Wednesday, November 30, 2005

What's really moving the markets...

There’s an interesting trend emerging in oil. No one’s defending high prices any more. CNBC commentators have been saying that traders are net short and are using any move up to short it even more. You almost never hear an analyst coming on talking about supply problems, too much demand, growth in China, or any of that nonsense anymore. No ones talking about refining outages. Now every one seems to have reversed and is talking about there being plenty of supply. Even T. Boone Pickens has backed off his near term bullish projections. When prices first started to subside after the hurricanes people were saying that prices would stay high going forward, but no one is even saying that any more. Now there talking about whether OPEC will cut production to put a floor on prices, which incidentally I clearly recall that being what triggered the buying stampede back in early 2004 that set off the series of dominoes that got us in the mess we’re in now.

The thing about oil is that people aren’t just going to step in and buy every dip when the consensus belief is prices are going lower and traders are shorting the heck out of it. The hedge funds will just go somewhere else, namely stocks. There’s no floor at these levels. We’re still walking on clouds. I think prices can and probably will go quite a bit lower before they stabilize.

In recent weeks according to AMG Data there’s been about an equal amount of money going into domestic equity funds as into international funds. In October domestic funds had outflows while international funds had massive inflows. In the third quarter of the nearly $28 billion in equity fund inflows 77% of it went out of the country.

All the money over in commodities and international funds is like a nitrous oxide bottle hooked up to the S&P 500. It might as well be in money markets just waiting to see what happens next. If U.S. stocks keep rallying more of that money is going to be injected and stocks will get a serious boost.

It won’t matter what the fundamentals for oil, other commodities, or international stocks are, if the hedge funds decide the better place to be is tech and financials. The alternative investments will fall and U.S. stocks will rise. And if anything the revision to 4.3% annualized rate of GDP growth for the 3rd quarter lends confidence to stock holders.

posted at 1:25 PM 5 comments

Tuesday, November 29, 2005

Inevitable

US says China not forex manipulator but watching

Globalization is making for some interesting dilemmas in the markets. In the past we’ve prosecuted people for cornering and manipulating markets. The game has changed and we’re still playing by the old rules hoping everyone else will play by them too. It’s like only sending amateur athletes to the Olympics when everyone else is sending their very best athletes regardless of pay status. Something strikes me as wrong that a communist government, which literally by definition of its collectivism does not believe in free markets, is allowed to openly participate in our free markets when acting in its own best interest means that it will strive to control the markets in which it participates. It does so supposedly for the common good of its people, but more often for the good of itself, with the common good of the people being used as a justification.

The point we’ve come to is that the Chinese communist government can set up and maintain a controlling interest in a company, issue equity that’s traded in China’s secondary stock markets and as ADRs trading on American stock exchanges, and that company can open up say a Refco account to buy and sell futures also on our exchanges. You can twist it and justify it any way you want, but the reality is that the Chinese communist government is the holder of the account.

Everything is for sale in America. Through the same convoluted and confusing network of channels the Chinese government can buy our land or just about anything else they’d like to own, such as oil companies for example. The sticking point in the Unocal deal was the fact that CNOOC is 70% owned by the government. Of course that doesn’t stop people from putting roughly the same price to earnings multiple on it as they do Exxon Mobil.

So next time they just make the suitor appear to be more independent. If it weren’t for the 70% ownership catch we probably would have taken the bait. So a private Chinese company, which is a bit of an oxymoron, buys our oil company instead. After a while everyone’s forgotten an American company has been folded into the Chinese company. Then a state owned company gobbles up the private company and gets what they wanted in the first place.

Want to be even more discrete? A German company issues special bonds through a financial intermediary, which in turn sells the debt to another company, which sells it to a Chinese company. The German company uses the proceeds to buy an American company. Then the Chinese company swoops in and buys the German company. Is there any stopping it?

posted at 4:22 PM 0 comments

Housing Hype

What’s really funny is when the mainstream media speculates on something creating story out of thin air, gets it wrong, then back peddles trying to pretend like it was someone else doing the speculating in the first place.

Today a popular financial media outlet did just that. They hyped up the housing market all summer. They had the bubble bursting the last few weeks. Then this morning when new home sales data came showing a 13% increase to a record sales level they said that speculation that the housing boom was ending was on hold. But they were the ones that suggested it was ending in the first place. After the fact, they decided it might be a good idea to pose the question as to whether there was hype at both ends of the spectrum, something I posted about on November 11 in Let the Trade Come to You.

The truth shall make you money.

posted at 3:28 PM 2 comments

Something Fun

An investment lesson from The Simpsons?

Homer: Doh, the Broncos won! Why didn’t I bet on them like Professor Pigskin told me too?

Lisa: Who’s Professor Pigskin?

H: He’s a pig who can predict football winners in advance.

L: How is that possible?

H: Because he’s got something no gambler’s ever had. A System! I’ve got the pamphlet four weeks in a row and every time the pick of the week has been right on the money.

L: Ohhhh. I get it. Every week they send out two pamphlets, half picking one team and half picking the other. Eventually, there’s a small group of people who only receive the correct predictions and think Professor Pigskin is always right. That’s when they ask for your money.

H: Uhh. I have money!

L: Daaaaddd! It’s a scam.

H: A scam? Not according to Eddie F. from Tucson or Football Millionaire in Michigan.

L: All I’m saying is you really should think twice before…

Homer on phone: Expiration date 0608…


This is a known as survivorship bias. Many mutual fund families and unscrupulous newsletter writers do the same thing creating a myriad of possible combinations and later shutting down the losers. Then they market the big winner.

posted at 2:28 PM 0 comments

Readers Keep Me Honest

My last post on the copper trade contained an irreconcilable error in the consumption data. My data was limited to just that consumed by mills and foundries. The error undermined the context of the post so I deleted it. Of course readers quickly pointed out the error, and I appreciate them keeping me honest.

What’s really interesting about this is that one of the mainstream media’s (MSM) biggest complaints about blogs is that they run rough shod, unfettered, unedited, and unchecked. They portray them as being completely unreliable and full of B.S. In fact as it turns out, when comparing successful blogs to traditional media outlets the opposite is true.

My blog has a self-correcting mechanism built into it in the educated readers and their ability to communicate openly with my readers and me. If I’m wrong, they tell me, and everyone else, exactly why I’m wrong. If I’m wrong a lot, I will lose readers and the blog will fall by the wayside and eventually cease to matter. Ironically, I get many of my ideas from seeking out shoddy journalism in the MSM that I can readily dispute via the blog.

The MSM has traditionally tightly controlled its only feedback mechanism, letters to the editor. They’ve sought to limit disagreement with their message and often provide information through the highly biased eyes of the noisy minority seeking to lead the silent majority to believe everyone else thinks differently than they do, when in reality that may not be the case at all. In the process they manipulatively and reflexively seek to sway peoples opinions.

By contrast, in the blog world there is near immediate feedback and correction, which I can learn from and use to fix or delete my mistakes. Yes, I can control the comments people make if I so choose, but only on very rare occasions have inappropriate comments been deleted or sanitized. And actually, I only have the ability to delete an entire post. Only the publisher has access to controlling the comments.

I appreciate being kept honest because this blog isn't about feeding my ego. I don't need a blog to do that. Seriously, if readers aren't correcting me then I'm not learning anything. I don't want my readers to be just a bunch of boobs giving me booyahs and patting me on the back. I'm not above gloating. Lot's of people at the top of their game gloat. They tell NFL players not to spike the ball, but most find ways to show their attitude. It's funny that in sports we all sorts of things to psyche up the players and feed their egos so they'll be confident and play at their highest level, but when they have success they're not supposed to show their confidence. Having and expressing confidence isn't the same thing as being hubristic.

This blog is about seeking truth, seeing past the murkiness further clouded by the controlling MSM, and finding out what's really moving moving the markets. When I find the truth, I'm going to express my confidence and remind people why they're reading.

Now I must redeem the fumble.

posted at 1:48 PM 1 comments

Monday, November 28, 2005

Another Market Myth Busted

Here’s something to think about. Has the housing market really been the major consumer catalyst in recent years? That’s what we hear all the time. Recently, there’s been increased talk about the housing market cooling off. That may be so. More likely it wasn’t quite as hot in the first place as the media made out to be. The truth is probably somewhere in the middle between the hype. The bears are latching onto indications of a slowing housing market as a reason for stocks to stop rallying.

Indeed home equity cash outs have grown substantially in the past five years, particularly on a percentage increase basis, but it’s small relative to the increase in disposable income, as the charts below show. Home equity cash outs were more than $140 billion in 2004. The 2005 data is based on a Freddie Mac forecast, so I don’t put much stock in them. Meanwhile, disposable income has increased about $1.5 trillion over the past five years. From July 2004 to July 2005 disposable income increased $400 billion, while home equity cash outs decreased in 2004. Just GE’s revenues alone are larger than the total amount of home equity cashed out. Well, they’re very close, but you get the idea.

Interestingly, retail sales have only increased $18 billion in the past five years. So compared to five years ago we’ve got $1.5 trillion more in disposable income and we’re taking an extra $100 billion and change out of our homes every year. In total we’ve got roughly 1,600 billion more to spend every year, but we’re only spending $18 billion of it in the stores! We’ve spent a teeny tiny 1% of the increase in money we have available to blow, at the stores. Obviously, if home price appreciation slows or home prices step back a little, it isn’t going to make much of a difference for retail sales.

So where’s the money going? Oil for one. But also, it’s going to pay the interest on all those home equity loans and the bigger mortgages that come with a more expensive home. When home prices increase it’s purely inflationary. For every person cashing out home equity someone else is making a bigger mortgage payment. And it’s not one for one. People only cash out a small portion of their home equity when their property value increases, about 13%. But people pay 100% of the increase in price when they buy a new home. The average time a person spends in a home is only about six years. For all the money they’re cashing out now, they’ll pay it back when they switch homes. Say a home increased in value from $200,000 to $250,000. They owe $175k with 25 years to go, but refinance for $200k and another 30 years, cashing out $25k in equity appreciation, most of which they spend on home maintenance and upgrades. Then they sell the home for $250k and buy another home for $250k with another 30-year. They pay back the $200k and keep another $25k in profits to use on the new home. That leaves them with $25k to put down on the new home. It’s five years later and they now have a $225k mortgage for another thirty years. Their payments are bigger and they’ll be paying another five years. On the other side of the deal was a first time home buyer whose mortgage is for $50k more than it would have been for the same home just five years earlier.

The original home owner got $50 grand in home improvements, perhaps spending $20k of it on updated furnishings and appliances, but that’s offset by a larger mortgage payment on their new equivalent home, and an extra five years worth of payments. Meanwhile, the person whose buying their old home is paying $50k more, which equates to less disposable income to spend. Both parties now have less money to spend. So the home price appreciation actually amounted to a net loss and less money being spent overall.

So the next time you hear someone saying that homes are driving the consumer and the bear says stocks are going to fall because the housing sector is slowing, you’ll know the truth. Cheaper home prices means more disposable income, which in turn means more money to invest and higher stock prices.

posted at 4:17 PM 3 comments

Friday, November 25, 2005

Spitzer: No Criminal Charges Vs. Greenberg: Financial News

Spitzer: No Criminal Charges Vs. Greenberg
Additional civil charges against former American International Group Inc. Chairman and CEO Maurice "Hank" Greenberg are possible, but no state criminal charges are expected, a spokesman for New York Attorney General Eliot Spitzer said Friday.

Criminal charges are still possible, however, from federal prosecutors in two separate investigations of Greenberg...

posted at 2:33 PM 0 comments

Setting the Record Straight

Here are charts depicting the world’s production (supply) vs. consumption (demand) and demand vs. inflation adjusted prices:





Here’s what you should realize from this data:

-The supply and demand of oil has been in balance for a very long time.
-There has been no sudden appreciable demand increase, as we’ve been told repeatedly.
-When prices rose dramatically in the late seventies consumption declined significantly, prices fell back, and stayed back for many years.

If supply and demand weren’t in balance inventories would have been drained. Also, both supply and demand have increased steadily for more than 20 years. The data proves that there has NOT been any recent significant leap in demand, nor reduction in supply or inventories to justify increased prices. It’s a figment of the imagination, a justification for high prices that otherwise are fundamentally illogical.

The most recent excuse for higher prices has been that there’s a geopolitical risk premium. Supposedly there’s increased geopolitical risk, but that’s just another big fat lie. There hasn’t been any particularly unusual developments in the last couple of years. If this argument is true, then prices wouldn’t have continued to decline after 9/11, which was certainly the peak point in geopolitical risk since Kuwait was going up in smoke.

Oil, metals, and other commodities are alternative investments to stocks. This chart depicts volume of metals futures contracts on the Comex:



It’s most certainly no coincidence that volume declined during the stock market bubble and then began to climb as stocks fell out of favor and the number of hedge funds capable of buying alternative investments increased.

Hedge fund assets under management have doubled to about a trillion dollars in the past four years. Hedge funds also took off as stocks were doing poorly. The biggest jump in hedge fund assets came in 2004. It’s no coincidence. The mutual fund scandal hit in the fall of 2003. Very many mutual fund managers went over to hedge funds and brought high net worth investors with them. That’s when oil and other commodities really began to take off. Energy prices jumped sharply again this year after the Hot Commodities hit the shelves and the media repeated the false rational for higher commodities prices depicted in that publication.

Where do you think hedge funds have invested the nearly $300 billion in assets that have been added in the last two years? The S&P 500 is one place. It’s up almost 20% in the past two years. But that’s certainly not the only place.

posted at 1:39 PM 4 comments

Wednesday, November 23, 2005

On Commodities

With regard to recent comments on the copper markets and commodities in general:

At issue is not the size (200,000 metric tons short) of China’s copper trade, but rather the coming to light of a million more metric tons of copper stocks than experts presumed, putting China's share of the world's copper stocks at roughly 46% and on par with the magnitude of the silver accumulation the Hunt brothers managed to amass with the help of a syndicate of wealthy Arabs when they were convicted of manipulating that market in the 1980s. Throughout the summer China released copper from its reserves with the specific admitted intention of manipulating copper prices.

I will reiterate the size of this accumulation. Sitting 20-foot cargo containers side by side filled with 20 metric tons each would roughly cover 75 square miles. That's a helluva lot more than a boatload of copper. I find it absurdly hard to be believe that China innocently overstocks a million metric tons of copper holding half the world's available stocks, and then coincidently a rogue trader is short a massive 200,000 metric tons, or about 10% of the world's stocks, which would have been 20% if China hadn't come out with an unexpected million. How much do they really have?

By extension, this makes the claims of increased consumption related demand for other commodities suspect. And actually when you get right down to it, it’s not the Chinese who are making those claims. They’ve repeatedly cut their growth projections. It’s Wall Street’s tentacles reaching all the way out to the small-town financial advisors taking the path of least resistance trying to sell naïve investors on the China growth story.

I never fully believed the China growth or demand story in the first place. I couldn't understand how China could suddenly have had such massive growth out of nowhere while we were in the midst of a recession, as such growth would have be directly correlated to its exports to the U.S., That just didn't add up. We do of course run a large trade deficit with China and they do have lots of dollars to spend. They can sit on them. They can buy bonds. They can buy real estate. They can buy businesses, as they have been doing and attempting to do. Or they can buy commodities, which we know for a fact is something they have been doing on a massive scale. That’s not new news.

There’s nothing the slightest bit complicated about buying and amassing large quantities of commodities. Only the scope and scale is hard to fathom. They already operate in all the various commodities markets to meet their consumption needs. All that is necessary is to buy contracts on more than is immediately needed, take delivery on those contracts, and store the excess. What’s difficult or coordinated about that? We now know that this is true for copper. Why isn’t it true for silver, steel, and other commodities as well?

The only reason we know about copper is because of the supposedly rogue 200,000 ton trade. If it weren’t for that, the world would have gone on naively and deniably believing they held a fraction of what they actually do. We know about just one commodity and we know they’ve stockpiled it in a major way. From a probabilistic standpoint it’s very unlikely, and illogical to believe, that the single commodity we know about happens to also be the only commodity that they’ve stockpiled. The odds of that would be similar to picking a card from a deck, shuffling, and coincidentally picking the exact same card again on the first try.

The Chinese can supposedly now educate more scientists than us, manage a nuclear arms program, become a world leading exporter, but they are incapable of making a coordinated effort out of stockpiling commodities through open free market purchases?

We’re speculators. As such, we make assumptions, forecasts, and best guesses. Sometimes we’re right. Sometimes we’re wrong. We want to be right more often than wrong. The best bet in this case is extending what we know. We know that China has amassed a large portion of the world’s copper stocks. We know that prices rose as inventories elsewhere in the world declined substantially. It was believed that consumption demand was outstripping supply. When you take China’s recently stated holdings and add that to the rest of the world’s holdings the total is modestly lower than where we started before the declines began a couple years ago. If you figure in the possibility that China is understating its true inventories, just as a negotiator understates the true price he’s willing to pay for something, then that puts actual world inventories at record levels.

From a speculators perspective there are several things to realize about these facts and best guesses. First, part of recent increases in demand and reductions in inventories outside of China are probably related to Chinese stockpiling. We can’t say that with absolute certainty because they could have long held large quantities of copper. But it’s the most probable scenario. If that’s accurate, then true consumption related demand isn’t what we thought it was. That reduces the value of copper on a fundamental basis and makes the market look more risky. If demand is based on consumption, then the investor could expect prices to increase steadily. But stockpiling demand would be associated with increased uncertainty, manipulation, and volatility. Next China has to make good on 200,000 metric tons of copper. It’s probably too large a quantity to deliver on immediately via market purchases. The implication of stating their reserves is that they will dip into stocks to fulfill the contracts. So that would not necessarily imply an immediate demand increase as has been assumed.

When the Hunt brothers cornered silver the Fed intervened and silver prices collapsed. We have laws to stop people from doing that again within the U.S., but these are global markets and we have very little recourse against a foreign government doing the same thing. Since we can’t know what the Chinese government will do, or what its true intentions are with any reasonable degree of certainty, then the best course of action for all but the most informed speculators is to stay out of that market altogether. The market is tainted.

From a macroeconomic perspective we need to realize and admit that we’ve probably been incredibly naïve and we’re potentially facing a huge economic conundrum with regard to commodities if we don’t wake up and face the truth. The truth is that the Chinese have the power to control copper prices and they are acting on that power. That’s a fact. The irony of it is that the Chinese have taken advantage of free markets to suck the freedom out of the copper market and the most probable conclusion is that they are doing or attempting to do the same thing in other commodities as well.

If China is hoarding multiple commodities, then that would be a bullish scenario, but highly risky, volatile subject to the manipulative markets actions of the Chinese government, and not for the fundamental reasons we’ve been told buy the supposed experts. What concerns me much longer-term is the possibility of a domino effect of countries racing to gain control of various commodities. In such a scenario our own government would be backed into a corner of countering by creating large strategic reserves of our own for a variety of non-renewable commodities. Whet we’d end up with in the very long run is not a free market for commodities, but one controlled and doled out by governments. That may sadly be inevitable in the very long run, but obviously bullish along the way there.

posted at 2:23 PM 5 comments

Tuesday, November 22, 2005

From the comments...

A reader asks: “How would you play copper right now?”

My response: I'm still absorbing, thinking, and philosophizing about what this really means. If China is into copper this huge and we so drastically underestimated their holdings, then what are they doing in silver, gold, lumber, steel, coal, oil, etc…? It’s a bit scary to think about the consequences of that. What we’re potentially facing in the future is a rush to obtain control over commodities. The commodities bulls would be right, but for the wrong reasons. I want to understand it better before I try to jump to any conclusions about what it means for prices.

It looks to me like this is a topic that I'm going to beating to death going forward. It's really got the gears turning over the implications and of course how to profit from it. I suspect I'll be playing the role of grassroots watchdog on this issue to some degree. As I try to understand it better much of what I have to say no doubt will be of little value with regard to immediate market action. But with understanding the implications should come a plethora of opportunities to profit along the way.

I'd like to see this issue being debated in the mainstream media. It's a helluva lot more relevant and immediate than the trumped up bird flu. MSM, I know you're watching. Pick this story up and run with it. It's huge. I'd prefer a bit of credit for being the first to bring it to attention, but it's important and I'll be satisfied knowing you heard it hear first. I'll do my best to spread it around. Readers, you can contribute by passing it about as well. The important thing is that the significance of the issue be brought to light. But I wouldn't mind getting a little publicity from it.

posted at 2:42 PM 6 comments

Random thoughts on oil and other matters

With regard to oil, I have a unfinished post that I’ll put up later today with the promised chart. For now here’s something for Tom and any other oil bulls out there to consider. That if you believe in the Peak Oil ‘Theory’ then a good way to play it is a long / short strategy. Buy long-dated oil futures and hedge the bet by selling short say December 2006 and 2007 futures. If oil prices fall in the near term, as I believe they will you’ll gain handsomely on the short take your profits and then eventually turn around from a loss to a profit on the long position say five years from now, which you can keep rolling into longer dated contracts if you want. You can use options on futures. Or you can the same thing with ETFs or stocks, as oil company stocks should remain highly correlated to oil price moves.

If you believe you’re right have conviction and formulate a strategy from that belief. If you’re wrong, sell. Otherwise, have the wherewithal to hold out and be contrarian as necessary. Don’t buy into arbitrary stop loss baloney that has nothing to do with being right or wrong. If you have to get out on that basis, then it’s because you’ve mismanaged the position size. Using arbitrary stops mathematically guarantees that you 50/50 random results. After taking out trading costs you’ll slow bleed to death that way. The industry leaches thrive on a steady flow of slow bleeders that overtrade and believe everything they are told.

Bet on the truth and you have an automatic edge. Cut a loss for no particular reason than to keep them from losing more and you have an automatic loss. A small position might not get you the big gains you desire, but it won’t get you the big losses you abhor either. But, being right on a lot of small positions will get you big gains without the big losses.

Personally, I wouldn’t make such a bet based on Peak Oil Theory alone because the supply of oil is still rising as steadily as it has been for the last twenty years, and is in fact currently outpacing demand, as is evidenced by increasing inventories. I’d want to see a consistent trend of declining inventories and slowing supply growth indicating that oil supply has indeed peaked. It’s not good enough just to be right eventually. You have to be right at the right time. However, the stockpiling of commodities that the bad China copper trade uncovered could very well be a legitimate driver of higher prices. I think that's a more likely scenario than increased consumption, or slowing supply.

But I want to avoid debating Peak Oil Theory on this blog, or else we’ll bring the whacko’s and market scam artists out of the woodwork. Whether or not Peak Oil Theory is right or not isn’t the issue. The problem is that it’s too much like talking politics and religion. People have lots of beliefs and few facts. The topic is tainted. It’s talk radio material. It attracts very emotional and gullible people. Market con artists prey on these people. That goes the same for the gold bugaboos, penny stock hypers, naked short selling theories, or any other nonsense intended to advantage of people’s fears and innocence. Yes, Eric and I do have the right to censure the site. If we didn’t censure the site on occasion the noisy minority would take over and ruin it for silent majority. We’d just be another talk show with a bunch of booyah boobs and rubes.

Speaking of booyahs every time I hear you know who say that he does want to make friends he just wants to make money it reminds me of a commercial we used to hear constantly growing up in Indiana when we still only had four channels on the boob tube and the TV was called a boob tube for a reason. It was Don’s Guns. Don was a Wolfman Jack look alike and your typical way out there used car salesman personality who did his own bad commercials, which he always ended with, “I don’t want to make any money folks, I just love to sell guns!”

Here’s something to consider. No one ever questions Mr. Booyah’s intentions because he’s running a ‘charitable trust’ as we are reminded constantly. So the profits go to charity. Gee, that’s swell Beav. I don’t know the details of that particular charitable trust, but I did some checking and what I learned was that charitable trusts are extremely flexible. As it turns out such funds only need allocate a not specifically specified, but significant portion of its profits to the charity of choice. Furthermore, there can be various management fees including a percentage of profits to the investment manager just as in a regular hedge fund. In other words, to the best of my understanding, from the perspective of the investment manager it’s possible for there to be no monetary difference between running a charitable trust compared to a for profit hedge fund. The only real difference is that the investors are giving money to charity. Consequently, a person managing a charitable trust may have the same conflicts of interest as any other money manager. Don’t take me wrong. I’m not accusing anyone of doing anything wrong. It is legal and now the accepted practice for a money manager to talk up stocks they manage so long as they inform people of their interests. Knowing that it’s your responsibility to due diligence and to consider the source, the bias, and possible conflict of interest.

As I’ve said before with regard to Mr. Rogers, the Oracle of Omaha, and the Super Spike oil report, they all have the right to say what they say, to promote themselves, and such. I just try to clarify that relationship for those people that may not realize what it means and may take the information at face value. I do the same thing on a very small scale. I have newsletter subscribers. I give them specific ideas about the markets. Sometimes, I promote those same ideas via the blog. Of course my influence is nearly zero.

Occasionally, it’s happened that a mainstream media outlet has borrowed a unique perspective from me and they’ve had a temporary influence on the way investors and traders think about the markets via my ideas. But generally speaking I’m barely even a fly on the wall. At most I’m a pesky gnat that some people would prefer be swatted. Though if I did have an influence realistically I’d take advantage of it to the extent that the law allowed me, so long as it was within the confines of my own morals. I’m no saint, but I prefer to do right by people. I tell the truth about the markets as I see it at any given time. I’d draw the line morally at intentionally deceiving people. In my experience, however, the majority of Wall Streeters will and do cross that line freely. I guess that’s why no one’s beating on my door to offer me the big bucks. But it is possible to make damn good money in the markets and keep a clean conscience. The motto I’ve adopted is that markets regress to the truth, but in order to know the truth you must know the lies, deceit, and trickery when you see it.

I get paid to write pretty much anything I want about the markets. When I started doing the blog I just thought that I’d rather look back and have something I could be proud of and maybe in the long run I’d be more successful at it instead of going for the quick buck. I don’t know if that’s true or not. All I really know is that Eric the publisher is still sending me my checks every month, I absolutely love writing this blog, and when I look back at the work I’ve done for going on a year now I am proud of it, much more so than of the far less thought provoking work I’ve done for the more mainstream media and other newsletters in the past.

posted at 1:03 PM 3 comments

Monday, November 21, 2005

It's control, not consumption

This Bloomberg article Fiasco exposes Chinese stockpile supports my long-held conspiratorial suspicion that China has been excessively stockpiling commodities in an attempt to control world commodity prices. It has been suggested that China would not be able to deliver on a 200,000 metric ton short position in copper.

Buying U.S. government bonds is not all that China has been doing with our dollars. In order to quell misinformation the country has come out and said that it has a stockpile of 1.3 million metric tons of copper. China’s stockpiles have been secret. So what are we to believe? The Chinese communist government lies and withholds information at its convenience. So it’s a liar’s paradox. If a liar says he’s lying, then he’s telling the truth, then he’s lying.

So we really don’t know what to believe, but what it does tell us is just how suspect worldwide demand and consumption data is for literally any commodity and you’re certainly not going to get an accurate picture riding around the world on a motorcycle or in a Mercedes.

The 1.3 million metric tons is according to the article about a million more than most estimates. Here’s some back of the envelope math to help you put 1.3 million metric tons into perspective. A 20-foot cargo box (20’ x 8’ x 8’) holds about 20 - 25 metric tons of copper constrained by weight not dimension, but as best I can tell would fill a container to a few feet high. The containers would cover about 50,000 acres, or 75 square miles.

Last month the International Copper Study Group (ICSG) wrote, “Demand is expected to be supported by continued growth of the Chinese industry in both 2005 and 2006. Note, however, that the projections for China are based on longer-term trends in apparent demand. Owing to significant changes in unreported stocks, including those held by the Chinese State Reserve Bureau (SRB), year-on-year apparent consumption calculations may differ significantly from actual consumption.” Indeed, the stocks and consumption apparently do differ significantly.

Copper prices have increased 150% in the last three years in large part based on the assumption that world stocks were being depleted. As it turns out that hasn’t been the case at all. The stocks have merely changed hands in such a way that they’ve been lost statistically, which shows just how much we really know. ICSG further writes, “Total world copper stocks gradually increased from 943,000 t in 1995 to a peak of 2.084 Mt in 2002. Stocks began to decline in 2003, and by yearend 2004 had fallen by more than 1 Mt to only 923,000 t.” They couldn’t have been more wrong. The reappearance of 1 million Mt of copper in the hands of the Chinese puts actual worldwide stocks at 1.923 Mt, roughly the same level as in recent years. The Chinese knowingly let the world think that stocks had declined 56% in two years time, when in fact they had been accumulating copper to the point that they now hold 46% of the world’s stocks. That is if we are to believe the 1.3 million figure stated by the Chinese. It’s extremely likely, however, that they are significantly understating actual holdings. Of course it’s pure speculation, but if this is so, then world stocks would actually be at all time highs and actual world demand based on consumption is much lower than previously thought.

Stockpiling demand is real demand, but it’s very different from consumption demand on fundamental basis. Stockpiling can stop at any time. In fact the Chinese have been openly selling copper specifically with the stated intention of lowering worldwide prices that are hindering the countries growth. But I wouldn’t put it past them to be playing one of the oldest market manipulation tricks in the book, which is to be a public seller, but a private buyer of even larger quantities. In that case traders think that copper prices are going to fall, they sell, and the Chinese buy on the cheap.

And that brings up another separate issue, which is how to control manipulation in world markets when the major players include foreign communist governments. The Hunt brothers were convicted of market manipulation for cornering the silver market at a magnitude of half the world’s deliverable supply of silver. China’s very nearly at the same level of control of copper.

It’s just insane how gullible we are. In a November 3 article China Consumption, Dwindling Supplies Positive Signs For Silver the author says, “An attempt to corner the market, like the one the Hunts engineered, isn't likely to repeat, but some analysts predict prices as high as $100 an ounce under certain market conditions, seeing that demand for silver has outstripped supply every year for the last 15 years.” Then he goes on to talk about China’s growing demand. How ironic. Everyone seems to want so badly to pretend that China’s playing fairly, that there’s no way anyone can ever do what the Hunt brothers once did.

If commodities prices have any real reason to continue to climb, it’s not because of geopolitical terrorism risk, or rapidly increasing global consumption. It’ll be because of a an economic battle to acquire control of the world’s supply of commodities. China’s attempting to acquire oil interests all over the world on behalf of the communist government and it’s actually getting American sucker investors to pay for its acquisitions.

This is all no doubt fascinating, but what does it have to do with average investors? It means that there’s potential for continued turmoil in the commodities market and it will have little to do with real long-lasting consumption related demand issues, but it will impact stocks and our economy. The real demand for commodities is for control, not consumption.

So we've a bit of the truth behind the copper story. I think it's safe to assume that the stories a similar one for a number of other key commodities. We've heard the same story over and over regarding China's demand for oil, etc...

There's apt to be more volatility to come and it's impossible to predict the direction of that volatility. Playing the markets based on such events is speculating at best, not investing. Buyer beware.

posted at 4:40 PM 4 comments

Friday, November 18, 2005

China's Commodity Demand More than Meets the Eye

China copper trade woes send prices to new peaks
Copper prices rose again to record highs above $4,200 a tonne on Friday as investors gambled that China cannot ship enough metal to cover a trading position that might expose it to losses of $200 million.

Traders believe a looming December delivery deadline on contracts to supply between 150,000 and 200,000 tonnes of copper placed by a Chinese trader will be impossible to meet. The trader has since vanished.

Some metals traders have previously said their Chinese colleagues like gambling and often do not set price limits for their positions, believing they will always come right in the end.

It has not been disclosed just how much copper is at stake but the market bets could total more than twice what is held in the warehouses of the London Metal Exchange.

I hope you immediately see the bigger picture of this story. China took a futures position in copper big enough to lose $200 million. What does that tell you about the commodities markets? What are they doing in other markets? You think that might add volatility to the commodities markets?

I never written it, because I don’t want sound overly conspiratorial and it is total speculation, but I’ve long wondered if the Chinese haven’t been stockpiling commodities and trying to manipulate the commodities markets. If that were true, then it would lend some credence to the China demand story for higher commodities prices. Though it wouldn’t be for the reasons we thought, it would still be a justifiable fundamental reason for higher prices.

That would make me partially wrong. I say partially, because a slight increase in demand, whether it is due to actual commodity consumption or stockpiling and manipulation, would attract additional speculation. The Chinese have long been market manipulators and idea stealers, so it wouldn’t be all that surprising to learn that they have been using our dollars to manipulate the commodities markets. The Chinese have had an increased interest in acquiring oil interests, suggesting the possibility that the country has a larger agenda with regard to commodities in general. Countries might some day find themselves fighting over commodities they way they once did and still do to a reduced degree over the control of land.

I just don’t believe that actual worldwide demand has jumped suddenly enough to justify the price increases we’ve seen on various contracts over the past couple of years. I believe it’s a combination of things, including a normal consumption increase, stockpiling, hording, manipulation, and speculation.

I note that the case in this article was actually a short position, but that means someone had to take the long side of the position. I also recall reading somewhere back in the summer that China said, if they are to be believed, that they were not going to buy oil at such high prices to fill the SPR they are building out. I am very distrustful of the communist Chinese governments intentions, but I don’t want to sound like some old codger with a conspiracy theory for everything.

At a minimum what we know from this is that the Chinese government is a big speculative player in our commodities markets.

posted at 2:44 PM 1 comments

Got to get those returns...

In Another reason to be bullish... I said that the major indices could rally simply because everything else, commodities, real estate, international stocks, and small caps are all now relatively expensive:

A reader responds: It seems the logical conclusion would be to invest in short term money market instruments. If every other asset class is considered expensive, then its time to take your chips off the table for a while.

We're talking about speculative managed money that needs to make a return for its investors. The only thing that would drive such money to the near zero interest money markets would be if we started into a serious recession. Then the mutual fund managers who can’t go short would go to as much cash as they’re prospectus would allow them too, and probably more.

But in general money managers have to try and find returns. That’s their job. If they put the money in money markets they aren’t doing their jobs. In the money markets they’re guaranteed a near zero return.

That's partly what drove up commodities and international stocks in the first place. Stocks weren't cutting it, money managers had to find a new place to invest. They simply roll to the cheapest speculative asset class. Right now the major indices are one of the cheapest investment vehicles with one of the highest potentials for a decent return. There's a lot of money just waiting to see if this rally is real or not. If it keeps going for a while, then money could come out of international stocks and commodities into the major stock indices.

Even the big corporations flush with cash are not above putting some of that money to work in the markets if they think they can get a decent return. In the late nineties lots of companies were doing just that.

There's no good excuse fund managers can come up with to justify putting assets into money markets right now. The economy is too strong. Growth is there. Hedge funds, which have sucked billions out of the mutual funds, are expected to make money in any market. So even if the economy went kaput, they should be making money on the short side.

posted at 1:57 PM 3 comments

Speculation Spills Over

Speaking of steel prices, I was just recalling a comment a reader made about the price of steel. This person used a run up in steel prices as an example to illustrate that futures speculation can’t explain all the run up in commodities prices we’ve seen, because many commodities don’t participate in the futures markets and they still have run up. It was a good point and good effort, but I didn’t buy into it. There are very many ways that a commodity can be run up via speculation without a futures market.

In 1999 many dotcoms that never made it to the IPO market were worth beaucoup bucks due to the large influx of investments from angels and venture capitalists. Many of the commodities that fed the dotcom bubble rose in value, chiefly the value of programmers.

Similarly, though there isn’t a futures market dictating the price of steel, if there’s a large increase in investment interest in the steel industry, then steel is bound to rise in value. If, for example, hedge funds throw money at steel companies, then those companies have more money to buy up steel interests. Hedge funds don’t operate like individuals. If a hedge fund thinks the price of steel will go higher, whether it be for fundamental or purely speculative reasons, they don’t just buy shares of U.S. Steel, but may go directly to private or public companies and inquire about buying an interest in them. A hedge fund would want to buy directly into a source company because it thinks that the company will benefit from higher steel prices.

Such activity is reflexive. The price of steel rises because enough people think it will, that they make it happen. There never has to be a fundamental reason for such an increase. There might be one, but it’s not a requirement. How many dotcoms ever made a profit? Most did not. That didn’t stop the venture capitalists from funneling hundreds of millions into them. In the end the fundamentals weren’t there to support most of the dotcoms and they came crashing back down. The same thing will happen in commodities, eventually.

Now I’m not saying don’t speculate on them. I’m just saying that if you’re going to do it, don’t do so naively believing all the bogus stories of fundamental reasons for price increases. If you believe that nonsense, then you’re apt to stick around to long and take a beating when things turn bad. Make your money and get out while the gettins good. You’ve got to spot a trend when it’s just getting started. Not wait until it’s nearly played out. And that’s not an easy thing to do. Sometimes it’s easier to play the reversal of a trend in typical contrarian fashion. But it’s very hard to get the timing just right.

What I recommend to my subscribers of The Market Spectator letter is having a sound theory and then having the conviction to see it through. For example, in an accompanying model portfolio I’ve had a short position in Dec06 oil futures at $62.75 since about mid summer. Obviously, that position was way under water right after Katrina hit. I’ve held onto the conviction that oil prices would fall significantly between now and the end of next year. That position is doing very well now with a gain of more than 100% on the initial margin.

More than once, I didn’t have the conviction I should have had and accepted lossed that would have turned into gains. I was short December euro futures contracts at 120.90 because I believed strongly that there were many reasons for why the dollar would continue to strengthen in the medium term. When the hurricanes hit I thought maybe foreign investors would pull out of the U.S. over concerns about our economy. That was a panic reaction and I should have stuck to my beliefs and had the wherewithal to ride out the downturn. Sound money management is the key to being able to do that. Keeping the positions small bites when you’re up big and is great when you’re down. In the long run, though, you’ll be right more often if your position size is not overbearing, because you’ll be less apt to make rash judgments. With the EuroFX now trading at 1.1761 the gain would be more than $4,000 per contract, or 145% on the initial margin.

Fortunately, I’ve had conviction more often than not. It took a lot of wherewithal not to cut losses on the December S&P 500 futures contract I suggested at the beginning of October, which were then going for about 1,240. It promptly dropped below 1,200, but has since moved back into the black, which today helped to ever so briefly push the model portfolio to a gain of more than 40% from inception six months ago.

But to get back to the main point of the post, I’m not saying don’t speculate on commodities because they’re in a speculative bubble. I’m just saying that if you’re going to be in denial, believing that prices accurately reflect fundamental supply and demand, having little to do with the level of speculation, then the commodities and futures markets offer a game you’re not prepared to play. If you don’t understand, then you’ll be like a beginner skier accidentally turning down a double black diamond, way in over their head, scared silly and doing everything wrong.

posted at 1:29 PM 0 comments

Countdown of the Crookedest Corporate Cons

Robert McCormick allegedly managed to blow $241,000 in one wild night at the now more famous than ever Scores strip club, which reminds me of the movie Dude Where’s My Car. But Conrad Black has McCormick beat hands down. Conrad is right up there with Dennis Kozlowski. It’s a bit humorous to look back at this BusinessWeek piece I happened on listing Kozlowski as one of the magazines “Top 25 Managers – Managers to Watch” and saying that he had a midas touch for doing deals.

He ‘had’ a midas touch alright. Everything he touched was outrageously expensive like $6,000 shower curtains. With commodities prices for paper, steel, and concrete being what they are Dennis can still indulge and express his expensive tastes through industrial strength paper, steel bars at $600 a ton, and silky smooth wall to wall concrete flooring. And when the boys down the block decide to ignite some of that TP, perhaps he’ll have a Tyco fire protection system to be thankful for. Imagine the irony of Kozlowski looking up at Tyco sprinkler heads. Maybe while he’s in there he can sell them on an upgrade to the Royal Flush II Pendant Concealed sprinkler model.

Still Kozlowski wasn’t as bad as WorldCom CEO Bernard Ebbers who tried to save his ass with a Got Religion? campaign.

But at number one in the countdown of corporate bad boys is Richard Scrushy who in my opinion got away with his crimes by managing to convince the jury that he was too evangelical to have orchestrated a $2.7 billion dollar accounting fraud at his HealthSouth company. He was able to convince the jury that 12 company executives, including five one-time CFOs who testified against him, all participated in a vast conspiracy behind his back. Ok, maybe the jury didn’t believe he was innocent, but they certainly believed he was to down with God to do hard time. If God will be his judge, I just want to know where I can get tickets?

posted at 12:00 PM 0 comments

Thursday, November 17, 2005

Another reason to be bullish...

I’ve said that if oil falls stocks will climb. Oil’s now down to $56 and change. That’s still outrageous, but investors are removing the oil discount from stocks as the price of crude falls.

But there’s one more reason to be bullish on the major stock indices and that is that there’s nothing left in the world that’s cheap. Worldwide, bonds are expensive. Demand has pressured yields to stay low. Worldwide, commodities are expensive. Recent pullbacks in energy prices has commodities speculators nervous about whether the rally can continue. Interest in international stocks is likely to wane as the dollar continues to climb. Real estate is looking increasingly iffy. People are still skittish about stocks, but there’s no other place left to put money to work.

posted at 4:13 PM 3 comments

Fed Transparency: A Fine Line

Fed officials have to maintain a certain amount of aloofness. Providing too much information tends to undermine control and power. That's why communist governments have always sought to control the flow of information to their people. They don't want people to start questioning and expecting justification for their actions.

When you make a decision and tell people why you made it, then critics have an in. The president made this mistake going into Iraq. Had he been more opaque about his reasons he wouldn't have provided such an obvious point of debate and contention. Did anyone really not know that the president wanted to go into Iraq, regardless of the WMD status? When he wanted to go in, the majority of the public was all for it. People said, “OK, but if you do it, then do it right. Get the S.O.B. and don’t leave the Iraqis hanging again. Stay in there as long as it takes to make sure that the countries stable when we leave.” The president’s been consistent. It’s the public and the media that’s turncoated on him. Maybe they would have turned against him anyway, but being overly transparent and somewhat deceitful didn’t help matters. That’s just the first example of transparency that comes to mind. Please refrain from commenting on the political aspects. There are a myriad of blogs specializing in debating such matters, but his isn’t one of them.

Bernanke has already been criticized for his transparency with regard to his thoughts on deflation. And as usual he was taken completely out of context by the media who simply regurgitate and never bother to actually read or try to understand what he had to say about it.

The Fed has to walk a delicate line between transparency and opacity. Investors beg the Fed for increased transparency, but if they had complete transparency they'd be severely disappointed because they’d find out just how human their leaders are and how simple and subjective their analysis really is. We’d do nothing but complain no matter who was in charge if we knew everything there was to know.

Here’s a link to a Fed paper on transparency:
Fed Transparency: How not Whether

posted at 3:20 PM 1 comments

Upside Panics

It’s not age that separates the so-called smart money from everyone else. There are plenty of crotchety old codgers sitting around pissin’ and moanin’ about the deficits, gold prices, inflation, and politics. The smart money knows a panic when they see it. And most importantly the smart money realizes that panics can be associated with rising or falling prices. In the case of oil the panic is that we’re running out, which has caused the price to skyrocket. Most people willingly accept all sorts of bogus justifications, while the smart money looks at this information, sees that things have gotten severely out of whack, and realizes that they won’t stay that way forever.

Here are a few charts I worked up:

The world's crude production has risen steadily while spot prices have made excessive lows and excessive highs.



U.S. crude inventories have remained relatively stable, while spot prices have shot higher.


U.S. gasoline inventories have also remained stable, while gas prices have increased relentlessly.


Gasoline and crude prices have moved neary in lock step.

posted at 12:31 PM 5 comments

Wednesday, November 16, 2005

Bernanke Hearing Links

Since most of you are probably reading this blog from a cubical somewhere, you probably missed the Bernanke hearing. Here are links to his statement highlights of the Q&A session, and link to online video:

Testimony of Ben S. Bernanke
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate

HIGHLIGHTS-Fed chairman nominee Bernanke's testimony Q/A

Link to video of hearing

Bonus link: Greenspan on disinflation
The Fed Chairman's Parting Message

Note that disinflation is a reduction in rate of inflation meaning prices are rising slower than previously, while deflation means prices are falling.

posted at 1:19 PM 1 comments

EIA Report Suggests Production Shift

Today’s weekly EIA report was interesting. There was a drop in crude and gasoline, but a build in distillates, which is the opposite of what has been happening over the past few weeks. The media is reporting that the unexpected shift is related to a decrease in oil imports and warmer than expected weather. But I suspect it also has a lot to do with refiners switching over to producing more heating oil for the winter months. Next weeks numbers will be telling. I'll have to dig into the production numbers more closesly.

posted at 12:50 PM 0 comments

Inflation offset by dollar related deflation

We got the PPI yesterday and the CPI today. Traders are suggesting via the fed funds futures that the data isn’t inflationary and today are backing off of interest rate hike expectations though the spring of 2006. The core CPI came in inline with estimates at an increase of 0.2%.

And though that number is still very low and inline with estimates I caution that it’s an uptick from the 0.1% increases we’ve had every month since the beginning of the summer. Each time we got a 0.1% increase it was below forecasts for 0.2%. This has been because economists have been expecting increased producer costs to start trickling down into core CPI data and month after month that didn’t happen. What this means is that the December number will be very closely watched and will likely move the markets if the core CPI comes in above or below 0.2%. If it moves back to 0.1%, then 0.2% will look like a normal gyration and the expectation will be for continued low inflation and for the Fed to finish the rate hike cycle sooner rather than later. If it comes in at 0.2% again that will be a neutral level, but will indicate producers are beginning to pass on higher costs slightly. But if the core CPI ticks up to 0.3% then traders will take that as an upward trend. Now a tiny uptick of 0.1% might not sound like much, but on an annualized basis 0.3% translates to a core inflation rate of 3.6%, which is well above what any of us would like to see, especially the Fed. To make matters worse traders would be anticipating an upward trend in inflation such that January’s data would come in at an increase of 0.4%, which would be totally unacceptable to investors and the Fed.

And though investors and fed futures speculators aren’t pricing in an inflation increase, it’s worth noting that gold prices are up $8 today.

Now here’s something really interesting to consider. Well, at least it’s interesting to those of us that obsess over such things. The biggest criticism of Bernanke, who today received the approval of the Senate Banking Committee, was his stance on deflation, which critics have taken to imply dovishness towards inflation. But if it weren’t for high energy and commodity prices, where would the core CPI be now? I think it’s safe to assume that producers have passed on at least some of their increased costs. Therefore, in order for the core rate of the CPI to have remained at 0.1% there has to have been a significant level of deflationary offsets. In other words, if energy and other commodity prices hadn’t rose as they have, then it’s likely that economists would all be worrying about deflation right now, instead of inflation.

Though I do think as long as the deflation comes in the form of lower prices on foreign goods, that’s probably not going to be a harmful thing. And part of the deflation is probably related to the increase in the value of the dollar over the past year, making foreign goods cost less.

But it’s always good to consider such what ifs about the markets.

posted at 12:42 PM 0 comments

Tuesday, November 15, 2005

Oil is all that matters

Tom asks my thoughts on an inverted yield curve. He probably won’t like what I have to say about it. I suggest reading the following previous posts for my thoughts on the matter, as they haven’t changed:
BlogginWallStreet: The Fed is recession culprit, not inverted yields!
BlogginWallStreet: On Yield Curves

My take is that the if the yield curve inverts it will be because of inflation trickling down into core prices induced by high energy, commodity, and wage expenses for companies. But oil is the primary culprit. If oil prices continue to subside, then the Fed won’t go as far up and the yield curve won’t invert.

Also, I wrote The Ms aren't what they used to be... on 9/23. What I had to say in that post was strikingly similar to Greenspan’s Economic Flexibility speech on 9/27. Coincidence? Probably. I’d have to be pretty full of myself to believe Greenspan’s been reading this blog.

The things I talked about in that post are also reasons why an inverted yield curve should not be as much of a problem as they were in the past. Financial institutions aren’t nearly as dependent on a steep yield curve as they once were. They are much more diverse now. The average Fed rate when the yield curve inverted in the past was about 10%. There’s a big difference between inverting at 5% and inverting at 10%. Because 10% is twice as economically debilitating as 5%. So is it the inversion, the high rates, or other underlying problems that cause recessions? If we do invert at 5% and we get a recession, it won’t be because of the Fed. A rate of 5% is not debilitating. It would be because of the accompanying high energy, commodity, housing, and wage costs. And it would be because people believe yield curve inversion is problematic. If they believe it, it doesn’t matter whether it’s true or not. They will sell stocks and buy commodities, further exacerbating the problem.

It all depends down to where oil prices go and that really sucks. But since the recent trend for oil has been down I am bullish on stocks. The markets have discounted high oil prices. If oil prices fall, investors will remove the discount and stocks will go up. If oil prices stay high or rise, then stocks will do poorly. That's why I spend so darn much time obsessing over the energy markets on this blog. I wish I didn't have too, but it's what moves the markets.

posted at 1:56 PM 1 comments

Climbing the wall of worry...

I was up most of the night crunching Organisation for Economic Co-operation and Development (OECD) data. I’m still bleary eyed and chugging coffee.

Believe it or not though, I do have a life. Yesterday was distracting day here in Keystone, CO. We’ve had a couple of feet of snow here since Saturday. It dumped more than a foot Sunday night and I’ll admit that after getting my son off to school I snuck in a couple of fresh powder runs. I couldn’t resist and it was awesome. It snowed all day yesterday and turned into a nasty blizzard in the afternoon that shut down the interstate from Denver to Vail. But this morning I woke up to sunshine. Here’s a picture of a chair full of snow on my deck:



Here are a few other pictures if you care to see them:
I took this picture of myself yesterday to update my blog profile. This is the front view. And here’s a recent sunset picture off the back deck.

Anyway, back to the important stuff. I was crunching some data for The Market Spectator letter and felt that the information that came out that work was too good not to pass on to blog readers as well. I try not to overlap the two so that subscribers don’t feel gypped, but the main dividing line I adhere to is translating thoughts and outlooks on the markets into specific executable ideas.

I’m always trying to think about things objectively and from a different perspective than everyone else. And I’m always preaching that here to you. Well, all the time we hear about deficit this and debt that. This morning during the Bernanke confirmation hearing a senator asked Bernanke if he was concerned about foreigners financing our debt. This senator clearly was concerned about foreigners buying increasing amounts of our debt. Bernanke’s answer was right on. He explained that as long as we have debt that it’s preferable that someone should want to finance it, but that in the long run we should strive to reduce our debt. In other words it doesn’t really matter who buys it. The amount of debt and who buys our debt is uncorrelated. If we don’t want foreigners to buy so much debt, then don’t take on so much debt. Problem solved.

But the more important thing is that people like this senator point to our debt and talk about how huge it is without giving any sort of relative perspective as to how our debt compares to that of other countries. Obviously, in total dollar terms our debt is incredibly massive. And that’s why perma-bears with a fetish for frightening investors so often cite such figures without any perspective.

My job is to give things perspective. Maybe our debt is huge. Maybe it’s not. Most people say it’s huge. But is it really? What really matters is how much debt we have as a percentage of GDP compared to the other countries we compete with. As it turns out of the 30 countries that the OECD tracks such statistics on, the U.S. has the 11th lowest debt-to-GDP ratio. But we have the 2nd lowest tax-to-GDP ratio. In other words, if our government spent the same amount of money and raised taxes to the average level as a percentage of GDP we could probably have zero debt.

So the truth of the matter is that the U.S. doesn’t have a debt problem compared to other countries. And that’s really all that matters because if 19 other countries have more debt relative to their GDP then it’s a wash. We’re actually taking relatively more of their debt than they are of ours. And the reason that other countries can take so much of our debt is because they tax their citizens so heavily. The burdensome debt banal is just a myth. But it’s not the only one.

I took this a lot farther. I collected data on the following ten categories: Trade Balance % of GDP, Budget Deficit % of GDP, Tax Reciepts % of GDP, Govt. Revenues % of GDP, Per Capita GDP, Debt % of GDP, Marketable Debt % of GDP, Unemployment Rate, CPI, College Participation Rate. I then ranked, totaled, and averaged the results. By this I mean that for each category ranked the countries in order from best to worst. So, for example, the best ranking applies to the highest positive trade balance, lowest budget deficit, lowest taxes, highest per capita income, low unemployment, low CPI, and high college participation rates.

For all categories combined the U.S. tied with Australia. And if weren’t for our large 24th for our trade deficit and 19th on 2004’s CPI, the U.S. would have royally kicked ass. France, which complains more about the U.S. and our spending habits than all the other countries combined, came in 26th overall. It’s no wonder they’re rioting. They’re government’s sold them a bill of goods. And they think we’re naïve.

The U.S. ranked in the top ten for Budget Deficit % of GDP, Taxes, Total Govt. Revenues, Per Capita, Marketable Debt, and College Participation. In other words there’s no country that’s more competitive than the U.S. overall looking at important economic measures on a relative basis.

Everything you’ve ever heard about our problems is a bunch of hooey. Whatever problems we do have are relatively less than the rest of the world. So if the U.S. is in trouble, then the rest of the world is headed straight back into the dark ages. It’s all in our heads, put there by the likes of Buffett and his perma-bear bedfellows such as Mr. Rogers who care more about making money than they do about the truth.

posted at 12:16 PM 0 comments

Monday, November 14, 2005

What really moves the markets...

From a fundamental analysts standpoint the homebuilders are great companies. Even though the stocks have been hot for several years now they have grown enough to keep to keep the widely watched pricing multiples very low. By rights they’re still value stocks. But are they really?

You can safely chuck price to earnings out the window along with chart patterns where these stocks are concerned. Whether these stocks go up or down boils down to whether home sales rise or fall, period.

These companies will have great earnings even if they sell a few fewer homes in the coming months, just as the oil companies will still have great earnings even if oil prices went to $40 a barrel. The problem though, is that investors and traders price the stocks based on current revenues and prices. If home sales drop off, the stocks will likely decline also. Similarly, as oil prices fall, the oil company stocks will fall too. It won’t matter that these companies are still putting up great numbers.

Investors who think they are buying a dip will get burned in these stocks if the underlying commodities don’t hold up. They are tempting, but they are deceiving and risky.

posted at 2:57 PM 1 comments

Friday, November 11, 2005

Let the trade come to you...

The financial media manipulates statistics unscrupulously. Recently they’ve been jumping on the housing bubble is bursting story. They’re reporting homes over $1 million are taking three times as long to sell as a year ago. But just before Katrina hit we got story after story about how the housing sector was booming, how people were flipping mansions, how everyone wanted in on the real estate game. Which is it?

I’ve heard a lot of complaining from the mainstream media about how there’s no fact checking in the blogging community. Ironically, they lift my unique and often contrarian viewpoints about the markets regularly and never give me any credit for them. The MSM needs to look in the mirror.

They create the news, not report it. If they want to paint the picture of a housing boom, they go out and get statistics that support that conclusion, interviewing real estate flippers, etc… When they want to say that the balloon is bursting, they get the statistics that support that conclusion. They come to conclusions first and then find whatever data seems to support them. Has the dynamics of the housing market suddenly and completely reversed over the course of just two or three month’s time? Of course not.

The housing market is a very slow moving market. It’s becoming increasingly volatile as closing costs come down, deposits are lowered, transaction times are reduced, but it’s still not a fast-paced market. The market couldn’t have changed that much that fast.

They’re just taking advantage of the normal seasonality of the market to support sensationalized conclusions. The housing markets always hot going into the summer and weaker going into the winter.

The good thing about the media creating the news is that they do very often create excellent trading opportunities for those that are able to see the bigger picture. You don’t really need to have very many of these opportunities either. An occasional really good one is all you need to do very well. It might not do much for your trading fix if you’re an addict, but your trading account will be better off.

I don’t see an obvious trade in the housing market hype, but a fairly recent example was the swing in attitudes about what the Fed would do following Katrina. The media created the story that the Fed should pause and they went out and found the people that supported that conclusion. That got everyone singing the same song, but it never had any basis in reality. The fundamental economics didn’t support it and the Fed didn’t support it. The media helped setup a killer trade with Fed funds futures swinging 25 basis points in both directions as opinions changed.

Just so you’re not thinking that was all in hindsight I posted regularly from right after Katrina all the way through to the next Fed meeting that the fed futures were priced wrong.

posted at 2:21 PM 5 comments

More on Trade

The amazing thing about trade is how little we still know about it. Most people don’t get trade. The rare few that do, get rich. People have always had a hard time understanding trade. We’ve been trying to understand it better for a very long time. The British began to keep records in the late 1600s. In 1742 Scottish philosopher David Hume wrote Of the Balance of Trade. In the first several paragraphs he wrote of the Athenians errors and during his time how the French still prohibited the export of corn.

The British ran a trade deficit for 200 years. Some academics attribute a sudden widening of the deficit to the downfall of the British Empire. But I’m more inclined to think that the widening deficit was the result of other factors at work. It’s hard to look past the fact that the country was able to run a deficit and be a world leader for 200 years. And it’s ludicrous to think that if they’d managed trade differently they’d still be on top, because if they had then they never would have risen to the top in the first place.

When I look around the world I see deficits and surpluses being quite random. The U.S. and Great Britain both run large deficits of roughly 7% and 12% of GDP respectively. France and Spain also run sizable deficits. Germany and Japan run surpluses. Most developing countries run surpluses. China is the obvious surplus capital of the world and its economy is booming, but their GDP is still only 3% of the U.S. and our GDP per capita (per person) is about 150 times greater than that of the average person in China. The euro-zone runs only a slight deficit but it has an unemployment rate of more than 8%, inflation of 2.5%. The GDP of is bigger than the euro-zone and China added together and about as big as the entire EU, which includes the UK. We must be doing something right. Overall though, the most successful countries, in which the citizens are benefiting openly from wealth creation, run deficits to other smaller countries.

If the deficit doomsayers are correct that the trade deficit is too large and out of control, then we’d see slowing growth in the GDP. The money has to be coming from somewhere. We’re not just printing more, because if we were then we’d be experiencing rampant inflation. The only answer is that the deficit calculations are wrong because trade has become too complex for the governments formulas. And it’s not that we’re borrowing the money. The government borrows money from foreigners. But consumers for the most part do not. Consumers, for the most part, spend what they make. They make what companies can afford to pay them. Companies get their money from selling goods and services. The vast majority of the money in the hands of consumers gets to them through this route. So people are getting their hands on more money than the government is able to account for.

The increasing deficit is a product of the fact that foreign goods coming into the country are simple to account for, but the services and financial transactions we sell are harder to account for. We can count shoes coming in from China. It’s much harder to count complex financial transactions banks do overseas. And chances are that a big part of the deficit has something to do with the very many ways large international companies have of hiding income it makes overseas from the U.S. government. That money finds its way down into the U.S. economy and into the GDP without showing up in the trade figures. If our money really were disappearing overseas at a rate we are told it is, then over the last ten years we would have sent away more than an entire years GDP. How do we keep getting more money? How do incomes keep growing without becoming overly inflationary to companies? How do companies keep growing cash balances? The trade deficit simply doesn’t jive.

posted at 1:57 PM 4 comments

Thursday, November 10, 2005

It all goes back to the Internet...

A reader writes:

Not so fast with the backslap on "Mr. T", Mark.

In fact, there are refinery shortage problems: For the So-called boutique fuels, for Low Sulphur Diesel Fuel and mostly for refining of Heavy Sour Crude.

Oh, the CEO of Conoco said today that his company is increasing refinery capacity here by 11% over the next 5 years or so and they certainly wouldn't be doing that if they had enough.

You are so credulous!

All of these statements are inaccurate, except maybe the last, but if someone knows of a less credulous source of market information I’d like to know about it. Since I’ve made a niche of being incredulous that would be a site I could learn something from and I always want to learn.

I like to remind people that T. Boone Pickens aka Mr. T has a conflict of interest and likely acts in his own best interest and the interest of the people who invest in his hedge funds. He has a right to so. I don't infringe on that right. I've never said he shouldn't say such things, just as I never said Mr. Rogers shouldn't have written Hot Commodities.

I have an equal right to say that I think they are full of it and remind people that they are self-serving. I've never suggested that a person shouldn't be self-serving or shouldn't try to profit. I only point out that they are. I’m not even saying Mr. T. is a bad dude. I’m just saying I don’t trust him to give me an objective opinion. You wouldn’t trust a judge or cop on the take, would you? Of course not. Then why are people so quick to trust market pundits who get paid to say things that are in their own best interest? They shouldn’t be. They should be much more skeptical. Much less credulous.

Those people that are conscious of such conflicts of interest probably view this as stating the obvious. But, I can say with a high degree of certainty that vast majority of people do not think about such things. They believe anything people like Mr. T and Mr. Rogers say because of who they are.

There is no refinery shortage at the present time. Not a single time since the 1970s has anyone ever not been able to get as much gasoline, diesel, heating oil, plastic polymer, etc... as they not only needed to buy, but wanted to buy. A shortage means that refineries are unable to produce as much product as is demanded. That has not been the case. Not even right after Katrina with a large portion of U.S. production damaged or shut in.

Being able to refine more sour crude would be convenient. If all U.S. refiners could crack it we might pay a bit less at the pumps because sour crude sells at a discount. But not being able to crack sour doesn’t constitute a shortage. As it is Valero makes more money than other refiners by buying sour at a discount to sweet and selling the gasoline at the same price as all other gasoline. It amounts to a competitive advantage for the refiner who has invested in the capability to crack it, but at this time and in the near future it has nothing to do with shortages.

Refiners have enough capacity NOW. If they did not, you’d roll up to the gas station and not be able to get gas any time you wanted it. Of course they don’t have enough capacity in the future. As demand increases refiners increase capacity. There is absolutely nothing new about this. They’ve been doing this for as long as they’ve been refining. Even as they have consistently shut down old refineries and not built new ones they’ve consistently increased the amount of refined products coming out of existing refineries.

The only reason you’re hearing about Conoco’s plans to increase refining capacity now is because it’s the popular thing to say since so many people, especially the ignoramus senators, have been beating them up for not having built a new refinery in 25 years or so. And again I note that this was a twisting of the facts and selective / manipulative use of data by Mr. Rogers to fuel (pun intended) the commodities fire.

Finally, I will add that its basic economics that when prices are high producers will want to produce more. Often times as is the case with oil companies and discovery they will be conservative about investing into volatile prices. But there are those that are less diligent and typically what happens a sharp change in prices kicks off a boom and bust cycle.

Actually this boom and bust cycle started in the late 90s when oil hit about $10 a barrel. That was a bust. It was a speculative bust then, just as this is a speculative boom now. The dotcom / tech / equity bubble was like a big magnet for investment capital. Who wanted to invest in commodities then? Nobody. Traders shifted. Oil prices fell. Falling prices attracts shorting, just as people have piled onto the long side over the last couple of years. Prices were overly depressed then. Margins were dragging the bottom if not negative. At those prices there was little incentive to produce. So if there’s any tightness now it’s partly related to the bust then. But again there’s never not been enough product.

The current high prices will inevitably lead to another bust a few years down the road. That’s why oil executives want to sell shares into buyback programs. They want out why the gettins’ good. Refiners will build too much capacity and then ten years from now everyone will be c