Seven Ominous Crises: How to Protect Your Portfolio and Profit!
Stock-Markets / Financial Crash Apr 30, 2008 - 01:28 PM
Sean Brodrick writes: Many of the investment trends I talk about tend to play out over an extended period of time — for example, the long-term price gains in food and energy. But I see at least seven different crises that could rock your world over the next 12 months.
My intention is not to scare you. I simply want to raise your awareness today, and give you different ways you can profitably hedge your portfolio against these threats.
Let's run down the list ...
Crisis #1 — Oil Could Hit $157 a Barrel
I'm talking even if there isn't a new war or military escalation in the Middle East, terrorist attack on the Saudi oil fields, etc. Even if none of that happens, we could see $157 oil just in the normal course of business.
I've laid out the case in recent weeks for the long-term forces that could drive oil prices to nose-bleed levels: America using one-fourth of the world's crude, Chinese oil demand growing 13.6% year over year, a "bumpy plateau" of supply, and lack of new discoveries, just to name a few.
But even in the short-term, there are forces that could drive oil much higher. They include:
» Increasing Demand. The latest EIA figures for last week show that U.S. gasoline demand climbed 0.57% year-over year.
year ago, gasoline sold for an average $2.86 per gallon. Last week, the national average was $3.50. So not only are Americans not using LESS gasoline as the price goes up — we're actually using MORE.
We might like to think that as gasoline hits $4, and even $5, a gallon this summer, people will drive less which will cause a supply surplus and send prices back down. But I don't believe that's going to happen.
» Geopolitical Squeeze. This week, the price of oil and gasoline is being squeezed by everything from a strike at a Scottish pipeline (which is shutting down a portion of British production) to rebel attacks and a strike that have forced Nigeria to shut down more than half of its oil output.
These will pass ... and then something new will come along. We'll probably see a long, hot summer where bad news from the oil fields keeps the heat on prices at the pump.
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| The 2008 Atlantic hurricane season will produce more storms than originally expected, according to an updated forecast from Colorado State University's Department of Atmospheric Science. |
» Stormy Weather? The past two hurricane seasons have passed without a serious storm hitting the U.S. This season is expected to have higher than average storm activity. And it would take just one bad storm in the wrong place to knock out The Louisiana Offshore Oil Port (LOOP) which supplies 13% of the nation's oil, about 1.2 million barrels a day, or the fleets of U.S. and Mexican rigs in the Gulf of Mexico.
Heck, Mexico's oil company, Pemex, just closed three oil export terminals in the Gulf of Mexico and the Pacific because of stormy weather. What are they going to do when the real blow-me-down hits?
Crisis #2 — The End of Cheap Air Travel
The past couple of months have seen Aloha Airlines, ATA Airlines, Skybus and Frontier Airlines careen into bankruptcy. Northwest has merged with Delta. United, US Airways, Continental and American Airlines are looking for dance partners.
And it's not just in the U.S. Around the world, airlines are merging or folding as they try (mostly unsuccessfully) to deal with $120 per barrel oil.
One analyst calculated that if crude oil stays at $110 a barrel for the year, it would boost fuel expenses for the major U.S. airlines — even considering a reduction in capacity and in flying — by about $19 billion dollars.
That's a whopping 53% increase!
Eventually, we'll probably be left with about four big airlines. And the only way they'll be able to make money is by raising fares — way, way up.
Americans have gotten used to being able to fly from New York to Los Angeles and back for less than it would cost to drive. Eventually, when airlines stop merging/imploding, you can look forward to having less choice, it will be to be more crowded, there will probably be less service — and you're going to pay more for all of it.
Crisis #3 — A Worsening Trade War with Europe
And surprise, surprise! The latest shots being fired in this trade war are over energy.
The European Biodiesel Board (EBB) has lodged a complaint with the European commission over competition from the U.S. that was putting EU producers out of business. It wants duties on "B99" biodiesel exports (biodiesel with 1% petroleum diesel), claiming they are unfairly subsidized and then dumped in the EU where they can win new subsidies.
Of course, American biodiesel firms aren't taking this lying down. They're hitting back by urging the federal government to take action against any protective measures for the European industry.
The EU and U.S. are already embroiled in several long-standing trade wars over beef and poultry imports from the U.S., genetically modified seeds and foods, and subsidies for arch-rival plane-makers Airbus and Boeing.
The problem with a trade war is that it can quickly spread beyond the flashpoint that got everyone excited in the first place. Add in that both the American and European economies are slowing down, and both the U.S. and the EU will be doubly desperate to come out on top. And in a trade war, it's very easy for both sides to become losers.
Crisis #4 — Global Warming Shifts into Higher Gear
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| Climate scientists may have significantly underestimated the power of global warming, according to a study of polar trends by the United Nations Intergovernmental Panel on Climate Change. |
This summer could be the first time in recorded history that the Arctic ice cap melts completely and the Arctic Ocean becomes ice-free. The last time scientists are sure this happened was about 50 million years ago.
And if a picture is worth a thousand words, click here to see a low-resolution reproduction of a sequence of satellite images of Arctic ice.
You can see a stream of once-solid ice flowing out of the Arctic basin down the east coast of Greenland. Also, the ice covering Greenland is melting incredibly fast and ice sheets over ocean water in Antarctica are collapsing.
And global warming could wreak other havoc by making hurricanes more intense (see Crisis #1), worsening killer droughts and by damaging global food harvests. With the world on the brink of a food crisis , that could be very bad indeed.
Crisis #5 — Runaway Food Inflation
In many ways, the U.S. is one of the luckiest places on Earth. For example, we are the world's bread basket — the OPEC of grain.
The bad news is that our grain is sold in a global market now, so you're competing with some family in Beijing for the wheat that goes into your box of Cheerios.
This is already ramping up food prices, hitting American consumers with the worst food inflation in 17 years. And it's probably going to get worse before it gets better.
The U.S. Department of Agriculture says U.S. food prices could rise 4.5% this year. That's up from the 4% rise last year and way, way up from the average 2.5% annual rise for the last 15 years.
Chicken and other poultry prices rose nearly 7% in February compared to a year earlier. Milk prices jumped 13% on average. And eggs are up 25%!
Still, even with all that, U.S. households spend a smaller chunk of their money on food than in any other country — 7.2% in 2006, according to the USDA. Compare that to Poland where people spend 22% of their household expenses on food, or Egypt or Vietnam where it's closer to 40%.
The bad news is your great-grandfather's food spending was closer to the level of Poland or Egypt — and we could be going back there in a hurry. The era of cheap food is over!
Global food prices surged 57% last month from a year earlier, according to the United Nations, and the World Bank warns surging food prices may trigger civil disturbances in 33 countries.
And with food prices inflating, we're already starting to see the governments of the world move to build stockpiles. That takes a bad situation for consumers and makes it even worse.
Crisis #6 — Infrastructure Collapse
If you think the breaking of the levees in New Orleans or the collapse of the I-35 Bridge in Minnesota last year were the end of America's infrastructure problems, think again.
More than half of U.S. roadways are crumbling ... the nation's water supply system is falling apart ... train tracks are rusting away ... and thousands of bridges across the country are rated "structurally deficient" by the Federal government.
America's infrastructure needs at least $1.6 trillion in investment over the next five years. Unfortunately, we're spending so much of our money in Iraq that we don't have the moola to spend here at home.
Pieces of U.S. infrastructure that have been tagged as needing urgent work include Atlanta's water system (18% of the city's water leaks away); the Herbert Hoover Dike at Lake Okeechobee in Florida, which engineers calculate has a 1 in 6 chance of giving way in any year; and the Brooklyn Bridge (the oldest suspension bridge still used in the U.S.).
In fact, there are 600,000 bridges in America, and 26% — 156,000 —received a failing grade from Uncle Sam.
Bottom line: The next car that catapults off a collapsing bridge could be yours.
Crisis #7 — a Dollar Crash
The odds on this aren't as good as the other crises, but if it hits, oh man, it's going to make a lot of things worse.
Basically, the U.S. is exporting its inflation by cheapening its currency. America's MZM (all types of financial instruments that can be easily converted into money) is growing at an 18% rate year-over-year.
That's what you get when the Fed throws billions and billions of dollars at every Tom, Dick and Bear Sterns that has hedge-funded itself to the point of bankruptcy!
Combine this with a constant parade of interest rate cuts, and foreigners who invest in U.S. dollars are getting a very poor return on their money. For example, Japanese investors, who own $586.6 billion or 12% of U.S. government debt, had their worst quarter in Treasuries this decade. The value of their Treasury investments dropped 7% in the first three months of the year as the dollar fell to the lowest since 1995 versus the yen.
Result — the Japanese are looking for greener investments. They've actually trimmed their U.S. Treasury holdings by 5.4% since last July. Money managers in China, which holds $486.9 billion in U.S. Treasury debt, are also shifting into other investments.
Where are the Asians putting their money? Well, some of it goes to euros. But a chunk of it goes into hard assets — commodities. And this brings us full circle to rising oil prices. The worse the U.S. dollar does, the more foreigners will pump their money into oil, gas, gold and silver.
The Federal Reserve has to be concerned and will try to pull the dollar's fat out of the fire, perhaps with action as early as today. But a low benchmark interest rate isn't the greenback's only problem. We have the Fed playing sugar daddy to Wall Street ... a ruinous war in Iraq to pay for ... a staggering national debt ... and a terribly lopsided trade deficit. And that's just for starters.
My point is that whatever fix the Fed comes up with may be a short-term fix only. If the U.S. dollar goes into full-scale collapse later this year, you'll want to be diversified into hard assets and lots of them.
How You Can Protect Yourself— And Potentially Profit
You might want to consider tucking some ETFs in your portfolio that could profitably hedge against these crises and protect your nest-egg, including:
- United States Oil Fund (USO): This fund is designed to track the performance of West Texas Intermediate light crude oil.
- PowerShares DB Agriculture Fund (DBA): This fund is composed of futures contracts on corn, wheat, soy beans and sugar.
- PowerShares WilderHill Clean Energy Portfolio (PBW): This clean energy fund is for folks who want to target energy profits AND a cleaner environment at the same time. Holdings include JA Solar, Trina Solar, First Solar, Yingli Green Energy and more.
- US Global Megatrends Fund (MEGAX): This fund is aiming to capture the global infrastructure boom. Holdings include FPL Group, Schlumberger, Chicago Bridge & Iron, and more.
There are other ways to protect yourself, too. For starters, you can consider tangible assets like gold, silver, and other natural resources. You can also use investments such as options to both hedge your existing positions and profit from down moves in various sectors, industries and companies.
But whatever you decide to do, the most important thing is simply understanding what's happening in the world right now, and how potential events could affect you, your family, and your individual investments.
Yours for trading profits,
Sean
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