(16 Jan) As this is written - due to the slow global economy and subsequent reduced demand - oil is trading at about $35 a barrel. Last July - as you may have read - it was $149. This drop is primarily responsible for the current rate of inflation in the US being at the lowest level in most people's memories. The experts are betting that it won't stay here much longer. Let's look at the background.
Scenic Cushing, Oklahoma
Actually, I've never been there but it's quite the popular spot. The truth is that 99% of all oil traders haven't either and yet, if an oil contract is delivered in the US, this is where it will go. The reason is that Cushing is located right at the intersection of many of the pipelines that move these products all around the country. Right now, with demand and prices down, the storage tanks located there - and everywhere else in the world - are almost at capacity. Oil is still being pumped and it has to go somewhere.
One of those somewheres is on one of the 35 supertankers, along with a number of smaller tankers, that are acting as floating storage facilities right now. According to Frontline, a company that is the world's largest owner of those monsters, the amount being stored aboard ship is the most in about 20 years. All it takes is $75,000 - a day - to keep your 2 million barrels floating around. That's about $1.12 a month per barrel.
What about gasoline prices?
You've seen them starting to move up a bit of late. Obviously, that's not due to big demand or tight supplies. It's because many of the refiners are simply creating less of it. They have retooled their facilities to instead produce more products with better profit margins like heating oil, diesel and jet fuel. They've also either extended their usual maintenance times or just cut production. So, even with demand being stable, the prices go up somewhat.
Until demand picks up, there will likely not be any immediate increase in production. Prices at the pump will likely be moving higher as a result.
Which way from here?
OPEC is said to be cutting production to help move prices higher, as those countries budgets are based on much higher prices. The bad news - for them - is that to do so means even less income than what they're seeing now so compliance on behalf of those folks is only marginally likely...make it 50/50.
The much-touted oil sands projects in Canada and the tough drilling projects in the US mainland and deep offshore are on hold for now too.
Interestingly, with oil at about $35 today, the contract for December is around $60. The traders are saying that oil prices will be moving higher. So, these guys paying the big bucks for the floating storage can sell those cargos for that price a barrel and, even after the storage, insurance and all, can still make about $14 per barrel. In the traders world, that's called a contango trade. Futures markets fluctuate daily - they do not indicate that those prices will, for sure, be in effect come this December.
It would appear though that as our economy and others recover, we'll see the increased demand cause the oil prices to rise somewhat. My semi-educated guesstimate is that we'll see the prices as high as $50 a barrel this year, with the current levels as the low end. This will help revive the stock prices of energy-related companies and, coincidentally, allow the investor in those issues to be protected from the inflation pressures that seem likely to revive as this bailout/whatever money moving through the economy increases that potential.
Now, all I need is a supertanker to store a bunch of gasoline for me at today's prices...
Friday, January 16, 2009
Thursday, January 15, 2009
When everyone's thinking the same thing - nobody's thinking
(15 Jan) I've mentioned in this blog before that the first hour of trading is referred to as amateur hour by the market pros. The reason is that most of the trading - buy or sell - being done right then is being done by uninformed investors based on news, often incomplete, and/or emotion - never a good idea. Thursday proved to be a fine example of just that.
By noon, the Dow Jones Industrials had dropped about 200 points. This was related to the news that Bank of America would need a huge deposit from the TARP fund, due to its acquisition of Merrill Lynch...and well, maybe a "just a few" of their own bad ideas, as well. Apparently, the herd decided all the banks were going to need money and the end was near, etc.
Well, as they used to say after the replays in the NFL, "upon further review," it was determined that while, yes, the BoA would accept additional funds, it wasn't near close to the level being bandied about earlier in the day.
Eureka, said the herd - it's okay to buy again. Net result, about a 400 point intra-day swing that will be reported simply as "just about unchanged."
By the way, check what happens during the last hour of a trading day. This is when the pros have seen the news, assimilated it and step up to make their moves.
Why the headline?
It has to do with the fact that most investors and their financial media enablers are continuing to ignore some truly great news. All "everyone" seems to be thinking and talking about is how bad the economy is. Better think again.
Remember last summer and the total fascination with the LIBOR rate? LIBOR - the London Inter-Bank Offering Rate - is used as the real benchmark for lending rates on any number of things all around the world - including mortgages on homes. That particular rate, and any other number of important global interest rates are way down. For example, here at home, it was reported Thursday that the 30 year fixed rate mortgage moved below 5% for the first time ever. Ever is a long time...
The LIBOR rate itself is now back to about 1%. That's where it was "way back" in the late spring of 2007 - or the year 1 BL, before Lehman. Before "credit crunch" was incorporated into the media's vocabulary.
Leading and lagging indicators
These are numbers, data and reports that are used to gauge the health of the economy. A lagging indicator is one that reports information based on events that have already happened, aka, the ones the financial media likes to use in times like these to help promote doom and gloom. "If it bleeds, it leads" goes the old newspaper adage. Fear, disaster - all that stuff will sell more airtime or column inches than reporting that things are getting better will. Human nature, I guess.
A leading indicator is one that is one used to help anticipate the directional trend of things. While one indicator shouldn't be used exclusively, the fact that there is very definite improvement in the credit markets now is cause for a bevy of adult beverages - in a row.
Retail sales, job losses - these are both lagging indicators. As I've mentioned here many times, lagging indicators such as these are the unfortunate end result of events and factors that have already played out. Think of it this way. If your house burns down, even after the fire fighters have controlled it and there's no more danger, you'll still have to rebuild it - it's not back to "as it was" instantly.
With all these rates dropping, a large part of the uncertainty around lending, investing and hiring is being removed from the system. To me, it simply reinforces the fact that our economy will be leading the way for the global recovery and that we'll be well on the way before summer.
Unfortunately, this won't stop the next Congress from coming up with all kinds of additional "stimulus programs" which are being created now to simply make the politician look good...instead of like they did last summer. I see them like that squirrel in the road in the TV commercial screaming in fear and not being able to respond.
These guys will be taking credit for something they had no real help in fixing and will, I believe, simply be setting us up for the next round of inflation in a couple years with this flood of money...
By noon, the Dow Jones Industrials had dropped about 200 points. This was related to the news that Bank of America would need a huge deposit from the TARP fund, due to its acquisition of Merrill Lynch...and well, maybe a "just a few" of their own bad ideas, as well. Apparently, the herd decided all the banks were going to need money and the end was near, etc.
Well, as they used to say after the replays in the NFL, "upon further review," it was determined that while, yes, the BoA would accept additional funds, it wasn't near close to the level being bandied about earlier in the day.
Eureka, said the herd - it's okay to buy again. Net result, about a 400 point intra-day swing that will be reported simply as "just about unchanged."
By the way, check what happens during the last hour of a trading day. This is when the pros have seen the news, assimilated it and step up to make their moves.
Why the headline?
It has to do with the fact that most investors and their financial media enablers are continuing to ignore some truly great news. All "everyone" seems to be thinking and talking about is how bad the economy is. Better think again.
Remember last summer and the total fascination with the LIBOR rate? LIBOR - the London Inter-Bank Offering Rate - is used as the real benchmark for lending rates on any number of things all around the world - including mortgages on homes. That particular rate, and any other number of important global interest rates are way down. For example, here at home, it was reported Thursday that the 30 year fixed rate mortgage moved below 5% for the first time ever. Ever is a long time...
The LIBOR rate itself is now back to about 1%. That's where it was "way back" in the late spring of 2007 - or the year 1 BL, before Lehman. Before "credit crunch" was incorporated into the media's vocabulary.
Leading and lagging indicators
These are numbers, data and reports that are used to gauge the health of the economy. A lagging indicator is one that reports information based on events that have already happened, aka, the ones the financial media likes to use in times like these to help promote doom and gloom. "If it bleeds, it leads" goes the old newspaper adage. Fear, disaster - all that stuff will sell more airtime or column inches than reporting that things are getting better will. Human nature, I guess.
A leading indicator is one that is one used to help anticipate the directional trend of things. While one indicator shouldn't be used exclusively, the fact that there is very definite improvement in the credit markets now is cause for a bevy of adult beverages - in a row.
Retail sales, job losses - these are both lagging indicators. As I've mentioned here many times, lagging indicators such as these are the unfortunate end result of events and factors that have already played out. Think of it this way. If your house burns down, even after the fire fighters have controlled it and there's no more danger, you'll still have to rebuild it - it's not back to "as it was" instantly.
With all these rates dropping, a large part of the uncertainty around lending, investing and hiring is being removed from the system. To me, it simply reinforces the fact that our economy will be leading the way for the global recovery and that we'll be well on the way before summer.
Unfortunately, this won't stop the next Congress from coming up with all kinds of additional "stimulus programs" which are being created now to simply make the politician look good...instead of like they did last summer. I see them like that squirrel in the road in the TV commercial screaming in fear and not being able to respond.
These guys will be taking credit for something they had no real help in fixing and will, I believe, simply be setting us up for the next round of inflation in a couple years with this flood of money...
Wednesday, January 14, 2009
Cycles R Us
(14 Jan) The markets continued to trend lower Wednesday as more reports of the effects of last year's challenges are made.
Retail sales are down the most, in a percentage sense, since the late 1960s. On one hand, just about half the drop is directly related to gasoline having dropped so much in the last part of the year. The bad part was that the core retail, which excludes gas, car sales and building materials sales, was off by 1.4% in December.
There are some non-related reasons for this. Cold, snowy weather in many parts of the country sure contributed. Amazon did pretty well as their sales don't require the buyer to show up in order to do biz.
Former market leaders
In 1965, GM was at $110 a share. What was good for GM, was good for all of us, its chairman said. That beneficiary of 19th century technology closed Wednesday at $3.85...a total speculation at this point.
The technology revolution is thought to have begun just after WW II. A major leader in the field, Motorola, the pioneer in cell phones and television sets, had been a winner of the prestigious Malcolm Baldridge award for productivity. Its stock price hit $55.05 at one point. Now, it doesn't really stand out in anything, leadership in both those areas having been taken overseas many years ago. Its price on Wednesday was $4.11 a share.
Now, another headline grabber at the start of the this millennium, Citigroup - the one time envy of bankers and brokerage firm officials, the largest bank in the US - is shedding assets faster than an Eskimo walking into a steam bath. If they're even around in a year, I'll be very surprised. They ended the day at $4.51.
Leaders in the markets start, peak and die. That's why you can't get personally involved with your holdings. There is always a time to buy and to sell. I assure you. They don't know you own them.
Where do we go from here? Who are the next leaders?
I don't know. I'm not a stock picker. I'm a trend analyzer. Here's what I analyze.
From about 1998, we've been morphing into the next phase of general growth - the bane of nationalistic types everywhere. It's what the noted strategist, Don Hays, refers to as "the new flat world." The computers, Internet and every and any communication devices have eliminated distance and time as issues. It's all about brains, ambition and focus. Where you live means almost nothing - other than time zone considerations. I was just exchanging emails Tuesday with a lady in Dubai for business. No cost. No interference. No problem. No limits.
I keep referring to 1974 as the time we saw this kind of market and economic travail. At that time, many significant companies - good ones - were selling at prices similar to now. I remember McDonalds - well before it became McDonalds, so to speak - was $10. Consolidated Edison, the utility that served NY City, was $8. GE was $12. A company called Penn Central was about to go bankrupt. To hear the talk at the time, perdition was just ahead. We had major (at the time) financial firms and brokerage firms closing or being absorbed - "old line names," it was said. "Who can believe it?" was heard. Sound familiar?
My point is that things are tough - but not nearly as tough as many would have you think and believe. We have been here before. Fogs lift. Skies clear. If you get or stay mired in the current mindset, you will do yourself a great disservice...and probably miss out on significant positive returns as well.
Remember, conventional wisdom is mostly - not. Make or stick with a plan. Invest with specific goal realizations in mind. Don't look at recent past performance as the be all for investing for the future.
Ignore the news and focus on your future. You and it will be better off for having done so.
Retail sales are down the most, in a percentage sense, since the late 1960s. On one hand, just about half the drop is directly related to gasoline having dropped so much in the last part of the year. The bad part was that the core retail, which excludes gas, car sales and building materials sales, was off by 1.4% in December.
There are some non-related reasons for this. Cold, snowy weather in many parts of the country sure contributed. Amazon did pretty well as their sales don't require the buyer to show up in order to do biz.
Former market leaders
In 1965, GM was at $110 a share. What was good for GM, was good for all of us, its chairman said. That beneficiary of 19th century technology closed Wednesday at $3.85...a total speculation at this point.
The technology revolution is thought to have begun just after WW II. A major leader in the field, Motorola, the pioneer in cell phones and television sets, had been a winner of the prestigious Malcolm Baldridge award for productivity. Its stock price hit $55.05 at one point. Now, it doesn't really stand out in anything, leadership in both those areas having been taken overseas many years ago. Its price on Wednesday was $4.11 a share.
Now, another headline grabber at the start of the this millennium, Citigroup - the one time envy of bankers and brokerage firm officials, the largest bank in the US - is shedding assets faster than an Eskimo walking into a steam bath. If they're even around in a year, I'll be very surprised. They ended the day at $4.51.
Leaders in the markets start, peak and die. That's why you can't get personally involved with your holdings. There is always a time to buy and to sell. I assure you. They don't know you own them.
Where do we go from here? Who are the next leaders?
I don't know. I'm not a stock picker. I'm a trend analyzer. Here's what I analyze.
From about 1998, we've been morphing into the next phase of general growth - the bane of nationalistic types everywhere. It's what the noted strategist, Don Hays, refers to as "the new flat world." The computers, Internet and every and any communication devices have eliminated distance and time as issues. It's all about brains, ambition and focus. Where you live means almost nothing - other than time zone considerations. I was just exchanging emails Tuesday with a lady in Dubai for business. No cost. No interference. No problem. No limits.
I keep referring to 1974 as the time we saw this kind of market and economic travail. At that time, many significant companies - good ones - were selling at prices similar to now. I remember McDonalds - well before it became McDonalds, so to speak - was $10. Consolidated Edison, the utility that served NY City, was $8. GE was $12. A company called Penn Central was about to go bankrupt. To hear the talk at the time, perdition was just ahead. We had major (at the time) financial firms and brokerage firms closing or being absorbed - "old line names," it was said. "Who can believe it?" was heard. Sound familiar?
My point is that things are tough - but not nearly as tough as many would have you think and believe. We have been here before. Fogs lift. Skies clear. If you get or stay mired in the current mindset, you will do yourself a great disservice...and probably miss out on significant positive returns as well.
Remember, conventional wisdom is mostly - not. Make or stick with a plan. Invest with specific goal realizations in mind. Don't look at recent past performance as the be all for investing for the future.
Ignore the news and focus on your future. You and it will be better off for having done so.
Monday, January 12, 2009
Deflation comments
(12 Jan) I have seen three separate articles on deflation today and thought I'd put my 13 cents in as I think it's about to become the favorite topic of my close personal friends in the financial media.
What about this deflation stuff?
Deflation is, basically, a drop in prices – as opposed to the inflation we saw in the first half of last year. After last year, it would seem to be a relief. But, no. According to these articles, it would appear that we are going straight to deflation with no slowdown and that presents its own sort of challenges.
And, of course, let's not forget that the depression was a time of deflation as well. So, the quasi-logic goes, since the depression had deflation, we should be afraid of it now too. Well, we would be - if the Federal Reserve and Treasury hadn't done what they did. Unlike the depression era folks, these guys moved quickly to pump major money into the economy.
For the year ending in July 08, the consumer price index (CPI) increased at a 5.6% rate. That CPI number is used to measure the rate of inflation. Since then, consumer prices have dropped like a rock – mostly due to oil prices falling from $146 in July to $34 in December. Matter of fact, the CPI in December of last year was below that of December 07. That's the first drop over a year since the 1950s.
The other reason for this huge decline is related to the speed – or lack thereof lately - at which money turns over in the economy. This is also known as velocity. This lack of velocity is linked to the panic by most consumers and businesses that was set off by the failure of Lehman Brothers last September. The drop in velocity caused our Gross Domestic Product (GDP) to drop as well, which then put downward pressure on our real economic growth and prices.
Indications are that the final CPI numbers for December, and into the reports for early this year, will show even less velocity. This will mean lots of talk of deflation. A lot more of the media types will be talking of us sliding into the depression again. The challenge with that is that the odds of that happening are quite remote. Here's why I say that.
The money that has been allocated to the various bailouts/recoveries hasn’t yet really worked its way into the system in any meaningful way. Further, with the new administration talking about even more money being force-fed into the economy, it’s almost impossible for us to see prices deflate for too long. Think monetary tsunami.
Instead, I think that we’ll be looking at inflation becoming more of a factor just about a year from now as the flood of money really starts to rev things up.
De / In - flation investments
So, if you do buy the deflation story, here's, generally, what to look at for investments. Bonds, fixed annuities and cash. Those are about the only things that do well in those environments. NOT gold. If prices aren't going up, you can be sure that prices for that and other tangibles won't either.
What if inflation does come back? Well, we have the so-called traditional inflation hedges of stocks, real estate, commodities (grains, oil, natural gas, etc.) and, in that environment, gold.
If nothing else, this sure helps make the case for asset allocation...
What about this deflation stuff?
Deflation is, basically, a drop in prices – as opposed to the inflation we saw in the first half of last year. After last year, it would seem to be a relief. But, no. According to these articles, it would appear that we are going straight to deflation with no slowdown and that presents its own sort of challenges.
And, of course, let's not forget that the depression was a time of deflation as well. So, the quasi-logic goes, since the depression had deflation, we should be afraid of it now too. Well, we would be - if the Federal Reserve and Treasury hadn't done what they did. Unlike the depression era folks, these guys moved quickly to pump major money into the economy.
For the year ending in July 08, the consumer price index (CPI) increased at a 5.6% rate. That CPI number is used to measure the rate of inflation. Since then, consumer prices have dropped like a rock – mostly due to oil prices falling from $146 in July to $34 in December. Matter of fact, the CPI in December of last year was below that of December 07. That's the first drop over a year since the 1950s.
The other reason for this huge decline is related to the speed – or lack thereof lately - at which money turns over in the economy. This is also known as velocity. This lack of velocity is linked to the panic by most consumers and businesses that was set off by the failure of Lehman Brothers last September. The drop in velocity caused our Gross Domestic Product (GDP) to drop as well, which then put downward pressure on our real economic growth and prices.
Indications are that the final CPI numbers for December, and into the reports for early this year, will show even less velocity. This will mean lots of talk of deflation. A lot more of the media types will be talking of us sliding into the depression again. The challenge with that is that the odds of that happening are quite remote. Here's why I say that.
The money that has been allocated to the various bailouts/recoveries hasn’t yet really worked its way into the system in any meaningful way. Further, with the new administration talking about even more money being force-fed into the economy, it’s almost impossible for us to see prices deflate for too long. Think monetary tsunami.
Instead, I think that we’ll be looking at inflation becoming more of a factor just about a year from now as the flood of money really starts to rev things up.
De / In - flation investments
So, if you do buy the deflation story, here's, generally, what to look at for investments. Bonds, fixed annuities and cash. Those are about the only things that do well in those environments. NOT gold. If prices aren't going up, you can be sure that prices for that and other tangibles won't either.
What if inflation does come back? Well, we have the so-called traditional inflation hedges of stocks, real estate, commodities (grains, oil, natural gas, etc.) and, in that environment, gold.
If nothing else, this sure helps make the case for asset allocation...
Subscribe to:
Posts (Atom)