The Investment U e-Letter
Wednesday, September 28, 2005 Dr. Mark Skousen On Energy and the Housing Bubble: Special Supplement to Investment U
by Dr. Steve Sjuggerud, Advisory Panelist, Investment U Mark Skousen is a legend in our business… For the last 25 years, he's written Forecasts & Strategies, one of the most popular investment newsletters of all time. I remember when I was a broker in the early 1990s, specializing in international stocks. I couldn't believe it, but about half of my clients were readers of Mark's. When you read what Mark has to say about today's hottest, and sometimes most confusing investment ideas, you'll understand why he's still one of the most revered and profitable investors around - even after a quarter of a century. - Dr. Steve Sjuggerud An Interview with Dr. Mark Skousen Investment U: With the energy sector up more than 50% in the last 12 months, is it possible to still make money in energy today? Mark: I'm, let's say, cautiously optimistic at this point. The good money - the easy money - has been made, and now it's a question of how long the trend will last. I certainly think that the Canadian oil and gas funds will continue to do well, just because they're not going to be subject to hurricanes and so forth. I think that natural gas prices are going to stay relatively high, and oil prices may come down a bit - it's the refineries that are maxed out, but the amount of oil going to the refineries continues to increase, so we may end up with a little bit of a surplus there… Investment U: So there's still money to be made, but it's just harder to find? Mark: I'm not sure there's a lot of big money left to be made… The approach to take is invest in energy, but place some appropriate stop orders within 10% of the price. And if you hit those stops, get out for a while. When you have huge profits being made in finding oil and gas, and in finding commodities in general, you can't ignore the supply side… Entrepreneurs are out there trying to find the supplies, and if new supplies increase faster than demand, it knocks the price back down. Investment U: What if new supplies are simply not there to be found? Mark: Then the price is going to stay high. All indications are that the supplies are limited… We're having a hard time producing oil and gas in the United States, where we have environmental controls and so forth - we don't allow some oil to be discovered or developed. But outside the U.S., others are searching to find new oil supplies. Investment U: The cautionary optimism you have with oil, do you have it with real estate also? Mark: Real estate is cyclical, and we've had a wonderful ride… Broadly speaking, all prices are based on a marginal number of buyers and sellers. Your home, according to recent sales, may be worth a half-million dollars, but it doesn't account for the fact that only 5% of homes at any one time are open for sale. If everyone starts selling their houses, instead of one in every 20 homes having a "for sale" sign, now one in every 10 homes has the "for sale" sign, and you really just increased the supply… I think that's putting a damper on prices. However, it's just going to be a slow-down in real estate, not a collapse. Investment U: Could lower interest rates also serve to keep the housing market going for a while? Mark: Well, the mortgage rates have stayed down pretty well. Remember, there's a difference between the short-term rate - the Federal funds rate that Greenspan controls - and long-term bond rates and mortgages, which have continued to stay relatively low. If you had a sharp increase in mortgage rates, that could really kill any real estate boom. Investment U: You'd think that mortgage rates would have been going up, too. Mark: You would think so, because inflation is clearly rising… and long-term rates are still quite negative… It's a bit of a conundrum, as Greenspan says. Long-term rates have gone up and they've come back down. There's really no upward trend yet. But when they do [start rising], that's going to spook the real estate market for sure. Investment U: What are your thoughts on Greenspan, and who might replace him? Mark: Let me first say that I don't give Greenspan as high a mark as some people do. I think he's been pretty good overall, keeping a lid on inflation in this country, as measured by the consumer price index. But along the way, he has definitely overreacted… When he fears inflation, he raises interest rates too far, too fast - he did that in '94 and in 2000. And then when he fears a recession or deflation, he lowers rates too fast the other direction. So we've been on a roller-coaster ride… I think he will continue to raise rates until the real estate bubble pops, and he can go out as a hero next February. Investment U: What's your favorite Asia play right now? Mark: I have preferred to invest in a closed-end fund, the Morgan Stanley Asia Pacific fund… This thing is just going like gangbusters right now. It's gone from $11 to $14 this year… Meanwhile, it continues to sell at a deep discount in net asset value. So you're basically buying Asian stocks in the entire region - Japan, Hong Kong, China and Malaysia - at a double-digit discount… that gives you leverage in the Asian market. China Fund, Inc. is another closed-end fund that I look at quite frequently. That's still selling at a substantial premium to net asset value. So I've been telling people to get out of the China Fund and invest in the Morgan Stanley Asia-Pacific Fun. I think that's a much better way to go. Editor's Note: Find out Mark's take on modern economics and the world's top free market in Part 2 of the Investment U interview with Dr. Mark Skousen. If you'd like to learn more about Mark Skousen, visit his biography. | 
