Leeb's Market Forecast

Leeb's Market Forecast
April 25, 2008

Dear Investor, Below is the most recent Market Forecast update. To ensure that you continue to receive our timely market emails, please add us to your address book or safe list. Leeb’s Income Performance Update   -----------------------------------------------------------------------------------------------   We hope we're wrong...   But the din emanating from the commodity pits says otherwise...   Through the eyes of an 11-year old...   -----------------------------------------------------------------------------------------------   Here's a statement you won't see everyday (if at all) from a writer of an investment advisory letter: We hope we're wrong. But that's exactly our sentiment regarding our bullish long-term outlook for crude oil prices. Unfortunately, since writing our cover story for the April Income Performance Letter, several disturbing news reports have come out that reinforce our view.   First up, Saudi Arabia's King Abdullah announced that he has ordered Aramco to leave some new oil finds in the ground so as to preserve the country's oil wealth for future generations. Quoting the king, "When there were some new finds, I told them, 'no, leave it in the ground, with grace from God, our children need it'."   There have been no reports of any new discoveries in the Kingdom. The only news we've come across has been more dry holes drilled in the Rub' al-Khali, or Empty Quarter, in southeastern Saudi Arabia. The vast dessert region has long been held out by the Saudis as a promising area for new oil and gas discoveries, although nothing has been found there in commercial quantities. In fact, French energy giant Total recently walked away from a joint venture there with Shell and Aramco after searching in vane for four years for natural gas in two separate parts of the region.   We therefore have to presume the king is referring to keeping future oil discoveries in the ground. Or--and this is more likely--it could be his way of saying "don't expect greater oil production from us."   Shortly thereafter came a more ominous report along the same lines. The Saudi oil minister, Ali al-Naimi, told industry newsletter Petroleum Argus that the country saw no need to increase its production capacity beyond its planned 2009 target of 12.5 million barrels per day (bpd). The Saudis' production capacity is believed to be around 11 million bpd now.   The world currently consumes around 86 million barrels per day of oil and associated liquids. Al-Naimi cited a greatly reduced demand forecast for oil as the reason the country wouldn't add to its production capacity. The minister believes that by 2030, instead of consumption of 130 million bpd, the world will only want 106 million bpd of oil. He blamed part of this reduction in demand on expected growth of biofuels.   But biofuels simply won't scale that high, nor has the growth in biofuel consumption ever matched forecasts. What's more, it's hard to envision oil demand rising by less than 1 percent a year going forward when Chinese and Indian auto sales are surging 15 and 10 percent annually to name just one stat.   Advertisement ------------------------------------- Who says real estate is in a slump?   Housing prices may have declined in recent months. 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Leeb's ETF Trader   -------------------------------------   The Saudis has spent more than $90 billion in the last five years to add to their oil production capacity, yet their output is less today than it was in 2004.   Given that the Saudis have repeatedly fallen short on their publicly stated planned production increases, and these latest statements from the Saudi king and oil minister, the logical conclusion is that that we should not expect any meaningful increase in crude oil production from the world's lone "swing" producer in the coming years.   That's a frightening thought which has surprisingly gone largely unheralded in the media. But the bad news doesn't stop there.   We've had additional confirmation that Russian oil production is slipping after a decade of big increases. Several senior Russian oilmen are now on record indicating that the country's oil production has permanently peaked. Russia actually produces more crude oil than Saudi Arabia (although it exports less of the stuff), so a peak there has important implications for the oil market. Mexico, another important exporter (our second-largest source), is also in irreversible decline. And the political situation there being what it is, we don't expect the country will be able to stem the rapid rate of it decline anytime soon.   Above ground factors also continue to exacerbate the problem, most notably internal strife in Iraq and Nigeria. We see little reason to believe that these situations will be resolved to any degree in the near term to allow for production increases.   The market, which is forever looking ahead, is telling us that the recent rise in energy prices is justified and not merely the result of a few speculators driving prices. Short of a major U.S. economic slowdown we're not likely see much in the way of a lessening in global demand for oil and, by extension, in crude prices.   That said, the seeds for a major U.S. contraction, one that feeds on itself, rather than just the modest pause the economy is going through now, could potentially be sown in today's high energy prices.   Crude prices have climbed more than 90 percent from their 12-month lows. While there is no magic threshold that makes a major recession inevitable, a rise of this magnitude has in the past been enough to get the ball in rolling. For now, our work suggests the economy will gather steam as the year progresses. That makes stocks a good bet here. But conditions have the potential to deteriorate and the likely culprit will be rising oil prices. If we see that happening we'll take a more defensive posture with our holdings.   Through the Eyes of an 11-year Old   Today was "Take Your Children to Work Day" and our offices were graced with the presence of several youngsters eager to learn about investments. Not surprisingly, their favorite stock picks tended to run toward toy manufacturers and clothing companies. More importantly, though, with all our depressing talk above of the bleak outlook for oil in the coming years and its dire implications for the economy, it's nice to be reminded of youths' optimism.   Simply put, where there is a will, there's a way. While the future poses real challenges, no other country is more capable of rising to those challenges than ours. What's more, every difficult era presents itself with outstanding opportunities. Despite our increasingly grim view of what the next decade will be like for most investors, there will be no lack of occasions to make outstanding money in the form of both capital gains and income. And we're well prepared to rise to those occasions.     Until Next Time,   Your LIP Team www.leebincomeletter.com   This email was sent to LEMMETRY@GMAIL.COM. You are receiving this email because you have requested a free subscription to Dr. Stephen Leeb's Market Forecast. Click here to be removed from this mailing list. Click here to be removed from all of our promotional offers. 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