No Respect (John Myers) / The Daily Reckoning

verfasst von - Elli -, 11.06.2003, 18:23

-->No Respect

The Daily Reckoning

Paris, France

Wednesday, 11 May 2003

---------------------

*** Showdown on the streets of Paris! The bill is coming
due...who will pay?

*** Bizarre three-way puppy love on Wall Street...investors
joyriding their keyboards...

***...Yet, the economy is still mired in a recessionary,
deflationary bog - what gives?...and more!

---------------------

The showdown continued in Paris yesterday.

About 1PM we heard the sound of whistles and drums...and
then a voice on a megaphone. Demonstrators - protesting the
government's plan to curtail public pensions - marched up
the rue de Rivoli towards the Place de la Concorde."Save
our retirement," said some banners."Keep your promises,"
said others. (Another group of protesters were shouting"No
more war," but we couldn't figure out what that had to do
with the rally.)

"What's really at stake," explained a friend in the office,
"is the unions' power. The changes the government is
proposing are very modest. The big unions already
negotiated with the government and accepted them. These are
just the hold-outs."

Hold-outs or no, it took the next 3 hours for the crowds to
pass our office. But the subject of today's note is not
politics, but bonds...about which we offer both a
recommendation and a forecast.

Every great fraud begins with wishful thinking and ends in
disgrace. Democracy, paper money, bull markets - all start
out well enough. People are restrained, at first, by
habits, memories and constitutions. But after a while,
these are as forgotten as parents, and the fun can begin.

Surely the Fed enjoyed issuing trillions of dollars...money
it created 'out of thin air'; it made Alan Greenspan the
most popular central banker since John Law. And almost
every Western democracy got a kick out of making promises
it couldn't keep.

Now, France struggles to lower expectations; the bills are
coming due and the French know they can't pay them.

On the other side of the Atlantic, a recent Treasury study
found the nation $44 trillion in the hole. Still, the
promises get bigger by the day. The Bush Administration now
pledges to make the entire world safe for democracy...and
cut taxes, too!

This is the same administration of the same government
whose Treasury bonds are now the rage on Wall Street. Both
professionals and lumpen love them. Buying bonds, they
believe, is safe. Many believe they are 'guaranteed.'

A forecast: sooner or later, they will find out otherwise.

Our recommendation will come tomorrow.

Eric?

------------

Eric Fry on Wall Street...

- The puppy love phase continues on Wall Street...The stock
market can do no wrong, in the eyes of most investors. But
what's this?...Bonds can do no wrong either? What sort of
bizarre, three-way puppy love is this? How can investors
love both stocks and bonds at the same time?...It just
ain't natural!...

- Yesterday, the Dow gained 75 points to 9,055, while the
Nasdaq Composite jumped 1.5% to 1,628. Tech stocks led the
charge, as usual, despite the news that Nokia is not
selling as many cell phones as it would like. But warnings
about lousy sales are as common in the tech sector as
soaring share prices. Happily for investors, non-existent
sales growth is no impediment to high-flying share prices.

- Gateway Computer was one of the tech sector's stand-out
performers yesterday, gaining another 10% on the day.
Shares of the resurgent PC-maker have jumped an astonishing
64% since Apogee Research recommended buying them a couple
of months back.

- I am delighted, of course, to see Apogee's subscribers
make money, (after all, I help out the team at Apogee). But
the stellar performance of Gateway shares is also a little
unnerving - the company's operating profile has improved
only a little over the last two months, while the company's
stock price has improved a lot!...

- If hope and expectation - rather than any actual
operating improvements - have been driving the recent stock
market rally, what will drive U.S. share prices higher from
this point? More hope and expectation?

-"The speculators are back to joy-riding stocks via their
keyboards," Barron's reports,"as online trading volumes
have swelled in recent weeks. Online brokers reportedly saw
retail trading activity up 25%-30% in May over April, which
itself showed a nice jump off a low base in March. Nasdaq
volume, no coincidence, rose more than 20% last month."

- Meanwhile, the bond market continues to rally as if the
economy is about to curl up in a ball and take a 10-year
nap. The 10-year Treasury note soared yet again yesterday,
pushing its yield down to 3.19% - ever closer to the
unthinkable, Japan-style yield of 2.99%.

- One of these two financial markets - either the Nasdaq or
the bond market - would appear to"have it wrong." If the
US economy is on the rebound, interest rates should be
rising, not falling. On the other hand, if the economy is
still mired in a recessionary, deflationary bog, then the
stock market should be slumping, not soaring. Something
isn't right with this picture.

- The simultaneous stock/bond rally is a financial marvel
for many reasons, not the least of which is the fact that
energy prices remain stubbornly high...and rising. This
trend imposes a de facto"energy tax" on American
enterprise, while also squeezing profit margins. In other
words, rising energy prices aren't a good thing for
corporate profits...and neither are they a heaven-sent gift
for the bond market. Rising energy prices, all else being
equal, contribute to rising consumer prices, which, all
else being equal, contribute to MUCH lower bond prices.

- But the bulls on Wall Street rarely contemplate such
troubling thoughts. They amuse themselves, instead, with
happy thoughts of ever-rising stock and bond prices. They
don't worry about the fact that corporate revenues are not
growing, that energy prices are rising, that the dollar is
falling or that a housing boom is the only thing holding up
the economy.

- The bulls assure us that the stock market"senses" a
recovery six to nine months off, which is comforting news,
because the economy continues to struggle mightily in the
here and now. We're sure glad that our economic problems
are almost over, cause that means the bear market in stocks
is absolutely, positively over...and a new bull market has
begun. Even so, it may be a while before the Nasdaq
revisits 5,000...

-"It has now been over 830 trading days since a new all-
time stock market high," observes Dr. James W. Paulsen,
Chief Investment Strategist of Wells Capital Management.
"It seems like the wait has been forever - but alas, it is
only the seventh longest wait since 1900."

- Pull up a chair...this may take a while.

------------
The Daily Reckoning PRESENTS: Canadian Synthetic Crude Oil:
The single-most-important factor in meeting America's
future energy needs?


NO RESPECT
by John Myers

America is rapidly running out of oil and gas reserves. But
Canada is loaded with the stuff. So why do Canadian oil and
gas stocks"get no respect" in the stock market?

Why do they, in general, sell for lower valuations than
their U.S. counterparts? Maybe it's just a bad habit. But
we think this is a habit that is about to be broken, as
Canada's oil and gas companies step in to supply an ever-
growing share of America's energy needs.

A rapidly expanding pipeline network will facilitate oil
and gas deliveries from Canada's distant fields to an
energy-thirsty U.S.. This pipeline network is just part of
the reason why we expect Canadian stocks to"re-price" in
line with American energy stocks over the next couple of
years. First, a few important facts:

* The United States imports more crude oil and petroleum
products from Canada than from any other country.

* Canada has proven conventional oil reserves of 4.9
billion barrels, as of January 2002. Oil production
averaged 2.9 million barrels per day (bbl/d) during 2002.

* And here's the sexiest part of the Canadian oil story -
Canada holds between 1.7 and 2.5 trillion barrels of oil
sands!

Unlike conventional crude oil, oil sands contain a mixture
of bitumen, sand, water and clay. Bitumen, which is a thick
and tar-like hydrocarbon, surrounds the sand and water.

To develop oil sands, bitumen is separated from the sand,
water and clay. Once separated, bitumen can be upgraded
into a high-quality oil called"synthetic crude." The
Athabasca Oil Sands deposit, in northern Alberta, is one of
the two largest oil sands deposits in the world (the other
is in the Orinoco Belt, Venezuela). There are also oil
sands deposits on Melville Island, in the Canadian Arctic,
and there are three smaller deposits in northern Alberta.

Current output of synthetic crude and bitumen is estimated
at 600,000 bbl/d. A new oil sands project, the Muskeg River
Mine, located on the Athabasca oil sands and operated by
Shell Canada, Western Oil Sands and Chevron Canada, is
scheduled to begin production in early 2003. The Muskeg
River mine will produce an additional 155,000 bbl/d.
Construction is also nearing completion at Petro-Canada's
MacKay River oil sands project.

Petro-Canada expects production of 30,000 bbl/d in 2003.
According to the Canadian government, synthetic oil and
bitumen production is expected to reach 1.2 million bbl/d
by 2010.

But this is merely the beginning of the exciting Canadian
oil story. It"ends" at several pipeline hubs across North
America...and that's a great story all by itself.

Canada's growing pipeline network may well be a boon to the
country's oil and gas production, as well as an important
catalyst for revaluing Canadian energy stocks in line with
American energy stocks.

Although most Canadian oil is produced in western Canada
(mainly Alberta), oil is consumed primarily in central and
eastern Canada. As a result, Canada exports mostly crude
oil from Alberta and imports crude oil and petroleum
products on the east coast, explaining why Canada exports
approximately 1.89 million bbl/d (gross) to the United
States, but net exports are slightly lower (1.78 million
bbl/d).

An extensive pipeline system transports western oil to
eastern Canadian and U.S. markets. There are two major
pipeline networks. The first is Enbridge Pipelines Inc., an
8,700-mile network of piping and terminals, delivering oil
from Edmonton, Alberta, east to Montreal, Quebec and
eastern Canada as well as the U.S. Great Lakes region.

Enbridge is one of the largest crude oil and petroleum
liquids pipeline systems in the Western Hemisphere, and the
company is currently expanding its U.S. export capacity
through its three-phase Terrace Expansion program. The
other major pipeline system is the Trans Mountain Pipe Line
(TMPL) system, which delivers oil mainly from Alberta west
to refineries and terminals in the Vancouver, British
Columbia area, as well as to the Puget Sound area of
Washington State.

Development of Alberta's massive oil sands has necessitated
new pipelines to transport diluted bitumen from the mine to
downstream processors and eventually to market terminals.
Most recently, Canadian pipeline companies have focused on
taking the Athabasca oil sands southward to processing
facilities in the Edmonton area. This is one of the primary
operations of the Enbridge network.

Construction of another similar pipeline, the Corridor
Pipeline (TransMountain) connects the nearly completed
Muskeg River Mine (Shell Canada, Chevron Canada, Western
Oil Sands) to Shell's Scotford Refinery, located in the
Edmonton area, near market terminals. The company expects
oil to begin flowing through the Corridor Pipeline this
year.

In January 2002, BC Gas announced that it intends to build
a new pipeline in conjunction with TransMountain, called
the Bison Pipeline, to transport diluted bitumen from mines
and refineries near Fort McMurray to pipelines and
processing plants in the Edmonton area. The Bison Pipeline
would cover about 320 miles and cost about $625 million. BC
Gas predicts that if regulatory approval is granted in
early 2003, the pipeline could come on-stream by 2005.

There has been considerable progress in recent years on
natural gas interconnections between Canada and the United
States. The $2.5 billion Alliance Pipeline, at 1,875 miles,
is the longest pipeline ever built in North America.
Alliance is designed to carry about 1.3 billion cubic feet
per day (Bcf/d) of natural gas from western Canada (Fort
St. John, British Columbia) to the Chicago area. The
pipeline entered into commercial service on December 1,
2000.

The Maritimes and Northeast Pipeline (M&NE) came on-stream
in January 2000. M&NE is designed to deliver natural gas
from Canada's Sable Island area to New England. The
pipeline currently is in the midst of two expansion
projects. Construction is underway on Phase III expansion,
which will extend the pipeline further into Massachusetts,
connecting it with the U.S. Algonquin pipeline system in
2003.

In every area, from exploration to oil sands development
and pipeline expansion, Canada is a growing energy market
with a built in buyer - the United States. This is
especially true in light of the development of the Oil
Sands project and the expansion of oil and gas pipelines
reaching into America.

The country will certainly be - if, indeed, it is not yet
so - one of the most important global energy players in the
years to come.


Sincerely,

John Myers,
for The Daily Reckoning

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• No Respect (John Myers) / The Daily Reckoning - - Elli -, 11.06.2003, 18:23