Commodity prices and Investments

At the Sheraton on the edge of the French Quarter, Jim Rogers is meeting his fans--while he waits for a taxi, as he walks through the hotel-lobby bar, while signing books upstairs in the third-floor exhibition hall, and now a few minutes before giving his speech to the packed New Orleans Investment Conference. The event is a popular annual gathering for "gold bugs," other contrarian-minded investors, and curiosity-seekers, and Rogers is a bona fide rock star here. (Former CIA director George Tenet, incidentally, is also a big draw.)
Rogers, dressed sportily in blue blazer, pink shirt, and signature bow tie, greets each admirer politely, dispensing well-worn nuggets of advice. What do you think about gold, Jimmy? "You'd make far more money if you could turn your gold into lead," he says. (The price of lead has, in fact, outpaced that of gold by a factor of more than two in the past year.) He gently dismisses queries about near-term market twists and turns with his usual out that he's "the world's worst trader." Still, the experience wears on him a bit. The effect is mild but noticeable. And it's not just because he hates being called "Jimmy." He has spent a long time playing the outlandish, crowd-pleasing "maverick," to use a moniker Rogers loves, and he is unquestionably good at it. But it can grate on a man.
Investing history is filled with contrarians, the lonely figures in the woods. They buy when and where nobody else will. And the savvy ones know that as soon as their opinions grow popular, it's time to move on. For more than a generation, Jim Rogers has been one of the most successful and colorful practitioners of this art. He was the small-town boy turned Wall Street wunderkind, joining George Soros in the 1970s to form one of history's most storied investing teams, up 4,200% in a decade in which the S&P 500 rose just 47%. Then he became the showoff on the Barron's Roundtable, teasing readers with buys such as a Malaysian rubber-farm operator or "white pepper" when the familiar pitch was GE at 24 times earnings. Then he was reinvented as the "Indiana Jones of finance," taking his motorcycle around the world, occasionally risking life and limb, all the while making wildly profitable investments in the unlikeliest places--and writing a bestselling book about the journey to boot. Then, as the mature adventurer traveling around the world again, through even more Third World nations, landing himself in the Guinness Book of World Records for a second time, finding more improbable yet highly lucrative investments--and writing another bestseller.
It is now, however, that feels a bit foreign. It's as if Rogers has found a new mission that doesn't quite jibe with his iconoclastic past. At age 62, settled into his third marriage, he has become a father for the first time, and--forgive us a bit of pop psychology --there is now something almost urgent in his message. To some degree it is the same vinegar-coated vision he has been promoting for years--that the U.S. stock market is going nowhere, that commodities will rule, that China will be the dominant economic force this century, that the dollar will continue its fall. But now he seems less willing to be alone (or mostly alone) in believing it. In short, he doesn't want to be the contrarian; he wants to lead the crowd, to share his investing wisdom with the masses. He wants to be recognized as a prophet, not just a quirky, entertaining moneymaker. And certainly not as "Jimmy."
"I get extremely frustrated," he concedes, speaking in an almost stream-of-consciousness flow, "but that's the nature of markets. It's the nature of mankind. The story of the emperor who has no clothes. That story's been around for centuries. People all start thinking one thing, and then it is especially difficult to even be heard, much less to be understood or accepted. When there's mass delusion, it's very, very difficult to persuade people. So, yes, it's maddening. Very frustrating." He pauses and concludes with aw-shucks misdirection. "But every once in a while I get it right, and so then a few people listen."
Nobody has gotten it more right lately than Rogers. Just look at the Rogers International Commodities Index. Since Aug. 1, 1998, when Rogers launched a private futures fund to track the index he created, the RICI has produced a total return of 194%, making it the top-performing investment index in the world over the past six years, according to Barclay Trading Group. Not just of commodities--of anything. It has more than doubled the return of the Russell 2000 value stock index over the same period. It's been three times better than the Lehman Brothers Long-Term Treasury portfolio. The Nasdaq? Rogers's index has lapped it 35 times. After fees, Rogers's private fund has returned 153%. A public version of the index fund, launched in 2001, is up 75% since then.
And according to Rogers, the real money has yet to be made. In January he will publish his third book, a guide for investors called Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market. The bulk of the text is devoted to demystifying the process of investing in commodities and analyzing the supply-and- demand scenarios for raw materials such as lead and sugar. But the most compelling aspect of the book is its central thesis: For the next decade the value of basic materials will go sky-high. There is a bull market underway but not in the familiar terrain of U.S. stocks. If his record is any indicator, you should take note.
The Quantum Leap Jim Rogers is a compact man with a round face and pale blue eyes. For his frequent television appearances and public speeches, he invariably wears a bow tie. At home he favors jeans and an open collar. In regular conversation he speaks softly but with great precision until he gets excited, and then he grows quite animated. His voice still carries the rolling softness of his Southern upbringing, though occasionally it lapses into Southern Gothic. He punctuates everyday conversations with words like "Balderdash!" and "Claptrap!"
Rogers grew up the oldest of five brothers in Demopolis, Ala., a town of about 7,000 people, founded by a group of French exiles in the early 19th century and located near the confluence of the Tombigbee and Black Warrior rivers in the heart of the Black Belt. His father was a World War II veteran who managed a Borden chemical plant during the day, moonlighted every night as a bookkeeper, and set an example of hard work for his sons. At age 5, Rogers got his first job, picking up bottles at the local ball field, and he soon started a business with his brothers to sell parched peanuts and sodas at the high school's Friday night football games. His younger brother Mabry, a successful partner at a Birmingham law firm, says Rogers was "very intense" and ambitious even as a young boy. "He always said he was going to be a millionaire by the time he was 40," says Mabry. "Always. How he was going to do it, he never said. Nor did any of us have any thought about that."
Eager to see some of the world outside Alabama, Rogers applied for and received a Key Club scholarship to Yale. In New Haven he became a coxswain on the crew and studied history. As he approached graduation in 1964, he was considering medical or law school, but a chance interview in the placement office led to a summer job on Wall Street, and Rogers was immediately hooked. "It was unbelievable," he says. "I didn't know a stock from a bond, but learning as much as possible about the world was already my passion, and I discovered that Wall Street would pay large sums of money just to figure out what was happening. I would have worked for free if I could have afforded it."
Seeking to avoid the draft, he accepted a scholarship to Oxford and spent two years reading philosophy and economics. He also became the "first person from Demopolis to cox the Oxford-Cambridge boat race." But most of all he spent his time reading The Economist cover to cover and daydreaming about becoming a "gnome of Zurich," one of the mysterious Swiss bankers who, according to myth and legend, controlled and profited from the worldwide flow of capital.
After returning to the U.S., Rogers spent two years in the Army. While stationed at Fort Hamilton in Brooklyn, he occupied himself by investing the base commander's money. He was discharged from the Army in 1968 and landed his first real job on Wall Street, as a machine-tool analyst for Bache & Co., just as a long bull market in stocks was coming to an end. It was there that he first encountered a bubble mentality. Senior execs told him not to worry so much about the numbers, just to focus on the "concept." Herd-following money managers gave him lectures on how creaky old machine-tool companies could now be valued like fast-growing computer manufacturers. Rogers rolled his eyes, stubbornly charted out balance sheets by hand, and told himself that "the world didn't work that way in Demopolis, Ala."
In 1970, with the equity markets headed into a long bearish period, Rogers went to work at an old European investment bank called Arnhold & S. Bleichroeder, where he became a research analyst for a hedged investment fund managed by George Soros. Each man immediately recognized the talent in the other and their shared belief that the prevailing wisdom was more often than not wrong. "He thought I was smart, and I thought he was smart," says Rogers. "It was clear that we worked extremely well together." When Soros set out on his own in 1973 to form an offshore fund, he invited Rogers to join him as the junior partner. With Rogers as the primary idea man and Soros as the trader, the fund, later known as Quantum, used leverage to make huge bets on defense-company stocks and oil, among other things.
Hearing Rogers talk about this time in his life is like listening to a man recall his first and most intense love. "Every day I woke up racing to get on the bus to go to work," he says. "There was nothing that made me more excited and happier than the markets. That's all I wanted to do. I adored it. I was so consumed and mainly just in a constant panic to know everything I could know. It's like you're continually doing a four-dimensional puzzle, because no matter what you do, they change the pieces every day and you have to put the puzzle together again. How much more exciting could it be than to sit there and try to put this puzzle together every minute of every day, and figure it out before other people did? Omigosh, I can't tell you how much fun that was!"
To stay three steps ahead of the market, he traveled constantly and read voraciously, subscribing to scores of periodicals and research journals. In his memoir, Soros on Soros, George Soros says that Rogers "did the work of six." Rogers was married and divorced twice during those years. Along with Soros, he took a cut of the profits, and he plowed most of it back into the fund. By the late 1970s Quantum had grown from its original stake of $12 million to more than $250 million.
Ultimately the stress of managing the growing fund took its toll. According to Soros, he desperately felt they needed to add analysts, but Rogers couldn't abide working with outsiders and chased off the talented people they trained as soon as they grew bold enough to take their own positions or, worse, question him. "Our success was punished by ever-growing work and responsibility," writes Soros. "It eventually came to the point where it broke up our partnership." (Through a spokesman, Soros declined to comment for this story. The two haven't spoken in decades.)
For his part, Rogers says that in 1979 he realized he'd made enough money to buy his freedom. His goal had been to make a million by age 40. At 37, his stake in the fund was reportedly worth $14 million. So he decided to cash out, ride motorcycles, and seek adventure.
Free from the 18-hour days at Quantum, Rogers found plenty of ways to put his considerable energy to use--none of which involved joining another investing firm. He was determined "not to die of a heart attack sitting in front of a computer on Wall Street," he says. Instead he tried out the role of pundit, becoming a fixture on TV business programs. In exchange for a lifetime membership at the Columbia University gym, he agreed to teach a course in securities analysis at the business school, and he eventually became a full professor. (On the wall in his guest room he has a framed letter from Warren Buffett to the dean noting that Rogers was "the best finance teacher in the country.") And the longtime motorcycle hobbyist carried out his fantasy of circling the globe with then-girlfriend Tabitha Estabrook. His book about the journey, Investment Biker, elevated him to cult hero.
All the while, investment opportunities seemed to call to him like sirens. And Rogers would follow. As in 1984, when he began to investigate the all-but-abandoned Austrian stock market, learned of some proposed investor-friendly changes in the law, bought shares in most of the 30 or so companies still listed, and watched his investments rise more than 400% over the next few years. Or when he passed through Botswana on his motorcycle in 1991, noticed the tidy streets and government budget surplus, and made a long-term investment in all nine stocks traded in the local market. That market is up over 800% since it was formally organized into a stock exchange in 1994. Or, again, in 1993, when he looked at Iran and concluded that after a revolution, a bloody border war, and a collapse in the price of its main export, he had to persuade Iranian officials to let him get in on the action. The market in Tehran is up almost 2,300% since the beginning of 1994.
It was with the same instincts that Rogers began seeing the value in commodities. To appreciate the boldness of this insight, it's necessary to cast your mind back to those mind-bending days of the late 1990s. The public's passion for Internet stocks was morphing into full-fledged mania; Rogers, meanwhile, saw a historic opportunity--in soybeans. And zinc. And copper. And oil. Commodities had been in a bear market for the better part of two decades. He began studying long-term price charts and found that raw-materials prices, adjusted for inflation, were approaching lows not seen since the Great Depression. It was a bottom.
Rogers wanted to put his money into a commodities index fund. When he saw there wasn't a fund, he went shopping for an index to license so he could start one. None of the existing indexes measured up, however, so he created his own weighted group of 35 materials--and then the Rogers Raw Materials fund to track it (see "How to Invest Like Jim").
He was as confident in the bet as he's ever been. The reason lay halfway around the world. Long before most others came to realize it, Rogers surmised that China's long march of economic growth would dramatically boost demand for the world's natural resources across the board. And that demand would keep growing for years.
The Baby Girl Fans of the itinerant investment biker, of the globetrotting Indiana Jones of finance, of the self-named Adventure Capitalist (his second book), may be surprised to learn that Rogers has become a certifiable homebody. His favorite place, there is little doubt, is the five-story Victorian mansion on the Upper West Side of Manhattan he shares with his wife, Paige Parker, 36, and their 18-month-old daughter, Hilton Augusta. Rogers met Parker at one of his speeches in her home state of North Carolina in 1996. He took her out the next night, and over their first dinner together he asked her if she wanted to go around the world with him. "Sign me on," she replied. Paige has flashing blue eyes and the impeccable manners of a Southern woman. When Hilton Augusta was born, Paige had her mother bring some dirt from North Carolina to sprinkle under the hospital bed so that her baby could be born over Southern soil. She is working on her own book about her trip around the world with Rogers.
Built in 1899 by a wealthy merchant, Rogers's house still has the original carved oak and mahogany walls, not to mention multiple kitchens, a dumbwaiter, a working elevator, and a roof deck with a Jacuzzi and a view of the Hudson River. Rogers has furnished it with items as exotic as a polar-bear-pelt rug and the ivory tusk of a woolly mammoth, which he bought in Alaska. While he has an office in the basement, Rogers gets by with a lone assistant and does most of his work on a laptop while riding a stationary bike on a converted sun porch he calls the "gym"--often while wearing an Indonesian bamboo peasant hat. He is the third owner of the house. Rogers bought it from its second owner, the Catholic Church, in 1977 when New York City was on the verge of insolvency and the housing market had collapsed. He paid $105,000. Today it's worth upwards of $15 million.
On a Wednesday afternoon in late October, a television crew from one of the Tokyo evening news programs has come to interview him about the rising price of crude oil, which has just hit an all-time high of $55 a barrel. The crew is set up in the second-floor living room. Drawings depicting highlights from the Kamasutra and a collection of 19th-century-erotica prints from Austria hang on the walls. On the antique tables are photographs of Rogers with his wife and daughter. A few feet away, huddled together on a sofa, sits another group of Japanese visitors--a trio of executives from Daiwa Securities who are there to review the contract they are about to sign licensing the RICI for a new index fund. (Daiwa began marketing the fund to Japanese citizens in December. There is also a European fund based on his index.)
"The best way to invest in oil right now is to buy sugar," says Rogers. He looks at the baffled Japanese TV correspondent and begins to explain that in Brazil, the world's largest producer of sugar, it is common to run cars on ethanol produced from sugar cane. "Oil is at an all-time high, and sugar is 80% below its all-time high," Rogers continues. "If I have a sugar farm in Brazil, I'm going to sell it to people who need gasoline."
Offering his usual disclaimer that he is a terrible market timer and the "world's worst trader," Rogers then asserts that he is loading up on his sugar investments but thinks that oil, which has been headed up since hitting a low in 1999, is due for a pullback. Ten years from now, however, he expects oil to be over $100 a barrel because of simple supply and demand--world reserves are being depleted while consumption increases. As the interview is coming to a close, Rogers makes sure to tell the crew for a second time, "Japan is one of my favorite countries."
And then business abruptly comes to a halt as Hilton Augusta toddles into the room. "Hello, Baby Girl!" he says in a booming voice, a broad smile breaking out on his face.
Spend any amount of time with Rogers and it becomes very clear that Baby Girl, as he typically calls his daughter, is unquestionably the center of his life these days. "I used to feel pity for people who had children," he says. "I thought it must be horrible. Of course, I had no idea how absolutely wonderful it is." He is so inclined to view the world through her eyes, in fact, that he has made her a regular rhetorical device in the speeches he gives around the world. As in, "My Baby Girl has a bank account, but she knows better than to open it in U.S. dollars. My Baby Girl has a Swiss bank account." Then there's the dedication of his new book: "For my Baby Girl, who owns commodities but does not yet own stocks or bonds."
Baby Girl is also learning Mandarin. One of Rogers's major regrets in life is that despite two laps around the globe, he is fluent in only one language. (He used to joke that he could ask for beer in 40 languages.) And since it is his long-held belief that China will dominate the 21st century, Rogers decided his child must know the most important language of the future. Rogers and his wife have a Chinese nanny who lives with them five nights a week and speaks only Mandarin to Hilton Augusta. In the kitchen, objects like "door," "gate," and "jukebox" are labeled with Chinese characters. At the neighborhood Chinese restaurant, Baby Girl thrills the waitresses when they say "show us your nose" in Mandarin, and she does.
Indeed, Rogers believes so deeply in the China Century that Baby Girl may soon be going to kindergarten in Shanghai. In what may be the ultimate bet on his own prognostications, Rogers is seriously considering uprooting his family, saying goodbye to his beloved Manhattan home, and settling down in China. Without fail, he mentions the prospect in every long conversation over the course of a month and a half. "Looking back over my life, I am astonished at some of the things that I have said that turned out to be true," he says. "All the things I have said--and ultimately did. So finally I have decided that if I say something enough times, I ought to listen."
Rogers's idea of listening means hurrying together a scouting trip. In late November, on his way to a hedge fund conference in Tokyo, he jetted to Chongqing, the anchor of China's western frontier and the world's most populous city, to conduct some firsthand economic research by chatting up both government officials and black- market moneychangers. Then it was off to Shanghai, where Paige met him and they visited a school ("incredibly clean and efficient"), had Thanksgiving dinner at the Grand Hyatt in the Pudong district (turkey was fine, but no dressing), and got feedback from American expats about life in the city ("they could not rave enough"). Rogers is now planning a "trial run" move next summer.
The History Lesson As bright as Rogers's vision for China is, his prediction for America's economic future is dark. He pounds America's policymakers in every speech for intentionally "debasing" the dollar. And he "strongly urges" whoever will listen to open up a bank account in at least one foreign country (preferably one like Canada or Australia, he points out, with a natural-resources-based economy). Despite his normally dry delivery, the message comes out as urgent.
It is also old hat. He has, in fact, been preaching doom and gloom about the fate of America's currency since at least the 1980s. In John Train's 1989 book, The New Money Masters, his chapter on Rogers includes a grim outlook in which Rogers predicts that foreign countries will soon stop lending to the U.S. In the afterword of his Investment Biker, Rogers said he couldn't "see much hope for the dollar" and felt that "America was an obvious short sale." That was in 1994.
Now, with the dollar hitting new lows against the euro and the pound almost weekly this fall since the U.S. presidential election, Rogers believes that the effects of years of irresponsible fiscal management are finally catching up. "I certainly thought this would happen sooner than it has," he says. "I'm always early. That's one of my flaws. I told you I'm the world's worst trader. I always assume the market knows what I know. But I have learned many times that the market does not know what I know. So I keep trying, when I figure something out, to delay it and delay it and delay it. I know I'm going to be early. I'm always early. After I published Investment Biker the dollar went down nicely for a while. Then we had the bubble years, which I didn't anticipate. But even during all those years, the fundamentals continued to deteriorate. The internal debt continued to increase and the external debt continued to increase throughout the '90s. Now people are catching on."
Even ardent fans of Rogers's, however, acknowledge there's no way to be sure how right or wrong he's been over time. His published picks tell only part of the story. "He's an original thinker, he doesn't mince words, and he's prepared to take a view," says the Swiss-born economist and market maven Marc Faber. "Can I judge whether he's a moneymaker? I cannot. Because he doesn't manage money. He manages for himself, but there is no record." Whenever Rogers is pressed for details about his investing returns, in fact, he trots out a practiced response. "I'm from Alabama," he'll say. "My mama and daddy taught me you don't ever talk about how much money you have, how much things cost, or how much you make."
No matter how much money he's made in the markets, many Wall Street veterans seem wowed by Rogers's ability to "see around corners," as hedge fund manager Bill Fleckenstein puts it. "He has a sense of how things are going to be changing and a sense of history--how the world really works, vs. how people think it works."
That sense of history is hard earned. Rogers is a voracious student of the past. On the top two floors of his house he has a collection of antique maps and political posters (such as a pre-glasnost picture of Gorbachev with his birthmark censored). The objects are more than just curiosities. They are reminders. Borders change, currencies change, and markets go through cycles.
When he was working with Soros, Rogers pored over long-term charts of currency or commodity prices, trying to figure out what caused the spikes or dips and, more important, determine whether he would have seen it coming. "I'm not some genius," says Rogers. "I have just read history over and over again, and I know how it works. All of this has happened many times in history, and it will happen many more times. Whether it's a mania or terrible despondency or manipulation or crooked accounting. And not just in America. You can go back and look at other financial markets. They were trading options in China 300 years ago. It's not as though the Chicago Board of Options came up with options for the first time. Everything has happened before, which will teach you a lot."
In part it is this appreciation of history that makes Rogers so sure of himself. And ironically, it also helps explain his habitual need to declare himself the "world's worst trader," because history works in broad strokes, not in day trading. Rogers always says he likes to make carefully selected bets and stay with them a long time. That is particularly true when it comes to his investments in commodities.
In his new book, Rogers cites two historical market studies as guides. The first, a Yale study, looked at the period from July 1959 through March 2004. It found that commodities futures have produced better annual returns than stocks and outperformed bonds even more--and they did it with less risk and volatility. The second, by Legg Mason researcher Barry Bannister, shows that for the past 130 years stocks and commodities have alternated "leadership in regular cycles averaging 18 years."
The current commodities boom began in early 1999--so it still has more than a decade to run, Rogers figures. What's more, even as demand is rising for many key materials, supply remains stagnant. "Only one lead mine has opened in the last 25 years," Rogers exclaims. "Last year 75% of the money spent on metal exploration was spent on gold. No one's investing in tin or nickel."
Certain as Rogers is that the bull market will continue, he's equally convinced that there will be setbacks, corrections, and pain for investors along the way. There always are in bull markets. And his recent trip to China convinced him even more that the country is heading for a hard landing in the next 12 months. The pullback will affect not only Chinese companies but world commodity prices as well. "It will definitely happen," he says, "and when it does, I hope I'm brave enough, smart enough, and alert enough to pick up the phone and buy a lot more commodities and a lot more China."
If Rogers's long-term predictions for both booms hold true, he is sure of another scenario as well. Ten years from now, when commodities are peaking, says Rogers, "I'll be saying to people, 'Please sell. This is going to end badly.' And they will be looking at me like I'm a damned fool. They will be saying, 'But everybody knows the price of oil is going to go to $1,000 and the price of gold is going to go to $10,000. Everybody knows!' And there will be learned papers, and professors, and TV personalities. FORTUNE will have changed its name to Fortune Commodities. At that point I will tell people to get out, like I always do when it's time. But nobody will listen."
PHOTO (COLOR): KING AND CASTLE: Rogers and clan at home
PHOTO (COLOR): GLOBETROTTER: At Ireland's Drumoland Castle, kicking off his 1990 world tour
PHOTO (COLOR): SHANGHAI-LA: Rogers, sure of China's boom, may move his family to Shanghai. Here, with wife Paige, scoping out model homes at a real estate fair
PHOTO (COLOR): Greeters at the Lifan motorcycle company in Chongqing.
PHOTO (COLOR): MAGIC ACT: When Rogers teamed up in the 1970s with George Soros, the result was an astonishing 4,200% return.
PHOTO (COLOR): CIAO MAO: Hailing China's late Chairman in Chongqing
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By Brian O'Keefe
RESEARCH ASSOCIATE Doris Burke
HOW TO INVEST LIKE JIM
Jim Rogers is using three big themes to help guide his investment decisions right now:
1. RIDE THE COMMODITIES BULL The index of raw materials that Rogers created in 1998 is already up 194% over the past 75 months. But he's convinced that the market will go higher for years to come. In his new book, Hot Commodities, Rogers outlines how investors can trade futures directly. He also created a futures fund based on his index. The Rogers International Raw Materials fund (http://www.rogersrawmaterials.com/) is available to qualified investors in 37 states (and D.C.) with a minimum investment of $10,000. There are also regular mutual funds available such as Pimco CommodityRealReturn Strategy (PCRAX), which has a $5,000 minimum and is modeled on the Dow Jones--AIG Commodity index, and the Oppenheimer Real Asset (QRAAX), which requires a $1,000 initial investment and tracks the Goldman Sachs Commodities Index.
2. GO LONG ON CHINA Rogers believes that this is the century of China. "Investing in the Chinese market in 2004 is like investing in the Dow in 1904," he says. (The Dow closed at 70 that year; it's gone up 150 times since.) Nevertheless, his most recent trip to China reinforced his conviction that the Chinese economy, after years of torrid growth, is due for a hard landing within the next 12 months. When the correction comes, he plans to load up on Chinese shares. One user-friendly way to do the same is to buy the iShares FTSE/Xinhua China 25 (FXI), a new exchange-traded fund that is linked to an index of liquid, large-cap stocks of mainland companies and is traded on the NYSE.
3. BET AGAINST THE U.S. DOLLAR Though he expects a short-term rally in greenbacks, Rogers thinks the value of the dollar will keep falling for years. That's why he suggests opening a bank account in a foreign country. Another strategy is to open a foreign currency bank account with EverBank online (http://www.everbank.com/). Or, for a minimum of $20,000, you can buy one of EverBank's indexed certificate-of-deposit products. The Commodity CD, for instance, currently pays a three-month rate of 4.00% and is pegged to four currencies--the Australian dollar, the New Zealand dollar, the Canadian dollar, and the South African rand--in natural-resource-heavy economies that should do well against the dollar in a commodities boom.

OIL FUTURE PRICES

Global economic slowdown to ease pressure on oil prices www.chinaview.cn 2004-12-21 10:47:29
NEW YORK, Dec. 20 (Xinhuanet) -- Pressure on world crude prices, which had repeatedly pushed through new highs this year out of concerns over supply, would be eased next year, due to an anticipated slowdown of the global economy and lessened demand foroil supply, analysts said.
Admitting cheap oil has become "a thing of the past," analysts believed there are limited chances for crude prices to slip below 40 US dollars a barrel. However, they said crude prices next year will also be unlikely to stay as high as in this year.
Driven by the fast-growing world economy and hot demand for oil,world crude prices had been spiraling up all the way this year.
After reaching a ten-month high of more than 36 dollars a barrel on Jan. 10, crude went on to break 40 dollars a barrel on May 10, and pushed through 50 dollars a barrel in September. On Oct. 22 and Oct. 27, crude prices broke 55 dollars a barrel.
To contain crude price at a reasonable level, the Organization of Petroleum Exporting Countries (OPEC) had repeatedly raised its output since May and even pumped 30.61 million barrels a day in October, its highest daily production in 25 years.
However, though having nearly exhausted its spare oil production capacity, OPEC still failed to rein in the price, and, as a result, market confidence was severely hurt by OPEC's impotence of pumping enough oil to prop up the market.
Energy specialists voiced worries about OPEC's insufficient surplus production capacity, saying the "structure tightness" in supply could erode market confidence and spark panics when unexpected events happen.
"When you look at events back in the 90s and what was happening after Iraq invaded Kuwait, there was about 7 million barrels a day of spare oil production capacity in the OPEC countries," said Michael Rothman, a senior energy expert with Merril Lynch.
However, Rothman said, today there is only about 1 million barrels above normal in the OPEC countries. He warned that such a kind of "structure tightness" will add to market panic once there are unexpected events happening, leading to sharp rises in crude price.
In November, crude prices eventually somewhat bounced back. Analysts said increasing US oil inventories, more funds' flowing from oil to the stock market after George W. Bush's re-election victory, and an expected slowdown in the global economy combined have helped ease the pressure on world oil prices.
Looking to the 2005 crude market, analysts predicted that though cheap oil is impossible, crude prices may very possibly fluctuate between 40 and 50 dollars per barrel, considering demand,the impact of unexpected events, crude reserves and other factors key to the oil market.
"Cheap oil is a thing of the past, unless there is some major changes in the market. Thus even with Venezuela, Nigeria and Iraq, settled oil prices are unlikely to go down to or below 40 dollars per barrel, " said senior US economist Ken Goldstein.
"My guess is 45 to 50 US dollars a barrel; I wouldn't rule out another trip into the 50-55 range, though if there is one, it will probably be brief," said Goldstein.
As OPEC's spare production capacity is limited, analysts said changes in supply-and-demand will be key to world oil prices.
Several international organizations have foreseen a slowdown of world economic growth in 2005, which is believed to be going to damp demand for crude and ease pressure on the prices.
According to OPEC's report in November, world demand would riseby 1.49 million barrels next year, sharply down from 2.5 million barrels a day this year. From the perspective of supply-and-demand,analysts said oil prices are unlikely to stay high next year.
The impact of unexpected events on world oil prices also should not be ignored, analysts said, citing "fear factor" over supplies could deal a heavy blow to the world crude market.
Goldstein believed any major break off in the oil supply chain will be devastating to world crude price.
However, he said, as the world economic growth is expected to slow down, OPEC will have a "higher" spare production capacity as compared with the lessened demand. And as a result, unexpected events will exert less impact on crude price as they did this year.
Changes in oil inventories in the United States, the world's number one oil consumer, will also be a decisive element to world oil prices. Analysts said after the winter heating season, oil inventories in the US will continuously increase and market confidence will be boosted, thus contributing to a lower crude price.
Another issue of concern to market analysts now is whether speculative activities next year will be as active as in this year.Some analysts said heavy speculative activities in the fall added at least 10 dollars a barrel to the price of oil.
However, specialists like Goldstein played down the role of market speculation, saying speculative forces on the market cannot fundamentally change the track of world oil prices.
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The past 12 months were the year of the oil bubble. Here's how you can still get in on the action, no matter what crude prices do next
We know what you're thinking: It's over. After a long run-up to $55 a barrel, oil prices have drifted back down to the low 40s. Prices may bounce around for a while--they always do. But buy energy stocks? Now? Forget it. Oil shares are already up more than 30% this year, compared with 7% for the S&P 500; if anything, you should be selling those stocks before gas gets cheap again, right?
Well, there's a pretty good case to be made for energy stocks now. It's true that energy industries are cyclical: Oil prices fluctuate with the economy, the weather, wars, and so forth, and those fluctuations affect the stock prices of oil companies. And it's clear that we just saw a cyclical peak when oil hit $55. But the interesting thing (positive if you're an investor, negative if you're tanking up your Dodge Ram SRT10 with the sweet V-10 Viper engine) is that there appears to be an upward trend to recent cycles. Each cyclical low has been higher than the one before. If, like most analysts we talked to, you believe oil won't get lower than the mid-30s, then today's stock prices actually look cheap. "I'm hard-pressed to tell you why crude could go below $38 a barrel," says John Olson, senior vice president at Sanders Morris Harris. He says many stocks remain priced as though oil were at $28 to $30, which explains why they have enticing price/earnings ratios between seven and 15.
The reason these cycles are moving up over time has to do with simple supply and demand. India and especially China are modernizing at a pace comparable to the West's in the 30 years after World War II. Factor in views among scientists that overall oil discoveries could top out around 2010, and this demand is bound to collide harshly with increasingly tight supply. While the timing of that clash is a matter of heated debate, few doubt it will happen.
So, yes, you'd be sitting a lot prettier had you gotten into oil last year. But when you look at the big picture of the rise in oil stocks, Olson says, "this is just the second inning."
And that leaves the question, What to buy now? You could always dip into the hottest part of the business, the "downstream" oil industry--the independent refiners, tankers, and other service companies. Some stocks in that sector have risen 90% over the past year, but it's also a notoriously volatile group. What follows is something a little different: We've come up with three basic strategies to play the energy game for the long term. Some of the companies below have figured out ways to become less prone to cyclical shocks; some are devising whole new ways to produce power. All of them are good additions to a forward-looking energy portfolio.
STRATEGY 1 Stick With the Big Boys The safest way to invest in oil is to buy Exxon Mobil, Royal Dutch/Shell, ChevronTexaco, or one of the other so-called majors. (For more on Shell and ChevronTexaco, see "The 20 Best Bargains in the Market.") These stable behemoths have tons of capital and proven records for returning healthy dividends year after year. The group is up roughly 17%, according to J.P. Morgan analyst Jen Rowland, and many of these stocks maintain surprisingly low P/Es.
With a $60 billion market cap, ConocoPhillips (COP, $87) is a pipsqueak guard on a big-league hoops team. But moderate size gives it the agility to seize fleeting opportunities and distribute greater gains to shareholders while still exhibiting the stability of a Big Oil company. In other words, Conoco enjoys the best of both worlds. Despite its share price rising 45% over the past year, says Rowland, "this stock is way too cheap."
It's been a most outstanding year for Conoco. In September the company bought an 8% stake in Russia's Lukoil for $2 billion, securing not only a coveted share of Russia's reserves but also backdoor access to what could be a lucrative exploration of Iraq's West Qurna oilfield. That partnership alone, according to Oppenheimer senior energy analyst Fadel Gheit, should boost the company's reserves by at least 10%. "Their strategy is very clever," he says. "They pick their spots and ensure that the impact of explorations is greater on them than on their competitors." Conoco's refining operation--the largest in the U.S.--is running at 96% capacity and enjoys high margins. Meanwhile, the company has been improving its balance sheet: Since the Conoco/Phillips merger three years ago the company has reduced debt and sold off assets. In September it upped its dividend by 16%, to $2 per share.
And despite all that, it has a P/E of eight and trades at about a 30% discount to its peers.
Mega--oil company BP (BP, $60) is nearly four times the size of Conoco, placing it squarely in the slow-and-steady category. Revenue growth this year was spurred by its refining business, which is double the size of Conoco's worldwide, and BP also found a potentially lucrative Russian stake. Last year it bought a 50% share of Russia's TNK oil company and realized a 30% production boost as a result. BP has more than doubled its reserves since 1997 and is shooting for a 5% increase in production over the next few years. "A company like BP is tried and true," Gheit says. "They have a good game plan, a longer view, and they don't make mistakes."
STRATEGY 2 Go for the Fast Little Guys Exploration and production companies, also known as E&Ps, are stepping up as the agile growth stocks of the industry. You can think of these mid- to small-cap companies as a hungry swarm of opportunists picking over Big Oil's scraps. To sustain massive production in, say, West Africa, the majors have been selling off North American oil and gas fields they discovered 50 years ago, even though as much as half of the proven reserves remain in the ground. These old projects simply don't contain enough oil to keep a $200 billion company interested--but they have plenty for a small-cap player looking for some low-risk wells. The smaller E&Ps, boosted by efficient exploration technology and oil prices that support greater extraction costs, have been snatching up these older fields. "The companies that do best are the niche players, who know what they do well and execute it," says Joe Allman, an energy analyst at RBC Capital Markets. The group has surged 40% this year.
Apache (APA, $51), at a market cap of $17 billion, can barely be called "niche." Yet the company moves with entrepreneurial gusto. It conducts international explorations but has been a master acquirer of low-risk oil in the U.S. It has also devised a creative partnership structure that is changing the way the industry views acquisitions. When a Shell property in the Gulf of Mexico came up for sale last fall, Apache partnered with Morgan Stanley to finance the deal. The investment bank bought the proven reserves on the property for a low rate of return, allowing Apache to go after the higher-risk new finds without shelling out all the capital for the acquisition. The company cut a similar deal last summer. "They are able to make transactions that others are unable to think up or execute," says A.G. Edwards analyst Thomas Covington.
Apache's profits were up 57% last quarter year-on-year. In 2005 the company could boost production by 13%, which is, as J.P. Morgan analyst Shannon Nome says, "quite respectable in an industry that struggles to eke out mid--single digits." Apache offers a slight $0.32 dividend and sells for a P/E of 12. But Lucas Capital Management CEO Russell Lucas sees lots of upside: He says Apache's share price equates to buying a barrel of the company's reserves for under $12.
Also winning in the acquisitions game is Newfield Exploration (NFX, $59). It's small--$3.7 billion market cap--and comes with more risk, but the Houston company has increased earnings and cash flow consistently over the past four years.
Newfield has seven years' worth of proven reserves. That's short of the industry average of 11 years but double where Newfield was in 1999. The company has been diversifying like crazy, the most notable example being its purchase last August of Denver gas producer Inland Resource. This January, Newfield will start drilling on a high-profile new project that, according to Nome, could add more than $20 to the company's share price in the next couple of years. The details are complex, but the project is essentially a partnership in which the company gets a 23% stake in what will be the deepest well in North America without risking any of its own capital.
By some estimates Northern Canada has more oil than Saudi Arabia, and Suncor (SU, $33) is the region's first developer. The "oil sands" region--where land is mined, not drilled, and oil is extracted by heating saturated sand until the crude drips out --might hold 308 billion barrels. About 63 billion of that is deemed easily accessible in a 25,000-square-mile region, according to Randy Ollenberger, managing director of BMO Nesbitt Burns. Suncor's reserves, happily situated several time zones away from nasty geopolitics, amount to 1.3 billion barrels, and perhaps another ten billion barrels or so of total recoverable oil. That's about 135 years' worth of reserves. "They have basically cracked a nut," says Ollenberger, who thinks the stock is a value despite its industry-high P/E of 18. "They know what they are doing."
STRATEGY 3 Go Alternative And now for the high-risk but potentially high-reward portion of our program: renewable energy. No, it's not as cheap as oil or gas--yet. But solar power, wind generation, and other renewables are already a real deal for investors. GE said wind energy was an $8 billion business this year, and solar was worth about $4.5 billion. Denmark and Germany already get around 20% of their electricity production from wind. Conglomerates like GE and Siemens are pushing growth in the sector, but renewables are too small a part of their businesses to show up in the stock prices. That leaves the pure plays.
Fuel Cell Energy (FCEL, $9) has yet to turn a profit, but it has developed a solid product offering over its 35-year history. The Connecticut company ($455 million market cap; $34 million revenues last year) makes high-temperature, low-emission hydrogen fuel cells with patented technology. John Quealy, an analyst at Adams Harkness, says the 250-kilowatt to two-megawatt units hit a "sweet spot" for smallish industrial customers--enough to power a brewery, for example, or to back up municipal power. "This is a development-stage industry and a development-stage company," Quealy says, drawing parallels to biotech stocks. "You're betting on companies with the best management and technology and commercial paths."
The operative term is "bet." Revenues have been flat the past couple of years, but the company cut 27% from its production costs and entered into a promising agreement with Kawasaki to distribute the cells in Japan. "A value investor looking at this would laugh me out of his office," says Walter Nasdeo of Ardour Capital Partners. "But the proof of concept is there. The technology risk is extremely minimal. This company is not going away."
Investors haven't appreciated the profits of Gamesa (GAM.MC, $13), a wind-energy company near Bilbao, Spain. After a nearly 50% rise in revenues in 2003 and a three-for-one stock split last June, Gamesa's stock has slipped. It recently disappointed investors when it announced it would earn $296 million this year, a 10% increase. Despite the modest numbers, the company controls about 80% of the wind-energy market share in Spain and has been gaining in the rest of the world with nearly 12%. Last fall Gamesa opened its first wind plant in the U.S., a 50-megawatt facility in Lee County, Ill., and it says it has another 2,000 megawatts planned throughout the country. The company is also eyeing China, where the government has pledged $17 billion to bring renewable power to 12% of total electricity supply by around 2020, according to Jarett Carson of RBC Capital Management.
How much of that Chinese capital Gamesa captures remains to be seen. For that matter, we still don't know how much product Fuel Cell will move in Japan. But renewables are already big, and they're going to get bigger. "We're not generating new oil, supply is shrinking, and so from a long-term perspective investors should have a share," says Anthony Chan, a senior economist for J.P. Morgan Fleming Asset Management. "It's the wave of the future."