For much of the last decade, most investment professionals chortled and laughed as I advocated exposure to foreign stocks, natural resources and precious metals. Derision aside, it appears that by 2007 many of my erstwhile critics ultimately adopted the strategy themselves.

The change became clear during a May 2007 Bull-Bear Debate in which I participated, at the Las Vegas Money Show. (Click here to watch it on YouTube) My two usually bullish opponents, Louie Navalier and Joe Battapaglia, though still bullish on the U.S economy, actually made investment recommendations very similar to my own.  Though they certainly had different reasons for their recommendations, they had concluded that my investment recipe was ripe for success.

As a contrarian, I had some initial concerns regarding the apparent conversion of my critics. In hindsight their about-face amounted to a form a capitulation, where investors jumped on bandwagons that they did not understand. Years of foreign stock outperformance and surging commodity prices had lured many skeptics into the market right near what turned out to be a significant short-term market top.

As the wave crested in mid-2008, these newly arrived investors jumped off as quickly as they had jumped on. After the ensuing carnage in commodities and foreign stocks, it is likely that most of the money that entered the market in 2007 and 2008 has been flushed out.  Since many of these investors did not understand the true reasons behind the momentum, they lacked the conviction to hold through the sell-off.  The fact that many were also leveraged to the hilt also contributed to their being forced out of the market.

Those that came relatively late to the party (which is really just beginning) did so based on their feelings that continued health in the U.S. would pull along the global economic train.  But once the global financial crisis developed, this thesis quickly fell apart, as did any investment strategy based on it.  However, my reason for investing abroad and in commodities was based on a collapsing U.S. economy and the inflationary policies that would likely follow in an effort to prop it back up.  Since that is exactly what has happened, my thesis remains unchanged.

The synchronized decline in stock markets and global economic growth that began after the U.S. economy rode off the rails is not that surprising.  The short-term dollar rally continues to be a conundrum; however, recent dollar strength in no way alters how I expect this entire crisis to ultimately play out.

Most financial professionals have strongly concluded that recent market action has completely disproved the decoupling theory that I have espoused.  This is premature.  It will take some time for the rest of the world to realize that what has been decoupled from the economic train is the caboose, not the engine. In the meantime, I am heartened by my return to pariah status. With criticism of my investment strategy once again flowing with the same vigor it did earlier in the decade, I think the coast is clear for the long-term trends I have been following for years to resume in earnest.  The good news (unless you're selling, of course) is that being out of favor means that the assets I am recommending are still cheap.

Now that the weak hands have been completely shaken out of the market, I think the stage is set for a major rally.  How long it will take foreign stocks or commodities to make new highs, or the dollar to make a new low is anyone's guess, but I'm sure when they do, those who recently cashed out will be looking to get back in.

Based in Australia, Company # 2 represents an attractive mixture of high yield and growth potential, in the highly regulated, low growth utility field. Company #2 is a holding company, comprised of 5 operating units. The largest of these operating units is Western Australia's principal natural gas transmission pipeline, and the only one connecting the enormous gas reserves in Australia's North West Shelf with rapidly growing gas demand in South Western Australia (Perth area). With a yield of around 15%, and government regulated and sanctioned monopolies, we believe this company is a very attractive purchase candidate for investors seeking yield.

This Australian company is a growth story in an otherwise low-growth sector.

This growth is possible because the natural gas pipeline earns higher returns than other regulated utilities. The prices the pipeline can charge its industrial and commercial customers are fixed by government regulation. The deal struck between the pipeline company and the government gives the company a higher than normal rate of return until 2016. This deal provides an effective earnings floor for the pipeline unit. The Company's other business units are, 1) an electrical utility, 2) 2 regional gas distribution companies, and 3) a power company located in the US. All of the 4 operating units are government regulated, natural monopolies that should provide stable, predictable earnings in these uncertain times. While this company, like most others in the utilities sector, is highly leveraged, rising interest rates have a limited effect on the profit and cash flow. Furthermore, in the context of the potential for an extended bear market, we believe that the earnings stability of this company is undervalued.

Management has recently stated that all business units are operating according to plan.

Despite being somewhat more leveraged than the market, the company is in a strong position to cope with tight, volatile credit markets. The majority of the company's debt portfolio does not require refinancing until 2012. Furthermore, since its IPO, it has reduced leverage from 74.7% in FY05 to 65.8% in FY08 due to solid cash flow. Moreover, the company has stated that it has no intention to raise equity from security holders in 2009 and that all announced growth projects are fully funded.

Since listing on the Australian Stock Exchange, the company has grown distributions by 7% annually, and we are anticipating distribution growth to continue at 5% annually, both of which are faster than industry comparables.

At its recent Annual General Meeting, management reaffirmed its distribution guidance for FY09 which, at current prices, is a yield of nearly 15%. The company's distribution enjoys greater than 100% coverage from operating cash flows. We see only limited downside risk despite a more challenging economic environment, as the company's portfolio of companies will enjoy relatively stable returns given the significant proportion of revenues that are covered by regulation or long term take-or-pay contracts.

Furthermore, the company's yield will become relatively more attractive in a falling interest rate environment, pushing the stock price upwards.

The Reserve Bank of Australia has lowered interest rates 300 basis points in the last 4 months of 2008. We expect to see more rates cuts in 2009, in an effort to stimulate growth.

CONCLUSION

The company reached its 52 week high of A$3.48 in June 2008 and its low of A$1.60 in November of 2008. At a current price of around A$1.90, the company has a market cap of about A$1.2 billion and is expected to yield about 15% over the next year. The company is trading below its book value per share. The P/E ratio is 8.4 times projected 2009 earnings. The cash flow multiple, based on 2009 estimates, is 3.3. The company has had a significant drop in share price. We believe the drop is overdone. At current prices, and with a generous yield, this company deserves a serious look from investors.

RISKS

1. The share price could drop even further.
   
2. The dividend could be cut.
   
3. The Australian dollar could decline against the US Dollar.
   
4. The government could change the regulations to reduce utility rates.
   

Investing in foreign securities involves risks specific to international investing, such as currency and political risks. There can be no guarantees of success in pursuing any of the strategies we recommend, or that any of the specific companies will gain in value. Risks include an economic slowdown, or worse, which would adversely impact economic growth, profits, and investment flows; a financial accident resulting from the veritable explosion of global liquidity, increasingly risk-taking and its attendant volatility; a terrorist attack; any developments impeding globalization (protectionism); and currency volatility/weakness. While every effort has been made to assure that the accuracy of the material contained in this report is correct, Euro Pacific cannot be held liable for errors, omissions or inaccuracies. Euro Pacific has not independently verified the information supplied by the company, and cannot make any representations as to its accuracy. This material is for private use of the subscriber; it may not be reprinted without permission.

© Euro Pacific Capital Inc. All rights reserved. 1-800-727-7922
10 Corbin Drive, Darien, CT 06840

Is the energy boom over or was 2008 part of a natural cycle that sets the stage for the next bull market? I tend to believe that 2008 is similar to previous lows we have seen in 1998 and 2002 when oil prices were at cycle lows.

Investment Yields in the Sector are at Record Highs

The chart below gives you a long term view of the distribution history of an index that covers the Canadian Royalty Trusts and Oil Sands oil producers. Despite the record drop in energy prices and corresponding decrease in income distributions, the yields are at record highs.

Global Oil Demand Remains High

The table below shows that the economic contraction has only curbed demand for crude oil by 300,000 barrels/day in 2008 during one of the worst global recessions in decades.

New Crude Oil Discoveries are Dwindling

Global oil discoveries have declined each decade since the 1960s (see chart below).

Major Exporters are near their production limits

The International Energy Agency and the US Energy Information Administration believe that the major producers such as Saudi Arabia and Russia will be able to increase production dramatically by 2030. I think the historical evidence does not support this viewpoint. Saudi Arabia reached its peak crude oil production in 1980 and is experiencing declining production from their main fields. Russia peaked during the cold war and has chased foreign investment away via quasi-nationalization of crude oil and natural gas reserves.

Canada will become a Top Crude Oil Exporter by 2030

Canada is one of the few oil producers expected to increase production significantly over the next two decades. Meanwhile, many of the OPEC producers are experiencing major increasing internal demand because of rapid population growth and rising per capita consumption. In addition, many countries heavily subsidize gasoline which encourages overconsumption locally. The charts below show the expected breakdown of crude oil exporters for 2015 and 2030 based on IEA data and SWM estimates.

Canada Has the Largest Proven Reserves of Oil in the World

OPEC oil producers are assumed to have the world's largest oil reserves however their reserves haven't been independently verifies for decades. In the mid 1980s the national oil companies of the OPEC nations increased their proven reserves on paper by 100% to 200% without any reasonable justification.

After extensive study of the available reserves data, adjustments were made for the paper reserves created in the 1980s and for cumulative production from the OPEC producers since the 1980s. The results show that Canada should be recognized as having the largest crude oil reserves in the world and that OPEC reserves could be significantly overstated.

My advice to investors is to take advantage of today's absurdly low prices and invest in the good quality Canadian oil sands producers and royalty trusts that will benefit from the major trends developing in the global energy sector. Long term, you can expect inflation protection and leverage to oil prices while collecting a substantial yield in a currency that should benefit from rising energy prices.