Category: Articles

Here is a followup to yesterday’s post…$$

So, after that post yesterday, I got a bunch of options for investing in oil. Check out this chart.

I tracked the (USO), (DBO), (OIL), and (DXO) ETF’s that follow crude. The (DXO) is a leveraged fund in that it results will be outsized to the direction, plus or minus.

The takeaway is that on a percentage basis, they all, with the exception of the (DXO) track each other identically no greater than the current 6.5% differential.

The (DXO) had a near 100% outperformance of the other three as oil rose into July and the downside to it has been roughly 50% worse on the downside to the current prices.

So, what to do. If you think we are in for a very swift spike in oil in the near future, I am leaning towards to (DXO). The “on the other hand” statement is that should oil continue to drift lower, your losses look to be 50% greater than on average than you will see with the others.

When to buy? If oil drops below $40 a barrel, it is going to be hard not to buy. Consider this, rumors are out there Israel is planning a strike against Iran nuclear facilities. Want to see an oil super spike?

The thing with oil is that is only a 50/50 supply-demand equation. The other half is the nut jobs that have most of it. For the past 6-12 months they have been very quiet…..how long has that ever lasted?

Disclosure (“none” means no position):None ….yet
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This is really interesting stuff from Sears (SHLD) annual meeting..

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Deflation, Bailout 101, Naked Shorts, Credit cards

– If inflation is a tax, then don’t we want some deflation as a tax cut?

– Everything you wanted to know about the bailout but were afraid to ask

– The trades should settle

– Credit cards the next shoe to drop

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Taleb is is usual self, sorry. One does have to wonder though. Taleb used to stay away from specific predictions preferring to talk in generalities. He now regularly offers predictions on smaller and smaller time frames. Perhaps he is falling prey to some of the mistake paradigms in his books?

):
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Did well with this trade over the last year and I think it may be time to get back in…$$

For those who remember in Feb 2007 we bought Oil (USO) when the price of crude was $47 and rode it until we sold this May at $127 (it later peaked at $147).

With the price back to where it all began last year, I think I am inclined to start buying again.

First, watch Paul Kedrosky on CNBC yesterday.

Personally I think Paul may be a bit conservative in both the price level and the time it may take.

Why?

First, I came across this on Twitter yesterday:

My rough estimate says that at any given time in recent years about 600 to 700 million barrels of crude oil are at sea, enroute from exporters to consuming countries.

As a shipowner, about the only cost I have much control over is my fuel cost. Financing and insurance costs are a function of time–so much per month or year. Maintenance is also mostly a function of time, but it might be defered during economic downturns. Crew costs are also a function of time–so much per month, or per shift.

Fuel burned is a function of speed–the drag goes up as a function of the speed–roughly at the square of the speed–double the speed equals more than double the fuel, but half of all the other costs. So at any time, there is an optimum speed–the higher the cost of fuel, the slower to steam to optimize profits. The lower the fuel cost, the faster you show go, up to the limit posed by higher drag on the ship’s hull.

We have just had the biggest drop in bunker fuel prices ever experienced, so every good charter captain just started steaming faster–anything else would be to leave profits on the table. How much faster? If 25%, then the amount of crude at sea would have dropped by 100 to 150 million barrels over the past 2-3 months, or about 1.5 to 2 million barrels per day. This destocking at sea would make it look like we have a worldwide oversupply of that amount. By the way, this same factor of ship-speed also explains the weakness in the BDI.

It also says that once oil prices(bunker fuel) starts back up, then that 2 million b/d will dissappear from the markets as the steaming speed slows back down. I happen to think the destocking at sea is about to end, and that, together with the winter seasonal increase and OPEC cuts may remove some 6 million b/d from markets between now and February, and that is why Land-Lubber just might be right in his call for $150 crude by 2-29-2009. Just my 2 cents for discussion. I can sure tell you as a pilot I adjust airspeed to reflect fuel costs, and so do all the airlines.

Now disclaimer: Who knows if the person is really a pilot. But, based on what I could find, the number proposed are fairly accurate as the the #’s at sea and inventory levels.

Second: The dollar.
It reached record low levels this summer (when the price of oil peaked). Its subsequent rise (20%) has inversely correlated to oil’s slide (that and demand destruction for oil) of 68%. Here is the rub. The dollar has to come down. The Fed and Treasury are printing money like they think there is no tomorrow and unfortunately, there is. That future will have a falling dollar and which will be default cause oil prices to rise. It will cost more weaker dollars to import anything and oil is imported.

Third. Oil Demand.
Yes we are in a recession. Yes we will come out of it. No there is no tangible extra supply going back on the market. That means when demand begins to increase and the dollar inevitably falls in value, we are due for another super spike in oil. I just do not see anyway around it. We really have not done anything to address drilling or conservation here in the US which would add supply. Even adding natural gas supply would lower its price and cause million of Northeast homes that use oil to heat to convert to gas like they were this summer. With oil prices now low, those conversions, according to several heating companies in my area have stopped.

When?
Hell if I know. My guess is no longer than spring before it starts if we have a cold winter. The time to buy would be now before the winter hits.

I used (USO) before for the trade but I think this time I am going with OIL (OIL) as the correlation to price seems more true. I would also consider the (DXO), it is a double long index. Currently at $3 and change, the down side is limited and upside is substantial.

Thoughts on a better index?

Disclosure (“none” means no position):None
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Thank you, Meet the Press, Burress, Rubin, Rubin

– Thank you for the mention

– From Russert to Gregory…….talk about lowering the bar…

– Should be in jail…too stupid to be free

– Yes or No?

– About time

Disclosure (“none” means no position):
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This is a great book and its timing is perfect…..

Steve Moore and Arthur Laffer take the reader on an easy to follow explanation of supply side economics and its results. Readers get a modern day history of taxes and their effect on the economy. What this is not is an politically biased book. For instance:

– The authors heap praise on Democrat John F. Kennedy for his huge tax cuts in office and for the effect they had for the remainder of the 1960’s. They quote Kennedy:

“Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other…..It is between two kinds of deficits- a chronic deficit of inertia, as the unwanted results of inadequate revenues and a restricted economy- or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, produce revenues, and achieve a budget surplus. The first type of deficit is a sign of waste and weakness- the second reflect an investment in the future.”

– They make no bones at all pointing out the various failure of the Nixon, Ford and Carter administrations. For those keeping score those are two Republican and one Democrat. Those chapter are actually very interesting because those listening to the news today are hearing some of the same ideas being bantered about. Guys, it was a bad movie the first time, we do not need to see it again. If you get the book (you should), pay close attention to these chapters.

– Regan receives deserved praise for the tax cuts of the early 1980’s that created the near 20 year bull market in both stocks and the economy.

– After pointing out the mistakes of his first two years in office, the authors give Democrat Bill Clinton credit for reducing taxes in 1995 and the resulting economic surge from it.

The authors also give Clinton credit for welfare reform. In 1995 the Cato Institute did a study that showed a welfare recipient would need to make $12 to $15 an hour to replace the aid they received . In 1994, the New York Post ran a similar study that said a NYC worker would have t make $5k a year to replace all the welfare benefits. Worse, was the income offset of the program. Should a welfare recipient find a job, there was a near 100% offset in benefits, in essence a 100% income tax.. Why work if that income was going straight to the government? The news system, with its work requirement caused the number of families receiving welfare to drop from near 5 million to under 3 million in a decade.

– They do take a grim view of Obama simply because the book was finished earlier in the year. Obama seems to have come off some of his earlier statements and the authors do acknowledge that candidates say what they have to to get elected and may perform differently in office. In other words, the jury is out until results are in.

For statistical junkies there is plenty on the book to sink your teeth into. The authors show how the states with the lowest income tax rates are also the states with the most robustly growing economies. Detailed is how high tax rates in California have lead to a “millionaire exodus” from the state, crippling its budget. Where did they go? Nevada and New Mexico, states that offer far lower tax rates.

On a global scale, the authors illustrate how corporate tax rates are plummeting around the globe as nations compete for business and investment capital. Said the Prime Minister of Scotland, “Supply side economics works, we’ve seen that in Ireland. Their low rates are attracting all capital of Europe and if we want to compete our rates need to fall near theirs”. How much capital? Over 1,000 companies have moved into Ireland during the 1990’s. Ireland enjoyed budget surpluses and saw the hourly manufacturing wage grow 126%, unemployment fell from 18% to 5%, for the first time since the potato famine Ireland is seeing an annual influx of educated workers and on a per capita basis, the Irish are over twice as rich as they were in the 1980’s.

It is so good in Ireland that EU bureaucrats are complaining that the Irish are “tax poaching” to attract capital and business….so tax rates do matter?

15% flat taxes around the globe are being hailed as the reason for explosive growth in formerly stagnant nations like Ireland, Russia, Hong Kong and others. It also points out the US now has the second highest corporate tax rate in the world. They illustrate that the US is not, despite it highly qualified work force the prime place for manufacturing jobs due to it high corporate tax rate. We are not talking about jobs that build Barbie Dolls, we are talking about skilled manufacturing jobs in computers and semi-conductors and the like.

Supply side economics is not about eliminating taxes. Clearly they are needed for the gov’t to function. What it is about is finding a tax rate that does not punish entrepreneurial behavior and success and promotes income avoidance. The lower the penalty on the next dollar you make or save, the more of them you will strive for. It have been proven time and time again the government in that case always ends up making more money. Why? Because we all do…

Here is the book…please read it

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Peanuts, Blogs, Gas, OPEC

– GMO peanuts that will save lives…

– Consolidation?

– An immediate tax cut

– The Cartel that can’t agree

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Here is a neat video done “white board” style that explains margins calls and their effect on the market.

Margin calls and the financial market’s decline from Marketplace on Vimeo.

Disclosure (“none” means no position):
Visit the ValuePlays Bookstore for Great Investing Books