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MaxOut Savings
Retirement Seminar
Declining $ and China
$1000 Gold
Natural Gas
The Shale Gas Discoveries
Credit Drop
Outlook
MaxOut Savings Advisors Seminar
We
will be starting our fall retirement seminar series at the Houstonian Health Club Board room on Monday September 28 at 6:30
PM. We will be discussing our investment outlook, IRA rollovers and what to do
if you are retiring soon. If you would like to attend this free seminar, drop us an email at ted@maxoutsavings.com or go to the www.MaxOutsavings.com website to sign up.
Declining $ and China
Over the last twelve months there has been continued concern from world leaders
about the runaway spending and exploding budget deficits in the United States. There has also been concern
that the monetizing of the debt by the Federal Reserve would cause a decline in the US dollar. As an aside,
monetizing the Federal debt occurs when the Federal Reserve is the one buying part of the Treasury’s debt offerings.
The Federal Reserve has been very active in purchasing our debt over the last few months. We believe
that there is mounting evidence that many governments around the world are accelerating their diversification programs to
reduce US dollar holdings.
China in particular has been
very vocal about the spendthrift ways of the Untied States. The Chinese appear to be moving forward their
announced plan to diversify out of the US dollar. At the present time China has over $2,000 billion in
foreign exchange reserves, of which about 70% are in US dollars. They are now moving quickly to reduce
those holdings of dollars. The other day, they announced a $30 billion loan to China National Petroleum
Corp to secure global oil & gas assets. Brazil has agreed to a loan from China of $10 billion to help
it develop its huge deep water sub-salt oil reserves. As part of the agreement, China will take over 100,000
barrels of oil per day and we suspect that China will get access to deep water oil production technology. In
Canada, Petro China announced it will acquire a 60% stake in the Mackay River and Dover oil sand projects from Athabasca Oil
Sands Corp. These are very large projects that will require $15-20 billion to develop. Sinopec
recently spent $7.5 billion to buy Addax Corp, a European oil and gas company with reserves in Africa. China is also looking
at making purchases of commercial real estate in the US. China recently bought over 17% of Teck Resources,
the large Canadian resource company. The same thing is going on in Africa, South America, Iraq and
the Middle East. China is now talking about a $500 billion “Marshall Plan” for developing countries
to help those countries develop. The “plan” will also allow them access to those foreign markets and resources
and at the same time get out of the US dollar. We believe that this is just part of a worldwide trend by
many countries and individuals to get out of the dollar and US investments in general. In addition to our
debt problems and runaway federal spending, the Obama administration has done very little to foster any confidence in investment
in the United States. We believe it will continue to drive the US dollar lower. The only way this will
stop is for the US to get serious about debt reduction and deficit spending. No country has ever succeeded
in spending there way to prosperity.
$1000
Gold
The price of gold has recently moved above $1000
per oz. This is the third time this year that gold has hit $1000. We expect that it
will pullback and consolidate in here and then move higher. We are witnessing enormous worldwide demand
for gold as inflation concerns increase worldwide. According to Gold World, Chinese consumer gold demand
was 18.7% of the world total. We believe that gold demand from China will continue to accelerate as the
Chinese government increases gold holdings to reduce their US dollar exposure. The Chinese consumer continues
to stockpile gold as can be seen in the gold demand chart below. Another reason gold moved up recently
is that Barrick Gold is spending $1.9 billion to buy back their fixed price hedges. To do this, they are
buying gold and paying off the gold contracts. If Barrick Gold did not believe that gold was going well
over $1000 per oz, they would not be buying back their gold hedges. The main reason for the surge in gold
prices is that the United States continues to run up huge budget deficits and the Federal Reserve is monetizing the debt,
which will result in a declining dollar, high inflation and a higher gold price. This year, our target
has been $1250 per oz. for gold and we expect it to hit that target sometime in the next six months. Our
target for the long term is now over $1500.
 Why is Natural Gas Under $3.00?
Natural gas has plunged in price to under $3.00 per MCF (million
cubic feet). At the present time it is selling for around $2.88. At this level, many
natural gas fields are barely profitable. The decline is all the more interesting when we consider that
oil bottomed in the February/March time frame and moved up to $70 while natural gas has continued to decline to under $3.00.
Many industry analysts believe that natural gas will rebound strongly as companies quit drilling for natural gas because
it is unprofitable. Drilling has dropped off sharply over the last nine months with active drilling rigs
down almost 50%. Yet even after nine months of lower drilling natural gas continues to decline.
What is not well understood is that natural gas from the United States shale basins has fundamentally changed the natural
gas business.
 The Shale Plays
Shale gas has
been described as an undeveloped “sea of natural gas” that has been discovered in the United States.
Shale gas is natural gas produced by drilling into shale beds, in some cases deeper than 10,000 feet underground.
The well is drilled down toward the target shale and then the bit is drilled horizontally through the shale for several
thousand feet. The well is then lined with casing and then equipment frac is brought in.
The well will then be “fraced” using water. These wells are fraced because the shales
have a low permeability level and the natural gas is trapped in the rock. The frac procedure involves injecting
water and some additives under very high pressure to fracture and open up the shale so the natural gas flows out. One
of the keys to the shale frac procedure is that is some cases over 15 different fracs are done over several thousand feet
of the horizontal shale, which is known as a multiple stage frac. The water is then allowed to flow back
out of the well with the ensuing natural gas.
The discovery of five
major shale basins has altered the natural gas business by reducing finding and drilling cost to less than one dollar an MCF.
It has also led to lower natural gas prices. Even though we have seen a large drop in drilling rigs, the most
efficient rigs are still in use and they are being put to work in the “shale plays”. In many
parts of the country, shale drilling leases have become very expensive; in many cases over $5,000 per acre just to drill the
wells plus production sharing. In the past, many leases were $100-$150 per acre to lease. If
energy prices collapsed you often made the decision to let the lease lapse rather than drill at low prices. Because
your lease cost for a prospect might be only $40,000-$50,000. For the shale wells, lease costs for the
same amount of land could run over $2,000,000 so it becomes very difficult not to drill. Therefore, what
we are seeing is a large amount of natural gas shale drilling just to secure the leases over the long term by holding it with
production. This has thrown more natural gas on the markets at the wrong time and led to a natural gas
glut.
Now let’s take a closer look at the natural gas shale
in the United States. There are five major shale basins. The Barnet Shale in Texas around
Fort Worth has been the most extensively drilled. The Barnett Shale was the original shale discovery that
set off the boom almost ten years ago. The Fayetteville Shale is in Arkansas and is on par with the Wolford
Shale in Oklahoma.
The biggest recent discovery has been the
Haynesville Shale in northeastern Louisiana and East Texas. This is a massive field that is one of the
largest discoveries since the Prudhoe Bay discovery in Alaska in the 1970s. It will soon be one of the
largest natural gas fields in the Untied States. A recent government study put the size of the Haynesville
Shale field at 251 TCF (trillion cubic feet). That is total gas and it remains to be seen what is recoverable,
but it is still a very large number. The more reasonable recovery numbers appear to be around 60-100 TCF,
which is still a very big number. We are talking about a field with thousands of wells that are estimated
to have over 6 BCF (billion cubic feet) of natural gas per well according to Chesapeake Energy. To put
that into perspective, if you invest in an average deeper gas well and it produces 5 BCF you are thrilled. Some
of the companies that have acreage in the Haynesville are Chesapeake Energy, Devon, XTO, Petrohawk and Plains
Exploration. The Haynesville Shale field will soon be the largest producing natural gas field in the United
States.
The most recent large shale discovery is the Marcellus Shale in the Pennsylvania/West
Virginia area. This is a large discovery that is several million acres in size. A number of major oil companies
are now leasing up the acreage. At the present time Chesapeake Energy has the largest land position with
over 1.4 million acres under lease. Some of the numbers from Chesapeake Energy have this as the #2 richest
field with average per well reserves of 4.2 BCF. Recent government studies have listed the potential gas
in place at 262 TCF; the recovery will be materially less than that but still a huge number. The Marcellus
Shale field should be the largest producing gas field in the continental United States sometime around
2020.
 Other big shale discoveries have been the Eagle Ford/Pearsall shale basin in south Texas and
the Fort Hood discovery Exxon made, along with the Ootla that Apache has an interest in, both in western Canada.
Shell Oil has also made a play in the area with the Montney Shale through its purchase of Duvnernay Oil recently.
The shale plays have not just been in natural gas. In the Dakotas, the Bakken Shale has yielded
in a huge oil discovery that Marathon, Continental Resources and Whiting have a big acreage position in.
We expect the shale plays will fundamentally alter the energy picture in the United
States over the next decade. We believe that over time we will see a more stable price curve for natural
gas as more shale gas comes off stream. This should also put a ceiling in over the long term that will
result in lower prices. Although we think natural gas prices will rise from here we do not expect them
to move as high as many analysts expect. As winter approaches, natural gas will move higher but should
have trouble moving much above $5.5 MCF. The increased drilling for the shale gas, even at these low prices,
will lead to continued excess supply. On the positive side, it is great news for the manufacturing and
chemical sectors of the economy because we now have a huge new low cost supply of energy we can depend on. Texas
consumers will also benefit because most electricity contracts in Texas are priced off of the price of natural gas.
Credit Drop
The
Federal Reserve reported this week that US consumer credit dropped a record $21.6 billion for July as Americans continue to
reduce debt and have their credit reduced. This was materially more than expected and the biggest drop
since 1943. This further confirms our outlook that the recovery will take time, which does not bode well
for the economy given that consumers account for close to 70% of the US economy.
Outlook
The big news recently is the surge in gold & silver prices.
We expect the metals, along with the mining stocks, will move higher. Another way to play the declining
dollar along with higher gold prices is to buy energy stocks and multinational companies that do business overseas.
As the dollar declines, earnings of energy companies and companies that do business overseas will go up.
We now expect European and Japanese stocks to out perform the US stocks. Historically,
September, on a monthly basis, has been the worst performing month over the last 100 years, returning a negative 0.96%, with
February, the second worst, with a negative 0.15%. All other months had a positive return as can be seen
in the chart below. We would expect a substantial correction sometime in the very near future. When
China’s stock market recently corrected, it lost three months of gains in three weeks.
This correction could be quicker and of steeper magnitude than many investors expect. Over the next
couple of years, we expect the income component of investments to play a very important role in total returns. We
mentioned some stocks in the Report today to give you some “stock” color; these were in no way meant to be recommendations
of these stocks.
Do
you have an account at Fidelity?
Do you
already have an account at Fidelity Investments? Why not let the MaxOut Savings Advisors Team manage the
assets for you at Fidelity? We will make the investment decisions and you can sit back and relax.
We use the same value based investment strategies we talk about on the MaxOut Savings Show. In most
cases you can sign a simple form and we can use your same Fidelity account to get you started.
Considering an IRA Rollover?
If you are retiring soon or considering an IRA rollover, let the MaxOut Savings Advisors Team handle
your IRA rollover. We will sit down with you and go over your financial situation and needs and come up
with a plan. We will show you how we manage accounts using our value analysis strategy to grow your investments
and reduce risk.
MaxOut Savings Advisors:
Actively Managing Risk
In
these volatile times, investing your retirement funds can be difficult and time consuming. Is your advisor
looking at risk and actively managing your retirement? Hiring the MaxOut Savings Advisors team to manage your money or IRA
rollover is a great first step. MaxOut Savings Advisors is an SEC registered, fee-only investment advisor
based in Houston, Texas. Ted Geoca has over twenty year’s
investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual funds for our clients
using a value analysis strategy that we have developed over the last twenty years. We look at risk as well
as return to actively manage your investments though today’s changing markets. We use Fidelity
Investments as the custodian for our clients’ assets. If you would like MaxOut Savings Advisors to manage your retirement
investments using our value methodology, I would be happy to meet with you. To schedule an appointment
please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.
Remember Save Aggressively and Invest
Conservatively!
Ted K Geoca
Doug Saam Kellan
Caldwell
President
MaxOut Savings Advisors, LLC
Houston,
Texas
ted@maxoutsavings.com
713-627-0400
Remember
to catch:
The MaxOut Savings Show
with Ted Geoca on Saturday at 11:00am
on KNTH 1070AM!
The MaxOut Savings
Show and Report does not give out financial advice. Any recommendation
may not be suitable for all investors. Moreover, although information contained herein is believed to be
reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC may or may not have positions
mentioned herein. MaxOut Savings is a Registered Investment Advisor registered with the SEC. You should always make investment
decisions based on your own financial situation.
To sign up a friend for our free MaxOut Savings Report or to remove your
name off the MaxOut Savings Report list, email ted@maxoutsavings.com.
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