Today’s Notes:
. The Pain of the Pump
. Fuel Efficiency
. American Healthcare Costs
The Economist recently published an article (Pump Panic Gold Glee, Sept 13, 2005) that highlights the fundamental relationships between gold and oil. Oil is of obvious concern. It is beginning to decimate the consumer’s pocket book. Gold is still virtually unknown as is its relationship to oil.
The Economist’s article noted that gasoline is fetching almost $7 per gallon ($1.82 per liter) in England. As I mentioned yesterday, the IMF criticized governments for taxing oil production. We can see the impact of taxation at the consumer level. A percentage of the pump price of gasoline in England goes to the government in the form of fuel taxes. Protests in the form of “go-slows” have occurred in both England and the continent. Taxation has stimulated nascent revolts – by the people this time. This occurred because the “tipping point” in the consumer’s psyche was exceeded. It has happened before and taxes at the pump have been cut. This time however there are many fewer degrees of freedom. Budget deficits on the continent almost preclude serious gasoline tax rebates.
Finance ministers would prefer to shift the blame. OPEC will have none of it. Yesterday, I spoke of their position, which is – “we’ll sell as much as you want but we have no buyers.” This option is also flawed. It is uncertain whether additional production is possible or even if more oil would provide the solution – lower prices at the pump. This scenario is rapidly becoming a Catch 22. Slower growth generates larger deficits. Larger deficits generate higher gas taxes. The cycle escalates. Oil prices are not headed much below $55 in 2005/2006 according to the IMF.
Here in the US and Canada, the early Fall is beautiful. A blissful disregard for the impact of $7 gasoline obtains. Imagine the effect of $7 gasoline on Governor Schwarzenegger’s’ California with its road happy millions? Given the tepid energy legislation signed into law by the President, it seems Washington is also blissfully unaware. Voters will likely not treat the Republicans kindly the next time around even though this problem has been in the works for many, many years. Energy security and independence are off the table.
What’s a person to do? I have written on voluntary conservation. It will be forced this time around. I often get the feeling people aren’t listening. So I will now provide a painless approach, which has roots in Discovery Investing. It is not without risk. Buy gold explorers, buy gold producers, buy the gold / oil ratio. Buy the bullion. These four options all present different levels of risk and therefore are priced at a different risk / reward ratio. Allocate up to 5% of your wealth in this strategy and diversify. Diversification is the key to risk reduction in Discovery Investing.
I know you are tired of listening to these suggestions. Berry is a gold bug. Old hat. Must be a better way. The Economist article points out that in the postwar period an average of 15 ounces of yellow gold purchased a barrel of the “black gold.” When the ratio has strayed it has always reverted to its mean - 15. Today the ratio is close to seven. Over the past three trading sessions the ratio has begun to revert after four years of diverging. Richard Russell believes the ratio has made a major reversal. His point and figure analysis suggests a target price for gold of $522 – a 15% gain from today.
As far as discovery stocks are concerned, here are two names at different points of the Discovery cycle.. Seabridge Gold (SA AMEX $4.96) and Freeport McMoran (FCX NYSE $44.45). Please have a look and as always do your own due diligence.
2. Fuel Efficiency
Given my venting in Morning Note 1, it would seem that a country that can place a man on the moon could certainly discover the technology and production process to produce a fuel efficient and profitable vehicle. The old saying probably stills holds – as goes GM so goes the US economy. Things have changed folks – big time.
On March 17, I wrote a Morning Note (Ford and GM: fall from Grace) in which I said,
“Both
GM and Ford have decisively broken down technically and fundamentally.
Ford suffered a triple bottom breakdown February 28 – 2weeks ago. I have
recommended shorting these shares for the past year or so. I think the
decline of the auto industry is similar to the decline of the airline
and the pharmaceutical industries. The bottom line is that the business
model of these industries is obsolete. The cost structure is too high.
Will GM bounce from here? Sure, but GM is a long way from becoming a
long-term wealth creator. 
I read, with a heavy heart, the most recent chapter in the saga of GM. CEO Rick Wagoner, was quoted by the FT this AM as saying, “General Motors expects its new hybrid fuel-saving vehicles to incur losses but is developing them in the belief they will improve its image, the US carmaker's top executive has said.”
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He said that no manufacturer was able to make money on hybrid petrol-electric vehicles, sales of which are booming in the US. This attitude literally spells the doom for GM. GM needs a radical overhaul. A new business plan focused on energy efficiency might help. The Japanese automakers have beaten both GM and Ford to the punch. It is hard to imagine how such a powerful company allowed itself to miss so many market signals. To add insult to injury, financial analysts are concerned that the increased focus on fuel efficiency as petrol prices have soared in the past year could hurt GM's US launch next year of its new range of large SUVs and pick-ups.
Can you believe it?
GM is under pressure from rising healthcare costs and slowing sales of its existing big SUVs, and its North American automotive division lost $2.5 billion in the first half of the year. Surely, Ford and GM can produce a vehicle that offers 50 to 100 miles to the gallon. That should be its primary discovery agenda. It is possible. Smaller companies (such as Azure Dynamics) are showing the way. The demise of the US automakers is one very good reason to carefully consider Discovery Investing.
In the meantime, stay short GM and the US automakers. Apparently, they haven’t figured out what is happening around the world.
3. Corporate America: health care
Companies in the US are struggling with double digit increases in health care costs. Mercer Human Resource Consulting surveyed 1,800 firms and found that that employers are anticipating at least a 10% increase in health care costs in 2006. This is three times the official rate of inflation. You all know my feelings about inflation by now.
As you might expect “employees are bearing more of the costs because double-digit increases are unsustainable,” according to the Mercer study. Corporate cost shifting is now underway. Employees will pay higher deductibles, premiums and co-payments. Management is also limiting the choice of insurance plans.
This data puts more pressure on corporate America and the individual employee. General Motors and the US labor movement are examples of large organizations under fire with respect to health care costs. It is probably no surprise but it begs the questions of how effective Government-sponsored health care programs such as Medicare and Medicaid will be and whether, in the longer term, they can remain effective and sustainable.
These trends, if they hold, mean higher taxes and likely a lower quality of health care for most of us. We had all better start assuming more responsibility for our health care and our health.
The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition from time to time he may review investments that are not registered in the U.S. Michael Berry is a paid consultant to Immtech International, for which he receives a monthly cash payment. He is also a consultant to Senesco Technologies, for which he receives a monthly cash payment and has been awarded stock options. Michael Berry may own shares in the securities which have been discussed in this informational bulletin.