Macro Tsimmis

intelligently hedged investment

Archive for January, 2007

BUY PetroChina (PTR)—all roads lead to Beijing

Posted by intelledgement on Tue, 23 Jan 07

PTR = E * C²

…that is, PetroChina (PTR) equals energy (because it is an integrated energy company) times China squared (both because it is a Chinese company and because it is majority-owned by the Chinese government, and therefore doubly unlikely to lose).

PTR was f0rmed in 1999 as a result of the restructuring of the old Chinese National Petroleum Corporation (CNPC). PTR got most of the domestic (internal to China) assets, including the lion’s share of the oil and natural gas reserves. So far at least, PTR has minimal direct exposure to international geopolitical risks, aside from some purchase contracts. When you hear about China getting involved with the national oil companies of Venezuela, Iran, and others—not that these days this is such a risky proposition if you are China—that is most likely a Sinopec (SNP) operation (they inherited the CNPC foreign operations). So long as energy demand in China keeps growing and their reserves hold out—in both cases, likely to be years and years—PTR has a huge opportunity to profit.

Of course, the opportunity will not be realized as fully as it could be. PTR is controlled by the Chinese government and they have an interest in maintaining cheap access to energy to sustain growth. So while on the one hand, PTR’s access to the best energy market going forward is guaranteed, on the other hand, profits here will likely not be as good as they could be.

Plus there are some valuation issues. China is a great market and 11B BBLS of reserves ain’t hay…but Exxon’s (XOM) annual profit is bigger than PTR’s revenues…so it is a little unsettling to see PTR with a market cap of better than half the size of XOM when their revenues are more like a third of Exxon’s and their profits are about a quarter of Exxon’s.

But bottom line, this is China, the fastest growing market in the history of humankind and we are talking about a seller of energy in the ultimate seller’s market…and speaking of sellers’ markets, the demand for PTR stock—own a piece of China’s growth!—is stronger than it probably “should” be, and buying it here we figure to benefit from that…so we are gritting our teeth and bearing the rich valuation. Odds are good it will get richer…and thus so will we.

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Dendreon (DNDN) update

Posted by intelledgement on Tue, 16 Jan 07

It came a trading day later than expected, but Dendreon (DNDN) announced before the market opened this morning that the FDA has accepted their application for fast-track consideration of Provenge for approval. The date for a decision is 15 May, a month or so earlier than widely anticipated. The market was anticipating the FDA would accept the application for approval but was not expecting it would get fast-tracked, so this is a plus for the stock.

Now, of course, we get to the $64,000 question…will Provenge get approved? The possible outcomes include:

• UNCONDITIONAL APPROVAL (20%)—there are 1,000,000 men in the USA with prostrate cancer and over 200,000 new cases each year compared with 30,000 deaths, so the market is growing…because there is a customized element to the treatment, it is more costly and probably less profitable than a “standard” drug product, but the market is estimated to be around $1B/year, so there is no question Dendreon will instantly become profitable and at that level of sales, should be worth minimally in the $120 range per share…not saying it would get there instantly, but should ramp up to 25%-to-30% of that level pretty fast upon approval, and climb from there as production, sales force, and partnership issues are resolved.

• CONDITIONAL APPROVAL (70%) – because the Phase 3 trials failed to meet their major endpoints (did not slow disease progression within the mandated time parameters), the consensus is that the FDA are unlikely to approve Provenge for general use without the results of another Phase 3 trial, final results from which would not be available until 2009. But because Provenge does appear to extend survival and has negligible side effects, it arguably would make sense to approve use for terminal or advanced cases, where alternative treatment options are unattractive at best. The FDA could then await the last Phase 3 results before deciding on unconditional approval without enraging either the protocol sticklers (who want the drug turned down because it “failed”) and the patient population (who see a potential life-extending treatment and want it now). Should this happen, the company will get some revenue, but most likely not enough to become profitable and the stock could settle in the $8-to-$20 range in anticipation of eventual full approval.

• REJECTION (10%) – The logic here is that there is no basis for approving Provenge because it failed to slow progression of the disease in Phase 3 trials. The problem with this logic is that the trial criteria were designed for “standard” chemo-style drugs that work by directly attacking the cancer. Provenge works by martialling the body’s own immune system, and it apparently takes longer for the results to show up (apparently beyond the time frame of the trial with respect to standard disease progression measurements)…but the data do indicate that men taking Provenge live longer than those who don’t. Never-the-less, if the FDA stick by the letter of the law approvals-wise, they should reject this application—most likely, issue a so-called “approvable letter” stating that Provenge is approvable if the third Phase 3 data are positive—and await those data. In this case, the company will need still more funding and the stock is likely to drop back below $4.

So, we like the odds favoring additional gains here and are holding onto our position.

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BUY Dendreon (DNDN)—potential cure for cancer

Posted by intelledgement on Wed, 10 Jan 07

Dendreon (DNDN) are a US-based pioneer in developing immunotherapeutical treatments for cancer. They have a treatment for prostate cancer called Provenge, which is currently in Phase 3 testing that appears to afford a materially significant survivor advantage. We say “appears to” because the first two Phase 3 trials were designed to measure time to progression (TTP) for tumors, and Provenge narrowly failed to show a significant advantage in delaying tumor progression (that is, there was an advantage but it fell just short of statistical significance). However, as time passed and more patients from the study succumbed to prostate cancer, it became apparent that the Provenge arms were being afforded a significant survival advantage.

Dendreon’s approach is designed to stoke the body’s own immune system to fight the cancer. Provenge is designed to counter prostate cancer, but if the approach works here, it should be efficacious with respect to other cancers, too. So far, the FDA have never approved an immunotherapy, and the novelty of the technology may well have worked against it in the design of the first two studies: TTP is typically used to measure the effectiveness of chemotherapies that attack the cancer directly but it may not have been a useful measure of effectiveness for Provenge. Be that as it may, the FDA does not approve drugs that fail their primary end points in Phase 3 studies. The third study, which is still being enrolled, uses survival as the primary endpoint…but final results will not be available until 2009 or 2010, and with prostate cancer killing 30,000 men in the USA every year, there is pressure on the FDA to consider the extant survival data. The current standard of care for prostate cancer is a seldom successful regimen of chemotherapy that is so onerous that about half of patients eschew it preferring certain death to a painful and debilitating treatment with a scant chance of success.

Plus Dendreon (and other companies) have additional promising immunotherapies under development and should the FDA determine that Provenge is efficacious, funding for these will flow faster, which could be a big strategic plus for humanity in general.

To that end, with encouragement from the FDA, Dendreon have applied for fast track approval based on the results of the first two Phase 3 studies, and the FDA have committed to decide whether or not to consider Provenge for approval—and whether or not on a fast track basis—by 12 January, which is this Friday.

Here is our thinking: first and foremost, this is a highly speculative play. Dendreon have no products, and nothing else in their pipeline on which they are actively working. (They were working on Neuvenge for breast cancer but had to pull the plug on it to conserve cash when Provenge failed to meet the primary endpoints of the first two Phase 3 studies and thus was not approved as quickly as the company had hoped.) If the product is not approved, nothing else in their pipeline will have any value, either (it is all immunotherapy-based), and the value of the company will essentially degrade to the value of their cash on hand…perhaps $1/share.

Second, the upside is huge. It appears likely that Provenge does work, and will eventually be approved. With 72.4 million shares outstanding, at yesterday’s $3.89 close, the company has a marketcap of $281MM. The market for Provenge in the USA alone is $1B/year or more—if Provenge works, it would literally be the only choice for 200,000 men each year in the USA—and close to the same in Europe (although they would be likely to take on a marketing partner in Europe and thus split the revenues). Typically, a biotech with a blockbuster product commands a market valuation in the 6x-to-12x revenues range. $1.5B x 6 = a marketcap of $9B, which is like a 30-bagger from here.

We expect the FDA to agree to consider Provenge for approval within the next few days. Given the need for the product, it makes sense that they should, and we doubt they would have encouraged the company to apply for approval if the agency were going to refuse to evaluate the evidence. If Dendreon get the six-month fast track that they have requested (33% chance), that would give us a decision on Provenge approval by June and the stock should react positively. If the FDA accepts the application but does not grant the fast track exception (66%), then there could be a decision by October or so…but it could be longer…and the stock may not move much; this is what The Street is expecting. If the FDA rejects the application (1%), the stock will tank.

So, we like the odds short and long term…the dicey part comes in the middle…should the FDA agree to review Provenge here as we expect, it is not at all clear if they will approve now or require more evidence (completion of the third Phase 3 study presently being enrolled). The difference between approval in 2007 and 2010 is huge; this one will likely need more than normal attention between now and October.

Reminder: the speculative portfolio starts at $10,000, which is one-tenth the size of our model portfolio. We expect the components of the speculative portfolio will be significantly more risky and higher maintenance than those of the model portfolio; consequently, we anticipate a lot of turnover here. It would not be prudent to invest any sum of money that you can’t afford to lose in speculative portfolio components. And if you do invest in any of them, you need to pay attention to what is going on there to optimize your ROI. For our part, the same rules apply here as to the model portfolio: any transaction announced here when the market is open will be settled at the closing price. For announcements made when the market is closed, the next opening price will be used to settle the transaction. Exception: announcements made less than 30 minutes prior to the close of the market count are considered to have been made after the close.

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BUY Transmeridian (TMY)—black gold in Kazakhstan

Posted by intelledgement on Wed, 03 Jan 07

We making Transmeridian Exploration (TMY) our inaugural investment in our speculative portfolio. TMY’s cardinal asset is their license to develop Kazakhstan’s South Alibek field. There are 72.9MM BBLS of proven reserves there, and TMY has a market cap of $322MM, which means that the company’s oil is being valued at $4.42/barrel…a more reasonable valuation with the price of oil around $60/barrel would be between $10 and $15/barrel. How can this be?

The main problem is that it doesn’t seem to be that easy to get the oil out of the ground. The Soviets drilled a couple of dozen exploratory wells back when Kazakhstan was part of the USSR but never found anything compelling enough to develop immediately. More to the point, TMY have been trying for several years to pump just a few thousand barrels a day and failing. The geology is apparently quite challenging, and consequently, it seems likely that the field may not have been economic back in the days of $10 and $20 oil.

TMY need to produce at least 4000 bpd to breakeven on operations, and 6000-to-8000 bpd to be able to service their considerable debt and continue their drilling program. (They have developed only 8% of their proven reserves, so drilling more holes is most definitely a necessity.) In 2005, they only produced 1100 bpd, but as most of that was being sold to the Kazakhstani government at $8/barrel, investors did not fret much over the lost production. We are expecting production for 2006 to at least double to north of 2000 bpd, and for income to improve even more with a significant portion of that production now reaching the world market (we will know for sure when TMY release their 4Q06 results in March).

But 2007 could be the year that Transmeridian achieve a breakthrough. There are currently a record six drilling rigs either creating new holes or (hopefully) improving production from existing wells. We anticipate that production should attain 4000 bdp by the end of 1Q07, and exceed that level in 2Q07. In addition, we expect in 2007 that the company should be able to transport their oil via pipeline instead of truck/rail, thus cutting expenses, and that with the completion of their storage facility by mid-year, they should be able to sell all production on the world market (lack of storage forced them to sell a significant proportion into the local market at steep discounts in 2006). If they can ratchet production up to the 6000-to-8000 bpd range, they should be able to service their debt and afford additional drilling without the need to raise additional capital (which would require issuing more stock thus diluting the value of the stock already out there, obviously an undesirable result for current shareholders).

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BUY iShares MSCI Hong Kong Index (EWH)

Posted by intelledgement on Tue, 02 Jan 07

The reasoning for taking this position is presented in our earlier writeup on FXI. FXI consists exclusively of mainland companies—about a third of them government-owned—that trade on the Hong Kong market. EWH adds Hong Kong-based companies to the mix. All the reasons for investing in China apply to the companies based in Hong Kong…plus management teams with more capitalist-system experience than their mainland counterparts and more access to the China market than their foreign-based company counterparts are likely to have a persistent competitive edge for the next several years.

The objective of the iShares MSCI Hong Kong Index ETF is to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Hong Kong market, as measured by the MSCI Hong Kong Index. The ETF has been operating since March 1996. The market value of the trust is US$1.0B and on average 1.5MM shares are traded each day.

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BUY iShares Silver Trust (SLV)

Posted by intelledgement on Tue, 02 Jan 07

The arguments in favor of this position are presented in our earlier writeup on GLD. As with GLD, we see SLV not so much as an investment, but rather as a good way to hedge against a decline of fiat currency in general, and the dollar in particular.

While not in any sense a gold bug, I would be remiss in any discussion of silver in not owning up to having bought a couple of bags of circulated US pre-1965 dimes and quarters during the Hunt brothers’ disasterous attempt to corner the market in 1980. The price ran up breathlessly and relentlessly, briefly hitting nearly $50/ounce (and we are talking 1980 dollars here) before crashing back down to under $4. My purchase was on the way up, at around $21/ounce, so I briefly felt pretty good about it, but the feeling didn’t last. The one silver lining is that whenever I feel myself getting to bigheaded, I can conveniently let some air out just by forcing myself to calculate what the money I paid for those coins would be worth today had I just put it into an S&P 500 index fund. If I am more than usually in need of humility, I compare the ROI on my March 1980 silver purchase to a similarly-timed investment in AAPL.

The objective of the iShares Silver Trust ETF is for the shares of the trust to reflect the price of silver owned by the trust, which constitutes its main assets. The trust is managed by the Bank of New York; the custodian of the trust is JPMorgan Chase Bank N.A., London branch (the silver is stored in the UK). The trust has been operating since April 2006. The market value of the trust is $1.3B and on average 400,000 shares are traded each day.

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BUY United State Oil (USO)

Posted by intelledgement on Tue, 02 Jan 07

For the most part, the arguments in favor of this position are presented in our earlier writeup on IXC. We have just a couple of points to add.

First, while the name of this ETF is “United States Oil”—and the USA remains the largest consumer of oil of any country on the planet—it is really not USA consumption that is driving the price of oil at the margin these days. That is because our consumption is relatively stable and, therefore, predictable. It is the growth of the Asian economies—China and India in particular due to their scale and propensity to surprise us to the upside—that are constantly threatening to unbalance demand and supply in favor of the former. This could change if the USA economy falters significantly before Chinese consumption comes closer to catching up: in that case, a decline in USA oil demand would drive prices lower temporarily (for as long as a few years). We foresee that as a likely scenario, but probably not for several years, and almost certainly not before 2009. So for the nonce, expect to see the price of “USO” driven more by what happens in Beijing than Washington.

And speaking of driving the price of oil, expect the USO to be more volatile than the IXC. Because supply and demand are so finely balanced here with little excess productive capacity, any hint of material disruption on the supply side—hurricane damage to the Gulf Coast facilities, violence in Nigeria, threats by Iran to block the Straight of Hormuz to oil tankers, etcetera, etcetera—can cause oil prices to spike. Conversely any indication that demand might moderate can have a big dampening effect on the price per barrel. These moves are typically abrupt and short-lived breaks in what is otherwise a secular uptrend.

The United States Oil ETF is a commodity pool managed by the Victoria Bay Asset Management, LLC. USO’s investment objective is to reflect changes in the price of West Texas Intermediate (“WTI”) light, sweet crude oil, less the fund’s expenses. The fund pursues this objective through investments in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures and other U.S. and foreign exchanges and other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and over-the-counter transactions that are based on the price of oil. The fund has been operating since April 2006.

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BUY PowerShares Water Resources (PHO)

Posted by intelledgement on Tue, 02 Jan 07

Most reading this buy recommendation probably have no direct experience with lacking water for daily use. But less than 3% of the water on the planet is fresh water, and about two-thirds of that is frozen at the poles or glaciers. So the supply of fresh water for use by humans and other land animals is quite limited. There are already many countries where a substantial proportion of the population does not have access to convenient supplies of potable water…let alone enough for agriculture, cooking, washing, plumbing, etcetera. This scarcity is projected to grow more serious by 2025, when, barring an unanticipated reversal in demographic trends, most of southern Asia including China and India, most of Africa, and most of South America will face severe imbalances between fresh water supplies and demand. So by no means is all the demand in poor countries which cannot afford to pay for solutions.

Accordingly, the efforts now underway to improve supplies of potable water, the treatment of water, and the technology and services that are directly related to water consumption are presumptively “good” investments in both senses of the word: that is, both likely to create value and generate a superior ROI and likely to result in the advance of civilization…or, at least, reduce the odds of a precipitous decline.

The PowerShares Water Resources ETF—which invests with the intent of matching the Palisades Water Index—has not been around long, but so far has met at least the first of those criteria: in its first year-and-three-weeks of existence (6 Dec 05 to 29 Dec 06), the fund had an ROI of 19.5% as compared with the S&P 500’s ROI of 12.2%.

For more information about the PHO ETF, check out the PowerShares website.

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BUY streetTRACKS Gold Shares (GLD)

Posted by intelledgement on Tue, 02 Jan 07

My father has been a gold bug for as long as I can remember. Canadian mines, gold mutual funds, Krugerrands stashed in the bomb shelter (yep, true child of the 50s: my family had a bomb shelter), you name it, he tried some.

When I was a kid, this sounded like a good idea, particularly once I learned to read an inflation chart and looked at what had happened to the dollar since 1945. $35 an ounce? Ha! Tell me another one. However, by the time I got to college and had some economics under my belt, I became more skeptical.

Mathematically, the main dynamic behind the value of gold (taking on faith for the sake of argument that it is intrinsically valuable to humans for whatever reasons) is that a growing demand—as people grow more numerous and richer—is chasing a fixed supply—given that whether yet mined or not, there is an effectively fixed supply of gold on the planet. However, consider that based on the dynamics of supply and demand the market price for risk capital is 10% per year. For gold to increase in value 10% per year, year in and year out over time, the human population of the planet would have to be increasing 10% per year. Fortunately for us all, the human population is increasing at a much smaller rate than that: less than 2% (although some consider that dangerously high).

Anyway, aside from jewelry and some arcane industrial applications, gold is really not all that useful. If not for its history of being used as money, or to back paper money, historical demand would have been much smaller…maybe even $35 an ounce would not seem so outlandish.

So the point is, long term gold is actually a pretty lousy investment. Or, more precisely, it should be a lousy investment. Actually, when you look at the numbers, since the USA unilaterally ended the Bretton Woods system in August of 1971, the S&P 500 index has a compounded annual growth rate of 8%—a tad below historical norms—while gold has a CAGR of 9%. Go figure.

But never mind, because in the event, we are not adding gold to the portfolio as an investment. We are adding it as a hedge against the probable demise of the dollar. Even if gold were sporting a 35 year CAGR of only 2%, we would still be recommending it here, because history demonstrates that when fiat money fails, gold shines.

And the dollar is at significant risk of failing here. The government has a current accounts deficit. We are staring a looming demographics-triggered entitlements deficit in the face with no solution in sight. Individuals in the USA have undertaken more debt per capita than at any time in history, and savings rates have fallen so low, they are actually running in negative territory. And our trade deficit is setting historical highs nearly every month as we fail to produce stuff as valuable as the stuff we buy. All this debt is being financed by foreign lenders who retain confidence in our ability to meet all obligations…for the time being.

As the risk of default rises, normally the only way to get the lenders to keep stepping up to the plate is to raise the interest rate to counterbalance the increased risk with increased reward. In present circumstances, however, increasing domestic interest rates in the USA risks crashing the housing boom-funded economy. No one—presumably excepting Al Quaeda—want to see that.

As it happens—and it’s not entirely clear this is a good thing—there are lenders out there who have big incentives to keep the cycle going—even as the risk for them increases—either because they already own huge quantities of dollars and don’t want to do anything that will increase the rate at which those are depreciating, or because they are big net exporters to the USA market and need to keep those sales happening while they build up their own economies…or both. As my father is wont to remind me, if you owe the bank a million dollars and can’t pay it back, then you’re in big trouble…but if you owe the bank a billion dollars and can’t pay it back, then the bank is in big trouble.

Of course, everyone with lots of dollars can see that the value of the currency is in decline, if not in a death spiral. So there’s lots of folks wanting to cash out dollars for real property, or failing that, for a more stable currency. The problem is that with so many depreciating dollars facing a relatively limited supply of available and durably valuable property, there is a real danger of getting stuck in the exit door, should everyone attempt to stampede out of the theatre at once. So it is a delicate queuing theory problem, with crowd psychology complications.

On top of all these many pressures on the value of the dollar, however, comes the killer: the specter of default. The only way we will ever be able to avert default and pay back all this debt is to inflate our way out of it. And the biggest debtor of all—our own government—still owns the printing presses. The logic is simple and inexorable: if the dollar is worth less, then dollar-denominated debt is easier to pay back (assuming it is not indexed for inflation, that is).

Our best guess is that an immediate crisis is not likely. The Chinese middle class is not yet spending enough to absorb the loss of the USA consumer market, so as long as the American saps keep extending their credit card debt, it is in all the powers-that-be’s interests to retard the decline of the dollar and keep the party going. Of course this non-solution only allows the underlying structural problems to fester and worsen. And as we continue to skate further and further out onto thinner and thinner ice, the situation is progressively harder to manage; the wrong failure by the wrong hedge fund or the wrong terrorist attack at the wrong time could engender a panic that no one can head off before it engenders a selling plunge right through the surface ice into the cold, black depths below.

Whether the final collapse comes next winter or next decade, it is important to keep one’s assets protected from the declining dollar. Owning some gold through this time of turbulence is part of that plan.

The streetTRACKS Gold Shares (GLD) exchange-traded fund (ETF) is not the only gold ETF, but it is the gorilla in the band, with some 80% of the market ($7.5B marketcap). The trust that constitutes the fund actually owns bullion; when the fund started out in 2004, each share was equivalent to one-tenth of an ounce of gold. (As the trust’s 0.40% annual expense load is provided for through the sale of small portions of the gold, this fraction declines modestly over time.)

GLD is not our answer for the end-of-civilization. There is no way for retail investors to redeem shares in actual gold. (Brokerages can buy 100,000 share blocks, or redeem them for gold; that is where the shares we buy come from.) If the NYSE closes due to an overall market collapse, it would be helpful if you had already traded in your GLD shares and used the proceeds to buy actual gold coins, or probably better still, razor blades, alcohol, aspirin, ammo, chocolate, and some pre-1965 circulated US coinage (when they still contained silver). Assuming you know how to use the ammo effectively, that should set you up well for post-apocalypse life…but we digress.

What GLD does do for us is provide a cost-effective, convenient way to maintain an interest in gold bullion. Because GLD is an ETF, one can trade it whenever the market is open (in fact, it trades until 4:15pm most days). No hassles with insurance, transport, storage, or transaction fees. So long as the NYSE is still operating, GLD is a good way to hedge against a decline of fiat currency in general, and the dollar in particular.

For more information about the GLD ETF, check out the streetTRACKS website. For more about ETFs in general, see the “How Intelledgement can make a difference to your life” section of our website.

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BUY iShares S&P Global Energy Sector Index Fund (IXC)

Posted by intelledgement on Tue, 02 Jan 07

OK, time to review those Econ 101 notes from freshman year. What happens when increasing demand occurs for a product with inelastic supply? If you said “the price rises” then go to the head of the class.

In 1965, the USA used 36.9% of all the oil consumed on the planet, and China used 0.7% of it. Forty-one years later, in 2006, the USA’s share had dropped to 24.6% of all oil consumed while China’s had risen to 8.9%. Note that this is not because our consumption has declined. No, indeedy, we were quaffing 79% more barrels of oil in 2006 than we did in 1965…it’s just that humans overall consumed 168% more oil in 2006 than 41 years prior…and the Chinese consumption over that time frame was up 3,328%.

The point is that the massive modernization buildout currently underway in Asia—the largest construction project undertaken in human history—is fueled by energy and other materials. It takes electricity to run factories and computers and trains and keep the lights on in the cities and the countryside. It takes petroleum to fuel the cars and trucks and planes and ships that transport people and goods.

OK, so it is an exaggeration to call the supply of energy “inelastic”. As demand outstrips supply, the consequent rise in price affords increased efforts to obtain energy assets from sources previously uneconomic. But the supply is relatively inelastic, both for technical reasons relating to the difficulty of obtaining harder-to-get oil, coal, and natural gas and because of political considerations that tend to limit supply for reasons not related to technical problems (e.g., strikes in Nigeria, the mess in Iraq that prevents most of their potential production from reaching the market, the government in Venezuela deciding not to sell oil to the USA). Bottom line: demand growth is outstripping supply growth. In this environment, suppliers—and the industries that service the suppliers—profit handsomely.

And profit they have. It took 34 of the 41 years between 1965 and 2006 for the Chinese to achieve two-thirds of their oil consumption growth; the last third of growth happened in merely seven years. And as the growth in consumption has accelerated, so have the profits of energy companies. Since the end of 2002, the S&P 500 is up about 35%…and the Global Energy fund is up 180%.

This iShares fund invests 90+% of assets in an aggregate sample of securities that reflect the predominant characteristics of the S&P Global Energy Sector index. Its component companies include oil equipment and services, oil exploration and production, and oil refineries. Among the IXC’s top holdings number companies based in the USA (Exxon Mobil, Chevron, ConocoPhillips, Schlumberger), the UK (BG Group, BP), Holland (Royal Dutch Shell), Italy (Eni), France (Total).

OK so what could change this dynamic? Obviously either a significant increase in supply or decrease in demand. It would be great for everyone if we perfected cheap, unlimited fusion power…for everyone, possibly excepting Exxon Mobil et al. Scenarios where demand decreases tend to be more problematic—bird flu wipes out 20% of the human population, global warming sinks all coastal cities and crashes our economy, a devastating terror campaign crashes the economy, the US dollar collapses along with US consumption in the next few years (that is, before Chinese consumption is big enough to take up the slack). None of these eventualities are impossible but until something like any one of them transpires, the IXC remains a compelling investment.

In the long run, energy assets also constitute a good hedge against the all-but-inevitable demise of the dollar…although in the short run, precious metals are better because a sudden dollar collapse could engender a temporary decline in energy demand but would most probably increase demand for precious metals.

Note: some data cited herein are drawn from a most useful spreadsheet prepared by BP listing oil consumption in MMBBLS for each of the planet’s major countries for each year from 1965 to 2006 inclusively.

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