Thursday, December 4, 2014


The Billionaire's Secret…

… straight from one of the richest men who ever lived: J. Paul Getty. When he died in 1976, Getty owned estates around the world and one of history's great art collections.

What did Getty know about investing for spectacular gains that his contemporaries didn't? A few years before he died, Getty shared his "secret." He explained that whenever he made an investment, he tried to apply one simple principle: If you want to make money, really big money,

do this…

On the Road Again

Thomas Scarlett

The most important economic news of recent months has been the dramatic drop in oil prices, which accelerated over the Thanksgiving holiday break when OPEC basically began a price war with the United States and other oil producers.

Cheap oil is great news for the U.S. economy in all sorts of ways. It is good for the demand side, as consumers have more money in their pockets and bank accounts to spend on other goods and services. And it's good for the supply side, as big companies have to spend less on shipping costs and other fuel-related matters. (For more on this, see my colleague Chad Fraser's article "Who Wins from the Oil Price Plunge?")

Falling oil prices are particularly good news for American automakers, as the cost of being a motorist drops and consumers are more willing to consider U.S.-produced cars (which tend to not be the most fuel-efficient in the world). Could this be enough to revive General Motors (NYSE: GM), the best-known automaker of them all?

There was a time when Americans said that "what's good for General Motors is good for America," but those days seem very far away. By 2009 the once-mighty GM was an economic basket case dependent on government handouts to stay in business. The company has also been hit with safety recalls and lawsuits. Could such a company really ever be a good investment again?

For all its problems, GM is still one of the top companies in the world in terms of total revenue. Its iconic brand names like Chevrolet and Cadillac have achieved a cultural resonance that most firms can only dream about. Its stock price has ranged from 27 to 42 over the last couple of years, and it is currently in the middle of that range at 34. Its price-earnings ratio is a reasonable 21.

U.S. car sales were quite strong in November, with the combination of cheap gasoline and low interest rates proving a potent combination in bringing potential buyers into the showrooms. GM reaped a healthy share of that benefit. And the strong November was not driven by a big boost in sales incentives --- incentives were down vs. the previous month --- so automakers still have tools to keep sales strong.

In the month of November, GM sales jumped 6.5% to approximately 226,000 vehicles. GM's average selling price increased by 2.3% from last month (and 9.5% from a year ago), which suggests GM did not rely on discounts to move inventory.

General Motors recently announced third quarter net income attributable to common stockholders of $1.4 billion, or $0.81 per share. A net loss from special items reduced net income by $0.3 billion, or 16 cents per share. The special items were primarily related to flood damage sustained at the GM Technical Center in Michigan and asset impairments in Russia.

"Strong global sales and growing margins in North America and China helped GM deliver very solid third quarter results," said GM CEO Mary Barra. "Despite industry challenges in Russia and South America, our earnings were on plan as we continue to execute our customer-focused strategy."

In the third quarter of 2013, GM's net income attributable to common stockholders was $0.7billion, or $0.45 per share.

Earnings before interest and tax (EBIT) adjusted was $2.3 billion and included the impact of $0.2 billion in restructuring costs for actions taken in GM Europe. This compares to the third quarter of 2013, when the company recorded EBIT-adjusted of $2.6 billion, which included $0.1 billion in restructuring costs.

Net revenue in the third quarter of 2014 was $39.3billion, compared to $39.0 billion in the third quarter of 2013. In the first nine months of 2014, revenue rose to $116.3 billion, up from $114.9 billion in the same period a year ago.

One of the effects of lower oil prices is that consumers are more willing to consider automobiles that do not get the greatest gas mileage. GM tends to have quite a few vehicles in this category, such as the Cadillac Escalade and the company's well-known line of pickup trucks. This could be one of the factors boosting recent sales numbers, as noted above.

If you do invest in GM, you should be aware that it could still be quite volatile. Some of the safety issues remain unresolved, and Wall Street still had doubts about current management. But with oil prices plunging and potential customers lining up to buy cars after several years of making do with their old ones, GM could benefit in a big way in the coming months and years.

Tom Scarlett is an investment analyst at Personal Finance.


Superhuman Strength – Massive Profits

Lockheed Martin is testing robotic exoskeletons for its workers. These "suits" will allow workers to go longer periods without a break – which, of course, increases productivity. That's great news, but it pales in comparison to what's happening half a world away from its Marietta, Georgia plant.

There, in one of the most desolate parts of the planet, an army of robots has transformed a completely different industry. And in their wake they've left an enormous profit opportunity. I'll give you the lucrative details when you

click here.

Saudi Arabia Still Calling the Shots

Robert Rapier

One of my longstanding concerns about U.S. energy policy is that the Organization of Petroleum Exporting Countries (OPEC) has long exerted a strong influence over our economic destiny. This became apparent to many for the first time in 1973 when members of OPEC initiated an oil embargo against the United States and U.S. allies. At that time, OPEC's share of global oil production had just exceeded 50%, and the group was very much in a position to stall Western economies by denying oil exports to countries that had come to rely on them. It of course did that, and the price of oil quadrupled over just a couple of years, sending much of the world into a deep recession.

But the other thing the embargo did was spur changes in the energy policies of countries that were dependent on oil imports. When Gerald Ford became president in August 1974, addressing the U.S. loss of energy independence was high on his list of priorities. In his 1975 State of the Union address, he said: "Our growing dependence upon foreign sources of petroleum has been adding to our vulnerability for years and years, and we did nothing to prepare ourselves for such an event as the embargo of 1973."

Ford proposed a number of initiatives designed to reduce growing dependence on foreign oil. He promoted expanded use of coal and nuclear power, development of synthetic fuels and shale oil resources, and proposed tax credits to help homeowners with the cost of installing insulation. He set goals to reduce oil imports by 1 million barrels per day (bpd) by the end of 1975 and by 2 million bpd by the end of 1977.

In December 1975, Congress established the Strategic Petroleum Reserve (SPR) under the Energy Policy and Conservation Act (EPCA). The law was designed "to reduce the impact of severe energy supply interruptions" such as the OPEC embargo. EPCA also extended the Emergency Petroleum Allocation Act of 1973 -- which had established price controls on petroleum -- and for the first time set federal standards for fuel efficiency in new cars.

Some of the policies from Ford's tenure have had a lasting impact. Fuel efficiency in cars initially rose rapidly following implementation of the Corporate Average Fuel Economy (CAFE) standards in 1978. A 2002 study by the National Academy of Sciences concluded that motor vehicle fuel usage was 14% lower in 2002 than it would have been in the absence of fuel efficiency standards.

The result of these policy changes -- as well as those in many other countries dependent on oil imports -- was that a decade after that 1973 embargo, OPEC's share of global oil production had fallen to under 30%:

141203TELopec
One other thing to note about that graphic is that each time OPEC has sharply increased its share of world oil production, global crude oil prices have climbed, generally after a delay of a few years.

Over the past couple of years OPEC's share has again been on the decline, but so far the decline has been relatively modest. Nevertheless, OPEC has indicated that it considers continued shale oil production a real long-term threat to its market share. Last week, when OPEC met it surprised many by declining to make production cuts in order to shore up prices. Production cuts were favored by Venezuela, Nigeria, and Iran, but Saudi Arabia still calls the shots as the largest OPEC producer (with 31% of OPEC production in 2013).

Saudi Arabia is taking the long view, in the belief that while low prices will cause economic pain for OPEC in the short term, over the longer term they will rebalance supply and demand at the expense of the U.S. shale producers most sensitive to market signals.

Recall that not too long ago Saudi Arabia was quite happy with $100/bbl oil, and in fact needs oil prices to be nearly that high to balance its budget. Other countries, like Venezuela and Russia, need oil prices to be at least $100/bbl to balance their budgets. But Saudi Arabia is hoping that a little short-term pain will pay off the in long run.

In the short term, the losers will be countries that depend on oil exports for revenue. These are primarily the OPEC countries, Russia, and even Canada. U.S. shale oil producers will also lose revenue, and some could conceivably go under or be taken over if the price remains low for long enough.

Winners will be those dependent on oil imports. The U.S. economy is arguably the largest beneficiary, as the U.S. is still the largest oil importer in the world. China isn't far behind. This drop in oil prices -- while painful to many oil producers -- is a net short-term benefit to the U.S. and Chinese economies. Whether it will be a long-term benefit remains to be seen. Saudi Arabia is betting that it won't be. But if history is any guide, U.S. energy policy may shift yet again to ensure that Saudi Arabia isn't back in the driver's seat, calling the shots on world oil prices.

This article originally appeared in the The Energy Letter column. Never miss an issue. Sign up to receive The Energy Letter by email.


My Oil-Panic Bounce-Back Picks

As surely as night follows day, energy stocks will rebound quickly from the 30% to 50% sell-off by panicked investors. Join us as we seize the moment and snap up bargain buys BEFORE the market comes to its senses. Profit upsides range from 30% to 74%. Don't delay on this chance!

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