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The World's Most Expensive Babysitters

By Tom Dyson, publisher, The Palm Beach Letter
Monday, August 6, 2007

Today, I heard the story of Angela.

Angela is 17 years old. Recently, she was offered $3,500 per month to babysit three children for a few hours after school each day while the parents work late. Two of the children are grown up. The third is a toddler. The toddler sleeps. The other two children take care of themselves. Angela watches TV, does her homework, then goes home. That's it.

Wouldn't you agree, $3,500 a month is a lot of money for a 17-year-old high-school student like Angela?

Not Angela. She quit the job because it wasn't paying her enough money.

Right now, I'm writing to you from one of the most extraordinary towns in the world, Fort McMurray. It sits at the end of a 500-mile highway in Northern Canada. (Actually, the highway continues north, but only when the ground freezes in the winter months.)

Fort McMurray is the town at the center of the Athabasca oil sands region. The people here claim there are more proven barrels of oil here than in Saudi Arabia. And with oil over $40 – the breakeven price for the oil companies here – it's booming. In fact, there is such a severe shortage of workers here, that all sorts of things – including Angela's pay – are totally out of whack with the rest of the world. For instance:

Dump truck drivers can earn $150,000 a year here, if they work hard. And that's all gravy, because they'll also receive free accommodation and excellent food. (Some get a "Living Out Allowance" of $1,000 a month instead.) They'll also get subsidized flights to and from home and other package bonuses.

And get this: You need no experience to be a dump truck driver. All you need is a regular driver's license. I was tempted to sign up myself...

Experienced petroleum engineers command double what the dump truck drivers get. I popped into McDonald's. McDonald's pays $18 an hour here in Fort McMurray. I talked to a bus driver. He lives in Thailand for eight months of the year and comes to Fort McMurray for the summer season because "the money is stupid." His company is short 40 drivers at the moment. "They'll pay you $20 a hour just to wash the buses," he says.

Here's another quirk. There's a Wal-Mart in Fort McMurray. I went in to buy some simple supplies, but I kept finding the shelves empty. Why? Because Wal-Mart can't afford to pay people to stack the shelves!

It's not just wages. Home prices have gone crazy here. The lady in the tourism bureau told me her parents bought a duplex for $100,000 and sold it for $300,000 less than a year later. That was two years ago. It'd now be worth $450,000 she says. Apparently it's the government's fault. They didn't release enough land for residential development when the oil sands started booming. There was a massive shortage and prices quickly went through the roof. They've leveled off now, although you'll still pay $550,000 for a standard three-bedroom house.

(Interesting fact: The work camps here are so big, there's only one place in the world where you'll find structures with more beds in them: Las Vegas.)

What about investing in Athabasca? I'll sleep on this question for a few more days, but for now, I'll discuss the conventional plays...

Two obvious plays here are Suncor and Syncrude. There are other companies operating here, but these two are by far the biggest producers. Syncrude is a syndicate formed by some of the largest oil companies in the world, like ConocoPhillips, Husky, and PetroCanada. The Canadian Oil Sands Income Trust is the publicly-traded investment vehicle of Syncrude. 

I would not invest in either of these companies. Right now, Athabasca appears to be a fantastic business. That's what worries me. Aside from oil hitting $100 a barrel, I just don't see much upside. Suncor trades at a P/E of 20. That's much higher than regular oil companies. But there's lots of downside:

Oil could fall. They're having to dig deeper and wider to maintain their growth. That costs more. Also, equipment and labor costs are shooting up and I hear Greenpeace just opened an office in Edmonton and wants to make Athabasca oil companies its new target. Innovation is responsible for much of the growth here... but how much more can they innovate, scooping up dirt out of the ground?

As investors, we must pay attention to value, not business prospects. Business prospects are great in Athabasca, but the value in the stock prices isn’t there. There's no upside and lots of downside, in my opinion.

I prefer the ancillary plays that investors haven't thought of yet. I'll do some more scratching around here and report my findings in my next essay.

Good investing,

Tom




Market Notes


NEW HIGHS OF NOTE LAST WEEK

Nokia (NOK)… cell phones
Cummins (CMI)… diesel engines
Chipotle (CMG)… burritos
Crocs (CROX)… funny looking shoes
Under Armour (UA)… athletic apparel
Apple (AAPL)… iPods and computers
Armor Holdings (AH)… body and vehicle armor
Raytheon (RTN)… worlds largest missile maker
UltraShort Financials (SKF)… goes up as banks go down
UltraShort Real Estate (SRS)… goes up as real estate goes down


NEW LOWS OF NOTE LAST WEEK

Foot Locker (FL)… shoes
Best Buy (BBY)… electronics
Circuit City (CC)… electronics
Moody’s (MCO)… rating agency
Lee Enterprises (LEE)… newspapers
Gannett (GCI)… USA Today
Amgen (AMGN)… biotech
Pfizer (PFE)… Big Pharma
Motorola (MOT)… cell phones
Lennar (LEN)… homebuilder
KB Home (KBH)… homebuilder
D.R. Horton (DHI)… homebuilder
Beazer Homes (BZH)…homebuilder
Standard Pacific (SPF)… homebuilder
WCI Communities (WCI)… Miami condos
Boston Properties (BPX)… office REIT
Washington Mutual (WM)… mortgages
American Home Mortgage (AHM)… mortgages
JPMorgan Chase (JPM)… investment bank
Bear Stearns (BSC)… hedge fund loser
Citigroup (C)… world’s biggest financial firm
Lehman Brothers (LEH)… world’s biggest bond trading desk
Countrywide Financial (CFC)… America’s largest mortgage lender

-Brian Hunt


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