Category: Articles

Holmes, Earthquake, Macke, Oil

– Can’t wait to see this..

– Whata 7.8 on the San Andreas fault would do…scary

– This is great

– Up and Up



Disclosure (“none” means no position):

The chart at the end of the post says more to me that any words spoken….

First, from the release…

Staff Economic Outlook
In the forecast for the meeting, which was prepared prior to the release of the advance estimates of the first-quarter national income and product accounts, the staff revised up its outlook for economic activity in response to recent favorable financial developments as well as better-than-expected readings on final sales. Consumer purchases appeared to have stabilized after falling in the second half of 2008, and the steep decline in the housing sector seemed to be abating. However, the contraction in the labor market persisted into March, industrial production again fell rapidly, and the broad-based decline in equipment and software investment continued. Conditions in financial markets improved more than had been expected: Private borrowing rates moved lower, stock prices rose substantially, and some measures of financial stress eased.

The staff’s projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP expected to edge higher in the second half and then increase moderately next year. The key factors expected to drive the acceleration in activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets. The staff again expected that the unemployment rate would rise through the beginning of 2010 before edging down over the rest of that year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised up slightly.

The staff raised its near-term estimate of core PCE inflation because recent data on core and overall PCE price inflation came in a bit higher than anticipated. Beyond the near term, however, the staff anticipated that the low level of resource utilization and a gradual decline in inflation expectations would lead to a deceleration in core PCE prices. Looking out to 2011, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core PCE inflation would stay in a low range.

Full Minutes

Here is the chart I was looking at:

Notice every metric they are now forecasting is worse than their expectations in January? This goes back to Bernanke saying in 2007 he thought the housing crisis would “be contained” and “would not effect overall economy”. The Bernake Fed has been consistently overly optimistic in its forecasts only to then have to lower them.

Now, the reason for being optimistic is obvious, to instill confidence in a fear ridden environment. But, after a while that strategy begins to backfire as folks begin to discount everything the Fed says as they begin to expect actual results to come in worse than expected. Then it becomes a “how much worse” guessing game.

I get the whole transparency effort vs Greenspan’s ramblings, but if we are going to do it this way, then the transparency has to be 100% honest and not an attempt to steer investor sentiment in a particular direction. In that case, the transparency is simply “transparent manipulation”.

Now, I also understand that no estimates are perfect, BUT, when over the course of a few years they almost to a 100% rate err in the same direction, then it is either intentional, OR the methodology to make them is flawed. Either scenario from the Fed is bad.

Just give it to us straight Ben, we can handle it far better than you think we can…

Disclosure (“none” means no position):

Have several different oil positions and want to briefly explain reasoning behind them.

I own:
DXO – the 2X monthly oil ETF
USO AO- Jan 2010 $42 call on USO (USO)- time frame 7 months
OLL AI- Jan 2011 $35 call on USO (USO)- Time Frame 19 months

Why the options? Example:
You are of the mindset that oil is going to rise rapidly for a variety of reason the rest of this year and next. Because of that you want to own it. Buying, for exmaple 500 shares of the oil ETF USO (USO) would cost you over $15,000. With the options, you can control the same amount for a fraction.

Real life example…
I paid $550 for each OLL AI Jan. 2011 calls. So, to control the same 500 shares of USO in our example above, it would have cost me $2750, not $15,000. Since USO has risen closer to my $35 price target since the purchase, so has the value of the option. At its current price $660 each option has an unrealized return of 20%. With the option, it has real value at any price over $35 for the USO. The real gains will kick in once USO surpasses $35 a share.

At the $165 I paid for each of the USO AO options, the same $500 shares would have cost $825. Now, there is no free lunch. IF USO does not rise rapidly and hit $42 (23% higher) by Jan, 2010, my options are essentially useless/worthless. This type of far “out of the money” option is very high risk/high reward. These positions should be very small wagers as you can be right on the direction of the movement (oil prices rise) but wrong on the degree (15% rather than 20%) and still lose money. But, if you are right on both counts….ka ching..

Why own oil?

Supply: A picture is worth a thousand words..

Here is the supply/demand equation:

Here is an expmple of the steepness of the decline in Mexico for example from the Cantarell field:

Source of charts is this excellent post at The Oil Drum. Please read it

Geopolitical

A few recent events:

After President Obama said in a White House press briefing he wanted Iran to come to the table “by the end of the year” to hold talks on it nuclear program. He reiterated his “holding out a hand” to Iran to open talks with them.

Just days after:

President Mahmoud Ahmadinejad said Iran test-fired a new advanced missile Wednesday with a range of about 1,200 miles, far enough to strike Israel, southeastern Europe and U.S. bases in the Middle East.

General Commander of the Iranian Army Ataollah Salehi: It Will Take Us 11 Days “to Wipe Israel Out of Existence”

Now, whether either statement is 100% accurate is not really the point, nor is the “whose fault is it” argument. What is the point is that it is clear what Iran’s intention are and one would have to be a bit naive to think Israel will just sit pat and allow the storm to continue to gather.

Now, were this an Afghan leader saying this the effect on oil would be insignificant (or exponentially less). Because Iran is a huge oil exporter and it sits on the Persian Gulf, so it matters a great deal to oil.

In an odd move, 75 of 100 US Senators sent a letter to Obama reminding him of the “risks” Israel faces. Now, the letter is odd in that it almost implies the President is not fully aware of Israel’s situation or is discounting it. Coming so soon after the recent events, its curiosity cannot be ignored. Again, no matter your political leanings, both the left and the right must wonder at the letter coming from both party’s Senators to the President.

Right now crude oil sits at $60 given the current economic/political conditions globally. What are the risk to the price in either direction?

1- Global growth. An increase or decrease will lead to oil prices following in either direction. After a Q4 and Q1 globally worse than any in recent memory, improvement is probable. This does not mean we return to 2007-2008 levels soon, but with the oil supply destruction taking place, that is not necessary to cause prices to rise.

2- Geopolitics. Can anyone see a scenario in which the geopolitical risk to oil is lessened? What is far more likely is that it is increased. There are a number of nations in which the threat could come from as almost all are lead by, shall we say, erratic regimes?

3- Inflation. Eventually the trillions of dollars created out of thin air has to have its intended inflationary effect. Since oil is priced in those dollars, its price will rise accordingly. Can the Fed put the inflationary genie back in the bottle once it is out? Not easily, quickly or at all without destroying the growth it is intended to create…

My though is clearly heavy risk to the upside for oil. If oil can rise from under $40 to $60 on benign economic news then either good economic news, bad political news or renewed inflation (or all of the above, a very possible scenario) ought to cause it to spike……hard

Disclosure (“none” means no position):Long oil

The former GE (GE) Chairman was in Boston yesterday and commented on a range of subjects…

From Bloomberg:

Welch said he’s optimistic about an economic recovery and looking closely at the housing market for signs as to when it may begin.

“I want (new) housing starts to go down, down, down,” he said. “It’s the only way to get housing prices stabilized, and we need to stabilize housing prices.”

Housing starts slid 13 percent to an annual rate of 458,000, a lower level than forecast, Commerce Department figures showed today in Washington. The drop was led by a 46 percent tumble in multifamily starts, a category that tends to be more volatile. Housing starts fell 10.8 percent to an annual rate of 510,000 in March.

“While the market didn’t like it — housing starts going down again — I like it,” Welch said.

This goes to commentary on this blog. With the demand side of the equation plummeting, housing cannot be stabilized until the supply side of the equation is adjusted. With foreclosures hitting the market at a record rate, the ONLY way left for this to be done is for housing start to fall……dramatically, for a prolonged period.

Disclosure (“none” means no position):

VIC West, Market Folly, Palm, Feingold

– Notes from the California Value Investing Congress (hat tip reader Aaron)

– Jay does a great job tracking the hedgies

– An Apple/Palm price war for phones?

See more at Stocktwits

Disclosure (“none” means no position):None

We have been talking about housing here a ton lately and finally have some good news to report.

First, here is some of the previous conversations: 5/6, 5/13, 5/15

Today:

The Commerce Department said Tuesday that construction of new homes and apartments fell 12.8 percent last month to a seasonally adjusted annual rate of 458,000 units, the lowest pace on records going back a half-century.

In a disappointing sign for the future, applications for new building permits dropped 3.3 percent to a new record low annual rate of 494,000.

Economists had expected home construction and building permits to post modest increases in April as signs that the worst collapse in housing activity in the post-World War II period was drawing to a close.

Even in last month’s big decline, there were some signs of stabilization. Construction of single-family homes rose 2.8 percent to an annual rate of 368,000, following a 0.3 percent gain in March and no change in February. The stability in single-family construction likely will be viewed as a hopeful sign that the three-year slide in housing could be bottoming out.

The weakness last month came in the more volatile multifamily sector where construction plunged 46.1 percent to an annual rate of 90,000 units after a 23 percent fall in March.

Housing construction fell 30.6 percent in the Northeast, the largest drop for any region. Housing starts dropped 21.4 percent in the Midwest and 21.1 percent in the South.

The article misses the point. We have too much supply and a permanently depressed demand situation in housing due to current foreclosures and tightened credit markets. If that is true (it is), then the ONLY way housing prices firm is for supply to be reduced.

The fastest way to do that is on the production end of the equation by slowing or stopping the rate of new homes hitting the market. This forces price firming for those new homes currently out there and also increases demand for “used” housing for sale. Is more needed? Yes. It this a step in the right direction? Yes. If it rebounds next month and rises, proving this to be a 1 month anomaly is it bad? Yes.

SCOTUS, NY Times, Taxes, Denial

– This just cannot be true…..can it?

– No they don’t

– Raising them hurts………everyone

– How can this be?

Disclosure (“none” means no position):

Law, Stewart,  Pelosi, 

– Sooner or later people are going to see all this for what it is..

– I agree with him here…

– when CNN goes after a Dem, you know it is bad…

Disclosure (“none” means no position):