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Weekend Edition

The Best of The S&A Digest
Saturday, July 4, 2009

Iraq completed its first round of oil auctions, and only one company – British oil giant BP – won a contract. BP will pump oil from the Rumaila oil field, which has 17.8 billion barrels of oil reserve. The company will earn $2 a barrel for every barrel it pumps out over 1 million barrels per day. Iraq expects output can reach 3 million barrels per day.
 
BP originally wanted $4 per barrel, but the Iraqi government countered with $2. ExxonMobil offered $4.80 and wouldn't accept anything lower. It backed out of the bidding.
 
At $2 per barrel, Iraqi officials estimated foreign companies could have earned $16 billion in total. Meanwhile, with oil at $50, Iraq would take home $1.7 trillion. Maybe they can afford to pay us back for the war...
 
As we've pointed out before, a few billion dollars to the world's largest oil companies is a rounding error... And while it's exciting Iraq is opening up its massive reserves to foreigners, you won't make any money investing in the oil majors.
 
That's why we've been researching microcap Iraqi oil stocks... We found one with a near monopoly for drilling oil wells in Iraq... And it's about to be very busy. This company is partners with the Iraqi government. When the oil majors enter the country, this company will be drilling almost all of the new wells. Today, we can buy it for 84% below its fair value.
 
Another company owns parts of eight oil fields in Iraq, two of which are in production. Preliminary results suggest this company's largest field will produce more than 2 billion barrels. We expect this stock to double in the next 18 months based on its production capability. But with the massive amount of money flowing into Iraq, it's more likely a Big Oil company will simply buy our recommendation for many multiples its current value. (It already happened with our Oil Report recommendation, Addax.)
 
To access our microcap Iraqi oil recommendations, which we released in the latest Phase 1, click here.
 
Of all the publications following the shady dealings of "Government Sachs," music magazine Rolling Stone published the absolute best article we've read – The Great American Bubble Machine. Author Matt Taibbi starts the piece by dubbing Goldman Sachs a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."
 
The article claims Goldman has "engineered every major market manipulation" since the Great Depression. Ultimately, the article blames Goldman Sachs for five bubbles – the Great Depression, tech stocks, the housing craze, record oil prices, and "rigging the bailout." This is an absolute must read... Check it out here.
 
[Update: The author reports that the "amusingly-named mouthpiece Lucas Van Pragg" issued a response from Goldman.]
 
Just as Congress goes to vote on the Waxman-Markey bill (the cap and trade tax on carbon emissions), the Wall Street Journal has published its assessment of how the tax will affect Americans: "Waxman-Markey will cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035."
 
If you'd like to sign a petition protesting Waxman-Markey, click here.
 
The S&P 500, by any reasonable measure, is fairly valued in the 900s. It's still about 33% above its March bottom, an enormous move in a very short time.
 
When you combine a big move with fairly valued stocks, enormous government expansion, an already weak economy, and rising interest rates, that's a clear signal to sell fairly valued stocks, find some good short picks, and be careful.
 
If you want to know how to spot a likely bank failure, just ask Joshua Siegel, managing partner of StoneCastle Partners. StoneCastle has more than $3.1 billion invested in banks. Siegel told AmericanBanker recently that predictors of bank failures include "moving your loan book to high-risk loans without first increasing your capital, growing too quickly and especially growing into markets where the median home price to median income went out of whack with historical measures."
 
Any fast-growing bank is highly suspect. The one we're shorting in Extreme Value grew more than 70% last year, and 8% in the first quarter of 2008 (a 32% annualized rate). To get access to the full Extreme Value report on this and two other short-sale recommendations, click here.
 
Regards,
 
S&A Research




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