If you sell out now, what price will you get? A low price, right? So if you sell now, you will leave a lot of value on the table. That is, most things in the world of energy and resources are underpriced compared with their intrinsic value. I don’t care how bad the market looks just now (and it looks awful). Go out and try to find an oil field somewhere, or build an oil refinery, or find an ore deposit and build a mine. Can’t do it, can you?

So if you sell out now, just be aware that you will be getting a relatively low value. You will be leaving long-term value behind. If that’s what you want, then that’s what you ought to do. Just understand the point.

Which brings up the next set of issues. How badly do you need the money? How soon do you need it? How scared are you of further declines? How much risk can you handle, especially going forward? What kinds of reassurance do you need?

The markets are down. A lot of Elvises have left the building. And who is left to do the selling? Just you? Nope. Whatever you think, you are not alone. There are still a lot of people holding their shares. What do they know? And what is their reasoning to hang on?

Have You Lost Control?

From what I have seen, the biggest sellers — the market drivers who are taking the express elevator down to the subbasement — are people who have lost control of their money, if not their investment destiny.

People are selling to meet margin calls. The wildest sellers are traders who are just plain behind the eight ball. It’s more than being scared by what is happening. Heck, we’re all scared in some way or another. I wasn’t around in the 1930s, so I have no firsthand experience with the Great Depression. I know only what my parents and other relatives and friends told me. It was pretty bad for a lot of people.

But right now the serious sellers are people who cannot afford to be patient. A lot of the sellers in the energy and resource field are hedge funds. These firms are meeting redemption calls from investors who want out. The hedge funds just plain need cash. They have to sell. And a lot of those funds are throwing everything over the side, even the life rafts and the emergency rations.

Where Do You Fit In?

When you look in the mirror, is that you? Are you like a hedge fund in panic mode, selling everything just to raise cash? Do you fit into this “sell-sell-sell” model? Don’t feel bad if this is what you have to do. Just be honest with yourself.

Meanwhile, the U.S. — and the world, really — has been dealing with a credit crisis for over a year. Which makes me wonder if there is a turnaround coming sooner, rather than later. I don’t know that. I don’t have a copy of the Financial Times from next March. So I just cannot say if we are closer to the bottom than to the top.

How soon do you need your funds? If you need cash within the next 12-24 months to pay bills like those for college tuition or a nursing home for a relative, then maybe you ought to just take the hit and get out of the market now. There’s no shame in being safe. Look after your needs.

But do you have a longer horizon? Are your “down” stocks in your IRA or 401(k)? You can’t take it out without penalty until you are 59½ years old. Then consider riding it out. And maybe with these low valuations on most stocks, it’s even time to go shopping — but certainly not blindfolded. Nibble away.

For example, for less than three thin dimes, you can buy a share of a Canadian miner that is the only significant tungsten producer outside of China. For under six bits, you can own shares in another Canadian miner that controls one of the richest deposits of indium ever discovered — and according to the U.S. Geological Survey, the world will “run out” of indium in less than eight years.

The World Is on Sale

In a lot of respects, the world is on sale right now. Heck, a lot of stocks in the OI portfolio have turned into dividend plays. Can they maintain their dividends? That’s a good question. Can they sustain earnings? At the same time, if you were management at these companies, would you risk further tanking the stock by cutting the dividend?

And let’s look ahead a year or two. Commodities in general have been plunging in price since early July. The dollar has been strengthening. Will that continue? Can it continue? Why should the dollar stay strong? Does the number $700 billion mean anything to you? So sure, the strong dollar can continue and commodity prices will stay weak. But at some point, the dollar will start to decline in value. And commodity producers will have to cut back on operations by closing mines and mills and smelters. Then they regain pricing power.

And if the world has the vast recession that many people are forecasting? Then global demand should decline in the near and further future.

But there are 6.5 billion mouths to feed on this planet. The world will still have to produce a lot of materials to satisfy basic demand. That is just built into the equation of human survival. And what will happen to pricing power as some layers of high-cost output go away?

For example, the world petroleum industry will lift over 31 billion barrels of oil this year. Even if world demand dropped by, say, 5% — as if the world airline industry simply vanished — the world would still lift nearly 30 billion barrels. And as the current economic woes cause new projects to slow, annual depletion will overwhelm annual new output from new fields. There will be less oil.

That is, looking ahead, the world may never again exceed the oil output levels that we will have in 2008. Indeed, it will require heroic efforts just to keep global oil output flat in the future.

So this brings us back to that OI investment thesis. Energy and resources are getting scarcer and ought to become more valuable going forward. Hey, too bad the world financial system is busted. But that just means that there’s an opportunity to buy good stuff really cheap.

No, I’m not saying that you ought to go out and buy stock with both arms or back up the pickup truck and start shoveling. You need to be very cautious right now. But don’t panic, either.

Sell if you need to sell. Buy if you want to take on the risk. We’re in for some rough economic times. But unless world population starts to die off fast or people develop a taste for living low and being cold a lot, the energy and resource plays are still going to work over the long haul.

Until we meet again…
Byron W. King
October 20, 2008

When Bad Things Happen to Good Investments, Part II was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Within the past eight days, I’ve driven from Washington through Idaho and into Montana. Then I traveled across Alberta and Saskatchewan, and down into North Dakota. I’m astonished at how much of the trip involves driving past energy projects of one sort or another.

Visiting Grand Coulee Dam

On a big scale, I toured the Grand Coulee Dam in central Washington. This massive structure is the product of decades of vision and many years of hard work. In 1933, President Roosevelt dusted off a Hoover-era plan to build the dam. Congress would not buy into it during the early years of the Great Depression. FDR was more persuasive.

The bulk of the dam was completed in 1942, just in time to provide electricity to the U.S. economy as America entered World War II. Grand Coulee provided the electricity that made a difference to the U.S. aluminum industry. It powered the Boeing factories that built aircraft for World War II. And it electrified the machinery at Hanford, Wash., that produced the plutonium for the atom bomb.

So it goes to show that big energy projects matter. At some point, you have to quit thinking about doing something and just plain do something. Build it. You have to start blasting and pouring concrete.

And I mean a lot of concrete. Grand Coulee is three times the size of the Great Pyramid at Giza, Egypt. Just the spillway is twice the height of Niagara Falls. The dam contains over 24 million tons of concrete, and over 12 million tons of steel reinforcement. That’s the weight in steel of about 240 standard battleships from the prewar era. So Grand Coulee was no small national effort.

Grand Coulee is rated at 6,809 megawatts of power output. Today, it provides “demand” power to the North American grid, literally from San Diego to southern Alaska and as far east as Chicago. If you live west of the Mississippi and have ever flipped on a light switch on the hottest day of the year, then you have drawn power from Grand Coulee.

Energy Is “Burning Up the Roads”

As I’ve driven across Canada and down into North Dakota, I’ve been seeing energy everywhere.

The farms are well tended, and the agricultural productivity is awe-inspiring. There are wind farms up, and going up, on many a hillside. Power lines crisscross the landscape. There are dams and impoundments on many of the rivers. And the trains of the Canadian Pacific Railway are rolling in both directions, hauling grain, ag products, coal, phosphate and so much else.

In Saskatchewan and North Dakota, the big story is the Bakken Shale formation. I’ve seen over a dozen working rigs and dozens of brand-new oil wells. The pump jacks are still in the break-in period. Heck, the paint on some of them is still drying.

It’s a mixture of old and new. There are old farm buildings, and all of the traditional agricultural effort of the region. Right next to the buildings, you might see a new oil well. And in the distance, there might be a wind farm going up.

The highways are crowded with working trucks. Trucks are hauling pipe and equipment to well sites. The motels are crowded with oil field workers. In some small towns, real estate prices and rents are actually rising. People around here have seen nothing like it in many years.

Or if the trucks are not hauling drilling equipment, they are hauling agricultural products. Or there is farm equipment driving down the roads from one area to another. It’s all just plain busy.

At the customs station at Noonan, N.D., the U.S. agent told me that the traffic in energy-related commerce is just burning up the roads in both directions. There are simply not enough skilled workers. Some companies are poaching staff from others.

At the same time, I can almost feel the slowdown that is afflicting the North American energy sector. Costs for everything have risen too far, too fast. Now the whole sector is starting to feel the pinch.

Couple the rising costs with a serious difficulty in obtaining financing. The banks have cut back on lending, even to the best of energy projects. It’s not for lack of investment merit of the energy projects. It’s because the banks are struggling with their own solvency.

So the mess in the financial sector has infected the rest of the economy. Just when the U.S. and Canada need to be investing in energy projects, the financial system is letting us down.

It reminds me of what I heard from an old rancher a long time ago “Out here in the prairies, we farmers work hard and raise the cows. Back East on Wall Street, they milk us farmers.”

I’ll be out in the field for the next few days, looking at other points of energy and geological interest. All of this travel helps my perspective in coming up with better advice for my Whiskey readers.

Until we meet again…
Byron W. King
August 7, 2008

P.S.: While there is no shortage of energy projects taking place, some are simply more exciting than others. It’s rewarding to see the wind farms and crisscrossing power lines across the country, but one project that may revolutionize energy as we know it needs your investment now more than ever. And of course, this could be such an Earth changing breakthrough that your investment could wind up being the best one you ever make.

Energy Investment was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.