Are mining stocks the safe haven from the bailout crisis?

There is no deal on the bailout of the U.S. financial markets as of this moment. Treasury Secretary Paulson is in the White House as I type trying to create a new plan. The Congress is busy trying to make their own plans as well.

That is the situation that the world markets will be facing tomorrow. And in the wake of this revelation I expect that the Dow Jones Index and other markets will retreat in the face of an unsure weekend. Which means that this is a great market for mining stocks.

I have already mentioned that I feel that coal mining is a great area for the future, based on the need of alternative sources of energy to crude oil. But when the markets are in turmoil, and with direct talk from the likes of Warren Buffett stating that the potential of failing to get a bailout deal done is akin to a financial Pearl Harbor, well there is just 2 place you can bet people will go – gold and oil.

Gold is the traditional hedge in worrisome times. And crude oil has gained in popularity as a hedge as demand has increased in China and other developing nations. Both of these items are limited commodities, and require mining to bring them from the earth that surrounds them.

In the immediate short-term gold will have to fluctuate to handle the demand for safety. Which means that the gold supply will diminish and mines work harder to make up the difference. In the short and long-term oil is both required for energy needs and depleting the finite supply.

And I have to say that mining stocks look great because of all these factors. Why?

There was an old saying from when I was a stockbroker

“You may or may not get rich looking for the gold vein, but if you own the picks and axes you’ll never go poor.”

Companies with proven assets in coal, gold, and oil are the picks and axes of this market and on into the future. The world needs these commodities for safety and energy. No matter the financial outcome, and perhaps because of it, these valuable commodities have to come up to the surface. And mining companies are the means to do so.

With the decreased liquidity in the capital markets, competition is reduced and weaker companies will be forced to merge with bigger and stronger companies. Thus supply will be centralized into fewer hands. With demand up, profits will increase.

Now some would say that this is a temporary blip. And were this the spring I would agree. But with winter and cold weather approaching, and the fact that a slow 4th quarter is all but guaranteed in the U.S. this small blip should last for 6 months from this point.

Plus the fact that a Democratic President has usually been met with a lower market day one. In this case, Senator Obama has yet to declare that the current bailout of $1 trillion (including AIG and Fannie Mae and Freddie Mac) will disallow his initiatives on healthcare and other social programs. So the damage, unless he changes his stance, will even be worse.

When you consider all this, I come to the conclusion that mining stocks are one of the few safe havens in this tumultuous market. If you disagree, please do let me know why.

What's misleading about energy

I ran across an interesting article and comment just before I decided to drop off to sleep. I will share my response with you and you can tell me what you think.

The original post is LET THE ENERGY GAMES BEGIN. The comment was:

Rick Says:
September 11th, 2008 at 2:05 am e
Please give me a reference to the statement that “George Bush’s own Energy Department has said that if we opened up new areas to drilling today, we wouldn’t see a single drop of oil for seven years…”
I want authoritative facts so I can warn others that it is not a quick fix to the high gas prices as republicans want to mislead them to believe.

My response is

Rick,

I did not write this post, but I am very aware of the issues it discusses. And I wanted to take a moment to address what has been said so you have a full understanding of what is before all Americans.

It is a fact that crude oil prices have increased roughly 1000% since 1972. It is a fact that oil usage in the U.S. has increased dramatically over that same time period. And it is also a fact that Democrats have long sought to prevent domestic drilling.

But to say that only Republicans are at fault for the current, and future, dependence on oil would be a lie. Inaction by both Republicans and Democrats since the 1970’s are the cause of the crisis. Neither side has effectively presented a plan of action, nor explained to the general public the cost of failing to seek a new alternative.

Currently America will spend some $700 billion on foreign oil. Part of that reasoning is due to the idea of using up foreign sources of oil while maintaining reserves for the future – ensuring the continuation of the American quality of life. That reasoning was solidly in place 30 years ago, and far less so today.

Another reason has to do with ethanol. The U.S. chose to use corn as the base for ethanol, whereas other nations have chosen and effectively use grass and sugar. All these bases for ethanol result in a fuel that is only 75% as useful as gasoline, thus requiring more fuel to be burned. In addition there is a debate on whether ethanol production is amplifying the dead-zones found in the Gulf of Mexico. Lastly by using corn as the base food prices have been forced higher, which is a core inflation factor.

Oh by the way, there is currently a glut of ethanol, with a mandate from the Government to increase that glut by 60% next year. Ethanol is currently available only in 5 states, of which only 2 allow its sale to the public (those 2 being Illinois and Michigan).

Solar energy, geothermal, wind, biomass, oil shale, and all other alternative sources at this time are either ineffective or inefficient.

Because of these facts, the only options that will effectively provide the energy that America requires to maintain it’s current quality of life and allow for research and development of new energy sources are coal, nuclear, and oil.

Coal is available, and starting to gain greater interest though many ecologically sensitive groups are against its use because even the latest developments create too much carbon dioxide and residue.

Nuclear has long been an energy source that Democrats oppose. Fear, without regard for advances in science and safety, and political preferences have held back the development of any new nuclear plants since the 80’s. This is in the face of significantly greener nations like France that use this as an energy source.

Thus we are back to oil. If we are to maintain current energy usage oil is the only logical and constant source. Since dependency on foreign oil is expensive and unreliable domestic drilling makes sense. The money saved can be used to fund alternative sources of fuel.

But will domestic drilling tomorrow cause oil prices to drop tomorrow? Yes and no.

Crude oil is priced like a stock or more accurately an option. Thus the price reacts in advance of actual events most of the time. When OPEC cuts production the price of oil rises long before the supply is affected. When a nation that produces or ships oil is under strife or war the price fluctuates whether production is affected or not.

So on that basis the knowledge that domestic drilling will decrease the demand by the largest buyer, prices will drop for a period of time until other buyers step in to make up that difference. If OPEC does not just reduce production to maintain current prices.

But more importantly if nothing is done today, as it was not in the 70’s, 80’s, 90’s, and on then you are guaranteed to have higher prices 2 years from now as well as 10. And where will the alternatives be then? As more money, maybe $1 trillion dollars a year or more, goes to foreign nations, where will America get the extra money to fund the 2nd, or 4th, or 7th year of research?

And lastly I want to inform you of something that many Democrats, particularly Speaker Pelosi have not made public. Nancy Pelosi makes money every time alternative energy is funded. She owns a substantial position in alternative energy stocks. It’s to her benefit to not allow domestic drilling. It fills her pockets with money every time that the debate lingers.

How is Nancy Pelosi different than the charges made of Republicans when she is in the pocket of Big Wind?

So to answer your question is oil going to resolve all America’s fuel needs forever? Of course not. Will domestic drilling drop the price of crude oil significantly tomorrow, or short-term? Not overly likely, though some effect will happen. Do Republicans understand this, and the alternative? More than you are giving credit to.

But the real question should be this, what alternative is being proposed by Democrats that will ensure the energy needs of America now, and provide any hope of reduced cost and increased energy in the next 2 years? Or 4? Unless you don’t mind not heating your home during the winter, or being unable to use the internet when you wish.

Oil is not the answer, we can all agree on that. But by using oil, particularly domestic oil, we improve our ability to create new sources of energy.

Full Senator Obama interview from O’Reilly Factor

The following is the full interview between Bill O’Reilly and Senator Obama as first seen on the O’Reilly Factor. For commentary on each part of the interview please check out Black Entertainment USA

Part 1 Iraq



Part 2 The Economy



Part 3 Bill Ayers, Rev. Wright



Part 4 Alternative Energy and Domestic Drilling

Coal-bed methane, $5 trillion in energy that is not talked about

Coal-bed methane, have you heard of it? I’m sure most have not. Up until the recent surge in natural gas prices no one really paid attention to this fuel source. Now people are very interested.

Coal-bed methane is not a new item. It’s one of the fears that fill every coal mine. It is responsible for many of the explosions that have occurred in coal mines since the fuel has be sought. In the most simple description methane is produced as a by-product of the process that creates coal. This gas accumulates in cracks within the coal formation, under high pressure. The United States is estimated to have upwards of 700 trillion cubic feet of methane which is currently worth more than $5 trillion and can provide perhaps decades of energy.

In Kansas there are many that are very familiar with exactly what coal-bed methane is and what it can do. This is a positive and negative for the community, and they are expecting more interest as energy alternatives are sought.

The reason is that the wells in Kansas are not like those found in oil. An oil well is at peak production on its first day. A coal-bed methane well may not reach its peak for a decade. Thus leases to land-owners can be highly lucrative. An initial lease can be valued as much as $30,000, with monthly payments for a productive well being $3 or $4,000 a month or more.

While the money can be very good in these economically troubling times, there are other problems that come with it. Wheat, corn and other farm fields are cut by gravel roads to and from wells; roads are in need of constant repair from the heavy vehicles traveling to and from wells and storage facilities. And the influx of high property values has caused the local schools to lose matching federal funds.

And not every land owner has had the same benefits as another. Deals are made individually, and have been for decades. Early adapters may have only received a lease payment of $2,000 and well production payments can vary wildly.

Still this is not a horrible situation. And with the nation struggling to keep up with the cost of foreign oil, and Congress playing political games with the issue of domestic drilling this option is more attractive by the day.

With all the renewed interest in coal as an energy source there is one thing that we can be sure of. Coal-bed methane along with coal mining will be something that many more Americans will become familiar with in the coming years.