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Thursday, June 30, 2005

Schumer-Graham trade legislation put on hold

Senators: Greenspan, Snow say China to move on yuan

posted at 6:29 PM 0 comments

Mack is Back at Morgan Stanley

Bruised board changes tack to welcome Mack

posted at 3:02 PM 0 comments

Good News for Options Traders

PRESS RELEASE Pacific Exchange to Trade Options in Pennies

I would like to see other exchanges follow this path. The spreads are too wide on low cost options.

posted at 2:43 PM 0 comments

China

I have a plenty more to say about this China CNOOC/Unocal business. More on this forthcoming.

posted at 2:32 PM 0 comments

Timeline of Gloom and Doom

For kicks I have compiled a timeline of books / authors predicting economic and financial collapse, depression, worldwide disaster, the end of the world, etc… The list is primarily focused on the markets, barely touched on apocalyptic prophecy, millennial fears, Y2K and things of that nature.

I had hoped and expected to find a book predicting disaster for every year in recent history. They’ve probably been written, but many of the works in this list, not surprisingly, are out of print. I vaguely recall numerous titles written in the ‘90s that seem to have disappeared.

A trend that did expose itself is the fact that the greatest frequencies were in 1993 and 2003, presumably these were written during the recessions that preceded publication and not surprisingly these titles hit the book market just as the financial markets and economy were coming out of their funk.

Paul Krugman, Robert Prechter, and Doug Casey are noteworthy for having made the list more than once.

Prechter forecast “The Great Bear Market” in 1997 at the start of the great bull market. He then proceeds to tell investors how to handle a deflationary depression in 2003. Do you think he was surprised when we started fighting inflation at the beginning of 2004? Give it up Prechter. Your timing couldn’t be more off.

Casey, whom I met at an event in Aspen a few years ago, belongs to an informal group that includes Bill Bonner (also on the list) who reproach American life. Bonner resides in France.

I dined with a gentleman who took Casey’s 1979 book The international man: The complete guidebook to the world's last frontiers: for freedom seekers, investors, adventurers, speculators, and expatriates literally having moved to a small South American country. He was quite verbally bitter that so few of his cohorts had actually made the leap. Casey himself found freedom on a large ranch near Aspen writing books predicting economic depression in the 80s and again in the 90s.

The list:

Holy Bible: New Testament, The Apocalypse

Nostradamus 1503-1566

1933, The coming collapse in gold

1937, The coming collapse and other sermons

1957, The coming disaster, worse than the H-bomb: Astronomically, geologically and scientifically proven

1979, The coming depression: When, why, and what to do about it

1979, "California's Watergate": The coming national disaster

1980, Crisis Investing: Opportunities and Profits in the Coming Great Depression, Douglas R. Casey

1981, The coming depression: The upheaval and how to handle it

1981, Doomsday 1999

1987, How to survive the world's biggest stock market crash

1989, How to Prepare for the Coming Depression: A Workbook for Managing Your Money and Your Life During Economic Hard Times

1989, Spiral to Economic Disaster: Lifeboat Measures If You Act Now

1991, Twilight of the dinosaurs: Economic disaster in the making

1993, The plague of the black debt: How to survive the coming depression

1993, America in Depression: The Coming Economic Collapse

1993, The Great Reckoning: Protect Yourself in the Coming Depression

1993, Crisis Investing for the Rest of the 90's, Douglas Casey
Since his first Crisis Investing (1979) book, Casey has been warning of coming financial disaster. Once again he sees us as being on the brink of what he now calls the Greater Depression, citing various plausible excesses, including the cycle of boom and bust.

1993, Nostradamus Now Warnings of Upcoming Political and Economic Disasters

1993, Bankruptcy 1995: The Coming Collapse of America and How to Stop It

1994, World Economic Collapse: The Last Decade and the Global Depression

1994, Coming soon: The biggest financial disaster in America's history

1995, The Retirement Myth: What You Must Know to Prosper in the Coming Meltdown of Job Security, Pension Plans, Social Security, the Stock Market, Housing Prices, and More

1995, Currencies and Crises, Paul Krugman

1995, Final Warning: Economic Collapse and the Coming World Government
Jeffrey paints a truly dark future for the United States and the rest of the world. He backs up his claims with research into Bible prophecy and other areas that allow him to present his points clearly, while offering valuable insights for each chapter. The sections on Daniel's prophecy and the future Great Depression are excellent and allows readers to open their eyes to a number of possibilities.

1996, Current reality as seen here.(stock market crash and recession are imminent) : An article from: Countryside & Small Stock Journal

1996, False Dawn: The Delusions of Global Capitalism. : An article from: New Statesman, Paul Krugman

1997, At the Crest of the Tidal Wave: A Forecast for the Great Bear Market, Robert Prechter

1998, Millennium Time Bomb: How to Prepare and Survive the Coming Technological Disaster

1999, The Crash of the Millennium: Surviving the Coming Inflationary Depression

1999, The coming collapse of the U.S. economy?

2000, The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, Why the Crash Will Be Worse Than You Think, and How to Prosper Afterwards
Will today's high tech economy burst in the near future, prompting a 1929-like depression? Mandel, an economics editor at Business Week, believes so.

2000, God's Plan to Protect His People in the Coming Depression

2000, Stock Cycles: Why Stocks Won't Beat Money Markets over the Next Twenty Years

2000, The Return of Depression Economics
Paul Krugman

2001, The Coming Global Superstorm
It's time to stop talking about the weather and do something about it. Paranormal superstars Art Bell and Whitley Strieber bring environmentalism to the masses tabloid-style in The Coming Global Superstorm, a quick look at global warming and its potentially catastrophic effects. Like Old Testament prophets, Bell and Strieber embrace lovingly detailed depictions of global cataclysm; unlike them, our modern-day doomsayers have more to go on than that old-time religion.

2002, The Great Bust Ahead: The Greatest Depression in American and UK History is Just Several Short Years Away. This is your Concise Reference Guide to Understanding Why and How Best to Survive It

2002, Rich Dad's Prophecy: Why the Biggest Stock Market Crash in History is Still Coming...and How You Can Prepare Yourself and Profit From It!

2002, The Orion Prophecy: Will the World Be Destroyed in 2012
According to Mayan & Egyptian prophecy, the earth awaits a super catastrophe in 2012: its magnetic fields will completely reverse in one agonizing shift. Devastating earthquakes and tidal waves will completely destroy civilization as Europe and North America are pulled north to polar latitudes. Almost all the earth's population will perish. These predictions stem from the sophisticated astronomy of the Maya and Egyptians, descendants of the legendary original Atlanteans, whose island, in this theory, is now buried under the South Pole. The Atlanteans predicted the world-wide flood in 9792 BC. In 2012, according to several 10,000 year-old star codes, Venus, Orion and several other stars will take the same 'code-positions' as in 9792 BC. There is also a forgotten and massive labyrinth, created by the Old Egyptians, of secret chambers filled with artifacts and documents about the previous flood.

Patrick Geryl had been following a fruit and vegetable diet, to improve longevity, and had several pension plans, that were to mature in 2015, and could not be cashed before that year. Then he read The Mayan Prophecies, by Gilbert and Cotterell, (see item 3), which concluded that the Maya had based their Long Count calendar around long-term magnetic cycles of the Sun, and that the world faced a catastrophe in the year 2012. Geryl was so convinced by the book that he cancelled his pension plans, after 20 years of subscriptions, and started his own investigation into the matter, to look for more evidence.

2003, The Retirement Myth: What You Must Know to Prosper in the Coming Meltdown of Job Security, Pension Plans, Social Security, the Stock Market, Housing Prices, and More

2003, How to Profit from the Coming Real Estate Bust : Money-Making Strategies for the End of the Housing Bubble

2003, The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment

2003, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, William Bonner

2003, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, Expanded and Updated Edition, Robert Prechter

2003, The Great Unraveling: Losing Our Way in the New Century, Paul Krugman

2003, The Kondratieff Crisis

2004, The Coming Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets

2004, The Coming Generational Storm: What You Need to Know about America's Economic Future

2004, America the Broke: How the Reckless Spending of The White House and Congress are Bankrupting Our Country and Destroying Our Children's Future

posted at 2:30 PM 1 comments

Fed Hikes Rates Another Quarter Point

The fed hiked another quarter point and gave no indication that it would let up any time soon. It said that rates are accommodating, implying the Fed believes the current rate is still at a level that’s promoting of economic growth. If you happened to trade for a surprise as I wrote about yesterday. The markets haven’t changed much from before the announcement, so no more damage done than buying a few lottery tickets.

posted at 2:29 PM 0 comments

Wednesday, June 29, 2005

Oil is like...

…an undead zombie; Jason, Freddie, Chucky, and the Boogie Man rolled into one. It just won’t die.

posted at 12:34 PM 0 comments

Expect the Unexpected

Expect the unexpected, as the saying goes. I was recently looking at the relationship between fed funds target interest rates and the major financial indices when it occurred to me, why not expect the unexpected?

The assumption that the Fed will raise rates again tomorrow is pretty much a unanimous expectation. And I have to admit that it does seem very likely. However, it is not entirely inconceivable that the Fed could hold off on raising its target rate. In the last week we’ve seen the financial markets respond quite negatively to oil closing above $60 a barrel. And though oil prices have receded quickly it is still within the realm of possibility that the Fed could see the combination of high oil prices and further interest rate hikes as being more than the economy can bear.

The likelihood that the Fed will surprise the markets is small, but the payoff is huge. In looking at past recent rate hikes on average there has been a slight decline in the markets following such events. When the Fed does what investors expect, the markets don’t have much reaction. However, if the Fed were to do the unexpected and hold rates steady the markets would likely have a very positive reaction.

So the way I see it, anticipating the Fed holding rates has a high payoff potential with reasonably limited downside risk. There is also the possibility that the Fed could provide more information with regard to signaling an end to this rate hike cycle and the markets would likely react positively to that situation as well.

But do also keep in mind the very remote possibility that the Fed raises rates even more than a quarter point, which would likely send stocks sharply lower. It is possible that the Fed could view higher oil prices from a purely inflationary aspect and attempt to stymie the oil markets with further rate increases sacrificing the securities markets in the process.

There are a number of ways in which one could get into this play. One is via close dated S&P futures contracts. Another is via an ETF or option on an ETF that tracks one of the major indices. The more direct way would be via interest rate related futures.

If the Fed goes ahead and raises the target rate by another quarter point as expected the downside risk is likely minimal. However, if the Fed surprises the markets by holding rates steady or gives a clearer signal that it’s nearing an end, I’ll be your new best friend.

All I ask in return is that you check out our letter at MarketSpectator.com and give it a try. This is a low probability event with a high payoff expectation. The Market Spectator subscribers, however, get high probability market calls with regularity.

posted at 10:28 AM 2 comments

Tuesday, June 28, 2005

China Threats Not Idle

Official warns vs any efforts to 'starve' China of energy - Oil and Gas

"...U.S. Rep. Joe Barton, a Texas Republican and head of the House Energy and Commerce Commission, wrote to Bush calling Cnooc's bid for Unocal "a clear threat to the energy and national security of the United States."

CNBC just had Rep. Barton on and I was pleased to hear his sentiments and concerns echoed my own very closely. This is someone in a position to understand the long-term implications, something companies and businessmen do not concern themselves with.

CNBC just had Rep. Barton on and I was pleased to hear his sentiments and concerns echoed my own very closely. This is someone in a position to understand the long-term implications, something companies and businessmen do not concern themselves with.

I am very much a free market capitalist, but I am not religiously fanatical about it. I recognize that there are flaws, and this is one of them. The extremist free market theorists don’t understand the situation. It’s an extreme anti-government Libertarian argument. There are situations that need some degree of centralized control.

For example as soon as we let go of control of the energy markets, Enron was the result. Similarly, it’s been understood for very many years that we can’t have numerous power companies or phone companies operating on the same turf unless they share the infrastructure. Thus these markets have to be regulated.

What we’re going to learn as globalization grows is that it too will require an increased level of regulation, however unpleasant that may be to some of us. China’s bid for Unocal makes this clear. And it’s a good thing to that we’ve gotten such an extreme example so early on. Otherwise we’d be at risk of wandering aimlessly down the wrong path unaware of our mistake until it’s too late to turn back. Even in this case I’ve heard numerous free market proponents and politicians in favor of the deal cite cases of precedent. Fortunately they are few and there are easy to define important differences.

What we have to be concerned with is the precedent that allowing this deal would set for increasingly precarious future deals. I see this deal as being similar to the way Native Americans slowly sold away their lands and signed worthless peace treaties.

It is probable that the Chinese would like to control world’s oil markets. This is something the U.S. is incapable of doing with our free market mentality. But the Chinese believe in precisely the opposite. They believe in a planned society. Having such a belief enables the Chinese government to allocate revenues in way it chooses too, including gradually acquiring more and more of the world’s oil interests.

We know that in the long run planned societies are inefficient and don’t work. But it’s the short run that we must be concerned with. In the short run planned societies are very good at following skewed strategies like building up armies and weapons or wreaking economic havoc. In the short run it is completely possible for the Chinese to use the money we give to it buying cheaply made goods, to buy more and more of the world’s oil interests to the point that it carries more weight than OPEC. And we’d willingly hand it over to them calling it capitalism.

posted at 3:42 PM 5 comments

Diary of a Madman, er Bond Salesman

Investment Outlook
Bill Gross July 2005
Fire!

Blog readers I post this link to be taken with a grain of salt, for you to add to your pool of opinions and collective information. Mr. Gross has the respect of many (perhaps too many), as the ‘bond king’.

I recall a number of years ago that many in the 'smart money' community read his opinions and took him seriously. Apparently though, Mr. Gross got a swollen head. His motives have increasingly been called into suspicion, as his prognostications have often been quite absurd. Most notably was his call for the Dow to fall to 5,000 in 2002. He’s said some pretty weird things over the years and most including Dow 5,000 have been conveniently removed from the site. As convenient as Scrushy found religion, though it didn’t work as well for Ebbers.

But people haven’t let Gross live down the 5,000 prediction and in April’s Investment Outlook titled Everything You Wanted to Know About The Universe But Were Afraid to Ask Gross attempted to take the heat off the issue claiming temporary insanity.
“Remember Dow 5000? I sure do and if I should ever forget, there is always someone nearby to remind me of that “singularity” when I temporarily lost my mind. It only lasted for a split second…”

BusinessWeek quoted Mr. Gross’s commentary in September of 2002: "Come on, stockholders of America. Are you naive, stupid, masochistic, or, better yet, in this for `the long run'? Stocks are losers, and anyone who owns too many of them will be losers too."

Sound like a pitch for bonds to you? Almost as obvious as the call Goldman Sachs made for oil to go to $105, only to later report a serious decline in profits on the firm’s own admission in large part coming from its commodities trading activity and more specifically from an absence in hoped for oil volatility.

The subtitle of CNNMoney’s take on the 5,000 call is telling, the key word being ‘influential’. Gross predicts Dow 5,000: Influential Pimco bond manager sees stocks moving lower before recovery begins.

The temporary insanity plea just doesn’t cut it with me. Calling stocks losers in the face of a long history of outperforming bonds and telling people this is why they should be in bonds is at a minimum irresponsible and in my opinion borderline criminal given the nature of his business and what he had to gain from such a call. No excuse will get peoples money back or make up for lost opportunity of this call.

Mr. Gross missed the Dow’s low point of 7,286 by just a month and a few days! The Dow has since risen more than 40% since then and has gone a long way towards recouping the losses dealt to investors during the recession. Mr. Gross had people selling stocks at almost precisely the optimal time to be buying them or worse yet he gave investors a reason to give up hope for stocks and get out of their holdings at the very bottom of the markets and the recession.

Now days it seems traders are more interested in gaming his opinions due to the breadth of his cult like, or should I say Buffett like, following. So take anything the bond king has to say about the markets with a grain of salt. Having the hindsight of the ridiculous Dow 5,000 call he’s sure to be a subtler bond salesman.

posted at 2:37 PM 0 comments

Consumer Confidence Surprisingly High

June Consumer Confidence Gains Momentum

posted at 1:00 PM 0 comments

Monday, June 27, 2005

WSJ.com - Is China's Rapid Economic Development Good for U.S.?

WSJ.com - Is China's Rapid Economic Development Good for U.S.?

Here’s a bit of irony to consider. The same people who are ranting and bragging about how great China is, the countries tremendous growth rate, and telling us to buy the stocks in their companies, also tell us that we should sell our companies to the Chinese communist government because if we don’t we will be protectionists. So how is that China’s growth is so much greater and better than our own and the country is one of the most protectionist in the world?

Don’t take me wrong. I’m not advocating protectionism. But I don’t think a little protectionism in the form of putting our foot down on letting a foreign communist government own our companies is going to do any serious trade damage. Like anything else it comes down to a matter of risk vs. reward. I, for one, don’t think the risk is worth the reward in the case of letting China buy our companies.

Whether or not the Chinese let us buy into their companies is irrelevant apples to oranges. The U.S. Government doesn’t own the U.S. companies doing deals in China.

posted at 3:59 PM 0 comments

Will Mack Go Back, to Morgan Stanley?

Morgan Stanley May Let Departed Executives Return Under New CEO

Of the several articles I looked at this was the only one that bothered to mention that Mack just took the reigns of a major hedge fund company less than a month ago.

posted at 3:31 PM 0 comments

Let's be rational about rate hikes

We all hear a lot of talk about how Federal Reserve interest rate hikes are going to damage the economy. But consider that the average effective rate over the past 50 years is about 6% and since 1990 it’s more than 4%, while the current rate is still sitting at 3%. It would take five more hikes of a quarter point each just to get to the average rate of the past fifteen years, which has also been the most prosperous period in our countries history. A few more quarter point hikes isn't going to kill the economy.

posted at 3:13 PM 0 comments

Earnings growth still looks good to me...

S&P 500 Quarterly Earnings Expected to Slow in 2nd Quarter

posted at 2:56 PM 0 comments

I really don't get all the hoopla about Sears

Sears store operators sue company over Kmart deal

I don't get all the fuss investors are making over these two tired out brands.

posted at 2:40 PM 0 comments

Congres has it all wrong...

Chinese premier rules out immediate reform of yuan

This is a good thing. There's little doubt that floating the yuan instantaneously would cause an economic shock both here and the U.S. despite what the Whitehouse and the democrats pushing for this to happen ASAP have told us.

posted at 2:35 PM 0 comments

Friday, June 24, 2005

Good article on value vs. growth investing

Winning Streak Puts Value Investors in Tight Spot: Chet Currier

posted at 2:56 PM 0 comments

A Realistic View of China Relations

I must reiterate that I’m not in any way an advocate of isolationism or protectionism. I’m an advocate of common sense, logic, and reason. The right will try to convince people that anyone who thinks we shouldn’t allow communist governments to buy U.S. companies is a leftist protectionist that doesn’t understand basic economics. And the left will continue to make idiotic statements about jobs and such.

This deal transcends such small mindedness. These people don’t get what’s at stake. The Chinese communists do know what’s at stake and it’s part of a larger strategy that’s not in our best interest.

We are very gullible to think that just because we can trade with China that the communists are our friends. It is just business. Nothing more. Doing business with China doesn’t make the Chinese our friends. If we can’t even befriend the French, how do we suppose the Chinese are our friends. If we think the Chinese are our friends and business partners, it is because they want us to think that. Do drug dealers think their suppliers and customers are their friends?

Reader replies: “Hey, I’m a drug dealer and I have lots of druggy friends. I resent that statement!”

We’ve already forgotten that one of the things coming out of 9/11 was an investigation as to where we stood with other countries and what the commission found out about China wasn’t good to say the least.

This is an interesting article:
Red Tiger Rising: China Preparations For War With The United States
by Melana Zyla Vickers (August 14, 2002)

Much of material in this article came from testimony that can be found on the U.S. - China Economic and Security Review Commission’s site. There you can find numerous citations by experts explaining how China is gradually preparing for war with the U.S., particularly if we should choose to defend Taiwan. This doesn’t imply that China is preparing to attack the U.S. or even to go out of its way to provoke the U.S., but rather that it sees the U.S. as it’s primary military adversary or the only power it is incapable of defeating militarily. According to various commission testimonies the PLA believes that war with the U.S. is inevitable and it refers to the U.S. as the worlds ‘Hegemon’, meaning that it sees us as a totalitarian bully of rest of the world.

This is the common view of countries that do not share the same beliefs as us including many other countries we trade with, for which we do not have such a false sense of friendliness.

posted at 2:51 PM 1 comments

Thursday, June 23, 2005

And another thing...

I often do agree with Kudlow, but I disagree with him that democratic saber rattling over protectionism and putting tariffs on Chinese goods had anything to do with the 166 point drop in the Dow. I don’t the broader markets were watching this.

I believe the drop was related to two things. In the past oil traders claimed to have fundamental reasons for the high prices and investors believed the stories. All of them have turned out not to be true and there was absolutely no reason for today’s jump. This made investors realize that there’s nothing rational about the oil price action. This translates into an unknown and uncontrollable risk for the economy and the markets.

How can anyone continue to argue that speculation isn’t driving the oil markets when the price of a barrel oscillates 3% in a day for no real reason whatsoever?

The other reason, I believe is that investors were spooked by the idea that we might let the communist Chinese government buy one of our companies. This isn’t like selling them a car where they take possession of the physical asset and use it just as we wear shoes they make for us. This would mean that American’s working in America would receive their paychecks from a company majority owned by the Chinese communist government.

I’m not going to be politically correct about this. These people would be working for communists. If we are supposed to have some level of loyalty to our employers, then this would be American’s with a loyalty to the Chinese communist government.

You can argue that they would have loyalty to an oil company, not to China. But this would be a misunderstanding the structure of Chinese companies. These companies ARE part of the government. The Chinese government is not a superficial happenstance owner of Chinese companies. They are government organizations, not just highly government regulated organizations like our public utilities. They are not independent of the government.

If the Chinese have long-term political, economic, and militaristic ambitions against the U.S. as I believe they do, this far outweighs the near-sighted wishful thinking that free-trade will addict the country to capitalism. This is another way that we incorrectly try to understand the Chinese from our own way of thinking. We would actually be funding their ulterior motives.

Maybe this is true, maybe not. Maybe its paranoia, but we owe it to our selves to consider the possibility. We incorrectly think that everyone else in the world will appreciate capitalism as much as we do once they have a taste of it. Remember that our country was founded in large part by capitalists who left behind people that didn’t think the same way they did. So we have a historic bias towards capitalism, while many other parts of the world has the opposite.

Furthermore, we assume that the once the Chinese are as addicted to capitalism and world trade they won’t want to do anything to jeopardize the supply chain. Again this is a huge cultural misunderstanding. American’s cultural underpinnings are freedom, democracy, and capitalism. These are the most important things to us. They are, however, not the most important things to everyone else.

Our government has limited ability to act in any way that’s not in our best interest. If our government is doing something we don’t like, for the most part we can fuss and shout and do something about it. The Chinese don’t really have this right and the Chinese government doesn’t have to put the best interests of its citizens first. Chinese decision makers are aristocrats. They can isolate themselves from the plights of their people. This allows them to make a decision that might hurt their citizens in the near term if they think it will further empower the country’s government in the longer term.

The Chinese government is detached from the consequences of its actions as they impact its citizens. They care about mercantilism only to the extent that it further enriches and empowers the government and enables the government to afford its agendas and strategies. Historically, this has always been true of governments run by aristocracy.

We like to think the world has changed and become modern, because our perspective is a modern one. This is not at all everyone else’s perspective of the world. We really need to wake up and realize this.

posted at 6:09 PM 0 comments

Why won't the media call the Chinese 'Communists'?

The point we are all missing with regard to selling our companies to China is that we don’t even allow our own government to have ownership in our companies. Why would we let a communist government buy all or any part of U.S. companies?

It’s a massive mistake to think that the issue is as simple as democratic protectionism vs. republican free trade. It is far deeper philosophically than this. What Americans generally don’t understand is the issue of moral relativism involved.

American’s don’t have a strategy. We (and particularly those to the far, far right) tend to think that capitalism and free markets will work all problems we come across. We’re already forgetting that the cold war with Russia was very real. Yes economics worked the situation out for us. But it’s only a matter of diplomacy and a whole lot of luck that we never ended up lobbing nuclear weapons back and forth at each other, killing hundreds of thousands and destroying entire cities in the process.

If we had ever gotten into a serious war with Russia during the cold war, then the historical perspective would have been very different. Economists would not have been able to say, “See, it worked itself out.”

Last night I watched part of Office Space, on the American Movie Classics channel already. And the China problem reminds me of the way the consultants handled the glitch with Milton.
Bob Slydell: Milton Waddams.
Dom Portwood: Who's he?
Bob Porter: You know, squirrely looking guy, mumbles a lot.
Dom Portwood: Oh, yeah.
Bob Slydell: Yeah, we can't actually find a record of him being a current employee here.
Bob Porter: I looked into it more deeply and I found that apparently what happened is that he was laid off five years ago and no one ever told him, but through some kind of glitch in the payroll department, he still gets a paycheck.
Bob Slydell: So we just went a ahead and fixed the glitch.
Bill Lumbergh: Great.
Dom Portwood: So um, Milton has been let go?
Bob Slydell: Well just a second there, professor. We uh, we fixed the *glitch*. So he won't be receiving a paycheck anymore, so it will just work itself out naturally.
Bob Porter: We always like to avoid confrontation, whenever possible. Problem solved from your end.

Of course after not receiving a paycheck, having his dissident red Swingline stapler taken away, and getting moved to the basement, Milton burns down the building.

Don’t even try to put me on one side or other of the political fence. When I pointed out problems with the President’s Social Security plan, that’s precisely what some readers tried to do. But I made most of my points before the Republicans and Democrats had even took a stance against each other, which by the way had more to do with opposing each other than any sort of common sense.

Common sense, logic, and reason is the side I’m on. The way I see it is that both the Republicans and Democrats are in intellectual ruts, not being able to see the real and pervasive issues, being blinded by their own issues with each other.

Americans don’t really have an agenda or strategy. We just bop along fixing things as they break. We used to have strategies. We built a kick ass military and a convenient system of highways to move our military across the country. For years that system of highways has been one of our major economic strategic advantages. There are still many developed countries that are hindered by transportation issues.

We don’t plan things on that kind of scale any longer. Rather we are so divided politically that we change strategies every four to eight years.

It’s hard for us to understand that a mostly politically undivided country like China can have long-term unwavering agendas designed to alter the balance of global power. We like to think that China has been overtaken by capitalism and commerce and that this will override any adversarial political agendas its communist government might have.

Nothing could be further from the truth. The communist government plans, controls, and owns most of the countries capitalism. The government owns about 70% of the shares of CNOOC as it does with most of its publicly traded companies. The government set up the countries stock exchanges and controls what companies can trade on them. It also determines what companies get traded in the U.S. as ADRs.

American’s that invest in Chinese companies are suckers. The communist government lets us invest only in what they want us to invest in and nothing more. Most of these companies never even pay dividends and the ADRs trade at massive premiums to the underlying Chinese exchange traded securities.

In the U.S. when we buy securities in our companies we are part owners of those companies. When the companies experience problems we might get some of our money back. This is frequently the case when a distressed company is sold for somewhere around book value. The stock investors maintain some ownership. Sometimes the company is repaired or the stockholder gets shares in a healthier acquiring company.

What rights do investors in Chinese shares have? Do you really believe you have any? If the Chinese government decides to fold a company it is the majority shareholder of, do you think American shareholders will have any claim on the sale of its assets? Of course not. American investors in Chinese companies are lucky to get an annual report and when they do they have no way of verifying any of it. They have no evidence whatsoever that anything the company tells them is true. They have nothing more than the good faith of the Chinese communist government to rely on. That sounds funny doesn’t it? It should because it shows how skewed our perspective has become.

This is how stupid we are for Chinese shares. The Chinese could completely make up an entire multi-billion company that doesn’t even exist at all, change the signs on an existing company, take a few Wall Street brokerage executives on a little tour so they could take pictures and put together a brochure. They could then sell us an IPO, and we would gobble up the shares. The brokerage executives wouldn’t care one iota whether the company actually existed because they’d get paid the same either way and they are the same greedy psychopaths trying to convince us oil should be over $100 a barrel.

But the sad fact is that it really doesn’t matter whether the company exists or not, because in most cases the companies aren’t going to return any profits to us, at least no more than necessary to keep the Ponzi scheme going, and they aren’t going to give us claim to the company’s assets if it folds. So all we have to hold on to is the hope of a greater fool.

Why do you think the Dow tanked 166 points on the announcement that CNOOC wants to pay $18 billion for Unocal, $1.5 billion more than Chevron? Because it scares the crud out of investors! They are waking up. That is perhaps the good of China’s bid, if it manages to snap us back to reality.

If you read the article ‘Your Boss a Psychopath?’ consider the similarities in mindset between the people described in the article and the many corporate leaders that advocate such open business with China. They are focused only on the money, but people listen to them, follow them, and take their advice. Note that many of these characteristics are common among politicians as well.

Now I am for free trade and globalization, but lets emphasize it with other rapidly developing countries with cheap labor like India that don’t have their sights set on world domination.

posted at 2:21 PM 5 comments

Say No to CNOOC

My apologies for getting political here. I try not to do so, but I feel very strongly about the CNOOC / Unocal deal. I can’t believe the media is even debating the issue of whether the Chinese communist government should be allowed to own a U.S. company! It goes to show the similarities between socialist minded liberals and communists. Oh the hypocrisy, because these are the same people who decry the woes of globalization.

I’ve said here that we’re being hypocritical by pushing China on floating the currency, while putting tariffs on Chinese clothing, but this not the same thing at all.

I think it’s been long enough since we’ve been in a war with communists, the wall was torn down, and the Russian economy collapsed that many people have forgotten what communism is and what kind of government runs China.

People need to understand that CNOOC is a Chinese state owned company. China’s communist government owns 70% of the company’s shares. This is true of nearly all of the publicly traded companies in China. In fact their stock markets are rigged so that primarily only state owned companies are allowed to trade. I don’t want to go so far as to say this is true of all companies on the exchanges, because I can’t say that with certainty, but I know it’s nearly all of them.

People also need to understand that the impression American’s have of China is a designed one. Remember the movie Wag the Dog with Dustin Hoffman? This is an exaggerated but still true analogy of the view of skewed view we get.

Why do you think China is demanding so much concrete, steel, and other construction related commodities? Do you really believe that while the U.S. was going through a recession China suddenly underwent massive economic growth when China’s economic growth is derived primarily from our purchase of Chinese goods?

China is undergoing massive state run infrastructure projects. Guess how they are funding these projects? Not just from the proceeds of the goods we buy. Notice how so many of their state owned company’s they’ve taken public that trade ADRs in the U.S. have some relationship to infrastructure building.

I believe this is primarily related to their hosting of the 2008 Olympics in Beijing, something we haven’t heard much about in quite a while. Look at the massive size of the construction projects undertaken to prepare a modern city like Atlanta. Now imagine the complexity of trying to squeeze the Olympics into a place more crowded than Manhattan yet little more modernized than say Bangladesh or Mexico City.

Then consider the complexity of confining and controlling the access of all those people. Do you think the Chinese are going to let people from all over the world just wander freely about the country and drive off into the interior? I don’t think so. Olympic visitors will likely be funneled from event to event, and to specific hotels, restaurants, and malls. Managing this requires incredible infrastructure enhancements.

And when the projects are completed all of a sudden these commodity demands will disappear. All for a dog and pony show to further the mystique and persona China has so successfully created in recent years starting with the polite televised takeover of Hong Kong, though China rolled tanks down the streets of the Pearl of the Orient for a reason.

posted at 1:46 PM 4 comments

Oil Up On Trend Following

The latest reason traders have been giving for higher oil is quite humorous. It is because oil has tended to pull back then go higher. Now there’s a good reason. If this isn’t an admission to the speculative influence in the oil markets, I don’t know what is.

posted at 12:25 PM 0 comments

This shouldn't be allowed to happen...

Unocal Faces $18.5 Billion Hostile Takeover From China

A company owned by a communist government should not be allowed to buy an American company. That would be setting a precident we shouldn't set and start us down a path we don't want to go.

Remember the campaign contribution scandal? Recall Clinton taking contributions from China? Trade is one thing, but allowing such mixed corporate entities opens doors we definately shouldn't open.

On the plus side, the bid will hopefully remind people of the extreme governmental and economic philosophical differences. We need to realize that even the bid is politically motivated by the Chinese government.

Our mistake is wanting so badly to believe that the Chinese share moral beliefs.

posted at 12:08 PM 0 comments

Interesting Article

Is Your Boss a Psychopath?

I buy into this article. My belief is that our capitalistic market economy generally works well and certainly better than other world systems in the long run. But I do also believe that it leaves us open to the sort of psychopathic misbehavior described in this article.

The problem with relying entirely on market forces is that it assumes that people behave rationally and are incentivized appropriately, when in truth motivations vary from person to person. This is moral relativity. We assume incorrectly that people will act logically.

The rules of our system emphasize long-term success and putting the shareholders long-term best interests first. The logical person assumes that other people will also act logically when in fact there are quite a few people in the business world that will tell you they have the best interests of shareholders in mind, but actually only have their own interests in mind. The difficulty in recognizing this person stems from the fact that very often in the short run the interests of the psychopathic corporate leader also benefit shareholders.

posted at 11:09 AM 1 comments

Wednesday, June 22, 2005

Uncap the IRA

Kudlow asks Burton Malkiel, of Random Walk fame, why not allow unlimited IRAs? I don’t tend to agree with much of anything Malkiel has to say, and the Kudlow interview didn’t change my opinion. It was Kudlow that brought up the IRA issue.

This is something I suggested on this blog months ago. Uncap the IRA, take away the contribution limits, and you’ve got Private Accounts. It’s the same thing. Problem solved that simply.

But I do have to say that Kudlow, like everyone else on CNBC thinks world demand is the reason for higher oil prices. But if I had a TV show to run I’d be also be too busy to look at the data and see the truth.

posted at 5:43 PM 0 comments

Weighing in the Supposed Housing Bubble

You’ve probably noticed that I’ve yet to weigh in on the real estate bubble debate. This is because I don’t know whether real estate is in a bubble or not and therefore don’t have a strong opinion about it. When I was living in a suburb of Denver during the recession many of my neighbors were out of work amidst the tech and telecom collapse. It seemed like For Sale signs were everywhere you looked. I thought then that prices would have to drop. And I still believe that the statistics were skewed to some degree by the real estate industry. But somehow and someway prices for the most part held up and then began to rise.

I moved to Denver just before the economy collapsed and when I moved to the mountains a few months ago the economy was still struggling to recover and the job market still stunk. But house prices were very noticeably higher. Does this mean that the Denver housing market is in a bubble? I don’t think so. I didn’t see many signs of speculation.

Though my landlord of the house I rented turned out to be a weasel, when she gypped us out of our deposit though we’d been perfect renters and maintained the place excellently for four years. That was longer than we’d planned too, but that’s another story. My feeling was that, though house prices had risen significantly, rents were down and she wasn’t going to be able to re rent for the same as we were paying. And the reason for this was because a lot of those For Sale signs were swapped out for For Rent signs. People couldn’t take the hit of letting their house go for less than their mortgage balance so they settled for the next best thing, having some or all of their mortgage paid via rental income. But, that means that people like my landlord who owned two rentals in the suburbs wouldn’t be making the easy money they once were.

In other words people found ways to hang on until the economy improved some and jobs became more plentiful. Perhaps a one working person family had to become a two working person family, that sort of thing.

Now people are asking if the springing up of businesses like CondoFlip.com means that there is rampant speculation in the housing markets. In this regard I do have one observation or analogy that I think is worth sharing.

In the late 90s people started dotcoms because investment bankers were willing to pay them very well to start them and larger companies were buying these startups and making the founders rich. And some of those early dotcom founders are still out there circulating the wealth they acquired. Recently, Landry's, the seafood restaurant company that saved Rainforest Cafe from extinction, bought the Golden Nugget casino from two Internet pioneers who flipped it for a very nice profit. They acquired the Casino I think fromMirage after selling their stake in an online reservation company.

However, many of those early Internet pioneers never had significant customers or business from the Internet. They were cited as examples of an Internet bubble. But it was never an Internet bubble. The Internet didn't implode. Internet usage and Internet commerce have grown multiplicatively since the mid '90s with no let up even during the recession, as Internet companies were going belly up right and left.

I suggest, similarly, that the bubble is actually in real estate related businesses, more so than in actual real estate.

posted at 5:33 PM 5 comments

Retail Investor Not Dead

CNBC questioned the Ameritrade (AMTD) / T.D. Waterhouse deal for $3 billion, saying the retail investor is dead. If that’s true then how come Ameritrade’s business has increased by every measure even after stripping out purchased accounts? Trades, qualified accounts, and customer assets are all up over the past two years.

This is good example of how the MSM gets it wrong and opens up opportunities for investors willing to check the facts. If CNBC, for example, were to continue talking down the deal, saying the retail investor is dead, then this could create a good buying opportunity if investors that buy into such disinformation punish Ameritrade’s stock.

posted at 11:16 AM 0 comments

Tuesday, June 21, 2005

Where's Your Best Interest?

Caterpillar (CAT) is up a $1.50 today trading at a new 52-week high.

03/29: Cat Call Creates Buying Opportunity
04/20: Cats Will Be Moving Dirt For Long Time To Come
04/21: What is a Cyclical Stock Really?
05/05: Time to Buy Cyclicals is Now
06/08: Cat Fights Back

posted at 4:13 PM 0 comments

Round and Round Oil Goes, Where it Stops Nobody Knows

Morgan Stanley sees oil prices headed down quickly - Jun. 16, 2005

Morgan Stanley takes the opposite side of Goldman Sach's trade.

posted at 1:01 PM 0 comments

Oil Admission

Oil prices' relentless rise csmonitor.com

This article contains a couple of admissions that there are no fundamental reasons for high oil prices.

posted at 12:33 PM 0 comments

Oil Prices: One Lie After Another

There was peak oil, global demand, and refiner bottlenecks. Each of those popular myths fell by the wayside as oil fell back to $47 a barrel. Then rather suddenly after a couple of drawdowns in inventories prices started to spike again, testing $60 for a second time. This happened with little explanation along the way. Only after oil had quickly climbed $12 in less than a month, to the chagrin of the public and applause of trading firms feeding on the volatility, then did the market media ask why.

The volatility traders needed another excuse. The one they came up with this time is that oil producers are running flat and there is no spare capacity to keep up next winter or handle supply chain disruptions. Well, they’ve got one thing right. Oil companies are running flat out. OF COURSE THEY ARE PUMPING AT FULL CAPACITY WHEN THEY’RE GETTING FIVE TIMES WHAT THEY WERE LESS THAN TEN YEARS AGO!

The truth is that oil companies are nearly always running flat out. The only time they aren’t is when they lose money doing so. Look at the copper market. Copper companies were sitting on tons of copper for years, as prices were too low to justify the extraction costs. Only after prices have remained high for some time are copper miners then willing invest in getting at this copper. Experts are calling for a glut of copper later this decade.

The only real difference is that copper is a much smaller market and much easier to wrap your mind around the supply and demand issues. But oil is no different in this regard. The higher the prices, the more oil companies have to invest in harder to extract sources.

Think of it this way. Imagine there’s a relatively small Russian oil company pumping X barrels per day out of Siberia using old antiquated soviet era equipment. But they’re sitting on a major pool, though oil economists have little information about this source because the Russians have kept it to themselves supplying disinformation.

There would be nothing new about this tact. Miners have often sought to downplay their claims. They might want to purchase other nearby claims or rights and they wouldn’t want to drive the price up against themselves by bragging on how rich their claim is. After all, it’s not a public company so there’s no incentive to boost a stock price with false reserves or that sort of thing.

But at $50 - $60 a barrel this little company starts to see green, or whatever color it is Russians picture when they think of money. Exxon wants to do a deal. Exxon will upgrade the companies equipment to double output in one year and will share in profits in such a way that both companies come out ahead.

This happens all over the world a little here and a little there and all of a sudden we’re awash in oil and companies are complaining that they can’t build storage facilities fast enough, the final thread for the long oil speculator claiming a storage bottleneck issue. Soon prices start to tumble and to nearly everyone’s surprise oil slumps to all time lows.

The argument that oil companies are running at full capacity doesn’t hold up any better than the refinery bottleneck argument. The industry has been shutting down refineries every year. Yet capacity and output have grown steadily, keeping pace with demand. The mainstream media doesn’t understand that capacity is fluid. You can stay at full capacity indefinitely, yet total capacity keeps moving up. This is a market responding efficiently to demand.

Thus the high percent of capacity numbers are a product of high prices. They do not have anything to do with supply and demand.

posted at 11:19 AM 0 comments

Monday, June 20, 2005

Like Father Like Son

What do the Rigas’ and Greenberg’s have in common?

Adelphia Founder John Rigas Gets 15 Years for Looting Company
John Rigas, the 80-year-old founder of Adelphia Communications Corp., was sentenced to 15 years in prison for looting the cable-television company and lying about its finances.

His son Timothy will be sentenced later today in federal court in New York, where both men were convicted last July of conspiracy, bank fraud and securities fraud. Prosecutors said the Rigases used Adelphia as their ``private ATM'' to provide $50 million in cash advances, buy $1.6 billion in securities and repay $252 million in margin loans.

posted at 4:24 PM 0 comments

Please Stop this Insanity

Crude Oil Prices Soar Near $60 a Barrel

posted at 2:19 PM 0 comments

A Summer Slumber for Stocks?

A Summer Slumber for Stocks?

Stovall takes an uncannily similar approach to analyzing the summer doldrums, except that he limits his research to within the confines of the S&P 500 and I actually came up with some positions with a high probability profiting in The Market Spectator letter instead of telling readers to just sit out the summer.

posted at 1:43 PM 0 comments

Do Leading Indicators Really Lead and Indicate?

Leading indicators decline in May

posted at 1:37 PM 0 comments

I know none of my blog readers would fall for this...

Security Bytes: Phishers exploit MasterCard breach

posted at 1:35 PM 0 comments

Saturday, June 18, 2005

$105 Oil? Hmmmmm! Very suspicious indeed.

As I sit on the deck of the local Borders Café surrounded by mountains, working on the newsletter I hit on something compelling enough to post on a beautiful Saturday evening. Believe it or not I do have somewhat of a life. It’s just fragmented by odd working hours.

You may recall the first time oil hit these highs that very near the peak Goldman Sachs came out and made the call for $105 a barrel. It was laughable. I thought it was probably just a marketing stunt to get free media attention for its commodities desk.

Now as a Morgan Stanley economist conversely says that we may be headed for an oil crash, Goldman’s net income falls 27% mostly due to a decline in trading revenue. The firm says that net revenue from fixed income-, currency-, and commodities-trading fell 39% from the previous quarter and 20% from a year earlier. The firm further stated according to the WSJ that the biggest drops in revenue were on its credit and commodities desks, and that trading profits were hurt buy a reversal in a number of trends, such as volatility in oil prices.

The key word here is ‘volatility’. The firm was expecting more volatility in oil. Immediately following the $105 call oil prices leveled off for a while then somewhat gradually began to fall. But my guess is they didn’t move down enough to profit from a volatility play expecting either a large move in either direction.

I can’t help but wonder, is this ‘the tail that wags the dog’? Did the firm honestly expect $105 dollar oil or, dare I ask, did it secretly hope that such a laughably outrageous call would help to create the very volatility that it now admits it had been expecting and desperately needed?

Some readers have no doubt thought I was quite nuts with my oil conspiracy rants. But, here it is in plain sight. Put two and two together and you’ve got a clear case at a minimum of a very influential company with a major incentive to want oil to go significantly higher and no conscience or regard for what Middle Americans are paying at the pump, given how little its upper ranking employees are impacted directly by high oil prices.

I can’t come right out and say the words for what I think the firm was up too, because I’d be sure to get letters from its lawyers. I’m already on Greenberg’s mailing list as it is. So I know this blog gets watched in that regard.

That’s an interesting thing about blogging. It’s a bit anarchist, and unstoppable. Wall Street’s elite could try to shut down bloggers that say things they don’t like even when they are true, but the bloggers can just pop back up anonymously and secretly anywhere on the web moving about and morphing, taking on aliases and such.

Blogging isn’t like the movies where the bad guys always threaten people who keep their mouths shut always leaving you wondering why the victim doesn’t tell the authorities about the threat. Blogging is in small, subtle, and gradual ways forcing companies to act civilized. If a company sends a nasty letter to a blogger without anything to lose, most bloggers are going to work it against the company by publishing the letter and thus positioning the company as a bully and tainting it with bad press.

Bloggers, like the mainstream press, are also doing their part in forcing companies to do the right thing and be accountable for their actions. As this example shows they are quick to revert to their old tricks if we aren’t willing to step up and put them back in their place.

posted at 8:20 PM 0 comments

Friday, June 17, 2005

Mad About Cyclicals

Time to turn the TV off. MADD, no MAD MONEY comes on. Cramer starts the show off with a recap of the week telling audiences what a great week Phelps Dodge (PD) and Caterpillar (C) had. He didn’t flinch and he didn’t show the slightest sign of recalling the fact that about a month ago he was screaming at viewers to sell cyclicals and specifically Cat. He said this after I told blog readers to buy it earlier that day. It’s up more than 6%. When I started up the newsletter I told subscribers to buy some as a trade and to buy some as a long-term holding. This week I told them to sell the trading shares up 5%, and the rest is up more 7% in just a few weeks.

Newsletter pimping aside, you probably wouldn’t have thought you’d get better advice from a blog?

The difference is I might be a lowly blogger, but I don’t try to see how many ticker symbols I can make calls on in an hour. I take the time to dig into the data and if I don’t have time I don’t just make it up as I go along. I’m passionate about being right, not about being famous and I really don’t give a rat’s behind what anyone thinks about me as a person. I don’t tell people what they want to here.

You buy supposed cyclicals when nobody wants them. Ironically, the times when no one wants to own cyclical stocks doesn’t necessarily correlate with bottoms in business cycles. Rather there’s a separate emotional cycle within which stocks rise and fall. This deserves more study.

posted at 6:24 PM 3 comments

Adobe Outlook

Adobe drops on outlook, but analysts remain upbeat

posted at 3:29 PM 0 comments

Oil Prices Hit New High Above $58 Mark

Oil is trading at an all time high today. Thank goodness the equity indices are up today or we'd be heading into the weekend on a quite depressing note.

posted at 3:06 PM 0 comments

Kozlowski Found Guilty

Kozlowski going to jail! He was found guilty on 22 of 23 charges.

posted at 3:04 PM 0 comments

The New School Hedgers

MoneyCentral’s Jim Jubak published 5 stocks for the continuing oil rally on Wednesday as oil was bumping up against $56 a barrel. Whether this is a good call remains to be seen. It’s certainly a risky call. I suggested to Market Spectator subscribers that they buy an energy ETF as a hedge when oil was below $50. That trade is up nearly 15% thus far.

I thought oil should keep going lower. It should from a fundamental perspective. There’s no good reason why it should be this high. But it’s a market in chaos and my thinking was that to oil prices and the major market indices may move in opposite directions in the future. Right now they’re both going up, which has been very good to subscribers. Will they continue to move this way?

We’re at a weird time for the markets. There’s no reason for oil to go higher except that people are willing to bet that it will. The way I see it, the direction for oil prices at this level is about a about a 50/50 proposition at this point. The first time it dropped well below $50, after having been above that level for quite a long time, it was pretty much a sure thing that speculators would buy the dips. From this point it’s anybody’s guess where it goes next.

My best guess is that it will go lower reasonably soon, say in the next couple of months, and it will go lower than the last recent low. There’s no precise way to identify a market top. Magazine headlines certainly don’t. They tend to be somewhat contrarian, but not precisely so. But there are a number of signs out there that indicate we may be near a top.

For one, articles like Jubak’s bring in the retail investors. It doesn’t take long before the retail investor has committed as much money to small markets and sectors as they are willing to do so after having read a number of such articles recommending they buy into bubbles.

Once the retail investor is into the market, where is more money going to come from? That’s the point where savvy hedge fund managers start trying to out guess the markets and go against the retailer. They collectively work the short side of the market against the retailer. And once again the retailer loses.

This time is a little different though. I believe, though I cannot prove definitively, that the main reason oil prices got to this level in the first place is primarily do to the increase in the number of hedge funds.

Here’s what I know about this. I was tapped into the mutual fund world via my wife’s employment all through the recession. With bad returns and massive redemptions quite a few funds were closed and consolidated, fund managers were out of work. That meant a whole lot of managers competing for very few available jobs. We saw many cases of managers either starting or going to work for hedge funds. It hasn’t been hard for the hedge funds to find investors who were dissatisfied with their experience at mutual funds. And the ex mutual fund managers brought over high net worth client lists.

Consequently, these new hedge funds are being run by managers with years of long side only investing experience. Typically, mutual fund managers have come out of the CFA farm with degrees in finance. The mutual funds are very heavily biased towards this educational path. This group of people’s experience in the markets has tended to be little more than buying whatever stocks are going up (trend following) or whatever stocks they think will go up next (value investing). For years the definition of success they’ve had impressed upon them is how they stack up against the S&P 500.

Take these same people, stick them in charge of hedge funds, where all of a sudden they don’t have a prospectus they are accountable too and can buy or sell practically anything they want depending only on a broadly defined charter, then you have the makings of a group dynamic capable of collectively influencing the markets.

In this case, buying energy related securities and staying long. The old school hedgers short energy when the market appears to be saturated. The new school hedgers buy the dips and the retailers buy the tops.

So when will this pattern stop? It’s hard to say. As long as the new school hedgers can attract money, and they have returns to back them up, then they will keep buying up energy. But there’s also been a lot of media chatter about bad returns in hedge funds, concerns about redemptions, etc… so this could be a sign of a point at which we stop seeing growth in new school hedge funds and the funneling of money into energy securities.

But what does all this have to do with the price of oil? The NYMEX says that speculation isn’t the reason. But the exchange actually supports my theory and contradicts itself. It tries to make the case that hedge funds aren’t responsible for the volatility in the markets by saying that they aren’t the source of the majority of the trading volume. This is what they concluded:

Hedge Fund trading activity comprised a modest share of trading volume in both crude oil and natural gas futures markets. In crude oil, Hedge Funds constituted only 2.69% of trading volume while in natural gas Hedge Funds constituted 9.05% of trading volume during the review period.

Hedge Fund activity comprised a relatively modest share of open interest in both crude oil and natural gas futures markets. As a percentage of open interest, Hedge Funds constituted 13.4% in the crude oil market and 20.4% in the natural gas market during the review period.

Hedge Funds hold positions significantly longer than the rest of the market, which supports the conclusion that Hedge Funds are a non-disruptive source of liquidity to the market.

The problem with the NYMEX study is that it proves the wrong thing. Volatility isn’t the problem. The problem is the ongoing high prices, not the up and down swings of the market. As consumers we’d much rather have the price of oil jumping back an forth between $20 and $30 every day than have prices hanging out above $50.

The NYMEX says that hedge funds are responsible for less than 3% of the oil trading volume, but 13% of the open interest and then makes the claim that hedge funds are long-term investors. This actually gives credence to the theory that hedge funds are buying long dated contracts and supporting an ongoing high price for oil.

Another problem with the NYMEX study is the way they define hedge funds. It claims to use a very broad definition by including private firms and CTAs, but it gives no indication as to how it may be able to differentiate an individual investor or trader from a hedge fund. Very many hedge funds, and particularly new funds, act as individual investors. Many funds don’t have a lot of assets under management and don’t have enough income from the funds to warrant specialized institutional tools and trading methods. They look and act just like individual high net worth investors. They simply open a commodities trading account and buy and sell just as any individual might.

I doubt that this group of hedge funds is represented fully in the NYMEX study and this is precisely the group, which I believe is collectively long oil.

What to do about it? You can short energy related securities. But you’d better be doing it with risk capital and you’d better be willing to stay the course for many months holding onto your convictions.

posted at 12:56 PM 0 comments

Thursday, June 16, 2005

More info than any blog deserves

Paul writes in with regard to refining data:

Nice job with the numbers, Mark. It's powerful to know what's really happening, beneath the radar screen of the mainstream media.But I'm uncertain where to go with this information. What are the implications here for trading? Does it change your perspective on the fair price of crude oil? Of gasoline? Of the crack spread? Help me out here, please.

Many times here I am writing about what not to do. Why? Because I have learned from my own personal experience and witnessed in many others that the greatest threat to profits is giving them back via overtrading and uncalculated risk taking.

I’ve done a lot of experimentin’ and gettin’ an education in the markets over the years. When I look back closely at my own trading and investing and consider what I hear and don’t hear from others, I discover that most setbacks are related to trading for the sake of trading and following emotions, which tends to get people in at the ends of trends and long before turnarounds.

Trend followers tend to be influenced by a gravity in the markets that pulls them toward wherever the largest numbers of investors are congregating. Conversely, contrarians tend to think that doing the opposite of crowds is a good thing. There’s a lot of controversy about who makes money and who doesn’t. The truth is that people make and lose money in both camps.

My advice is to not be a part of any of these camps and view the markets from a completely outside perspective. When I look at the markets I view them as if I’m looking down on war between rivals and I’m waiting to go in loot the place when it’s over. The hard part is knowing precisely when the war is over. If you go in too soon you risk getting caught in the middle and if you wait too long you risk there not being any good loot left.

I don’t mean to sound like I’m quoting The Art of War or something, because I’m not. The point I’m heading towards is that the markets and war are very similar in the level of control and chaos. In war there is ambush, strategy, mutual engagement, and so on and so forth. I don’t pretend to really know anything about that subject. But I know that when I own a stock I’m at constant risk of ambush. A problem with a company can come out of nowhere and blindside me at anytime. Or I might have a strategy for getting into a stock and expecting things to go a certain way, but find that things don’t turn out as expected.

In the markets you have to pick your battles carefully. When I look at particular market conditions like what’s going on in the oil markets right now, I realize that they are quite chaotic and unpredictable when they are rife with speculative fervor. They are unpredictable. People have been trying to do so for as long as there have been markets and no one has ever figured it out yet. Certainly there are plenty of people who claim to. Hence the numerous books on chaos theory and topics like naturally occurring Fibonacci sequences applied to stock price movements.

But the simple reality is that sex isn’t the only thing that sells. In the markets complexity sells. Make things complicated enough so that no one really knows what your talking about and people will want to buy it because it makes them feel smart and they assume the seller knows what they are talking about.

So the gist is I can’t tell you what you want to here. I can’t tell you short this or go long that and you will profit from oil price changes. I can tell you if oil is going to do X, then you should do Y. But first I must have a handle on X.

I’ve given so many reasons why oil prices shouldn’t be where they are. And I believe in them whole-heartedly. But, what I am unsure of is when people will finally wake up and realize the deception.

With regularity I find that there are big lies and little lies. The best opportunities for profiting, in my opinion, are hidden in these little lies. A recent little lie in the market was analysts talking up the slow patch, telling investors to sell cyclicals, and buy defensive stocks. It came on so fast based on such little information that it had no basis in reality. It was almost entirely emotionally driven. And it was driving the decisions of many supposed experts.

In this case, instead of allowing myself to be swayed by the disinformation, I questioned it. I asked myself if I really should be selling cyclical stocks. I asked if I should sell Caterpillar (CAT) like an analyst told me to do on CNBC. What I found when I really dug into the data was that I should do the opposite. I should buy cyclical stocks when everyone else is selling them, because they are cyclical. By their very nature I can expect them to be the best value when no one wants them and to be worth