Wall Street's Biggest Blunder Yet

Market Minute: Still Ticking
What Happened: US exports rose to $172.7 billion in March. That is the single best month America has ever had.
What It Means: It doesn't happen without a strong manufacturing sector. Fact is, US manufacturing is as strong as ever. In 1980 the US produced 22% of the world's manufactured goods. In 2011 it still does.
Why It Matters: "Made in USA" did not go away. Yes factories moved overseas. But other factories were built to serve these growing markets. In the meantime US exports have benefited from the decline of the dollar and the rise of productivity. China is going in the opposite direction. Its Yuan is strengthening. And wages are increasing by 15-20% a year. "Made in China" is losing a big chunk of its appeal.
Suggested Action: US exporters are riding a long-term term of growing global competitiveness. And these companies are still cheap. You should buy now before prices go up. Start your search with companies like Intel and Caterpillar.

Wall Street's Newest Blunder

At any given time, Wall Street gets one "big thing" wrong. It's happening right now. And it's handing you an opportunity to pocket at least 50% before the end of the year.

Wall Street, you see, isn't infallible. Far from it, it's over-emotional, over-greedy, over-fearful, and over-reaching.

And when the unexpected happens? It badly over-reacts.

Take 2008. Wall Street assumed the US government would save the banks. Oops. The government let giant brokerage firm Lehman Brothers go under. The resulting financial crisis caused markets to plunge and banking to freeze in its tracks from London to Hong Kong.

Or take the dot-com fiasco. Wall Street priced Internet companies like pets.com more on crazy things like potential eyeballs than on traditional and proven metrics like profits and sales. (Just like it's drastically over-pricing LinkedIn and Facebook, the new breed of dot-com stocks.)

Or how about the unproven assumption Wall Street made that real estate markets were immune to a downturn. How did that turn out?

And now Wall Street has fallen under the spell of its latest "Mega Blunder"...

At this very moment, Wall Street is getting the all-important "SCT" very wrong.

What is the "SCT"?

It controls what we pay for most things, including gas, food, and airline tickets.

Unfortunately, we have little control over the SCT. It doesn't originate in Washington, DC or Manhattan or London.

It comes from the Middle East. More precisely, Saudi Arabia.

The country is saying one thing about the SCT and doing another.

What Can $10 Billion Do for You?

The SCT is the "Spare Capacity Theory."

In oil's case, it says that OPEC can pump up production at a moment's notice to meet demand.

That's the only thing keeping oil customers from panicking and prices at around $100 per barrel rather than $200.

OPEC's promise to meet rising demand depends on the ability of its biggest producer, Saudi Arabia, to jack up production going forward.

That's why the world's most powerful energy consulting outfit - the International Energy Agency - has been begging Saudi Arabia to increase production.

Yet, Saudi Arabia has been begging off.

In my book that makes the Saudis' latest move a huge red flag.

The country's government has just decided to go after the heavy oil that's trapped in a thick layer of limestone beneath the sand. Partnering with Chevron, the eventual payoff could yield as much as 10 billion barrels.

That's nothing to sneeze at.

But it's expected to cost $10 billion to get there.

Why is oil-rich Saudi Arabia doing this? It's sitting on 265 billion barrels of reserves. But it's chasing 10 billion barrels of heavy oil that flows like molasses instead of the billions of barrels of light oil it can supposedly tap that flows like maple syrup.

The answer is that Saudi Arabia does NOT have the spare capacity it says it has.

There is no other explanation. Think about it. Why else would the country (along with its partner, Chevron) spend so much time and money going after harder-to-drill, harder-to-refine, and less valuable oil?

The money would be better spent going after easier-to-reach and more valuable light sweet crude. But if the world wants oil from you, you go after whatever you have left.

Wall Street is giving OPEC and Saudi Arabia the benefit of the doubt.

Even as the price for Brent crude rose above $125 and Saudi Arabia did nothing...

Even as the International Energy Agency along with the US government asked OPEC to increase output amid warnings that Western consumers were being squeezed....

Even as civil war intensifies in Libya, civil unrest visits Bahrain, and Syria shows signs of being the next country to blow up in the Middle East...

And even as Saudi Arabia continues its five-year track record of producing less and consuming more oil domestically.

The country repeats its party line of "Don't worry. When the time comes, we'll turn on the oil spigot." And Wall Street believes it. Otherwise, US crude would be priced a lot higher than $102.62 per barrel.

The Calm Before the Storm

Now two things could happen.

In the first scenario, OPEC continues to tolerate tight supplies and prices once again head toward $120 or above.

But at some point, the second scenario kicks in. It will be soon. And you'd better be prepared.

That's when Wall Street finally realizes that Saudi Arabia doesn't have the oil it says it has.

And that's when you can expect oil prices to soar beyond the $120s, $130s, even the previous high of $147.27. I predict that, in the absence of another global slowdown, oil will reach $200 per barrel.

The oil majors are sure to make out. But their stocks are no longer cheap. And that will limit how much you can make from either of the two scenarios.

I have a much better way for you to invest. It's the only oil play available where you start off with dirt-cheap prices. And because prices are so low now, even the first scenario will give you a big gain. I estimate about 50%. The second scenario will give you a much bigger gain.

Look for Part II of this article in your inbox on Monday. I will tell you everything you need to know to make serious money from Wall Street's complacent attitude toward SCT and the coming oil crisis. It's not what you think.

Respectfully,

Andrew Gordon
Editorial Contributor
Early To Rise - Investor's Edition.