
Martin Weiss,
Larry Edelson, and
Tony Sagami
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2005 by Weiss Research, Inc. All rights reserved.
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