The Triple Play: Oil Addicts, The Credit Crunch and Deflation 18 comments
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In baseball, a triple play is the most coveted event for the defensive team. One, two, three, and the inning is over. It can save a pitcher, show case a team’s defensive abilities, shut down the offense, and most importantly win the game. Unfortunately, it appears the United States is on the offensive end of this triple play.
The Line Drive to Short: Oil Addicts
Goldman Sachs raised its forecast for the second half of the year to $141.00 a barrel.(1) Now, it appears that this may be on the low end of expectations. The United States is a nation of oil addicts. We cannot kick the habit. Currently, we are in a period where we will either one, check ourselves into rehabilitation by pushing the green energy themes and conserving the resources we have, or we will let the oil addiction kill us. With hat in hand, President Bush implored the Saudis to pump more oil. Thus far, the Saudis have responded with a mere 300,000 barrel increase.Mean-while,it is duly noted that large oil producers such as XOM, BP,andCOP are returning windfall profits to shareholders in the form of dividends.(2) Other companies like PQ and DNR are bound to hit a profit well beyond expectations.
While big oil receives a moral scolding from Congress, one cannot fault those who are making the best out of a supply and demand issue. In the 1970s and 80s, Green Energies never got the attention they deserved. By the 1990s no one cared as gas (adjusted for inflation) was near decade lows. Without foresight, and minimal amount of profitability, Green Energies remained a dream. Only now, when the addiction hurts are we turning to think of renewable resources. Be warned though, there are a number of .com type losers amid a winners. TAN may well be the safest play here, while other investors have been handsomely rewarded with home-runs like FSLR.
The Play at Second: Credit Crunch
Bill Fleckenstein pointed out that the housing bubble, and devaluation in housing prices are only one of the dominoes that are falling in this chain. John Paulson made a bundle betting against the sub-prime mortgages before they collapsed. With this point in mind, Paulson believes that housing prices still have another 10-15 %to fall. (3) As pointed out in earlier articles, financial institutions are still exposed to a ridiculous number of home equity loans; loans on homes which are currently losing value. If the borrower goes belly up then the lender is left holding a home that is worth less than the amount owed. Anyone who touts XLF should have their heads examined.
As far as credit cards go, there are several problems with current business models. At one time, it was the goal to get a consumer in debt, and keep them in debt. The idea was to milk out re- payments as long as possible creating continual cash flow. However, two problems now exist. Companies are now entering a hyper-competitive situation where one credit card company is willing to take each another’s best customers(See Creditmall.org). Companies are rolling out offers such as 15 months with 0% APR in desperate attempts to attract good customers! This situation does not bode well for issuers like COF who in the end, will be left holding bad debt of financial deadbeats. Throw in inflated prices for basics such as milk and gasoline this is a recipe for disaster.
The Throw to First: Deflation
On a much grander scale, the real story becomes deflation. What is the value of a U.S. Dollar? Stopping short of the gold standard (see Austrian School of Economics), as a collective lot the global economy is coming to terms with the question to what a dollar is actually worth. The fact the U.S. government (under the auspices of the Federal Reserve) are printing out ridiculous amounts of money. The Saudis then might have the answer, and now we are feeling it at the pump. Note that Ben Bernanke worked feverishly stop an all out run on the financials by helping engineer the BSC bailout.(4) There was no mere coincidence that Secretary of Treasury Paulson was in Asia giving extra assurance that the bonds (U.S. government debt) is still safe.(5) Congress is still figuring out another way to keep this Ponzi Scheme rolling with still more money for the troubled housing sector. Housing and Financial Services Chairman Barney Frank floated the idea of a $300 Billion dollar aid package. The plan would allow the Federal Housing Administration “ So it could back more affordable,fixed-rate loans for borrowers currently too financially strapped to qualify.” (6)
Play Ball?
While some prognosticators are calling a bottom to the financial rain out facing the United States , it appears as though we are heading into extra innings. Whether the Fed, Congress, Economists, or analysts are willing to call it, we are in a Recession. And as Yogi Berra said “It Ain’t over til it’s over!” As an investor, it is critical to take advantage of the situation at hand. Look for a continued rise in oil prices. Beneficiaries will include APA, BP, XOM, COP, and smaller businesses such as DNR and PQ. A cheap dollar will increase exports, as it appears that X, AKS, CLF, and ZEUS may have additional legs. Stocks with high exposure to consumer credit such as COF will go down swinging! Homebuilders like XHB are still sitting the bench due to a cash crunch and an over-abundance of vacant housing.
Sources Cited
1. Money Morning 2. Money Central.msn 3. Money Central.msn 4. Business Week 5. Chinadaily.com 6. Washington Post
Disclosure: None
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This article has 18 comments:
There is plenty of oil and gas in the US but congress and the States have made most of it off limits with moratoriums and other sneaky imposts. Your reap what you sow. Those small brained people who passed those laws should be cast out of the city gates.
How to make money, buy smaller emerging oil and gas stocks. The big ones have had most of their run. Short everything else.
The owners and top executives of the surviving companies had to make many hard decisions in order to survive. None of our politicians, or the general public were the least bit concerned, as long as the could obtain cheap energy and petroleum derived products.
Now that times have changed, "Big Oil" should be punished according to the warped logic of the pandering politicians and ill informed public.
This is tantamount to killing the goose that has laid many golden eggs that have enabled the civilized Western world to build great countries, and raise the standard of living for most of the people of the world.
If finding, producing, transporting oil and gas, refining, getting the end product to market is so easy and lucrative, why doesn't every one get in the oil business. All it takes, in most instances, is millions of dollars to speculate on leasing, drilling, and completing wells (assuming you are fortunate enough to find hydrocarbons in commercial quantities, instead of being liable for plugging a dry hole).
Better yet, why doesn't every one invest in oil company stocks?
After all, the oil companies only have to evaluate geological prospects, negotiate leases with mineral owners (whether they be individuals or foreign governments that can change the "rules" overnight), figure out how they can prepare the drilling site (whether it is located in deep oceans, swamps, mountain sides, deserts, or populated areas), comply with numerous rules and regulations, make arrangements to drill, evaluate the geological formations encountered during drilling operations, complete the well, install production facilities to separate oil, water, and gas (make arrangements to safely dispose of the produced salt water), and transport the hydrocarbon to market. Then comes the hundreds of millions of dollars worth of investment to design and build refineries that are efficient and comply with numerous EPA, and OSHA regulations (even if permission is granted).
Oh yes, "big oil" has it made. All it has to do is pick the low hanging fruit that abounds all around!
Better yet, let's just kick their asses, it will make us feel better even if only reduces supply and raises prices!
Please explain how this is deflationary? Perhaps you mean devaluation of the dollar?
Seems like we have more money chasing fewer goods, which should be inflationary.
But, the fact that almost 50% of the people in the US voted for AlGore and will probably vote for the Marxists running for president reallys shows that a huge percentage of the US voters are clueless and ignorant to basic business acumen. Ye reap what ye sow. No drilling offshore East/West Coast or ANWR, $5/gal gasoline. No big surprise!
Instead of using the system we already have, they'll demand some boneheaded moves from Congress. This kind of reaction is why I find America so unappealing as an investment target. The people have no discipline and would rather whine and blame others than get their own houses in order.
The improved efficiency of diesel engines can also help reduce oil consumption. It should be noted, however, that it takes about 25% more oil to make a gallon of diesel fuel than a gallon of gasoline, so we should really look at how a vehicle does on fuel efficiency in terms of "oil equivalents." Thus, we need to adjust the mileage claims for diesel vehicles downward by about 20% when comparing them to gasoline-powered vehicles. There are diesel four passenger cars in Europe getting 90MPG see VW & Audi 1.2 TDI. They are not and never have been imported here--WHY???---.
What we use now is nothing but solar energy converted to plant matter by photosynthesis. That process took millions of years, the technology exists, right here right now replicate and accelerate this process to produce bio-diesel that will run a truck or fly a plane in --24--HOURS, and clean the emissions of co2 from a coal burning generator as a fuel source---ALL at the same time!!!--(see bio-diesel algae).
Just connect the dots folks the path is clear, lets stop debating the rules of the race. That's just politico-speak for how I personally can benefit.
Thank you for your excellent posts. I find a high degreee of irony to the degree which Big Oil...and to a lesser extent small oil is taking a verbal beating from the powers that be.
There have been a number of theories behind oil price. Three make the most sense:
1. The purchasing power of the U.S. Dollar (oil is priced in dollars) has lost its clout...George Soros would agree!
2. The emergence of China and India as consumers has caused an
exceedingly high demand. This is coupled with a less than Pro-American stance from countires in OPEC.
3. Last, is the manipulation of prices. While there is a slight degree of manipulation (because oil is a commodity), Congress may try to hang their hats on this issue...However, it is nothing more than an act of grandstanding...and taking the public's eye off problem #1 and problem #2.
Interestingly enough, John D. Rockefeller Sr. (Standard Oil) took a beating for producing the best and cheapest oil in the country. As a matter of fact, he was viewed as the original tycoon...Teddy Roosevelt vilifed Standard Oil and became the trust buster.
Interestingly enough, once the Trust was broken oil prices actually increased...as opposed to decreased. And John D. was seen as a bad guy...go figure. Leave it to politicans and media to form public opinion.
Domestic drillers should be the big winners here!
Respectfully,
Brian A. Davis
The $100+ dollar/barrel oil prices are a blessing in disguise, because they make alternatives economically possible. But they will kill us (potentially literally) if there is no organization around developing the alternatives.
This is coupled with a collapse of our financial system. That is the 1, 2 double punch and you are out.
We need, in addition to the above energy scenarios, to TakeBackTheFed.com
If we do not get off our duffs, we will truly be in trouble. NOW IS THE TIME TO ACT.
Its funny how everyone, once again, wants to turn a blind eye to an obvious case of collusion and price fixing. Subprime happened, we let it happen - let the sharks bleed the system and yelled "MARXIST!!!" at anyone who suggested intense regulatory reform was needed.
Now everyone is running in a panic predicting the end of days and meanwhile, oil SOARS irrationally. And what happens? Some suggest that MAYBE the cartel of 9 figure investors manipulating oil futures should be reigned in and BAM... "MARXIST!!!"
We reap what we sow all right. The vast majority of us idiots keep supporting the protection of 8 and 9 figure net worth individuals buying into the bullshit that it will trickle down and believing the delusion that "some day, we'll get there too! thats what the USA is all about!"
Its high time that the vast majority of us (any loser like me working for a living - even in a deep six figure job - and posting on a board like this) dropped the delusions of grandeur and realized that the deliberate manipulation of the global credit market, and now commodities markets, by billionaires and institutions isnt something the free market can continue to allow if it plans to survive.
We're heading for a model where the top 1% hold 100% of the wealth and the rest of us are foraging for food or, perhaps, we return to feudalism.
The answer is increased regulation and more tools in the hands of the fed. And possibly some criminal prosecutions and 8 and 9 figure fines against individuals for the credit meltdown.
Yes, the first true fear is inflation...that will happen when prices go up and the buying power of the dollar does down. However, the true long-term concern would be deflation. Should wage increases slow for the other 99.5% of the population, this could be one of the catalysts that bring on a deflationary period as seen in the Great Depression. Here is a short excerpt from Wikipedia:
"In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. Conditions were worst in farming areas where commodity prices plunged, and in mining and logging areas where unemployment was high and there were few other jobs."
Respectfully,
Brian A. Davis
Let's see, that means we could roughly quadruple our production, producing about as much as Saudi Arabia and Russia combined. You are completely out of touch with reality.
"The answer is increased regulation and more tools in the hands of the fed. And possibly some criminal prosecutions and 8 and 9 figure fines against individuals for the credit meltdown. "
Ron paul said:
"...Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable."
TakeBackTheFed.com
Let's see, that means we could roughly quadruple our production, producing about as much as Saudi Arabia and Russia combined. You are completely out of touch with reality.
Ummm, how much oil do you think we get from Saudi Arabia and Russia? Most of the oil that comes into America comes from the North American shelf. The problem is that most of the oil that the rest of the world receives comes from OPEC and since oil is traded as a global commodity on the dollar, even if we don't get a single drop of oil from the Middle East it will do absolutely zilch to the price stability of oil. Strikes, terrorist actions, unspellables vs. unspeakables killing each other have more do to with the price in Kansas than domestic policies. Oil is something we have to negotiate from the demand side and not the supply side, supply is fine; its the demand that is screwing everything up.