'The Shock Doctrine', Unexpected Wars And How to Play Them

by: Marc Courtenay

"Some men see things as they are and say "why?" I dream things that never were and say "why not?"--George Bernard Shaw (Irish playwright, 1856-1950).

Bet you attributed that quote to the late Robert F. Kennedy Sr. He carried the "torch" of that marvelous message to the generations born after Shaw passed away at the ripe old age 94.

It is admirable to dream of a world where integrity, openness, fairness and honesty dominates the business and financial sectors. So far, that world is still a "dream".

That's why a recent review of Naomi Klein's "The Shock Doctrine" reminded me that things are not always how they appear or how the major news networks spin them.

An Example that May Both Shock and Move the Markets

King World News (KWN) recently interviewed Jim Rickards. Rickards has gained international recognition for his remarkably accurate predictions regarding the decision by central banks and international power-brokers.

Rickards let KWN know that the US is headed to war with Iran. In his interview with Eric King he pulled no punches:

Yeah, it’s very serious, Eric, actually grave. The big thing to get right in this case is that Iran will not be allowed to have a nuclear weapon, period. That’s just not going to happen. Now we know they (Iran & its allies) are pushing towards it and so there is going to be a train wreck.

If Rickards is correct in his assessment, the near-future price of oil could possibly double in the course of just a few days. All it would take would be for the Strait of Hormuz, the world's most important oil export route, to be blocked off and oil prices will soar!

Look closely at the map below. It doesn't leave much to the imagination. A war with Iran leaves this strategic strait vulnerable to blockades and aggression.

The threat of an "Oil War" is getting international attention in the press, as demonstrated by a recent article in the German magazine Der Spiegel in an article titled "Iran and the West Rediscover Oil as a Weapon".

If the price of oil leaped 50% or 100%, the stock market may take a huge "time out" and temporarily plunge.

At the same time, oil companies that produce mainly outside of the region shown in the map above may see their share prices move dramatically higher. Producers like Devon Energy (NYSE:DVN) could be the indirect beneficiaries.

DVN owns oil and gas properties in the mid-continent area of the central and southern United States; the Permian Basin in Texas and New Mexico; the Rocky Mountains area of the United States; and the onshore areas of the Gulf Coast, principally in south Texas and south Louisiana. It also owns oil and gas properties in the provinces of Alberta, British Columbia, and Saskatchewan, Canada.

At $150-a-barrel, it would not surprise this investor-writer to see DVN move closer to $100-a-share before you can say "shock-and-awe".

Keep an eye on the ascending price of Petroleo Brasileiro S.A. (NYSE:PBR), which is still trading well off its 52-week high at around 8 times earnings. The one-year chart shows that PBR recently rose above its 50-day Moving Average.

With an unexpected flair-up of war in the Persian Gulf region, PBR's price may suddenly challenge the present 52-week high of $42.75 and aim for $50-per-share.

One smaller oil and gas producer may also see a share price boom. Contango Oil & Gas Company (NYSEMKT:MCF), an independent natural gas and oil company, explores, develops, produces, and acquires natural gas and oil properties primarily offshore in the Gulf of Mexico.

Management and the Board of Directors own 24% of the Company's fully diluted shares, and they run the company with only 7 employees. Learn why MCF has a promising future at their web site.

If you're looking for income and upside potential from a "Shock Doctrine" scenario, consider Dorchester Minerals, L.P (NASDAQ:DMLP). They currently pay close to an 8% dividend by engaging in the acquisition, ownership, and administration of producing and non-producing natural gas and crude oil royalty, net profits, and leasehold interests in the United States. They were founded in 1982 and are based in Dallas, Texas.

DMLP has some rich over-riding royalties and leasehold interests. Pretty much everything you need to know about them can be found here. With share prices close to $23, a move up to $30 (very possible) would be a 30% gain.

War and massive disruptions of basic materials could ignite commodity prices. Such commodities as base metals, fertilizers and strategic minerals would figuratively go "through the roof".

Can you imagine what the price of Brazilian powerhouse Vale S.A. (NYSE:VALE) might be heading toward in the above-mentioned scenario?

Right now the stock is trading at between 5 and 6 times this year's earnings. Shortages of important commodities could cause VALE's shares to hit $48.

Just Vale's Base Metals segment could cause their profits to greatly improve. It produces nonferrous minerals, including nickel, copper, and aluminum consisting of aluminum trading activities, alumina refining, aluminum metal smelting, and bauxite mining.

As Alcoa (NYSE:AA) indicated recently, there's a worldwide effort to reduce the production of aluminum and increase demand for it and copper. If war ensued shortages are likely.

Other companies whose products and revenue drivers may explode upward include Freeport McMoRan Copper and Gold (NYSE:FCX), Rio Tinto plc (NYSE:RIO) and the multi-faceted and highly diversified natural resources company BHP Billiton (NYSE:BHP).

BHP offers a 3% dividend and FCX now offers a 2.6% dividend, and the depth of their resources includes the production of gold and silver.

Speaking of Gold and Silver

We know that during times of increased economic turmoil and dramatic international uncertainty that gold, and to a lesser extent silver, turns into a safe haven.

That may be one reason that speculative investor-legend George Soros revealed that he's been loading up on gold. He's been wrong before, but he didn't become a billionaire by being wrong most of the time.

Mr. Soros told an audience in Bangalore, India recently that... "The crisis in Europe is more serious than the crash of 2008."

He apparently believes the world faces the possibility of a "vicious circle [cycle]" of deflation.

In response to this he's been a big buyer of gold, this after earlier last year being a big seller.

According to a verifiable report and Securities and Exchange Commission filings, Soros Fund Management sold most of its physical gold shares in SPDR Gold Trust (NYSEARCA:GLD) and iShares Gold Trust (NYSEARCA:IAU) in the first quarter of 2011.

His timing was amazing, as gold dropped from its highs and the dollar rallied. But Soros started buying again in late 2011, according to financial news site Emerging Money.

Soros seems to be anticipating that a wave of global deflation [and possibly some shocking geopolitical surprises] will send the central bankers running for the money-making machines.

Yes, it appears quite likely that in 2012 we'll see the Fed, the ECB and other Central Banks creating more money to "solve" the shocking financial problems.

So perhaps Mr. Soros is betting on another round of massive, global quantitative easing. He may also be considering the reemergence of "The Shock Doctrine" as a way to distract the world's citizenry of the enormous fiscal fiasco.

In the past Soros' Fund Management has owned top producers like Goldcorp (NYSE:GG) and Barrick Gold (NYSE:ABX).

In the past five years, Goldcorp's net income margin has ranged from 13.4% to 48.7%. In that same time frame, levered free cash flow margin has ranged from -13.1% to 13.1%.

GG's profit margin is 30% yet it's year-over-year quarterly earnings growth was a negative (-) 53.50%. This could be a red flag. Learn more about GG here.

In comparison, Newmont Mining (NYSE:NEM), which pays a 2.3% dividend compared to Goldcorp's 1.2%, has a 22% profit margin and their quarterly earnings growth (yoy) is a more encouraging negative (-) 8.2%. One negative is that NEM has $4.24 billion in debt compared to $2.23 billion.

If you're looking for a royalty play in gold, now's a good time to look at Royal Gold (Nasdaq:RGLD), which recently announced an offering of 4 million shares that this week priced at $68-a-share. If gold prices (currently around $1,636) continue to remain in the current range (between $1,400 and 1,800) the share price looks promising. They pay close to a 1% dividend at the present time.

RGLD has 37 producing royalties, 22 development-stage royalties, and 128 evaluation and exploration-stage royalties. In fiscal 2011, approximately 70% of Royal Gold’s revenues were derived from precious metals.

By the way, Tocqueville Gold Fund (MUTF:TGLDX) manager John Hathaway told King World News yesterday that he's expecting a "terrific short squeeze" in gold and gold mining shares, as gold's fundamentals are strong and improving, even as sentiment in the gold sector has entered "the dry-heave stage".

That's why I believe that "just in case" we should at least have exposure to the gold metal and mining sectors by owning the two ETFs, The Market Vectors Gold Miners (NYSEARCA:GDX) and the SPDR Gold Trust (GLD).

Also consider The Central Fund of Canada (NYSEMKT:CEF) when the shares

are not selling for a high premium. CEF owns both physical gold and silver plus they insure their holdings and carefully store it.

So for 2012 "hope for the best, but plan for the worst". When it comes to both the socio-economic and geopolitical circumstances in the world today, don't forget about the existence of "The Shock Doctrine" and invest accordingly.

Disclosure: I am long DVN, PBR, MCF, DMLP, VALE, AA, FCX, RIO, GG, NEM, RGLD, GDX, CEF.