Friday, April 30, 2010


Our friend and master investor Rick Rule likes to say, "The U.S. dollar is the worst currency in the world, except for all the others." It's fashionable to point out the big problems with the paper U.S. dollar. But you should know most all countries are in the same boat… one overloaded with huge debts and unfunded liabilities… captained by smiling, well-educated pickpockets.

Case in point: the euro… the next stop on our "world currency tour."

In late December, we used Vic Sperandeo's classic 1-2-3 trend change method to nail the big decline in the euro. The euro is the paper of a tenuous currency union. Right now, it's being torn apart by the incompatible policies, work ethics, and savings rates of its members… who are as different as France is from Greece, Germany is from Italy.

Just after our December note, the euro suffered a guillotine chop from $1.50 to $1.43 (A). It then managed a flimsy relief rally into the $1.45 area (B). It suffered another value chop from $1.45 to $1.36 (C)… followed by another flimsy rally to the $1.37 level (D).

This is how bear markets conduct themselves… a stair-step series of one big step downward, a tiny step back, another big step downward, and so on. This one will end in tears.

The Monster Oil Find Nobody Is Talking About

In the past decade, the words "shale basin" have driven oilmen wild with greed.

For decades, geologists have known layers of certain kinds of shale rock contain huge amounts of natural gas… the vital hydrocarbon that heats our homes and powers electrical grids. But these rock layers are tightly packed… We simply couldn't access the gas "stranded" in the shale.

But in the past 10 years or so, advances in drilling technology have made shale basins – places with names like "Barnett" and "Haynesville" – legendary to oilmen and those who invest alongside them. They have also made a lot of people rich.

The Barnett Shale, for example, is a monstrous rock layer that sits thousands of feet below the surface of northern Texas. During the 2000s, this shale went from an interesting geologic formation to one of the largest natural gas fields in the United States. This sort of find produces incredible stock gains.

Consider Chesapeake Energy, one company that helped pioneer new drilling techniques in the Barnett. Shares in Chesapeake traded for around $2.50 in January 2000. Just eight years later, as this Barnett bonanza was being "proved," Chesapeake shares soared nearly 1,400%. Range Resources, another small pioneer in the Barnett, gained more than 2,500% in the same time.

Success in the Barnett kicked off a boom in "shale basin" exploration… huge new finds including the Haynesville, Bakken, Eagle Ford, and Marcellus fields helped propel gains of as much as 580% in Devon Energy… 1,600% in EOG Resources… 1,650% in Penn Virginia… and an astounding 4,300% in Southwestern Energy.

It also turned the U.S. from a country forced to import this vital fuel into "the Saudi Arabia of natural gas." Thanks to these new drilling tools, we have enough natural gas to meet our energy needs for 100 years… and our supplies keep growing.

This supply boom is creating a huge income opportunity for investors right now, which you can read about in this essay. But for huge capital gains opportunities, I think you have to look outside U.S. borders…

You see, now that the U.S. has made its extraordinary energy transformation, governments are wild to test the new drilling methods on shale fields around the world. As you read this, drill bits are turning in Europe, South America, and Asia.

And now geologists have found what might be the largest basin yet. Over the course of the next decade, it could put the Barnett, Bakken, and all the rest to shame.

While you never hear about it in general media, this basin – known by locals as "Junggar" – could be the largest in the world. Even more important…

It is in China.

Here in America, a number of huge fields have opened to exploration. The largest of these is the Piceance Creek Basin in Colorado. It contains about 700 billion barrels of oil shale resources. Piceance stretches across about 3,000 square miles. Junggar is 117,500 square miles – nearly 40 times larger than the largest prospective shale basin in America.

This is a monster find in its infant stage. We know there's potential, but it isn't fully explored or developed. In tomorrow's essay, I'll tell you more about this basin… and why it's so important to China's future.


Our next "world currency tour" stop is one of the most dangerous places on Earth… Australia.

In his fantastic book In a Sunburned Country, Bill Bryson highlights how the land of "Oz" is packed with species that are the deadliest of their kind in the world. If the critters don't get you, the heat or the ocean will. (The country once lost a prime minister to the tides.)

And like its "ABC" cousin Canada, Australia is packed with huge stores of natural resources. It has enormous stores of natural gas, uranium, iron ore, and gold. It's also on the doorstep of China and Japan, which consume incredible amounts of the stuff. A bet on Australia these days is a bet on China's raw material consumption.

Also like Canada, Australian banks have behaved "less dumb" than their counterparts in Iceland, Spain, the U.S., and the U.K. over the past decade. That restraint and rising commodity prices have produced the uptrend you see below.

Wednesday, April 28, 2010


You can always depend on traders to come up with great nicknames. For our next stop on our "world currency tour," we present you with our vote for the world's best asset nickname. Our stop is Great Britain.

For years, the letters "GBP" have signified "Great British Pound" in the investment markets… just like "USD" signifies "U.S. dollar." But as Tom Dyson profiled weeks ago, Britain's government has gotten so deep in debt, and treated its currency so badly, traders are now using GBP to signify "Gordon Brown's peso"… a knock on the country's prime minister and his financial bungling (and a knock on Latin America's time-honored tradition of currency crises).

For a picture of this bungling, we'll look at the GBP since 2009. The sovereign debt problems of Greece, Spain, and Great Britain became big news late last year. Since then, Gordon Brown's peso has lost about 8% of its value.

As Tom mentioned, Great Britain is just as broke as Greece or Spain… it's going to devalue its currency to make its debt payments easier… and this new downtrend has farther to run.

The Only Gold Indicator You Need

"So… where's the big gold bull market?" I asked John Doody over lunch yesterday.

John writes the excellent Gold Stock Analyst newsletter, where he takes a deep look into gold and the major gold stocks every month. Before starting the newsletter in the early 1990s, John was an economics professor. Right now, John and I are at a conference on Maryland's Eastern Shore.

"John, if gold is so great now, then why hasn't it soared this year?" I asked him. "It's only up like 5%."

John replied. "That's a good question… In my opinion, the primary driver of the gold price is real interest rates that investors earn on their cash."

In short, if investors earn nothing on their cash, then gold goes up. If investors earn high rates of interest on their cash, then gold goes down. As the chart below shows, that's the only gold indicatory you need to know.

Importantly, we're talking about the "real" rate of interest – after inflation. John defines the real interest rate as the interest rate on risk-free 90-day Treasury bills MINUS the inflation rate. That's a good estimate of your "real" return on cash.

As John explained, when the real interest rate is negative – when inflation is higher than risk-free interest – "cash loses purchasing power and buys fewer goods than it bought earlier in the year. When that happens, for protection, investors buy gold and drive its price higher."

Now, take another look at the chart. John explained, "Today's gold bull market and 1970s gold bull market were eras of negative real interest rates. But importantly, for 2010 to date, the real interest rate has been barely negative, as shown by the chart's red-circled area."

With the real interest rate at about 0%, gold isn't moving anywhere. And John pointed out that the Fed rarely raises interest rates as elections approach. So interest rates should stay where they are.

But eventually, John says, "A pickup in the economy will be the key to higher inflation. With the U.S. economy slowly on the mend, we could see inflation. Real interest rates would go negative and gold would rise."

One thing I like about John is, he's not the typical gold bug. He's not taking some moral stand against the government or digging a bunker full of freeze-dried food.

John simply looks at the facts. The facts say you need to own gold when the "real" interest rate is negative… almost regardless of the what's in the news.

His work shows that gold goes up when the bank's paying you nothing. That's where we are now… and that's what you need to know. John believes if the economy starts to recover before the election and inflation shows its head, the situation could get better from here for gold.

In short, gold looks good now, with low rates. And it could look better soon…

Invest accordingly,

S&P cuts Greek debt to junk status

Things are starting to get interesting in Europe. As we’ve been warning for weeks now (and equity investors have been ignoring) these problems are much bigger than many would like to admit.

The break-up (or dramatic changes in its membership) of the Euro looks inevitable to me. Germany should bring back the Bundesbank and Greece should restore its ability to print its own currency. 

Today's entertainment: Somali pirates actually a subsidiary of Goldman Sachs

Eleven indicted Somali pirates dropped a bombshell in a U.S. court today, revealing that their entire piracy operation is a subsidiary of banking giant Goldman Sachs.

There was an audible gasp in the courtroom when the leader of the pirates announced, “We are doing God’s work. We work for Lloyd Blankfein.”

Tuesday, April 27, 2010


This week is "currency week" in Market Notes. Each day, we'll take a different stop on a global currency tour to gauge the state of the world. Our first stop is Canada.

A nation's currency is like a rough "stock price" of that nation. Generally speaking, if a country manages its finances well and engages in productive behavior, its currency appreciates over the long term. If a country racks up crazy debts and runs its finances like a drug addict, its currency depreciates over the long term.

As you can see from today's chart, Canada is doing a good job of managing its affairs. The country's banks didn't take on the ridiculous risks, like the ones in Iceland, the U.S, and the U.K. did. Canada's economy is also heavily tilted toward natural resource production… raw materials including oil, natural gas, timber, copper, uranium, and gold. These materials are up big in the past year.

All of this has come together to produce the steady uptrend you see below. The "loonie" has appreciated 28% since March 2009… a huge gain in value for a major currency. You want money backed by "hard assets" like gold and oil? You want the loonie!

Euro crisis spreading... Portugal debt insurance reaches record high

The cost of insuring Portuguese government debt against default jumped to a record high on Monday on concern that Portugal could be next to suffer a Greek- style debt crisis if no lasting solution was found for Athens.

The price of insuring against a Greek debt default also rose, to 619,000 euros ($824,250) per 10 million euros of exposure from 614,600 euros at the New York close on Friday, according to credit default swaps data from CMA DataVision.

Monday, April 26, 2010

Another Way to Profit from the Coming Plague of Busted Banks

Earlier this month in DailyWealth, I predicted hundreds of banks would soon fail.

I suggested the best way to profit from this "plague" of bank failures would be to buy stock in the neighboring banks that assume the failed banks' operations.

Last week, I found another great way to profit…

The FDIC is the government agency in charge of cleaning up failed banks. When a bank fails, the FDIC lines up another bank to take over the deposits, branches, and loan portfolio. It also acts like a garbage can for the most toxic pieces of the failed bank. It assumes responsibility for all the nonperforming loans and the foreclosed real estate. (Other banks aren't interested in loans that aren't paying interest. Nor do they want to invest in foreclosed real estate.) Take City Bank of Lynnwood, Washington for example…

Last weekend, the FDIC seized City Bank. The FDIC merged this failed bank with a neighboring bank, but not before it removed $185 million in foreclosed property and $95 million in delinquent loans from the deal. The neighboring bank would not have agreed to take on these troubled assets.

Over the past three years, more than 218 banks have failed. As a result of these failures, the FDIC has accumulated nearly $40 billion in junk loans and foreclosed property on its books. But this is only the beginning…

If I'm right and hundreds more banks are going to fail, the FDIC's portfolio of junk mortgage loans and foreclosed property stands to swell even further.

What will the FDIC do with this gargantuan pile of junk loans?

It wants to sell these assets to private investors, of course. The FDIC is not in the business of managing portfolios of nonperforming loans, foreclosures, and subprime mortgages. It has no expertise in this business. Besides, it needs the money to pay out insurance claims.

Here's the problem: Who's going to buy these junk loans? The FDIC has accumulated these loans from all over the country. You might have a delinquent mortgage on a doublewide trailer in Sacramento, California, mixed in with an abandoned apartment in Hialeah, Florida. There will be subprime mortgages, prime mortgages, and everything in between. Some will have defaulted already; some might still be paying interest.

The FDIC isn't going to sell these mortgages one by one, like suits at your local thrift store. It wants to sell thousands at a time. Banks certainly aren't going to touch these assets. They're not in the collections and repossession business. What about hedge funds? They'd be interested at the right price… but how will they deal with a scattered portfolio of troubled home loans? I can't see a New York hedge-fund manager, for example, evicting Mr. Smith from his condo so he can put it up for auction or sending Mr. Jones in Tuscaloosa his second late-payment notice. Not a chance…

In short, the FDIC has turned to the mortgage servicing industry as the customer of last resort for these assets.

A mortgage servicing company performs all the mundane administration behind a mortgage loan. They send out the bill. They collect the payment each month and pass it on to the lender. They operate a website where borrowers can make online payments and check balances. When a borrower misses a payment, they assess the fee. And in the case of a default, the mortgage servicer handles the collections, eviction, and sale of the property.

Basically, mortgage servicing companies are professional debt collectors. They are the only companies capable of dealing with the high volumes of delinquent mortgages and foreclosed property the FDIC needs to dump.

In the past six months, the FDIC has completed a dozen transactions. All of them involved a mortgage service company. And in each case, the FDIC is dumping these assets at spectacularly low prices…

This is a typical example: Three weeks ago, the FDIC gave a company called RoundPoint Mortgage Servicing a 50% ownership stake in a basket of mortgages with an unpaid principal balance of $490 million. Half the mortgages aren't paying interest, says the FDIC. But RoundPoint paid just $34 million for this stake.

The best way to make money from the coming plague of busted banks is to own stock in the mortgage servicing companies – like RoundPoint Mortgage Servicing – that are going to help the FDIC digest its pile of "toxic" bank assets.

Unfortunately, RoundPoint is a private company. But there are publicly traded alternatives. Ocwen Financial (OCN) is the largest pure-play mortgage servicing company in America, with a market cap of $1.2 billion. I don't believe it's doing business directly with the FDIC at this point, but a quick news search shows it closed tons of new mortgage servicing deals recently…

Saturday, April 24, 2010


This week's chart displays one of the greatest wealth creations we've ever seen in the stock market: The past eight years of trading in Apple (AAPL).

We rarely write about Apple. You can read about the company every day on every mainstream news website and in every newspaper. But today, we must point out that Apple is on an extraordinary run.

After the bear market of 2000-2002, Apple shares bottomed (adjusted for splits) at $6.90. This week, shares struck an all-time high of nearly $270. This is a 39-fold increase in value… which has made Apple the second-largest public company in the U.S. They're moving lots of iPhones and iPods these days…

Friday, April 23, 2010


Few stocks can say they had a better 2009 than Freeport-McMoRan (FCX).

FCX is one of the big "bell cows" of the mining sector. It is the largest U.S.-based miner… and one of the world's largest producers of copper. It's a stock we track closely at DailyWealth.

After getting clobbered in late 2008, Freeport shares enjoyed a monster 300% rally last year. Copper prices were surging, and traders flocked into mining stocks. But as you can see from today's chart, that rally has fizzled. Shares are unchanged in the past six months… and have "bumped their head" on the $85 level three times. Even a terrific quarterly report this week was greeted with enormous selling pressure that sent shares down 3%.

There's a good case to be made that we should be worried about FCX and the copper price right now. Several mining insiders believe there is an enormous amount of copper being stockpiled and hoarded around the world. You can about read the situation here.

Long term, the Fed's funny-money program is going to devalue the dollar… which boosts the nominal price of commodities like copper. But in the short term, like one year, anything can happen. We say keep an eye on both the $85 level… and the short-term low at $66 per share. FCX tends to boom and bust, so a break of $66 puts it in bust mode… and validates the bear case for copper.

Greece begs IMF for a bailout

Greece petitioned Eurozone nations and the IMF for the funds necessary to keep it solvent, according to several media sources.

The Eurozone countries have made a “promise” to join the International Monetary fund to provide as much as $40 billion. It is not clear how much time that will buy for the southern European nation which has total sovereign debt of more than $400 billion of which over $50 billion is due this year.

Greece is mirroring Lehman Bros.

European sovereign credit markets are showing further distress with Greece 5yr CDS breaking fiercely through 500 level…currently trading at 540.

Other weaker European names including Spain and Portugal are also trading worse by a fair amount.

Muslim extremist threatens death to "South Park" creators

A decision by Comedy Central to bleep out the words "Prophet Muhammad" on a follow-up episode of "South Park" that aired yesterday is not enough to remedy the situation, the author of an extremist Muslim website told WND today.

Younus Abdullah Muhammad, author of, charged "South Park" creators Trey Parker and Matt Stone continue to "mock" Muhammad even though the Islamic figure's name was censored from a follow-up show that aired last night. earlier this week warned the "South Park" creators should be "afraid for their lives" since there is a "very real possibility" they will end up murdered like Dutch filmmaker Theo Van Gogh.


Our colleague Frank Curzio was right… the government's incredible homebuilder bailout is sending stock prices higher.

Back in March, Frank told readers of the Growth Stock Wire about a huge new tax rule that would boost homebuilder earnings and share prices to new highs. Most people can't stand the thought of owning these stocks, so a contrarian had to be interested in the idea. How's it working out?

As today's chart shows, it's working out well. The big homebuilder fund XHB is trending higher… and just struck a new 52-week high. Even the fundamentals we track (like homebuilder sentiment and months of current housing supply) are improving.

The improving homebuilder conditions, plus the incredible price strength, prove that when the government wants to "reflate" a sector, chances are excellent that in the short-term, it's going to get it done.

An even larger Icelandic volcano could erupt soon

Recently we posted seismic readings of Iceland's Katla volcano, which indicated the tremors around the area have increased substantially in the last few days.

Today, the Associated Press covers just how much of an imminent threat an eruption at Eyjafjallajokull's cousin, Katla, is.

For all the worldwide chaos that Iceland's volcano has already created, it may just be the opening act...

Thursday, April 22, 2010

The euro crisis is spreading

Bonds continue to fall as Greece edges closer to activating rescue aid from the European Union and the International Monetary Fund in order to avoid default.

As talks on aid conditions began in Athens today, Finance Minister stated that the country may ask for aid before talks conclude in a couple of weeks based off of a Bloomberg article.

Wednesday, April 21, 2010


In late 2007, we introduced a proprietary indicator called the "gold to HOG" ratio. Sounds fancy, but all we did was plot the price of gold versus the share price of motorcycle icon Harley-Davidson, symbol HOG. We introduced this ratio to track the flight of money out of expensive toys purchased on credit and into gold, which represents real, timeless wealth.

After introducing the ratio, gold soared and HOG crashed, and the ratio of "gold up, HOG down" worked out just as we thought it would. This ratio tracked our idea so well in 2007 and 2008 because consumers were buying less "landfill stuffing" on credit. Harley's profits and stock price plunged.

Now… considering we've profiled the "E-Z-Credit" boost that has lifted restaurant shares, copper, and home improvement stores, shouldn't we check in on our old friend HOG?

As you can see, HOG is enjoying the E-Z-Credit stimulus as much as anyone. The company just surprised Wall Street analysts with a solid quarterly update. The "gold to HOG" ratio has eased back… and HOG shares have climbed 50% in just the past two months. Now let's all get down to the dealership to buy another $20,000 bike.


ExxonMobil (XOM) – one of our favorite oil companies – just aced its latest stress test.

Like most every stock, XOM shares were punished during the historic "stress test" of 2008. Shares fell from the $90 level to the mid-$60s in just five months. After a brief rally, shares traded back down to that low point in March 2009 and rebounded nicely. This level is important. It marks the lowest price XOM reached during the worst general selling pressure we've seen in decades.

In early February, we bullishly noted shares were near their historic stress test level. On cue, shares bounced back into the high $60s.

Finding the stress test level is the sort of common-sense "technical analysis" we prefer at DailyWealth. No complicated cycles or geometric shapes to memorize. Just an obvious price where value-focused investors step in to buy shares in one of the world's best companies.

World's greatest trading firm still wildly bullish on China

Goldman Sachs is still wildly bullish on Chinese equities despite last night's 5.4% sell-off and the continuing concerns about an overheating economy.

They believe the sharp sell-off was an overreaction to the downside and gives investors an opportunity to move into the market.

Tuesday, April 20, 2010

How to Buy the Biggest Oilfield Left in Texas

Yesterday, I told you about the most important U.S. oil discovery in 40 years.

It's the Eagle Ford in South Texas. Judging by the pace of the drilling that's already begun and the production rates of each new well, production in the Eagle Ford will grow to nearly 40,000 barrels of oil per day within the next 24 months. That's roughly $1 billion worth of oil per year at current prices.

Those estimates don't take into account the hundreds of additional rigs that will be put to work…

By 2013, I expect Eagle Ford to yield more than $2 billion in oil and gas and to increase production for at least 20 years. These numbers mean Eagle Ford will probably produce hundreds of billions worth of oil and gas over the next 30-40 years.

How did this happen? How did a giant oilfield suddenly appear in Texas – an area that's been thoroughly studied and drilled since the 1930s? I asked my colleague, resource analyst Matt Badiali, to explain.

For decades, oil companies drilled into the Austin Chalk, the Georgetown, and the Buda limestone, just above the Eagle Ford. These rocks held billions of barrels and trillions of cubic feet of gas.

Geologists knew the Eagle Ford shale was the source of that oil, but couldn't extract it until new technologies – like horizontal drilling – opened up the shales around 2001. Even with new technologies, shale plays are tough to drill. The shale sits around 12,000 feet below the surface. And it's only about 250 feet thick.

To put it a different way, drillers are trying to drill onto a particular house lot from two miles away. Not only that, but the drill bit has to turn 90 degrees and become horizontal. That's no easy feat, and really only became common in the industry in the last few years.

The Eagle Ford shale stretches from the Mexican border in the southwest almost to Houston in the east – roughly 400 miles. It is about 90 miles wide.

Given the unique geography, the extensive drilling that's already been done, and the well results to date, there's not much uncertainty left about how much gas and oil are in the play.

The only question left: Which companies to buy to profit?

Currently, a dozen relatively liquid, publicly traded oil and gas companies are involved in Eagle Ford. The biggest are ConocoPhillips (COP), Anadarko (APC), and Chesapeake (CHK).

These three are world-class operators. But for more direct exposure to the field, a smaller company is a better bet.

In the latest issue of my investment advisory (out Wednesday), I told readers about my two favorite Eagle Ford stocks. One will get you the most amount of Eagle Ford acreage per share, at the very lowest price. The other is a small company I expect will become one of the major producers in the region. Click here to learn how you can get immediate access to this report.

Monday, April 19, 2010

Chinese stocks in freefall

Goldman jitters and the pledge of China’s central bank to immediately implement new lending rules to curtail property speculation have resulted in the Chinese Shanghai Composite Index plunging by a massive 4.8% this morning.

After today’s sharp sell-off, the Index (2,980 at the time of writing) is the only major bourse trading below both its 50-day (3,055) and 200-day moving average (3,096).

Steve Sjuggerud: It's time to be fearful of stocks

"Be fearful when others are greedy, and be greedy when others are fearful."
– Legendary investor Warren Buffett, one of the world's richest men

Now, my friend, is a time to be fearful.

It is the opposite of a year ago. Back then, it was time to be greedy – and we were...

Almost exactly a year ago in DailyWealth, I wrote an extremely bullish story, called "The Great Rally Before the Great Inflation."

At that time, investors were downright scared. But I said stocks would have one of the greatest bull runs in history. What I wrote turned out to be exactly right. But today, things have changed...

Goldman scandal: Firm may have known about charges for 9 months

Goldman Sachs Group Inc (NYSE: GS) was warned about pending charges against it as early as nine months before the SEC charges were brought.

SEC rules apparently do not require a public company to disclose the receipt of a Wells Notice from the agency. The notice is an indication that charges will be filed and a chance for the firm in question to make an argument for why it should not be.

The Most Important U.S. Oil Discovery in 40 Years

"They've ringed fenced me," Cactus said.

I am not an oil and gas analyst.

I know very little – nothing, really – about the engineering or the geology of hydrocarbon discovery and extraction. Fortunately, my good friend Cactus Schroeder has been discovering oilfields and pumping them dry for more than 30 years. His father was a wildcat Texas oilman, too. If I didn't know better, I'd wager the liquid in Cactus' veins was light crude instead of blood.

I recently spent the better part of a week with Cactus, fishing for giant blue and black marlin off the coast of the Darien jungle in Panama. With very little else to do on the boat (neither of us caught a big marlin), we had plenty of time to talk. And Cactus had a lot to say – far more than usual…

He told me he has found what he expects will be the largest oil discovery of his entire career. It lies in the middle of a huge new oil and gas discovery called Eagle Ford. It is a field so large, Cactus says he believes it will become the largest oilfield in the history of the United States.

Still… I had no idea what a "ringed fence" was. Or why it mattered. Cactus explained:

They've been drilling all around my land – on all sides. And every well they drill is a well I don't have to drill to prove the value of my land. I've got working rigs surrounding my property now. And they're producing a lot more than just gas. They're full of condensate…

Slowly, over four or five days, I came to understand what Cactus was talking about and why it is so important. You need to understand one critical thing about the Eagle Ford play in South Texas: It holds liquid hydrocarbons, not just gas. And there's a lot of liquid in it, not just a little.

So-called "condensate" is the holy grail of the natural gas business. It refers to the amount of liquid (think butane) that's mixed in with the gas that's trapped in "tight" shales.

Shale gas plays have been the driving force in the onshore oil and gas business for the last decade. You might even have heard of some of the big fields by now: Barnett, Fayetteville, Haynesville, and Marcellus.

Shale plays are big, rich resources… but they normally hold only a little condensate. Eagle Ford is proving to be a notable exception – it is rich in condensate. More information about the size of the field and the volumes of condensate and gas is coming out almost every day now, and the numbers get better and better. A year ago, only a dozen drilling rigs were working across the entire play, which stretches across more than 30 counties. Today, more than 50 rigs are drilling well after well.

Judging by the pace of the drilling and the production rates of each new well, these 50 drilling rigs should allow production to grow to nearly 40,000 barrels of oil per day within the next 24 months. That's roughly $1 billion worth of oil per year at current prices.

Keep in mind… this is just from the handful of rigs working Eagle Ford in 2009. Those estimates don't include the value of the gas that will also be produced. And those estimates don't take into account the hundreds of additional rigs that will be put to work. Oil production is going to ramp up quickly.

I expect Eagle Ford to yield more than $2 billion in oil and gas by 2013 and to increase steadily for at least 20 years. These numbers mean Eagle Ford will probably produce hundreds of billions worth of oil and gas over the next 30-40 years.

I know these numbers must sound like pie in the sky. After all, U.S. oil production fell every year from 1991 until 2009. The decline led some pretty smart folks to declare we'd reached "peak oil." They believed onshore oil production would continue to decline until there was literally no oil left. I never believed any of that nonsense. I knew eventually prices would rise enough to support the development of new technologies for finding more oil and extracting it more efficiently. Not surprisingly, that's exactly what has happened.

New seismic technologies allowed prospectors to find liquid hydrocarbons in shales, even though the plays are deep and narrow – 12,000 feet down and usually only a few hundred feet thick. To efficiently drill these finds requires so-called "horizontal drilling," where rigs first must bore down to the oilfield and then veer sideways through it. The combination of these new technologies is releasing huge amounts of liquid hydrocarbons in the Eagle Ford.

Consider just one company's recent results. On April 7, EOG Resources announced drilling results from 16 test wells drilled across a 120-mile trend. Yes, that's right – a 120-mile trend. Based on the initial results and a core analysis, EOG believes it will produce 900 million barrels of crude from these wells over the next decade.

Mark Papa, EOG's CEO, says of the discovery: "We believe the South Texas Eagle Ford horizontal crude oil play will prove to one of the most significant United States oil discoveries in the past 40 years."

After talking to Cactus, I think he's right. And in tomorrow's essay, I'm going to show you how such a large oilfield went untapped for decades… exactly how big it is… and a list of publicly traded companies involved in the Eagle Ford.

Sunday, April 18, 2010


Last week, we featured a chart produced by our colleague Bud Conrad of The Casey Report. It showed the enormous oil consumption growth of the world's most populous nation, China.

Today, we show you another amazing oil-consumption chart. This time, it's the mushrooming demand coming from the world's second most-populous nation, India.

India's car sales surged 25% last year from the previous year, according to an industry group. The group also reports that India's car sales have climbed at an annual clip of 10%-14% for the past decade. That's driving the amazing uptrend (blue line) you see below. It's also causing India to import more and more oil each year.

Friday, April 16, 2010


Should the "Dumb Money" selloff Steve writes about occur, one of the most vulnerable indexes out there is the "Dow Industrials of China," the Shanghai Composite.

The Shanghai Composite is the most widely used gauge of Chinese stocks… and it's managed to carve out an interesting stock chart.

We recommended buying emerging markets like China in our special "rebound trade" series in December 2008. Soon after our recommendation, the Shanghai composite screamed 75% higher in less than year. It then sold off after reaching a blow-off peak of 3,400 in August 2009.

The Shanghai composite made three attempts at besting its old high… with each attempt failing more miserably than the previous one. A repeated set of failures like this is usually followed by a sharp correction… It's a strong sign all buyers are exhausted. But the recent flood of money and bullishness into global stocks has prevented this natural decline. In just the past few months, the index has made another attempt at those old highs. Chances are good it will fail again.

Be Careful Now: Record Optimism in Stocks

"Be fearful when others are greedy, and be greedy when others are fearful."
– Legendary investor Warren Buffett, one of the world's richest men

Now, my friend, is a time to be fearful.

It is the opposite of a year ago. Back then, it was time to be greedy – and we were…

Almost exactly a year ago in DailyWealth, I wrote an extremely bullish story, called "The Great Rally Before the Great Inflation."

At that time, investors were downright scared. But I said stocks would have one of the greatest bull runs in history. What I wrote turned out to be exactly right. But today, things have changed…

I believe we're near the end of that great bull run. Take a look at what I wrote a year ago for perspective… then let me share with you where I think we are now.

From DailyWealth, April 24, 2009:

Stocks could rise dramatically over the next 18 months or so. I believe stocks could have one of the greatest bear market rallies in history.

…The market is telling us the bill for the government spending isn't due yet. Risk is subsiding… And the recession will possibly end sooner than anyone thought.

…I spent the last two issues of my newsletter, True Wealth, recommending speculative positions in stocks good for 12 to 18 months. I expect we'll see rallies of 50% in all the things I've recommended.

…What we're seeing now will turn out to be one of the greatest bear-market rallies in history. I know the bill for the government spending will come due some day. But for now, as long as Bernanke is juicing the economy and keeping interest rates at zero, stocks can run. Take advantage of it.

We took full advantage of that opportunity in my newsletter, staying invested for a very long time – even after the market had soared by record amounts. But times are totally different now…

Since the March 2009 lows, U.S. stocks have nearly doubled. The price of oil is up over 100%. The price of copper is up over 100%. The list goes on.

It's just gotten silly. And NOW investors are ridiculously optimistic… AFTER the 100% gain.

Folks, the time to buy was BEFORE the 100% gain!

In March 2009, investor sentiment was at an extreme of pessimism. THAT was the time to buy.

To put specific numbers on it, "Dumb Money" confidence, as measured by my friend Jason Goepfert of SentimenTrader, hit a low extreme of 21 in March 2009. Today, it sits at 75 – it hasn't been higher than that in years.

After weeks and weeks of a "safe" bull market, investors are downright greedy these days.

Don't fall for it.

To succeed in investing, you must do what Warren Buffett advises: "Be fearful when others are greedy, and be greedy when others are fearful."

It's been years since the "Dumb Money" was greedier than it is today. Trade accordingly.

Thursday, April 15, 2010


With the stock market up five out of the last five days and wonderful earnings reports flooding the headlines, it's easy to call the market overbought and place bets against the crowd.

The potential pitfall with betting against an overbought market, however, is that overbought markets can stay overbought for a long time. For proof, we present the past year's trading in the benchmark S&P 500.

You'll notice an extra window below today's chart. This window displays an indicator called "RSI." RSI is an "overbought/oversold" gauge. You can think of it like a rubber band. When the RSI rubber band stretches above 70, an asset is overbought and likely to take a breather to the downside. When the RSI rubber band stretches below 30, the asset is oversold and likely to rebound. We used this idea to identify a terrific gold stock trade a few months ago.

For the past year, an overbought reading of 70 was a great indicator the stock market was due for a correction. These readings, and the corrections that followed, are marked with red arrows. Now have a look at the current overbought nature of the market. Last month, the market entered an overbought condition… and has climbed higher and higher to remain in that condition. It's an amazing flight into stocks.

Protecting Your Wealth from Your Government

At DailyWealth, our major focus is on helping you grow your wealth as quickly and safely as possible…

For ideas on how to protect your wealth once you have it, I don't know anyone better than asset-protection attorney Joel Nagel.

I've known Joel for a long time. He's one of the nicest guys in the business… and he's spent over a decade helping some of the world's richest people protect their wealth from disasters.

As I mentioned yesterday, we're in a crazy situation right now in America. Instead of making the future brighter for our children, the government is making things worse.

That's why my publisher, Stansberry Research, recently held a private conference call with Joel… and he shared some great ideas. Given the problems I've written about recently, I wanted to share some of them with you today…

Stansberry Research: Joel, could you give us an overview of what you recommend folks do to protect themselves from the things we see happening in the next few years… whether they have $5 million in the bank or $50,000?

Joel: It really does come down to the level of financial wherewithal a person has and what they're trying to protect. The strategies are very different for somebody who has, say, $50,000 that they want to protect as opposed to somebody who has millions of dollars.

We advise our clients to consider opening up a foreign bank account based outside the United States. This will give you the ability to open CDs in foreign currencies. It'll provide you with insurance should something happen to the dollar or the U.S. banking system. And as you mentioned, in the event of future currency controls, you'll already have a nest egg outside the United States from which to operate.

Secondly, along the same lines, foreign currencies – most of our clients look to have some portion of their net worth held outside the U.S. dollar. And again, you don't have to be a millionaire to hold an account with some Swiss francs, New Zealand dollars, Canadian dollars, Australian dollars…

There are plenty of currencies that aren't based on the huge debt model the U.S. dollar has taken on, and therefore aren't as susceptible to the kinds of crashes the U.S. dollar is going to face.

Stansberry Research: How about gold and other precious metals?

Joel: You don't have to be that wealthy to consider owning precious metals. We recommend clients hold at least 10% of their net worth in gold, silver, platinum, palladium. And the precious metals should be located outside the United States.

Along with metals, physical metals, you have metal certificates, often referred to as "foldable gold" that you can quickly and easily move from one location to another and redeem either for physical metal or for cash later.

Stansberry Research: How about another idea?

Joel: Foreign real estate rounds out the bottom category – again, having not only foreign real estate as an investment, but also as a physical safe haven where you can go not only for vacation, retirement, or any other reason that you wish to leave the United States.

Steve here again… Joel outlined several easy steps you can take to safeguard your wealth. It doesn't take millions in the bank to make it worthwhile. So even though you might not have considered these before, you ought to now. 

George Soros: U.S. is creating a massive new bubble

At an event hosted by The Economist magazine last night, George Soros warned investors that the methods used to resolve the 2008 financial crisis are no different than the methods that helped cause the crisis to begin with. Soros says we are blowing inevitable bubbles that will have similar dire results:

“The success in bailing out the system on the previous occasion led to a superbubble, except that in 2008 we used the same methods….Unless we learn the lessons..."


Everywhere we look, we see signs the great government "goosing" of the economy is pushing assets higher. In just the past couple months, we've profiled rising crude oil, copper, bank stocks, home-improvement stocks, and restaurant stocks to show you this trend at work.

Today, we show you a market far larger and more important than measly restaurant shares… We show you the bond market.

Seasoned investors pay close attention to the bond market… even more than the stock market. Companies are legally obligated to pay off bondholders before shareholders see a penny in dividends. So if the price of bonds is headed lower, you know there's serious trouble in the markets.

Today's chart displays the price action in HYG, one of the largest investment funds that owns corporate debt. As you can see, there's no "serious trouble" in the bond market right now. Debts are being serviced… creditors are pleased… and bond prices are near their highs for the year. Sure, the U.S. government debt problems will come home to roost, but for now, the trend in most everything is UP. It will end when it ends.

Wednesday, April 14, 2010

The Potential Death of the American Dream

When I was a kid, the world was my oyster…

Some days, my buddies and I would go exploring in the woods. Other days, we'd play wiffle ball in Wade Welch's yard… or we'd play "kill the man with the ball" in Mike Bruner's yard.

I always had a secret mission, though: I was going to be a "pro" at something. Fortunately, I had the work ethic to get there…

When I wanted to be a pro basketball player, I'd shoot baskets in the driveway until late at night. And when I wanted to be a professional musician, I'd practice for hours a day… in the garage… in Florida. I didn't mind sweating in the garage, I didn't even think about it. Remember, I was on a mission.

The problem was, my mission changed about every year. But this fact never changed: I believed I could succeed at whatever I wanted if I tried hard enough.

I had no burdens in front of me… I had no impediments to my potential success. If I put my mind to it, I could make it happen. And thankfully, succeed I did. I'm living proof of the American dream –the idea that you could set out to make your own success and achieve it.

Today? I'm not so sure about things.

When I was a kid, we didn't have money. But that was OK. We were starting from scratch.

Unfortunately, my son will not even have the "luxury" of starting from scratch. Instead, he will start out in the hole…

According to public awareness firm the Peterson Foundation, the government's debt was $184,000 per person in 2008. For my little family of four, that's $736,000 of government debt. And it keeps growing.

By the time my son grows up, the federal government will have already "mortgaged" his household earnings by hundreds of thousands of dollars, by spending more than it takes in before he was born. Even worse, the government will force him (with the threat of jail time) to pay its debt.

Instead of improving the outlook for my son, the federal government is making the situation much worse… Consider these facts:

For 2009's taxes, 47% of tax filers will pay $0, according to the Tax Policy Center, a Washington think tank. This is an alarming trend. As recently as the 1980s, just 10%-15% of Americans had no tax bill. And in 2000, around 22% paid no taxes, according to

To say it another way, a family of four with a household income of $50,000 will have a federal income tax bill of $0… Actually it will receive a "refundable tax credit" –a check from the government! A full 40% of tax filers will receive a check.

It astounds me that nearly half of the tax-filing population will have the benefit of government services… and pay none of the costs.

I hope my son has the ability, like I did, to start with a clean slate… with the world as his oyster… with no shackles holding him back… so he can be successful.

But I shouldn't hold out hope.

We're facing the potential death of the American Dream –the thought that if you work hard and try hard, you can be as successful as you want.

We're quickly replacing the American Dream with the European Politician's Dream –that if you're lazy and don't try hard, the government will take from those who do try hard and give their money to you. That is not the America I was raised in. And that's not the America I want to live in.

So what can we do?

We can protect ourselves from the government taking more from us in future taxes. One of the best ways for most people right now is to convert your traditional IRA to a Roth IRA. I'm doing this now.

The other things I will do are: 1) hold my politicians accountable for their actions and 2) give my son the tools to succeed… an education and a work ethic. That way he is best equipped to succeed in whatever world he inherits. 


With oil, base metals, gold, and stocks of all stripes climbing, it's almost impossible to find a bear market right now…

Almost impossible if you aren't watching the brutal bear market in today's chart… the bear market in volatility.

Professionals keep a close eye on market volatility with an indicator called the "VIX." This is a gauge of how much traders and investors are willing to pay for portfolio insurance in the form of protective stock options. The VIX also measures investor fear. The higher the VIX, the higher the level of fear in the marketplace.

During the late 2008 credit crisis, folks got as scared as they have been in generations. The VIX spiked to an incredible "Armageddon" reading over 80. But thanks to the government's enormous E-Z-Credit bailout program, investors are piling back into stocks, commodities, and real estate… the Dow is up almost everyday… and folks are letting the other guy worry about risk. As any seasoned investor will tell you, when nobody is worried about risk, it is precisely the time everyone should be worried about risk.

Tuesday, April 13, 2010

Britain's Giant Property Bubble

My friend lives in a popular neighborhood in London. When I asked him about housing prices in his neighborhood, he said they've been rising all year. They're now breaking the records set in the great housing boom that ended in 2007.

London had the biggest housing bubble on the planet. The average London house price quadrupled between 1996 and 2006. Now the average house in London sells for $436,000. That's only 9% lower than the all-time record set in 2007… and it's higher than 2006 prices.

"The London real estate bubble, arguably the biggest one of all, still hasn't popped," wrote the Wall Street Journal two months ago.

My friend trades derivatives for a living in London's financial district. With house prices rising, I figured the confidence must have returned to his trading floor…

"It's weird," he said. "The trading floor is quiet. It's like a lot of traders are passing time and there aren't many deals being done."

How could house prices be rising and my friend's trading floor be sluggish at the same time? I have an explanation. The British government is devaluing the currency…

In terms of debt, Britain is in the same position as Greece, Spain, Portugal, and Ireland. It's broke and struggling to pay back what it owes. There's one difference. Britain has its own currency, and unlike these other European countries, the British government can intentionally devalue this currency in order to ease the pain of Britain's recession…

For one thing, a cheaper pound makes British goods cheaper for foreigners, so British factories have more work and more tourists come to Britain. It also makes British debt more manageable. Debtors can pay back their debts in devalued currency. It's like borrowing an ounce of gold and being allowed to pay it back with an ounce of silver.

Britain's already implemented this strategy. Right now, the British currency, the pound sterling, is near its lows of the last 20 years against the dollar and the euro… and there's no sign it's going to stabilize…

This "devaluation" policy is making the prices of basic goods and services rise.

I was last here in early 2007. One thing I've noticed is since then, prices for basic items like food, drink, newspapers, gasoline, public transportation, and cigarettes have soared. These items seem to have gained almost 25% in price in three years.

While devaluation is causing prices of basic goods and property to rise, it's not generating true economic activity. This is why my friend's trading floor is still quiet.

Currency devaluation is one of the oldest tricks in the government economic "hand book." Take the 1990s as an example. The Mexicans, Brazilians, Argentines, Russians, and several Asian countries used currency devaluation to ease debt burdens.

Now the Brits are using the same tactic. In London's financial district, currency traders now joke that GBP stands for "Gordon Brown's peso" instead of "Great Britain's pound."

It's easing the burden of their recession, but causing prices to rise. For now, rising property prices are not a problem so I don't see any reason for the country to stop inflating. Bottom line, the pound will continue to fall and property prices will continue rising.

If I were living in Britain right now – or any other country intentionally devaluing its currency – I'd convert some of my savings into U.S. dollars… and I'd also buy a few gold coins. 

How to Protect Yourself from a Bank Run

An elderly woman was panicking…

"It's my life savings we're talking about, my pension. I'll have nothing left if they go under," she said.

A rich couple nearby was panicking, too. They weren't just sobbing like the old lady, though. They had nearly $2 million in the bank. This was the fruit of a life's work… and they were about to lose it all. They'd barricaded a bank manager in his office and were threatening him.

Can you imagine how you would feel with your life savings trapped inside a bank… with hundreds of people in line ahead of you and the police telling you to go home?

In September 2007, Britain's eighth-largest bank, Northern Rock, announced to the public that it was running out of cash and would have problems honoring customers' deposits. A run on the bank developed. Lines formed at bank branches all over the country. Violence broke out in some instances. The police were called. Branches were suddenly closed down. Few people were able to get their money…

Fortunately for the Northern Rock depositors, the British government guaranteed all Northern Rock's deposits… and the panic dissipated after a few hours. No one lost money.

As I reported earlier this month, thousands of banks in America are going to fail over the next three years. Most Americans believe the U.S. government is safely insuring their bank deposits. But it's impossible to predict what havoc this wave of bank failures will create. Although it seems unlikely right now, some depositors could lose their savings and we could even see bank runs again…

The FDIC is the institution in charge of protecting bank deposits. The FDIC is supposed to maintain a pool of funds to insure America's banking deposits. This pool is empty. In fact, according to the FDIC's latest report, the pool had sunk to a negative $21 billion as at the end of 2009. Forty-one banks have collapsed so far this year, so the deficit must now be nearing $25 billion.

The head of the FDIC, Sheila Bair, has said the FDIC's insolvency is possible and she's assessed a one-time fee on every bank the FDIC insures in an attempt to cover the deficit. For some small banks, this onetime fee could consume an entire year's profits. Paradoxically, this fee could end up causing even more bank collapses.

So what can you do to protect yourself?

First, get as much money as you are comfortable with out of the banking system. I only keep a few thousand dollars in the bank, for convenience. I keep the rest of my savings in Treasury bills. T-bills are the safest financial instruments in the world. They don't pay any interest, but neither does your bank, so you don't have anything to lose by investing in T-bills. To buy T-bills direct, go to and open an account with the Treasury.

Second, keep a stash of physical cash. Make sure you secure it from fire and theft. I recommend you store at least three months of living expenses. I count gold and silver as cash, too. At the least, you should own a small bag of silver coins. You can trade these in small denominations if you need cash. Asset Strategies International offers the most competitive prices I've found on bags of silver coins. Three, if you already have deposits in a troubled bank, don't panic. Remove your money and deposit it in a safer bank. If withdrawing your funds will incur a fee, wait for your deposits to mature and then withdraw your money.

Finally, if you must hold significant sums of money on deposit in the banking system, choose only the safest banks. How do you judge which banks are safe and which are risky? They're quite easy to spot. Did your bank expand aggressively from 2002 through 2007? Did it offer higher than average CD yields? Did it expand its loan portfolios aggressively? Is it based in South Florida, Atlanta, Las Vegas, Southern California?

If you answered yes to any of these questions, there's a good chance your bank has taken some big risks. It's probably not safe.

Is your bank trying to participate in the FDIC's auction process? If so, then it's a safe bank. The FDIC only allows well-capitalized banks to participate in its auctions.

In America's modern economy, the idea you could lose your money in a bank failure seems farfetched. The fact is, thousands of banks are about to fail and the FDIC's deposit insurance fund is showing a deficit. Besides, banks pay almost no interest right now, so apart from the convenience of a small checking account balance, what's the point in keeping your money in the banking system? There isn't one. 

Greece to get 30 billion euro bailout

The most remarkable thing about the 30 billion euro bailout package for Greece by the euro-zone nations is the interest rate–5%. The yield on Greek sovereign debt was well over two points higher than that just last week.

According to The Wall Street Journal, the finance ministers agreed Greece would pay an interest rate of around 5% for a three-year loan program, according to the European Commissioner for Economic and Monetary Affairs, Olli Rehn. Greece will try to raise the money on its own this upcoming week. The 30 billion euro nation plan is a backstop if the Greek plan fails. The IMF indicated that it has an additional 15 billion that it will invest in Greece, if necessary.

Sunday, April 11, 2010


This week's chart comes to us from our friend Bud Conrad, Chief Economist of Casey Research.

Bud recently produced a great piece of research for readers of The Casey Report. It's about the long-term picture for oil prices. Bud sees higher oil prices ahead, driven by declining supplies and increasing demand from emerging markets.

For example, have a look at the growth in Chinese oil consumption since 1965. As you can see, consumption growth has far outstripped domestic production, which must be supplemented by imports from places like the Middle East.

China's consumption/production gap is getting wider each year… and helping drive oil prices higher and higher.

Saturday, April 10, 2010

One of the World's Biggest Oil Producers Is Going Bust

"What this means is that we require, in one way or another, the collaboration of other companies on an international level precisely in order to recuperate our levels of production."

From time to time, my job as a resource stock analyst means I get to act as "BS interpreter."

This quote above, uttered by Mexican Energy Minister Georgina Kessel at an international conference a few weeks ago, is a mouthful of government gobbledygook. Here's what she's actually saying… and what it means for your resource portfolio…

Most Americans don't realize it, but Mexico is a major player in global oil production. According to the Energy Information Agency, it was the seventh largest oil-producing country in 2008. Mexico is the U.S.'s second-largest source of imported oil, behind Canada.

You read that correctly: We import more oil from Mexico than we do Saudi Arabia, Iraq, Kuwait, or any other Middle Eastern country. You don't read about it much in the papers, but Mexico is a critical supplier to American drivers.

Now, Mexican oil officials like Georgina Kessel have a problem… one the entire world has: There are no easy barrels left.

You see, in the oil business, there are "easy barrels," like the kind discovered in Mexico, Texas, and Saudi Arabia decades ago. These easy barrels burst from the earth when you puncture a highly pressurized oil field with a drill pipe. These are the barrels you see in movies and cartoons.

There are also "hard barrels," like the kind locked inside oil sands. They require enormous amounts of digging and processing in order to become the "light, sweet" crude that we turn into gasoline.

Another example of a "hard barrel" is one located hundreds of miles out into (and miles under) the ocean. This requires hundreds of millions of dollars in ships, advanced drilling technology, and undersea pipelines.

The world has plenty of hard barrels in reserve. Brazilian oil major Petrobras has discovered several "supergiant" fields (greater than 1 billion barrels) off the coast of Brazil. Canada and Venezuela have extraordinary amounts of oil trapped in tar sands. The U.S. has over a trillion barrels locked in shale formations out West. And since 2004, 63 new fields have been discovered in the Gulf of Mexico – 16 of those in water at least a mile deep.

It takes billions of dollars in infrastructure spending to develop these difficult fields. Hardly the easy oil of Mexico's past.

Mexico's legendary Cantarell field – discovered in 1976 and named for the fisherman who found it – is the sixth largest oil field on Earth. And it was once the second largest producing field in the world, after the massive Ghawar field in Saudi Arabia.

Cantarell was a once-in-a-lifetime discovery… so for years, Mexican officials could pretend they were oil experts. The field was so ridiculously productive, they could afford to nationalize the industry, steal the company blind, and pump the oil with abandon.

Production peaked in 2004 at 2.1 million barrels per day, which accounted for 64% of total oil production at Mexico's state-owned oil company, Pemex. But years and years of mistreating the golden goose has left its world-class oilfield in a sorry state of underproduction. Oil fields are like children… you have to take care of them and invest in their future.

The problem is that the government has done a terrible job of "upkeep."

Production at Cantarell plummeted 30% in 2008. It produced less than 780,000 barrels per day in 2009. And Pemex's total oil production fell 21% from 3.3 million barrels per day in 2004 to just 2.6 million barrels per day today.

Worse yet, thanks to decades of complacency, Pemex can't find more oil. In 2007, it managed to replace just 50% of its production. In 2008, it replaced just 70%. The new reserves it does find come from much smaller fields. The company is replacing million-barrel-per-day fields with 150,000-barrel-per-day fields.

Mexico – for years a major oil exporter – could become an oil importer within a decade. This is a disaster for the Mexican economy. Pemex employs over 100,000 people and supplies the Mexican government with around 40% of its revenue… and its oil revenue is wilting away.

Now that Cantarell isn't blasting out oil, industry insiders are seeing exactly how incompetent Pemex is. It's the General Motors of the oil world… If it weren't such an important exporter, it would be a joke.

What Mexico and Georgina Kessel are finally doing is admitting they need outside expertise in righting their ship. Take out the flowery government speak from Georgina's quote and you get:

"We are running out of oil. We underinvested in our infrastructure in favor of huge social programs. We've mismanaged our fields so badly that we need immediate help to find and pump more oil."

This is from a major player in the global oil export market.

For investors, this sort of comment is further reason to own oil and oil-service stocks for the long term. Major producers used to easy barrels – like Mexico, Venezuela, and Iran – are experiencing production declines… so much so that they will pull their exports from the market, sending prices higher. I wouldn't' be surprised to see oil over $200 a barrel in five years (especially if our spendthrift government keeps debasing the paper currency we use to price oil).

This will make "hard barrels" – like the kind in Canada's tar sands or deep offshore – much more valuable… But only the expensive and high-tech expertise that skilled oil-service companies provide can unlock that value.

Stay long oil… and stay long oil services.