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Friday 25th July 2008

Pring Turner Capital Group: Time To Be Optimistic - My thanks to a subscriber for this important report. It is posted in the Subscriber's Area but here is the opening:

Yes, the financial news gets worse every day. Yes, the average stock is down more than 25% over the past thirteen months. Yes, the housing market is still reeling and foreclosure activity is rising. Yes, the price of gas is skyrocketing. And yes, this too will pass, and the economy and stock market will begin a new expansion and sustainable bull market, as all business cycles have. Over our several decades of investment management experience, we have witnessed many business cycle
recessions and stock market declines. They all have one thing in common. In the midst of the most negative financial news, the stock market (fulfilling its role as an accurate leading economic indicator) begins to move higher in anticipation of the
next economic recovery. We believe the market has more than discounted all the bad news out there and is putting the finishing touches on the bottoming process for stocks. Yes, a significant advance is set to begin that will take stocks much higher in the year ahead.

Considering all the negative financial headlines, is it any wonder investor psychology has reached a gloomy extreme? Legendary value investor and philanthropist Sir John Templeton made a career (and fortune) taking advantage of bargains that showed up during recessionary periods and bear markets. His foremost investment discipline was geared to wait patiently for stock prices to "reach the point of maximum pessimism" and then he invested. It is somewhat ironic that this pioneer of value investing, who began his career in the 1930's, would pass away this month at the age of 95, just when the markets have hit an emotional low point. We know Sir John would be buying stocks during today's financial turmoil. Investor psychology has reached that pessimistic extreme and conversely sets up the year ahead to be a very profitable one. In the remainder of this newsletter, we expand on four potent reasons to support our forward-looking optimism.

My view - This reports shows the diligent research and prescient analysis of my old friend Martin Pring, who I note will also be speaking at the Contrary Opinion Forum in October. Readers considering this event may be interested in this much earlier report from Time Magazine in 1983.

I think subscribers will be very interested in the informative graphs and table on Bear / Bull Stock Market Cycles in this report.

This item continues in the Subscriber's Area.


Email of the day - On Peak Oil:

"Hope all is well.

"I know you don't share my view about "Peak Oil" but if I am right in my view that the global supply of oil can't increase much from 85 mb/day and is in fact likely to fall in the years ahead, then I am afraid, the global economy will also contract. The boom of the past 35 years (since gold was removed from the monetary system) was built on easy money and cheap oil. Well, both conditions are now over. The massive boom in the world was brought about by an ever increasing supply of oil - if you superimpose the chart of world GDP and oil consumption, you'll see a direct correlation. Now, if Peak Oil nuts like me are right and if in fact, global consumption of oil declines due to supply shortfalls, then there is no way global GDP will expand (BRIC included) UNTIL we find another source of viable energy to replace our dependence on oil. I am afraid, we have left it too late and there is no other alternative. I am hopeful some genius will find a solution to this historic problem but time is running out. If oil drops to $100-$100 per barrel, I am going to load up the proverbial truck because I am convinced that unless we find a lot of easy oil quickly, prices may eventually go past $250-300 per barrel. I know people believe that high prices will cause demand destruction so prices may never rise to $300 - but if Peak Oil is real and the global supply of oil indeed falls by 3-4% every single year due to depletion, then global supply of 85 mb/day will drop to 75mb/day by 2013-2014 - you can imagine what will happen to the oil price when supply falls by roughly 10 million barrels per day! Needless to say, we can't consume more than we can produce so demand will also have to forcibly drop by 10 mb/day - so not everyone will get oil and the global economy will SHRINK."

My view - Thanks for an interesting assessment of what is probably the most important fundamental consideration, today and probably for a number of years - the cost of energy. Fullermoney has been discussing the possibility of Peak Oil for several years (readers interested in reports and comments on this subject can find it easily in the Archives, by using the Search facility upper left). We do think peak conventional oil is a real prospect, and that the cost of crude is in a secular uptrend.

However, price spikes such as we saw recently have always resulted in peak demand, until the cost of oil falls back to a more affordable level.

This item continues in the Subscriber's Area.


What the SEC Really Did on Short Selling - This is an informative Opinion column in The Wall Street Journal, written by SEC Chairman Christopher Cox. It may require registration but here is a section:

Already, heeding one important lesson, both the Securities and Exchange Commission and the Fed have strengthened liquidity and capital tests for the firms we regulate. Another central lesson is that financial institutions, which depend on confidence, are uniquely vulnerable to panic fueled by suspect information and market manipulation.

A run on a bank can take hold quickly, and can be fatal. In the wake of IndyMac's demise and Bear Stearns's desperate sale to JPMorgan Chase, even far-better capitalized financial firms may be threatened. What's needed now, therefore, is reliable information for investors, and confidence that trading can be conducted without the illegal influence of manipulation that can fuel stampedes.

When an irrational panic is fueled by false rumors that investors believe must be acted on immediately -- lest everyone else get out first -- market integrity is threatened. In such circumstances, it is the job of market cops to provide a measure of confidence that information about public companies is accurate -- and when it is not, to punish those responsible.
Who profits from intentionally false information in the marketplace? Those who are in on the scam and positioned to benefit from the predictable response of people who believe the fraudulent information to be true.

The classic "pump and dump" scheme, in which a stock is inflated through false information and then dumped on unsuspecting investors when the perpetrators flee, is one example of how this works. "Distort and short" is the same thing in reverse.

"Naked" short selling can turbocharge these "distort and short" schemes. In an ordinary short sale, one borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.

Last week, in close consultation with the Treasury and the Fed, the SEC issued an order to further the objective of existing commission rules that restrict naked short selling. It applies to precisely those financial firms that the Fed has designated as eligible for access to its liquidity facilities -- and for which the taxpayer could be on the hook.

My view -
These changes are inevitable and sensible. No one objects to short selling, which is a legitimate and at times, sensible practice. However if the SEC really wants to stamp out cowboy capitalism, it should admit that it was wrong in removing the uptick rule last autumn, and reinstate it (see also Tuesday 17th June's more detailed Comment on this subject).


Quote of the week - On the mind:

"It requires very unusual mind to make an analysis of the obvious."
Alfred North Whitehead

Additional Commentary by Eoin Treacy

Russia's RTS Enters Bear Market After Putin Rebukes Mechel - This article by William Mauldin for Bloomberg covers the RTSI's underperformance over the last few weeks. Here it is in full:

Russia's dollar-denominated RTS Index fell the most in six months, plunging it into a bear market, after Prime Minister Putin said Russia will investigate steelmaker OAO Mechel.

The 50-stock RTS index sank for a fourth day, declining 5.2 percent to 1,960.19 at 2:22 p.m. in Moscow, bringing its decline from a record reached on May 19 to 21 percent. A drop of 20 percent from a peak within a year is the common definition of a bear market.

The Micex lost 5.1 percent to 1,494.11, its lowest since November 2006, and the biggest retreat today among equity markets included in global benchmarks.

Putin rebuked Mechel's billionaire shareholder Igor Zyuzin for not attending a meeting with steelmakers yesterday and said prosecutors will investigate whether Mechel sold raw materials in Russia at twice the level as abroad. The company's American depositary receipts fell 38 percent yesterday in New York. Mechel said it would release a statement later today.

``It seems that Russia has decided to control everything with centralized oversight,'' said Zina Psiola, who manages $1.1 billion in Russian equities at Clariden Leu AG in Zurich. ``This is the way that Venezuela already took, and we know the outcome:

It's bad for investors and bad for the country.''
Putin is seeking to curb inflation, which quickened to an annual 15.1 percent in June, the most since December 2002. He is also pushing his Cabinet to investigate instances of price collusion among oil refiners and food producers.

Steel Stocks
Stocks of steelmakers and coal producers fell after Putin's comments. OAO Magnitogorsk, Russia's third-biggest steelmaker, lost 2.20 rubles, or 7.9 percent, to 25.80 rubles in Moscow.

OAO Sberbank, Russia's biggest bank, slumped 4.66 rubles, or 6.2 percent, to 71.06 rubles. The bank said net income in the first quarter climbed 16 percent to 31.1 billion rubles ($1.33 billion), or less than the mean estimate of seven analysts surveyed by Bloomberg News.

OAO Rosneft declined 4.2 percent today to 229.88 rubles, heading for a weekly loss of 9.3 percent. Oil prices have declined 13 percent from their July 3 high.

The RTS climbed as high as 2,487.92 on May 19, after Putin, who became prime minister after Dmitry Medvedev was elected president, said oil producers would get tax breaks.

My view - If Mechel is indeed charging domestic consumers higher prices that those to foreign customers, then the government is more than justified in sanctioning the company for such action. However, if this is simply a ruse by the Kremiln to gain more control over another Russian company, then minority investors are unlikely to greet such action with any enthusiasm.

This section continues in the Subscriber's Area.


Resources shares have underperformed of late. Is this a buying opportunity or a break of trend? - Commodities have been stellar performers this year, outperforming in both relative and absolute terms. Countries with high weightings of resources shares have been some of the best performers internationally and commodity funds have seen record inflows. However, in the last few weeks, resources have lost their position as market leaders and have entered corrective phases.

The majority of investors in this arena have been heavily influenced by oil and the regression of that commodity into a medium-term correction has had negative repercussions for many commodity related equities, regardless of their exposure to the oil price.

Russia profiled above has, of late, been one of the worst performing resources related markets. However, significant draw downs have also been witnessed in Norway, Brazil, Canada, Mexico, Argentina, Peru, Australia and South Africa. Commodities such as natural gas, sugar, and corn among others have also experienced selling pressure. Shares in a host of commodity companies have also come under fire.

This section continues in the Subscriber's Area.


Email of the day (1) - on oil sector indices:

"If you look at a weekly chart of the XOI in the US it is just above where it was in 2006 mid year. The Canadian oil index is back to where it was at the beginning of 2006. It is possible the stocks consolidated for two years. spiked up and are now pulling back getting ready to follow New York up? New York turned up March 10th, the Canadian Resources turned up the 20th."

My comment - Profiting from oil's advance through equities has been a challenging proposition because investors automatically gravitate towards the biggest oil companies and these have not performed in line with the oil price. This can be explained by the fact that they are not replacing their reserves as quickly as they are being depleting, they are losing resources due to nationalizations and many have written contracts where they have to pay higher royalties to host countries when oil moves above a certain level. The better performers have been smaller producers, more leveraged to the price of oil, with assets in politically secure parts of the world. The services and drilling sector has also done very well.

This section continues in the Subscriber's Area.


Email of the day (2) - on The Chart Seminar:

"Hello. I was interested to see one subscriber's concern regarding the Chart Seminar possibly being pitched to "professionals" and not necessarily to individual investors. I'll point out that I attended TCS in 1990 and there were 85 attendees in total, and only about a half dozen were not associated with any firm, and I'll admit I felt a little out of place.

"The seminar is so fascinating that after about 60 seconds I was so absorbed that who the others were and where they were from made no difference whatsoever. Go and learn and enjoy."

My comment - Thank you for this generous testimonial. The number of delegates is capped at 50 these days, in order to preserve the workshop environment, Much of what I know about trading and investor psychology I learned under David's tutelage especially at The Chart Seminar. I am delighted to have the opportunity to continue this learning experience through teaching The Chart Seminar and foresee doing so for decades to come.

The November seminar is now half full. For those interested in attending, an early booking rate is available at £875 + VAT for those who book and pay before September 30th.


Eoin's personal portfolio: sock index long stopped out a profit and half another stock index long stopped out at a loss - This section continues in the Subscriber's Area.


Email of the day (3) - on the Irish market:

"Do you have any thoughts on the Irish market?

"Inflation is running high, real assets are deflating (both property and stocks). Confidence in general has been lost in the Government; The PMI index is very low. Retail sales and exports are slowing. The euro is strong against Sterling and USD, & interest rates have being going in the wrong direction for most people liking...

"Nobody wanted the property market and the house of cards that came with it to collapse. There were many stakeholders involved in the game. (Developers, banks, real-estate agents, the government, and even long term house owners) who all cheered as the property market went from strength to strength. The old cliché 'it's different this time' was widely commented in the past number of years.

"The stock market has also taken a far hammering in the last 12 months, perhaps unduly so. The banks don't seem to be overly exposed to sub-prime, but does it matter. Perception is everything & sub-prime contagion took hold and the big players took all their money away...

"The dreaded "R" word is being bantered about and the banks have pulled up the draw bridge on credit for the foreseeable future. Many young Irish people have a 'tight' rope around their neck for the next 30 years with large mortgages...

"& then there was the Lisbon treaty just gone. Two fingers towards Europe means Irelands name will be scratched off its list of favourites. "Please sir can we have some more" might well be ignored next time.

"Of course a new house of cards will be built in time; isn't it always! But with the lack of Cash, Confidence and Credit (founding pillars of any new house of cards, ones even with solid foundations) the government seems a bit stumped as to whats next…"

My comment - Thank you for this interesting email encapsulating the bearish argument for the Irish market. Contrary to what many commentators believe, exposure to the subprime issue has little to do with the difficulties experienced by the Irish banks and wider economy. A drying up of liquidity globally resulting from the subprime debacle, which has affected just about every bank, coinciding with a peak in domestic property prices has more to do with the current malaise. Most of the growth in the Irish economy came from the construction sector, over the last few years, so with that sector now in recession, the wider economy is feeling the pinch.

This section continues in the Subscriber's Area.


Hydrogen fuel stations - Thank to a subscriber for this a link to this interesting site which contains a wealth of information on hydrogen technology. Here is a section on Home Hydrogen Fueling Stations:

Imagine in the future, driving your hydrogen car into your garage and gassing it up with your very own home hydrogen fueling station. Sounds pretty out there, doesn't it? But, as far off as it sounds, there are people right now working to make this concept a reality.

Take for instance Honda Motor Company, which has developed the Home Energy Station III that not only refuels a hydrogen car such as the Honda FCX, but it can also power a home as well. The Home Energy Station III uses natural gas and an onboard reformer to separate out the hydrogen for refueling the car. In order to create energy, it runs the hydrogen through a fuel cell and can thus generate power for a home as well.

In November 2007, Honda announced its new Home Energy Station IV that uses steam reforming of natural gas to derive hydrogen from both the steam and natural gas in equal parts. The Home Energy Station IV is 75-percent smaller than older units and provides hydrogen for a car as well as heat and electricity for the home.

The home refueling station is being tested at the Honda R&D Americas facility in Torrance, California. Honda is stating that the Home Energy Station IV will reduce CO2 emissions by 30-percent and energy costs by 50-percent compared to an average home that is on the grid and uses a gasoline-powered car.

General Motors has announced that they are developing a home hydrogen fueling station for use with their line of Equinox Fuel Cell vehicles that they will begin rolling out in limited numbers in 2007. The General Motors hydrogen generator will be able to run on either solar energy or electricity.

In 2008, British firm ITM Power announced that they were building a home hydrogen fueling station that would be available by the end of the year. This H2 refueling station uses an inexpensive plastic membrane and electrolyzes water to produce the hydrogen. Through economies of scale the price of this unit could drop as low as $4,000.

Hydrogenics (formerly Stuart Energy) also has developed a home hydrogen fueling station called the HomeFueler that is based upon the larger HyStat-A Energy Station. The HomeFueler uses electricity to electrolyze water, generating hydrogen for refueling cars. The HomeFueler may also be hooked into a wind energy or solar power for a home hydrogen fueling station based upon renewable energy resources.

My view - Personally, I find this technology fascinating and look forward to when I can install one of these systems in my home.


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