Wednesday, August 31, 2005

What companies will benefit?

Think outside the box about companies that are likely to benefit from the hurricane for some time to come. For example 3M (MMM) makes Scotchgard Mold and Mildew Block among other products that are likely to see increased demand. Think of companies that make things like plastic sheeting, vinyl siding, roofing materials, asphalt, etc…

posted at 2:35 PM 1 comments   

Homebuilders a less obvious beneficiary

With all the attention being paid to the energy markets and whose going to benefit the most there are very many companies that will benefit that are grabbing the attention of investors, but not the media. Have you looked at the homebuilders this week? Prior to the hurricane it seemed that all the media could talk about was why we should be selling homebuilders.

I recommended buying the homebuilders in Monday’s issue of The Market Spectator newsletter I put together for reasons having nothing to do with the hurricane. They’re up 3% to 7% in two days. I even suggested a couple of the worst performers as a hedge against further declines. The hurricane has certainly improved the prospects for those companies as many homes will be razed completely and rebuilt from the ground up. Many will likely jump into the rebuilding effort in any way they can profit. It will be a rising tide that lifts all boats, with several years of elevated activity for the sector, freed up real estate, etc…

posted at 2:30 PM 0 comments   

What will the Fed think?

Traders are grossly misinterpreting how the Fed will read the hurricane impact on the economy. One only needs to actually read the meeting minutes (there was only seven pages of relative content in the August minutes) to realize that the Fed clearly sees high energy prices as inflationary more than it sees energy prices as economically debilitating.

As I’ve said the hurricane is apt to be more stimulative than protracting for the overall economy. Therefore, the Fed will remain in an inflation-fighting mode as it has been. It is possible that the Fed could pause primarily due to the psychological aspects of the situation. It might want to seem compassionate, or rather not seem uncompassionate, to the problem.

But traders have reduced the probability of three rises between now and the end of the year without reducing the probability of rises in the next two meetings. In other words traders think the Fed is likely to raise rates in the next two meetings, but not in December. Now if the Fed were to pause between now and then, then the results would be the same for the expectation of December rates, but I think if the Fed is going to pause at all it will do so on September 20th. However, that’s still a long way off and if fears subside over economic shocks before then, then the Fed will likely keep moving forward with removing policy accommodation at a measured pace.

posted at 2:18 PM 0 comments   

Oil Market Relatively Subdued

One of the most interesting things about how the hurricane is impacting the energy markets is how rational they’ve reacted. If anything they’ve been overly muted all things considered. I think traders are still in shock trying to figure out what to make of it all.

If ever there was a market shock that should have taken oil to $105, this was it. There absolutely has been significant damage to rigs and oil production. Thus far the hurricane has set about a return to rationality to the markets.

One thing hitting impacting the oil markets is a sell the news mentality. This hurricane is just about the worst possible thing that could happen to the oil markets. Katrina shoved itself right down the throat of the nations oil industry. Their could have been more damage to rigs in the western half of the gulf, but the situation is about as bad as it could possibly with the storm blasting over half the gulfs rigs and right up into the hub for all the oil coming out of the gulf and much of the oil coming in from around the world.

All things considered, oil prices rose very little. But why? One reason as most traders would say is that such an event was already priced into the market. After all, this was one of the most often cited excuses traders have been giving for the rise in prices over the past year. They’ve been saying that supplies are tight, demand is strong, and the market would be shocked by any disruption. The trader’s mentality is to sell the event.

But the markets aren’t nearly that simple. The supply and demand excuse was just that. We’ve witnessed just about the worst possible disruption and prices haven’t risen all that much really. At least not much compared to how much they’ve risen for no good reason over the past couple of years. About a month ago prices rose almost as much supposedly because of a single oil refinery fire that actually should have reduced oil demand.

So at least the markets are finally acting somewhat rationally if not stunned. At least for a change gasoline prices are rising more than oil prices, as they should.

Another view is probably that this is the worst and therefore it marks the top of the market.

As for me I think we’re seeing people catch their breath and then we’ll see higher prices as the outages start to be tallied up.

One thing the stand still shows is the extent that past prices have been the result of speculation and having nothing to do with supply and demand. Trader’s may have already priced in this event to some degree, but that doesn’t mean that prices can’t go even higher when the event actually hits.

posted at 2:04 PM 0 comments   

Gasoline hedging pools a good idea?

Here’s the kind of strange idea that’s apt to come out of ultra high gas prices: Gasoline price hedging pools. Many small businesses have significant fuel expenditures but not enough to warrant buying futures contracts. A pool or fund with a low minimum buy in that holds gasoline futures would produce a profit that offsets a rise in prices and loses money when prices fall effectively locking in the price paid and insulating businesses from price shocks.

posted at 1:58 PM 2 comments   

Economic Impact

With the exception of the impact of energy prices the hurricane isn’t likely to have any significant national economic impact. This is turning out to be the most devastating hurricane in modern history, but the shut down of commerce is offset by the massive amount of work related to rebuilding.

From a broad economic perspective it’s likely that more will be spent than will be lost over the next year or so. Think of it this way: Everyone impacted is spending scads of money. The insurance and reinsurance companies will be shelling out billions. The government will be shelling out billions. Companies will be relinquishing cash. If they have any equity in their homes, people will be tapping into it to pay for repairing damages not covered by insurance. The money spent on rebuilding will trickle throughout the economy. The revenues lost from commerce being shut down and people not being productive have a more localized impact.

The hurricane is more likely to stimulate the economy than protract it.

With the exception of the impact to the ports and energy industry the areas hit doesn’t contribute very much on a relative scale to the overall economy. To understand what I mean imagine the national economic impact of the same hurricane hitting NYC or LA. There are relatively few national companies housed in the areas impacted the most. Neither does the area produce a major crop or other resource that will impact the overall economy. The national impact is primarily limited to the oil and gas markets.

September 11th was different because it caused people to reduce commercial activity out of fear. The hurricane would have the opposite impact. Immediately, entrepreneurs set about figuring out how they can get a piece of the insurance and government money being freely spent.

posted at 1:10 PM 0 comments   

Gasoline Crisis?

I’m not too concerned about the delivery of other commodities such as oil or coffee. Between the reserves and international distribution network these goods will find there way into the country through the many alternative ports that are undamaged. We are, however, facing the very real possibility of a gasoline crisis. We’ll probably be OK, but it’s iffy.

The math works like this: If you have $1,000 in savings and make $1,000 per month, but spend $1,100 in ten months your savings will be drained and you will be in dire straits. The math works is working the same with gasoline right now. There are offsets though that could effectively balance out the equation to break even.

Supposedly, the refineries out of commission amount to about 10% of U.S. production. I don’t know precisely how that relates to consumption, which isn’t the same thing. A few of those refiners will likely get back online relatively quickly. With gas at $3.00 a gallon or more people will most definitely conserve. I just filled up my old Audi on the way to the local Starbucks, because after spending all summer cooped up in the house with a six-year old the first day of school is like getting out of jail, and anyway it cost almost $50. Even before the hurricane I filled up my gas guzzling full-sized Jimmy / Blazer thing and it cost me $70. It would be closer to a hundred now. Also, people will likely start making a conscious effort to conserve for the purpose preventing a crisis.

Another offset comes from existing inventories. Refiners don’t deliver what they produce straight to the pumps. They store it. So we have to drain inventories first before we have real problems. The spotty supply disruptions we’ve seen so far are not the product of running out of gas, yet. They have more to do with gas stations expecting deliveries that never showed up. It’s a supply chain management issue, not a supply issue.

Also, the working refineries that are outputting the other 90% of the countries gasoline might be able to step up production a tad bit. Every little bit helps. And distributors might be able to import a bit more from South America than they have been.

Finally, the many thousands of displaced people in the South aren’t using fuel if they are sitting in emergency shelters, staying with families, or holing up in hotels and not commuting to jobs. But then the benefit is discounted by the long drives these people might be making away from the disaster area and the fuel that will be used in the process of making the area inhabitable again.

Some of these offsets are minimal, but they all add up. It could be that collectively we will be able to avert a crisis. Let’s hope so.

posted at 12:45 PM 0 comments   

Speak up

I’m mentally compiling what I think are the important questions and thinking about those as well as making various observations.

Readers please ask questions and make observations of your own as to how you think Katrina might impact the economy. Lets discuss. Let’s make this a forum. I know that there are thousands of ghosting readers not speaking up. When I asked for the somewhat obscure Goldman Sachs $105 oil report I got two copies in a half hour. So I know your out there. Speak up.

posted at 11:35 AM 2 comments   

Katrina and the economy

Today we got our son off on the school bus for his first day in the first grade and I did think about 10’s of thousands of kids not getting on the bus this morning, how they must have been saddened to leave favorite belongings behind, and how they probably didn’t understand that they may not be living in the same place again for a very long time and wouldn’t see best friends again any time soon.

The aftermath and continued cataclysmic destruction and displacement of Katrina is like one of Hollywood’s disaster movies except that people are to be a whole lot more resourceful and resilient than the movies give them credit for. Still, a whole lot more important things have been displaced than riverboat casinos; jobs, homes, family, friends, pets, personal belongings, commerce, etc…

Part of me wants to get in my truck and go help out however I can. I know if I’m heave hoeing I’m making a real difference instead of just sending something people don’t really need. I was living in Denver when we got slammed with four feet of snow a few years ago. It was called a blizzard, but really it was just a heck of a lot of snow. It was not a blizzard at all like the very real blizzard of ’78 that I remember hitting Indiana where I grew up. But there was a heck of a lot of snow to say the least. We had good friends living up in the mountains that were buried in over seven feet. I was on my way up in a 4x4 with tire chains, snowshoes, and a sled full of foodstuffs, when I learned via cell phone that rescue workers took them out in a snowcat. A picture of the family passing their baby over the snow to the rescue team made a back section front page of the Denver Post. They were taken to a rescue shelter where I picked them up and they stayed with us for some time. A week later it took four people most of a backbreaking day to dig out their driveway. A helicopter was still circling around looking for anyone who might be in need of rescue. Still it wasn’t in anyway comparable to the devastation down south.

What can I, what should I be doing to help? Well as trivial as it is I guess my immediate role in this it to try making sense of it all, understanding how the hurricane and everything that has come with it will impact the broader economy and the markets, dispelling myths and panics, and setting the record straight, just as I’ve been doing. So that’s the direction I’ll be taking in posts to follow.

posted at 11:19 AM 0 comments   

Refining Capacity

The problem at the pumps with having 10% of the refiners down is that shortages will be multiplicative. If people still want to buy 100% of the gasoline that they have in the past, then as one pump runs dry people turn to the next and the next like locust. We still have 90% of our gas, so we’re never going to run dry and the number of people displaced in the south that won’t be buying gasoline in the near future offsets demand. But for a time pumps are going to fall increasingly behind and the supply chain distribution is disrupted. Opening up the SPR won’t help with this problem because the existing refiners won’t be able to refine quick enough. My advice is to fill up while you can and then conserve as much as you can so as not to compound the problem.

posted at 10:32 AM 0 comments   

Tuesday, August 30, 2005

Reconstruction to be Hurculean Effort

Interestingly, Home Depot (HD), Lowe’s (LOW), and Sears (SHLD) are all trading down substantially today. It appears to me that they are down on sympathy with retailers suffering damage. Wal-Mart’s (WMT) announcement that more than 123 stores were closed shocked the retail sector. But already that number has dropped to 75. All three of the above mentioned retailers are likely to benefit to a much greater degree than investors are giving them credit for. Try to imagine the incredible amounts of building materials that these companies will sell. Perhaps investors haven’t yet figured out that Sears is a major installer of windows and vinyl siding. As is typical investors are still trying to sift through the information and figure out the winners and losers. As I see it the reconstruction will be more massive than is currently being realized.

posted at 3:18 PM 2 comments   

All Eyes on Katrina Conundrum

What can I say about Katrina? I doubt too many are turning to this blog for information right now. I’m glued to the TV like everyone else that can be. I’m watching every tick on oil, gasoline, and other commodity futures. I’m watching the major equity indices list today. I feel badly for those impacted and express my sympathy.

I can tell you that I looked at the S&P after the last hurricane of this magnitude in 1992 and there was no real impact a month out. So don’t panic out of your stocks.

I’ve been down on the sensationalism of the energy markets, but the impact of Katrina on the energy markets is very real and sensational.

Traders are thinking the Fed might pause because of Katrina’s impact on the economy. Traders have likely got this backwards. High energy prices are more inflationary than they are economy slowing.

posted at 12:11 PM 0 comments   

Monday, August 29, 2005

Employment Preview

Hurricane Katrina has overshadowed the fact that we get an employment report Friday. If it weren’t for the hurricane we’d typically be hearing about what to expect all week.

The NYT has a preview: History, at Least, Points to More Jobs

As the week moves forward I suspect investors will begin to hone in on the employment report. It’s a particularly key economic data point right now as investors debate the likelihood of further Fed rate increases. If the numbers are strong the investors will probably think that the Fed will be more likely to raise rates in December than previously thought and if they are weak investors will take it as a sign that oil prices are doing the Fed’s job.

posted at 5:33 PM 0 comments   

Leapfrogging Dip Buying Traders

When Hurricane Dennis came up from Cuba at class 3 on July 10 it hit shore on a Sunday giving the markets a chance to think things through before reacting. The previous Friday’s closing price marked Monday’s low. On Thursday of the week before terrorists bombed London’s subways, yet the next day the DAX managed to rally back and finish the week just about right where it was before the bombings.

The September 11th terrorist attacks rocked the markets. The attacks came on a Tuesday morning and the exchanges were closed for the remainder of the week. Ten days later the S&P 500 ended off by more than 11% from before the attacks. But only a month later the markets closed higher making every point in between a profitable buying opportunity.

Traders leapfrog each other to buy into market shocks to such an extent now that the shock sometimes never even comes. That I think is what we saw happen with the major indices today.

posted at 5:26 PM 0 comments   

Andrew did nothing to S&P

I looked at market data after Hurricane Andrew and there was no significant impact on the S&P 500 or on oil companies. There was, however, one energy related sector for which prices rose significantly in the days following Andrew, as they are today. Can you guess which one?

posted at 3:19 PM 0 comments   

Debt load makes Americans vulnerable

Debt load makes Americans vulnerable
Low interest rates, especially since the end of the 2001 recession, have fed the debt beast at home, allowing American consumers to accumulate nearly $11 trillion in debt as they buy more homes, more cars, more clothes, more dinners out. At the same time, foreign investment in the United States is helping to keep the dollar strong, which holds down prices on those imports that Americans covet.

posted at 1:13 PM 0 comments   

Bush may tap strategic oil reserve as prices soar

Bush may tap strategic oil reserve as prices soar
The Bush administration said Monday that it would consider loaning crude oil from the government's emergency stockpile, if requested by U.S. refiners facing delayed shipments due to Hurricane Katrina.

posted at 1:10 PM 0 comments   

Friday, August 26, 2005

A few articles...

I'm passing these on for your weekend reading pleasure. Or just relax and forget about the markets for a couple of days

Who will benefit when oil starts to fall?

Greenspan Worries About Economic Health

Housing boom is an imbalance: Greenspan

Black Gold and Jackson Hole

posted at 2:25 PM 0 comments   

Another Occasional Shameless Plug

I call it like I see it on this blog and give it to you pretty straight without any hidden agendas, or political aspirations. I inhaled. I admit it. I’m no saint. I’m not even here to make you money, as one clown likes to say. But I am trying to get you to think differently about the markets and see through all the hype and hoopla.

I’ve worked for outfits that put hype ahead of honesty and wit before wisdom. And I know that sensationalism sells. But when I was asked to start this blog I looked around and thought there must be a way to tell the truth about the markets and make money at it. The sad fact is that the vast majority of market pundits tell people what they want to hear, which is seldom the truth. Just as sad is that independent pajama wearing bloggers, as one arrogant academic I’ve battled wits with in the past referred to us, have risen in popularity to the mainstream media’s chagrin only because in effort to sensationalize the news journalist don’t bother to tell you things like the fact that Ecuador’s 144,000 barrels of oil per day amounts to somewhere around only a hundredth of a percent of the world’s production or that based on statistics refinery fires and other problems must be the norm, no the exception, because there has been no abnormal impact on the production data.

I figured that because so few of people were telling the truth that it might be an unfilled niche. I knew that this would be a slower approach, but I also strongly believed that in the long run I could get a more loyal base of readers.

It seems to be paying off as I’ve managed to carve out a decent little niche for myself debunking journalistic sensationalism and pointing out analysts’ conflicts of interest and the readership keeps growing. But I’m not above holding back. I’ve got to make a living just like everyone else. I love doing this blog and I want to make sure my publisher can keep sending me paychecks once a month. So not all that unlike public television every so often I’ll give it and The Market Spectator newsletter a plug.

If you’ve reading this blog and getting anything out of it worthwhile then please do refer your friends to it. Also you can try the newsletter for free without giving a credit card. I don’t think there’s another newsletter out there. As with this blog, I do it my way. I don’t promise to have great ideas every week. I don’t promise stellar returns, either. What I do is take this blog a step further and give specific ideas on how to act on many of the observations I make about the markets and peoples misunderstandings about the markets. I’ve had some good ideas and some bad ones. Overall though, they’ve most definitely leaned to the positive side. To prove that I put together a mini model hedge fund to track the results of the ideas. In the past several months it’s up more than 10% using minimal leverage and holding about 40% cash.

Here’s one example:

A while back I said that people were misinterpreting the Fed’s statements. They didn’t seem to understand that when the Fed said that policy accommodation can be removed at a pace that is likely to be measured it was implying that it would move rates to a level that was unaccommodating and that it had no intention of ceasing the rate hikes as soon as people thought. I recommended to subscribers shorting the January Fed Funds Futures at 95.9850 when traders were still seeing almost a zero probability of a December rate hike. This was something I also explained in the blog and perhaps coincidentally soon after that market pundits started to see things my way. After the feds last rate hike traders started seeing more interest hikes ahead. I suggested that it might be a good idea to lock in profits by closing out half of the position when the Fed Funds Futures fell to 95.8350, which then indicated a probability of greater than 50% for a rate hike in January.

Then as I recently wrote traders started reading the relationship between oil and interest rates the wrong way. They started to speculate that oil prices were doing the Feds work for it in slowing the economy down. Consequently they adjusted the Fed Funds Futures to reflect a lower probability of a December rate hike. I said that this underestimated the amount that oil prices were trickling down into other goods and services in an inflationary manner. My belief is that the Fed sees oil and home prices as inflationary and speculative. Slowing the economy down isn’t necessarily going to take care of a speculative bubble problem. The Feds job is to fight inflation and rising oil and home prices are clearly inflationary. So I again suggested that subscribers might want to consider shorting the Fed Funds Futures at 95.8700.

Now as we get information from the media about Greenspan’s speech in Jackson Hole, WY he had a lot to say about energy and home prices making it clear that he was targeting these as inflation problems. Consequently, traders moved the Feds Funds Futures down 0.0300 to 95.8550 making for a nice little position trade. But there’s probably still more left on this table as in my opinion a December rate hike is more likely that traders are bidding it right now.

posted at 2:15 PM 0 comments   

Uncommon Sense

It seems that with Greenspan nearing his exit we may begin to hear more about his personal philosophies than he’s given up in the past. He made the comment up in Jackson Hole that creeping trade protectionism threatened the countries economic vitality.

I have a nasty habit of looking at things from a different perspective than most people. I have found that it is difficult to present such viewpoints without having them taken the wrong way and having people try to read things into them or insinuate things about me that aren’t true. Thus, I find myself all too often saying, “Don’t take this the wrong way, but…” My perspective on trade protectionism is a definite “Don’t take this the wrong way”. Don’t even bother writing in to tell me how I’m an advocate of trade protectionism or have some sort of leftist agenda. You would be way off base and backing me into a corner in which I’d probably say things I shouldn’t be saying.

So for a moment try and think about this subject from a purely economic perspective and not a political one, as that’s where I’m coming from.

Greenspan hinted at his Randian past on this one. Our country does not have a problem with protectionism, at least not on a relative scale. The United States is the least protectionist major country in the world. We’re constantly pushing other countries be less protectionist. Our trade agreements are almost always like two boys daring each other to do something dangerous. When they can’t decide who should go first they agree that they should jump at the same time. The United States is the boy who jumps and our trading partner is the boy who only pretends to jump then laughs at the other boy and tells him what a sucker he is, that he was only kidding and the other boy is a moron for jumping. This is in essence the nature of the majority of our trade relations with truly protectionist countries.

If we’re the least protectionist major country in the world, how then is our protectionism a threat to our economic vitality?

We need to worry more about getting other countries to drop their protectionism than we do with our own. That’s not politics. That’s basic economics, which in my view is the same thing as basic common sense.

But I’m not sure we can call something logical common sense any longer since so few people seem to be rational any longer. Being logical and rational amounts to having uncommon sense.

posted at 12:45 PM 0 comments   

Thursday, August 25, 2005

Oil is no exception

It was speculation that got us into this petroleum predicament in the first place and it is speculation that will get us out. Up to this point the energy markets have been dominated by bullish traders. As the rally got under way it attracted more buyers looking for high returns. But as time goes on the market is attracting more and more speculators from other markets. Hedgers, shorters, arbitrageurs, are taking interest in oil’s volatility. The market will inevitably become more efficient and in time it will be driven in the direction of more rational prices. This is always the case. It just takes time.

I could cite dozens of cases of this for markets, sectors, and individual stocks. Think dotcoms and Krispy Kreme to name a couple. By contrast how many cases can you cite in the history of the markets where there have been real problems with not being able to supply as much of a commodity as there is demand? The cases are almost non-existent because people substitute and demand decreases to some reasonable point of equilibrium. Oil is no exception.

posted at 2:56 PM 1 comments   

Drop in durables orders may reflect oil price rise

Drop in durables orders may reflect oil price rise
Orders for big-ticket manufactured goods showed an unexpectedly steep 4.9 percent decline in July, the Commerce Department disclosed Wednesday, spurring concerns that dramatically higher fuel prices may be sapping the U.S. economy's recent momentum.

posted at 1:32 PM 0 comments   

Gas prices hit consmers harder than economists admit

Whether the high cost of oil and gasoline is taking a bite out of consumer discretionary income and even business spending is getting harder for those in denial to debate. Wal-Mart (WMT) has said that gasoline prices are hitting its bottom line. Not everyone believes this, but it’s hard to see how. Last week Larry Kudlow said on his television show that he didn’t believe Wal-Mart’s gasoline complaint because Target hadn’t been impacted in the same way. He said that he believed the real reason was that Target (TGT) had a better mix of goods. Now I kind of like Kudlow’s show, but to me he seems a bit out of touch with reality, at least my reality and the reality of other common folk.

I might know a thing or two about the markets and economics, but only because I’ve worked very hard approaching them as both an art and science, just as anyone else skilled in a trade would do. Some people would probably even classify me as a bit odd and if I were rich eccentric, but in most ways I’m very average. I have an old full-size Blazer, a classic Mustang, and an Audi. I love to drive my Blazer. It has character and I prefer it in most ways to the new trucks I used to own when I worked in cubicles. Obviously it’s hard on gas and some would say a selfish indulgence. Fortunately, working from home and with the grocery store only a few miles away, I don’t drive it whole lot. But when I do pull it into the gas station, it is truly painful watching the numbers spinning wildly like some kind of reverse slot machine. My only relief is a delusional one derived from the fact that the station I usually use has an anti-theft deterrent cap so that I can’t buy more than $50 at a time. And since I’ve been going there for about the last six months, not once has $50 been enough to top off my truck.

I live near Keystone and Breckenridge Colorado. I don’t have to tell you that homes aren’t cheap here. Our local paper recently ran a series about how many people who live here full time have to live away from the resorts and commute in, few families get by on one income, and very many people work multiple jobs and odd hours. Many people, for example, drive about 20 miles from Frisco to work in Breckenridge. These people really don’t have a lot of discretionary income leftover because such a large portion of their income goes toward housing. So for them the gas prices really do cut into their ability to spend at the plentiful sporting goods stores, eateries, pubs, and coffee shops. And yes, the local Wal-Mart too.

It’s the most basic of economics. It’s hard to see how anyone with an economics background could not see it. Lower income people spend a greater percentage of their income on housing and now gasoline than higher income people. Thus, they have less discretionary income left over and this impacts Wal-Mart more than Target.

I believe that high gas prices are hitting America’s small towns the hardest because so many people living in small towns commute to larger towns and cities to work. They spend a disproportionately large portion of their incomes on gasoline. Wal-Mart is the most popular retail store among small town shoppers throughout the country. It is also the lowest margin retailer in the world. So naturally it’s bottom line is very sensitive to its customer’s discretionary income, its own delivery costs, and other inflationary factors.

posted at 1:29 PM 0 comments   

Wednesday, August 24, 2005

Nine out of ten

All rivers lead to the ocean, as the saying goes. Water takes the path of least resistance to the lowest point. Money is like water. It also seeks to flow to the lowest point, to those that want it the most. Brokers are often referred to as sharks, but they are more like the symbiotic, yet parasitic suckerfish that cling to sharks. They provide a necessary and often valuable service, but their motive is very often driven by their desire to acquire money much more so than their desire to help manage other people’s money.

Collectively, brokers will take the path of least resistance to getting more money. This is what really moves the markets. Brokers are salesman first and foremost. And the salesman is unique breed of person.

Imagine that there are ten widget companies. One widget company makes the best widgets and they are far superior to the other nine and because it makes them for roughly the same price as the other widget makers. Widget numero uno’s salesman can tell its customers truthfully that it has the best widgets on the market. The salesman for the other nine widget companies have to somehow convince customers that their widgets are the best, that they provide better service, that theirs are more convenient, etc… It takes a certain kind of person to be able to do that.

I’m not suggesting that all widget salesmen are bad people. They are a necessary part of a competitive market, just as carnivore’s are in nature. It’s just that there’s a downside to carnivore’s, like having a mountain lion drag you off a hiking trail by your throat. Widget sellers are necessary to the balance of competition. If nobody were willing to sell widgets for the other nine companies then the widget company number one wouldn’t have any incentive to improve its product, nor to keep its price as low as possible. As soon as it tried to raise its price the other nine widget agents would be telling customers that their widgets were a better deal.

Similarly, a broker has to sell its product, for better or worse. There are literally thousands of mutual funds. Studies have shown that the ones that are superior today, tend to be inferior tomorrow. But the inverse isn’t necessarily true. It doesn’t imply that a fund that is inferior today will be superior tomorrow. In fact the majority of funds that are inferior today will also be inferior tomorrow. Strictly mathematically speaking, half the funds are superior and half are inferior relative to one another. But relative to some other measure such as the S&P 500 or by defining superior to mean only the top ten percent, then what I have said is true.

Yet the broker is apt to sell you what you are most apt to buy, which is the strongest performer, regardless of whether it’s in your best interest. It is in the brokers short-term best interest to do so because he’s more likely to complete the sale and collect the commission. Hence, investors incentivize brokers to not act in our best interest.

Market pundits and analysts employed by Wall Street brokerage houses tell us that its growth in world demand that’s driving oil prices higher. Nine widget sellers out of ten have to tell you story to sell their widgets.

Imagine that you’re a broker in 2001. You’ve got a mortgage and kids in school, just like most other people. Paying your bills is dependent on generating commissions. In 2001 equities were a difficult sell. What was the path of least resistance in 2001?

From the Wall Street brokerage houses down through to the small town financial advisor everyone follows the path of least resistance, though not straight through. The path spills over too the self-directed investor, the media, and various independent market pundits.

This brief article caught my eye.

Wall Street tunes into housing boom - or bubble
Research reports written by Wall Street's top gurus used to focus mainly on price-earnings ratios, highflying stocks such as Google and bull and bear markets.

Not anymore. In their missives to clients, investment strategists are increasingly shunning stocks and devoting more ink to the booming housing market.

Long bond yields began to fall back in 2000 in tandem with stocks as 401k plan holders got online and began to move their money over to bond funds. Real estate has followed a similar path. Gold turned around at the beginning of 2001. It has nearly doubled since. At the end of 2001 oil was still flirting with $15 a barrel. That’s when it turned up and kept on going. The CRB also started its run higher at the end of 2001. International stocks didn’t attract investors’ attention until 2003 after falling by more than 50% form 2000.

In every case we are told that there are supply and demand issue. But just step back and look at the bigger picture. These have all followed the path of least resistance in attracting investment interest. The fundamentals haven’t changed much during the last five years for any of these asset classes. It’s the limited supply of investments and increased demand for investing in these asset classes due to the relative lack of interest in the stock markets that has driven these markets higher. There is no doubt in this. The masses are being fed a pack of lies about the supply and demand equations for these assets, just as nine out of ten widget sellers have to sell you an inferior product.

But what is the next path of least resistance?

posted at 2:20 PM 0 comments   

Mini Doldrums

Since I started writing this blog at the beginning of the year this week was the first time that I found myself struggling with finding something worth writing about. There are always things I could write about. Google always has a new gizmo hitting the market.

In fact I tried its new Sidebar, which has some potentially handy features particularly via its Firefox browser like way of allowing developers to create their own plugins. But for me there was one seemingly tiny flaw that caused me to turn it off and probably will keep me from using it altogether. I could not find a way to turn off the ‘always on top’ feature. When you open the sidebar it pushes all the windows you’re working on over out of the way making them small to make room for the sidebar. Working on a laptop, the sidebar took away too much precious screen real estate. So I turned it off. I’d probably leave it on if I could just go to the desktop to see it or run it as a screen saver. But who really cares anyway? It certainly doesn’t make me any money.

I could have written about Merck, but I’d be blowing smoke if I did. You might have noticed that I don’t write about biotech here, and for good reason. I’m not even going to pretend that I know anything about biotech. It wouldn’t take you long to figure out that I don’t. It’s an interesting case, to be sure, but I just don’t have anything to say about it that you couldn’t find in the papers.

As I was starting to wonder if I was having some sort of stereotypical writers block, I realized that we were finally just now in a bit of a doldrums. The summer as defined by the traditional school season is coming to an end. My son starts first grade a week from today and I can’t tell you how much I’m looking forward to that. I’ve had him home with me all summer to save on the exorbitant cost of daycare. It was a good summer, but I’m definitely ready for it to be over, as I’m sure every parent with a kid at home reading this can attest.

And it has been a surprisingly good summer for the markets. I’ll give you some tallies in a separate post. It was up and down as the markets always are, but there was a slight upward bent to it and it was anything but boring.

Now though, it looks like we’ve got a couple of weeks of relief as parents across the country wrap up their summer activities and close out the summer with family vacations. Then I suspect we’re going to see some action return to the markets again.

In the meantime, these mini doldrums are giving me a chance to really step back and look at where we’ve been in the markets and hopefully I’m coming up with some decent insight as to where we might be headed next. I’ll be sharing those observations in future posts.

posted at 12:44 PM 0 comments   

Tuesday, August 23, 2005

Housing inventories rise with jobs

The media and investors are focused in on the existing home sales data today. Particular the focus is on an inventory of 2.75 million homes, which is an increase of 2.6% since last month and 12.6% from a year earlier. Sales fell 2.6% in July to a seasonally adjusted annual rate of 7.16 million homes. But that was still the third highest rate of all time.

The average inventory level so far for the year is 2.46 million, compared to 2.21 million in 2004, 2.25 in 2003, and 2.10 in 2002. But we’ve still got three typically slower real estate months to average into the 2005 data. Last year, for example inventories fell from 2.53 million in August to 2.21 million in December.

My take on the inventory data is that it isn’t a sign of slowing in the housing market, but rather has more to do with broader economics. I suspect that rising inventory levels has more to do with employment than anything else, though I haven’t yet tested historical data for the correlation. But inventories have risen as unemployment and the duration of unemployment has declined.

It’s reasonable to expect that as the employment market improves people are going to want to make job changes. Many employees that were able to stay in the same job through the recession felt compelled to do so and really had little other choice. But similarly to the way home sales go up when interest rates are low, job-hopping is apt to increase as the employment rate goes up. And that means turnover in the housing market.

posted at 12:41 PM 0 comments   

Monday, August 22, 2005

Kudlow & Co. Poll: Buy housing or stocks?

Kudlow & Co. Poll: Buy housing or stocks?

Where would you prefer to invest your money?
Homes 29%
Stocks 71%
Total Votes: 524

The results are interesting, but I think skewed by the fact that responders are clearly market followers. I suspect a similar poll of the general public would lean very heavily towards homes.

posted at 2:02 PM 1 comments   

Article: Buy When Wall Street Won't

Buy When Wall Street Won't [Fool.com: Commentary] August 22, 2005

Here's another article on buying when others aren't. This is particularly true of highly cyclical stocks, with the prerequisite that the companies are good companies with income and / or growth.

I liked the point:
I don't know about you, but every time I hear one of the talking heads on CNBC say "the market's overvalued" or "the market's oversold," I shake my head in disbelief. How anyone can get an accurate read on the valuation and growth prospects of all 10,000-plus companies in the publicly traded universe, and then sum them all up as being "expensive" or "cheap" in a 30-second sound bite, is simply beyond me.

One overrated after hours commentator seems to try and define all 10,000 in an hour. I think you know who I'm talking about.

posted at 1:37 PM 2 comments   

Article: Four Picks Wall Street Wouldn't Touch

Four Picks Wall Street Wouldn't Touch

I don't have a worthwhile opinion about the stocks mentioned in this article but I did find the following statement interesting:
According to a recent study by John C. Bogle--founder of mutual fund giant Vanguard Group--a fund's average holding period on a stock was roughly six years between 1945-1965. Today, the average holding period on a stock stands at around 11 months, representing a drastic shift away from the traditional buy-and-hold principles of the past.

posted at 1:28 PM 0 comments   

Friday, August 19, 2005

How Convenient for Goldman

Blogs have a reputation for bashing the mainstream media (MSM). I do it myself form time to time. It’s curious to me that when journalists disagree with each other it’s called a debate, but when a blogger disagrees with a journalist, then it’s bashing.

But maybe there’s a reason, other than proliferating this alternative information medium, that us bloggers feel compelled to bash the MSM and why readers have shifted to blogs snatching an albeit small share of the market from traditional journalism.

I should tell you that I have written extensively for popular financial media outlets and I might very well do so again in the future if it is to my benefit to do so. But, I feel compelled to express my frustration with the MSM today.

Merrill Lynch (MER) and Goldman Sachs (GS) recently came out with a new round of forecasts on the oil markets. This time around Goldman Sachs didn’t talk about a $105 “super spike” in oil prices. The company took a lot of flack over its “super spike” report a few months ago. Some in the media called it a marketing ploy and others called it an attempt at making the call self-fulfilling.

I called it both. It was irresponsible arrogant in my opinion. And Goldman Sachs per its quarterly report did in fact take a beating last quarter due to oil prices being less volatile than it had expected. The firm revenues are dependent on its commodities trading desk pulling a billion dollars a year out of the energy markets, according to the Bloomberg article I linked to above. Energy trading therefore amounts to about 5% of its revenues and probably more, recently.

I wish I could tell you about another somewhat humorous incident of pomp and arrogance involving someone at the top of the firm and someone close to me. I don’t mean to sound like Patrick Byrne, but it wouldn’t be prudent for me to relay the story publicly. Suffice to say, for the time being, that this person lived up to the stereotype of the spoiled rich and elite. Back to the topic at hand.

Notice that I didn’t provide you with a link to the report. That’s because I couldn’t find the report anywhere on the Internet. My frustration with the MSM stems from the fact that I looked at more than a dozen articles about the “super spike” and not a single one of them provided a link to the report or told readers where they might find it. And guess what, it’s not on Goldman Sachs Web site either. At least not anywhere I could find it. The firm does, however, conveniently provide access to a more demure report Global Viewpoint - Is there Life after $60/bbl?.

How convenient for Goldman. If any readers have this report or no where I can find it I'd be obliged, to Goldman's chagrin I'm sure.

posted at 3:48 PM 3 comments   

Par for the crude

The truth about oil production is that it’s limited by the inefficiencies of communism and corrupt governments around the world. And some would have us sell our oil companies to China so they can hoard oil. Yes, we hoard oil too. That’s not being hypocritical. That’s being a patriot (definition: One who loves, supports, and defends one's country) and looking out for our own interests first. Why should we play fair with the Chinese government when it is not playing fair with us, or its own people, and it has no intention of doing so now or in the near-future, if ever.

This is par for the course:
Though Ecuador has a relative abundance of oil reserves, it has been unable to take full advantage of those resources for its own development. Mismanagement, lack of investment, and corruption in the state-owned oil sector have caused declines in state oil production over the last decade. Commercial disputes as well as judicial and contractual uncertainties have deterred private oil and other companies from investing in the country.

In 2004, oil accounted for over 50% of total export earnings.

Source: U.S. Department of State

posted at 3:00 PM 0 comments   

CAT Back for Encore

Caterpillar (CAT) has risen 3% thus far today on news that the company will be expanding its presence in China. That’s a nice little pop for the stock, but it’s up almost 17% since I added it to The Market Spectator’s model portfolio. I’ve also posted about the company in this blog. Would you be surprised to hear that James Cramer told viewers to sell the company right near the low because he didn’t like cyclicals? He said that just after I recommended it. Here’s some of what I’ve said in previous posts.

On March 29 I wrote Cat Call Creates Buying Opportunity:
With the Dow Industrials now at two month lows this makes for a great long-term buying opportunity for Cat. There’s no denying the world is industrializing at an exponential pace and that means more sales for Cat. And while financial and other companies try to get a foothold in China, Cat has been selling there for a couple of decades. Cat also expects to quadruple sales in China over the next decade. I think its reasonable to expect similar results in many other developing countries.

On April 20 I wrote Cats Will Be Moving Dirt For Long Time To Come:
Cat’s have been moving dirt around the world for 75 years and they’re apt to be moving even more dirt 75 years from now as civilization spreads throughout more and more developing countries. There are few companies that have been around this long and even fewer that have been good investments for as long as Cat has.

On May 5 I wrote Time to Buy Cyclicals is Now:
...the time to buy cyclical stocks is when the very same pundits are telling us to sell them. It makes good sense to buy a stocks that follow cycles when other people don’t want them because their prices don’t necessarily follow the same cycle as their business fundamentals.There are many companies such as Caterpillar (CAT) that are merely perceived as being cyclical. Cat is a major global company participating in the rapid growth of civilization. Its stock price tends to move somewhat inversely to the economy and parallel to the Dow of which it is a component. During times of boom people become more interested in high flying tech stocks than big boring blue chips. But this is also when the company’s fundamentals are best.So people telling you when to buy and sell this company based on fundamentals and cyclical factors that favor the company have it backwards. How ironic is it that the same pundits telling us not to buy Caterpillar because of its supposed cyclical behavior, are also telling us to buy stock in Chinese companies because of the countries rapid growth?

posted at 12:13 PM 0 comments   

Ecuador Oil Inconsequential

This business about Ecuador oil impacting the oil markets is nonsense. In case you haven’t heard Ecuador's President: Oil Production Halted due to protestors destroying oil installations. The news has oil up a buck and change today.

The media is telling us that Ecuador produces 144k barrels per day, most of which goes to the U.S. This is just typical of the focus on outages that at any other time wouldn’t even be newsworthy if oil prices weren’t through the roof. And this kind of limited information reporting certainly isn’t helping. My view is the media doesn’t want you to know the truth because oil is making for great headlines day after day.

What their not bothering to tell you is that world production is 84 million barrels per day. Ecuador’s portion of world production is a mere two tenths of a percent. The U.S. has a steadily rising inventory not including the strategic petroleum reserve of 321 million barrels. Ecuador’s production amounts to four hundredths of a percent per day of our reserves. If every bit of Ecuador’s oil came to the U.S. and the country didn’t produce for an entire month it would amount to just over 1% of our inventories. We import 10 million barrels per day and thus Ecuador’s total daily production amounts to 1.4% of that amount. Of course all of Ecuador’s oil doesn’t come to the U.S.

The outage is inconsequential to the world’s oil supply network. It took me less than an hour to gather this data. Do you think maybe the mainstream media isn’t telling us this information for a reason? And us bloggers are supposed to be a lower level information provider.

posted at 11:52 AM 0 comments   

Thursday, August 18, 2005

Inflation Frustration

There’s more to the markets than oil. I apologize to my regular readers for having been so repetitive lately. But, unfortunately as much as I hate it, oil is a major market driver right now.

We got the monthly CPI and PPI data this week and both were substantially elevated even at the core price level.

Crude goods (no relation to crude oil) increased 6.7% in July and though the crude number has been volatile it has risen more than 9% over the past year both with and without the inclusion of energy costs. Finished goods climbed 1.0 including food and energy and .4 without it. The difference between finished goods and crude goods reflects an amount being absorbed by producers.

Oil and gas prices have trickled down through the CPI. The annualized rate of increase in transportation costs was 18%, other goods and services 7.2%, housing and medical care 4.8%. And if the CPI continued to increase at the same overall rate it did in July we would have an annualized inflation rate of 6% per year.

That’s certainly a pace high enough to warrant the current Fed intervention. But the difficulty of managing fed policy is that there is a lag between rate hikes and the impact on the economy. Rate hikes today are meant to stave off future inflation that may or may not appear. This is the reason why the Fed so often overshoots. It has to be conservative in its actions assuming that inflation today implies inflation tomorrow. There isn’t really a foolproof formula the Fed can use to figure lag time and economic impact of rate hikes. Each time it is a separate problem to solve.

What I’m not getting is why this week traders have bid down the probability of a December rate hike even with the jump in inflation in the indices. Right now as I see it every indicator is pointing to more rate hikes.

But what do traders know anyway? The media was reporting that traders thought oil prices were just pausing above $66 before they went over $70. That was Tuesday. And yesterday oil fell almost $3. Myself included, as the jump from $64 to $67 certainly caught me off guard last week.

posted at 11:36 AM 0 comments   

A reader writes:

First of all I'd like to thank you for your excellent posts on the oil bubble. The mumbo jumbo about refining capacity has been bothering me since I heard the argument for the first time and I'm glad you set the record straight in a previous post.

I have to ask you though, how is it possible to say that supply for oil exceeds demand, or vice versa. I'm having a hard time figuring that out. Supply = Demand at market price or the market price adjusts swiftly, that's the way I learned it. After all the oil has to go somewhere. Does one just mean that the oil producers build inventories with the "excess" oil or what?

Thank you and good question. As I understand it the supply side of the equation refers to production, rather than goods sold. So it’s possible for there to be more produced than sold. Conversely, it is then possible for buyers to demand and purchase more oil than is being produced with the difference coming from stored supply. This data is useful because in theory it should tell traders when to be concerned about too much / too little supply or too much / too little demand. Normally they are. But the market is now flush with buy and hold money managers who lost their jobs during the mutual fund scandals and billions in redemptions that resulted, then went out and started hedge funds.

Just so you don’t think I’m pulling that out of my you know what at the time of the mutual fund scandals my wife was working in the industry in Denver and we knew of numerous fund managers who lost their jobs and started money management businesses of their own, typically catering to high net worth investors as hedge funds or advisors, and typically not having any sort of commodities experience or understanding of that side of the fence.

Hence, without getting a big head about it, my prompting CNBC to ask analysts about the relationship between refining capacity and oil prices, lack thereof, probably helped to stall last weeks oil price spike. Not that traders suddenly understood the relationship, but rather that they suddenly had to be concerned that other traders would start acting more rationally as they have this week. Markets regress to the truth, eventually.

Now if I can just get CNBC to tell its viewers the truth about refining, that despite all the outages they are calling attention too, refiners are outputting more finished product and having no trouble meeting demand. Capacity utilization might be high, but capacity has ratcheted up to meet demand. So the capacity utilization is a percentage of an increasing amount. Gasoline inventories are normal. And refineries are importing more finished products to meet fluctuations in demand. Thus the increased capacity utilization isn’t as meaningful as it once was.

posted at 11:04 AM 1 comments   

Wednesday, August 17, 2005

SquawkBack Poll: Why is oil soaring?

SquawkBack Poll: Why is oil soaring?

Of 2,487 voters 47% said speculative buying is responsible for high oil prices. The next closest explanation was a shortage of supply at 17% . Excluding the 15% that voted other leaves at least 38% of voters who are ignorant about the facts behind oil economics.

The latest explanation is concerns about a lack of refining capacity. But CNBC's Mark Haines points out that while this may explain high product prices, a lack of refineries should push the price of oil down, not up.

Actually I pointed this out to Mr. Haines via Squawkblog.com on August 4th. The poll ran last Friday the 12th. No matter, I'm just glad to see that the mainstream media is finally reporting a smidgeon of truth about oil prices.

I'd like to think that it was the truth, whatever the source may be, that stalled the panicky buying spree we experienced last week.

posted at 3:55 PM 1 comments   

China and India: the Challenge

Yahoo! Finance is running a special report from BusinessWeek comparing India and China.

China and India: the Challenge


How America Can Compete With China and India
In the coming decades, China and India’s economic growth will challenge the U.S. in ways that we can barely begin to imagine. But some say the U.S. could beat the gloomy projections.

Crouching Tigers, Hidden Dragons
The economic momentum isn't unstoppable. China and India face huge obstacles to growth.

China and India; From Then to Now
Take a quick trip through 4,600 years of economic, political, and cultural history.

posted at 3:46 PM 1 comments   

What about world demand for oil?

A Bear Stearns analyst came on CNBC today saying that it was world demand and demand from China that was driving prices.

Would you be surprised if I told you that this doesn’t hold water either and that the data doesn’t support this argument?

As it turns out total world supply vs. demand is in great shape. The average difference between supply and demand in 2004 was almost 500,000 barrels per day. In 2003 demand exceeded supply by 252k barrels per day and 1.4 million in 2002.

Basically the supply and demand balance has ebbed and flowed over time. Recent data doesn’t suggest any sort of imbalance. From 2003 through the first quarter of this year total world supply increased 5.32%, while demand increased by a lesser 5.30%. Comparatively, from 2001 through 2003 supply increased 2.47%, while demand increased by a greater 2.87%.

What about all this talk of growth in China? Yes China’s oil demand is growing fast at more than 19% going back through 2003 compared to 13% from 2001 through 2003. But it’s share of world oil demand has only increased from 6.95% in 2003 to 8.09% in the first quarter of this year. China’s share of world demand is actually not much greater than Russia’s share. Yes, China’s demand is reportedly growing, but it isn’t causing demand to outstrip supply and we don’t know how much of China’s demand amounts to stockpiling vs. actual consumption.

It is a fact that China is establishing a strategic petroleum reserve of its own. But we don’t really know how much of its oil demand might be going into reserves. China is now demanding average of 6.83 million barrels per day compared to 5.55 in 2003. That’s an increase of 1.28 million barrels per day or 467 million barrels per year. The U.S. supposedly has a reserve of 700 million barrels, but is still adding regularly. It is entirely possible that a significant portion of its demand growth is the result of creating a reserve comparable to that of our own or even greater.

According to the article High fuel prices: is SPR to blame? China hasn’t started filling its reserves yet, but when it does so it intends to store about 100 million barrels. But this most certainly doesn’t mean that China hasn’t been storing and stashing oil about the country. It is also possible, if not likely, that China has purchased futures contracts to lock in the price it will pay on the open market while filling its reserves. This could explain some of the rise in oil prices even as actual supply has significantly exceeded supply on average over the past year and a half.

And interestingly according to the article above the U.S. has increased the rate at which it has been adding to its reserves recently. One has to wonder if the U.S. and China aren’t quietly engaging in a race to stockpile the world’s supply of oil and that isn’t also hitting prices in addition to the usual speculative suspects.

To be sure, it’s highly speculative on my part, but one thing I do know for sure is that it could be going on without our being aware of it, because we can’t even seem to get the simple economics of refining capacity and oil demand straight.

posted at 1:17 PM 2 comments   

The truth is in the numbers for oil and gasoline

I’ve got eight spreadsheets with an average of several tabs each, charts, and average calculations open on my PC right now. This isn’t the first time I’ve crunched the numbers and again the data offers up nothing to explain the prices we’re seeing. In fact the data suggests that prices should actually be lower than they were a few years ago. There are just so many ways that the energy markets are being misunderstood.

We often here via the mainstream media that refineries are running at the highest capacity utilization rates ever and therefore are sensitive to outages. I’ve said that I believed the media is focused in on individual outages at the moment without regard to whether they are normal or above average. I haven’t been able to find outage specific data. But I did dig deeper into petroleum data to get at the outage impact by process of elimination.

First it’s important to realize the difference between operable capacity and the refinery capacity utilization rate. Operable capacity averaged 16.77 million barrels in 2003, 16.86 in 2004, and 17.03 thus far in 2005, for an increase of 1.56%. By comparison the utilization rate has increased 1.18 percentage points over the same period. What this means is that refineries are using 1.18% more of its total capacity, but total capacity has increased by 1.56%. The media never tells you this.

Furthermore, gasoline supplied per day has increased 3.42% through 2003, but gas inventories have actually increased by 5.95% over the same period. In other words the outage fears are in fact unfounded because, despite a 5 million barrel drawdown last week, refineries are producing more product than consumers can consume. And at the current high prices this gap is likely to widen even further.

Another interesting fact that is never relayed to us common folk is that gasoline imports have increased nearly 13% through 2003 and imports now account for more than 10% of gasoline supplied. You should take this to mean that as imports increase the capacity utilization rate becomes less relevant and the ability to import becomes more relevant to distribution.

You might also be interested to know that oil inventories have increased by more than 12% through 2003!

Do you see anything in these numbers to suggest that oil prices should have increased 73% and gas prices 67% in the last couple of years?

posted at 1:11 PM 0 comments   

Tuesday, August 16, 2005

Overstock.com Naked Short Controversy

For those interested in the Overstock.com naked short controversy I refer you to Mark Cuban’s recent post Wall Street - Fact is stranger than fiction on his blogmaverick.com site.

posted at 3:43 PM 0 comments   

Posted to Squakblog.com

Yesterday I heard CNBC commentators asking energy analysts about the economic relationship between refining capacity and oil prices. It strikes me as odd that so many 'supposed' experts don't understand that if there's a cap on the ability to refine then there's a cap on the demand for oil. This seems like such a simple concept to me. Your average first grader can understand that if you have 10 barrels of oil and someone wants to buy 5 barrels from you, then you have 5 left over. The math is no more complex than this. Yet the vast majority of experts are telling people that high capacity utilization rates and refinery outages are to blame for high oil prices.

The analyst that was asked this question yesterday really stumbled on the question, mumbled something about there being a hedge fund component to it, then quickly changed the subject.

I am told that you asked this question last week and I thank you for that. The fear and speculation in the energy markets really is hurting us common folk. I don't have to drive much now and thankfully I don't commute 150 miles round trip like I did for a year some years back. But I felt the sting last week when I traveled through Colorado, down to Mesa Verde, four corners, and back up through Moab, UT. I had to pay more than $2.70 when I needed gas passing through one small town.

A problem that no one is talking about is the fact that one of the major sources of revenue for small towns throughout the country comes form residents commuting to work in larger towns. All across the country you can witness the mini rush hours as people commute from one town to another. Near where I live people commute about 20 miles one way from Frisco, CO down to Breckenridge. A rough calculation shows that at an average of 20 mpg these people spend about $108 a month at a gas price of $2.50 vs. $54 at $1.25.

By extension this amounts to many millions of Americans shelling out perhaps an additional $20 to $100 or more per month for gas than just a few years ago. For a person making $20k a year an extra $50 a month in gas amounts to 3% of their gross income and a very substantial percentage of their disposable income.

For young people getting started in their careers this could be the difference between staying in an apartment and buying a home. When you tack housing inflation, one of the larger components of today's CPI release, onto rising fuel prices it could amount to a whole lot of people remaining renters in the near term and in the long run it could hurt the housing market.

posted at 3:42 PM 0 comments   

Fast Company

I got the September issue of Fast Company magazine in the mail and there are a number of articles I look forward to reading. The August issue is still the current issue online. Here’s an excerpt of the contents from what they are calling The Leadership Issue:

My Brilliant Failure: One day, David Pottruck was CEO of a major company. The next, he was out on his ear. What’s it like to lose it all - and how do you get it back against?

Heroes and Cowards: We celebrate the courageous few who did the right thing - and roast the wretches who caved.

The CEO Next Door: It’s time for a little humility in the executive suite, say author and entrepreneur Jason Jennings, who shows us nine leaders who swallow their pride.

posted at 2:57 PM 0 comments   

Fear Based Speculation in Energy Market

Paul writes:

The statement that higher prices are speculation "pure and simple" is a bit naive. I think there is more happening in this market than just positive feedback.

I believe the driver is fear of supply disruption. Watch the market's reaction to world events. Anything that could lead to supply disruptions drives up the price of crude oil, regardless of whether the disruption actually happens or not.

And, yes, stockpiles of crude are rising. But that does not mean speculators are driving the market while hedgers and consumers are sitting on their hands. I think the hedgers/consumers are the ones driving the fear, despite their stockpiles.

I used to live in Northern Virginia, and one week there was a fierce rumor that supplies of toilet paper were about to be exhausted. (I am not making this up.) There was a run on toilet paper, and you could not buy it at any price. Shelves were empty. Everyone I asked admitted that they had plenty on hand. Inventories were not the problem. The problem was that they anticipated the end of toilet paper supplies.

That's what's happening in crude. When the market is finally convinced that the pipeline is safe, prices will come down.

Want more proof? Look at the commodity delivery curve. Until recently, it was in contango, indicating a crunch on the spot market. Now it has reverted to backwardation, indicating fear of future supply problems.



Whether speculation "pure and simple" is naïve or not depends on ones definition of speculation. By my thinking it encompasses the fear aspect of the market. It could be argued that a speculative price increase caused the fear that is so prevalent. It could also be argued that fear is feeding increased speculation. It’s a ‘which came first, the chicken or the egg?’ debate. The two act together and independently at the same time. But in general when I talk about speculation I mean it in the broad sense that encompasses all reasons for speculating.

Is it fear of higher prices or fear of supply disruptions leading to higher prices that’s driving the market? Both actually. Since the media has been stressing the supply disruption issue so much via the hurricanes impact on crude, though there wasn’t an impact, and refinery outages impact on gasoline production, it’s a given that many people including those in the industry are going to be affected by this fear propagation.

But who really even knows if the refinery outages are abnormal or not? Is it just that the media is more interested in the oil and gas markets than usual and therefore is pointing out every outage that comes along, whereas these things are normally not even newsworthy common events? I don’t know for sure because I haven’t been able to find data either way. But people new the Earth wasn’t flat before anyone sailed around it. My suspicion is that the outages are fairly normal and are just now being highly exaggerated because no one is proving otherwise.

A couple of months ago the demise of hedge funds do to the downgrading of GM’s debt to junk status was extremely exaggerated. It actually put fear in the markets and impacted prices and probably led to millions in redemptions in the hedge fund industry. Yet the media could not point to a single fund that actually did shut down because of GMs debt or that even took a heavy hit on it. What the media did do though was for a few weeks it reported on every hedge fund that closed its doors regardless of why they were closed. But what we never knew was whether this was a normal number of fund closings or unusually high. My suspicion is that there were just a relatively normal number of openings and closings on a percentage ba