Energy Charlatans

Ivan Martchev, June 4, 2010

I have kept fairly quiet on the issue the Gulf oil spill by British Petroleum (NYSE: BP) and Transocean (NYSE: RIG) because I believe that the easy-to-get oil has largely been had. In the future, we will have to resort to this type of dangerous deep-sea drilling to survive. But, it is also obvious that BP and Transocean do not know what they are doing -- they have been sloppy and content with unsafe drilling techniques.

However, it is my understanding that Brazil uses superior technology that could have prevented the busting of any valves and the resulting largest ecological disaster in U.S. history. This speaks well for Petrobras (NYSE: PBR), which has to develop oil found much deeper than that in the Gulf, but not so well for BP and RIG which are having difficulty disguising their incompetence at this point -- they have nothing to show for their elaborate efforts.

It's about time that Uncle Sam fires both due to their failed efforts to stop the leak.

Right now, both BP and RIG are under significant pressure as the cost of the cleanup is impossible to estimate. I am seeing numbers from a few billion up to and above $40 billion -- no one really knows for sure -- which could wipe out years of cash flow from BP. Who knows what will happen to RIG…

I recommend that you stay away for now, because those criminal and civil investigations are coming. Investing on the premise of "we are running out of oil" is not a good strategy in this case. We can run out of oil with both companies still heading to bankruptcy. Now, I am not suggesting this will happen, just that BP and RIG don't have to be around for us to see oil make new all-time highs, which is likely to occur in the next decade.

We may run out of oil, but you still have to be around to ride out the inevitable corrections and sell the wrong companies when the time comes. Otherwise, you'll end up like T. Boone Pickens' hedge fund investors and get wiped out in a long-term bull market for oil that has room to run to at least $300.

And you thought that Lukoil (OTC: LUKOY), Gazprom (OTC: OGZPY) and our favorite China National Offshore Oil Corporation (NYSE: CEO) were riskier than BP and RIG just a few short weeks ago? All three develop oil that is much easier to reach, and have assured growth for decades based purely on their existing reserves.

There are Charlatans in the Investment Business Too

In any business there are incompetent players, but it is in the investment business where they are most dangerous -- they hurt a lot of innocent people.

One particular charlatan that I have in mind would come down to see us every two weeks for a meeting and share with us his infinite wisdom on the markets for a few hours. Some of the executives of the company that I worked were convinced of his brilliance, but the younger analyst folk were highly skeptical. Here is why: After a while, we noticed that on far too many occasions those investment presentations were "borrowed" from the previous weekend's Barron's.

Although Barron's is a fine paper, I don't need someone to tell me that they are investment expert by reciting what they read over the weekend -- I can read too.

After this sort of thing went on for a couple of years, management finally saw the incompetence of this peculiar investment expert and fired him for incompetence. My point is, a well-spoken presentation by a person with a Ph.D. behind his name can fool a lot of people, but in the end only the results matter -- and there were none. This individual had gone through his whole investment career "borrowing" from Barron's and the real experts, which is truly sad.

I can honestly say that we do our homework in Asia Edge, China Strategy and Asia Insider, where the commentary aims to be topical and not "borrowed" from a newspaper. In fact, Robert just touched back down in the U.S. from his latest 10-day trip to China and is simply brimming with first-hand insights and observations. He'll have more on the subject a bit later in the issue, but for now let's move on to the euro.

The Euro is a Good Example of Groupthink

Charlatan investment "experts" have been bearish on the dollar forever. How can you not be bearish on the dollar -- the Fed is printing, the U.S. Treasury is minting and the Obama administration is spending like there's no tomorrow! With that said, I believe that the relative fundamentals of the euro are worse.

Still, it felt quite lonely in 2009 (as I discussed here and here) when I was saying this euro unraveling was coming. There is more to come, in my opinion, as the measures taken so far are not enough to stem the deflationary threat from Europe. The euro -- and I have been thinking this for well over a year -- is going to 1.

This is relevant for investors interested in China as Europe is a huge trading partner and the Chinese renminbi has massively appreciated to upwards of 20% against the euro vis a vis its hard peg to the dollar at 6.83. The Chinese are in tightening mode and a renminbi revaluation against the dollar is one such tightening tool, but at this point this revaluation should be smaller, given what is going on in Europe. The view here remains that the Chinese market is very close to a significant bottom and a significant trading rally has already started a week ago.

Gold bullion, on the other hand, continues to make rolling all-time highs in all major currencies. This is a sign that the biggest leg of the bull market in gold bullion has started. Investors are seeing through the shell games played by the Fed, the ECB, the BOJ and even the Swiss National Bank and taking action.

You are advised to do the same. Our favorite way to play it is via the SPDR Gold Trust (NYSE: GLD).