insideoil

Why the Stock Market Should Crash

While the US$ printing continues, it will stay a one way bet forcing you to stay in the market to protect your wealth through illusionary growth, that or spend any savings you have on things you do not need. The only way this can end is when China and the ROW stop funding the USA. It will not happen quickly, but it will happen as individuals make their own decisions that cost goods in other currencies and move away from the $ slowly, progressively and surely. No one can afford long term to be caught with cash that they know has no sound basis behind it, but plenty will take the gap in the short term and take their chances - especially if they know their government will bail them out.

Earnings Are Horrible, But It May Not Matter

I just read today a claim from the Chinese that they sold more cars last month than the USA or Japan, in fact almost more cars than the USA AND Japan combined. I suppose they are not the same size, value or fuel consumption cars, but they are cars nevertheless. Also imports of coal and iron ore at record levels into China.
I guess that leaves something to be said for saving, making things, and having a government controlled financial system. Seems to me the grand old USA is slowly finding the value of the real economy, rather than the virtual one that is disappearing to nothing. Point is we have all been living off the virtual economy, so it makes for a rough change to realise just how hard it is to make a living without leverage off the cheap manufacturing sweat of others. China seems to be spending its stimulus money on building their real economy and is still adding value. The West seems to be spending printed stimulus money on propping up failing real estate, virtual business, and keeping unproductive people employed in value destroying business. That is what is so difficult to believe in the present gains - you can sense it is the same phoney scam being continued. When we see the value system in the USA change - that will be the solid turn of the market, anything less will be a continuation of the confidence game, where the traders can feed but true long term investors never win.
I am still long on oil (and cash) - but realise it may take a while for any positive return to show in real terms.I just keep on buying in the big OilCo's when its cheap and pray it has to work for me eventually. At some point in time it has to work, either through inflation, or the value of easily traded raw material, or both. One catch-me though - I know just how much capital it is going to take to keep capacity on line - so its not just about reserves, it is about how much money it will take to keep the reserves flowing as well. Not all OilCo's are equal.

Who Can Lenders Trust?

Have to agree that at least 4 countries may well drop off the exporters list, and agree that NOC's seem to own the production that mostly goes to export. I also have to agree with Rule that it is a game of economics, not geology. Assuming however this plays out with high oil prices in the medium term however - that another thing entirely. While NOC's may own the oil, they still use IOC's to finance and operate the extraction, and at their risk. It is not only that the NOC's divert money to social programs - there will also be a lack of financing capacity - both due to lower returns as well as higher risk, all of which will further limit investments. In the short term we will also continue to see demand drop - if only due to more efficient use of energy - so the balance act of the two large numbers of supply and demand is going to remain very hard to predict until the world gets back to a general growth trend again. Of far more concern will be the temptation for some to create events to scare the market, or to radically reduce supply. Nigeria scares and even events in Gaza have made little difference recently, one hopes that those who stand to gain most from higher energy prices do not start something even bigger. We live in uncertain times again.

Oil, Stock, and Housing Declines

Seems people have forgotten when oil was 10-12$/bbl - it was not THAT long ago.
Fundamentals now support $80/bbl (based on marginal new production costs) - even with declining demand, and new increased Saudi production on line in the last few months. My simple view is that the OPEC members also keep their eye on return of capital, rather than just return on capital - so we will see production line out to demand by just cutting back to quota levels after the Sep 9 meeting. The loudest OPEC members in favour of production cuts will be those without investment portfolios - they need the cash to run their countries, and they are seriously struggling with $ induced import inflation.
The worst that can happen if the USA does not get its house in order is a bail out from the US$ by OPEC members, in favour of a currency basket for these oil producers.
My simple view is that the dominant OPEC decision will be taken one by one based on return of capital i.e a fear based defensive action looking at investment portfolios, rather than pure income only. We will see a dip to the $80/bbl level short term, but as soon as as any strength in demand returns, prices will jack up again as greed returns. That strength in demand can come from East or West, or from hurricanes or politics - it matters not from which cause, only when, as supply does not exceed demand by any comfortable margin.
The lower the price falls and the more jawboning on green alternatives, nuclear, drilling USA or whatever, the more real oil/product projects will be slowed - leading us closer to that supply/demand balance problem again.
I'm betting the energy sector will fall just as everything does during this downturn, but its pick up on the next cycle upwards will be faster and even more furious than the last rise from $10/bbl to $140/bbl.
Aaahh - but the only problem is the timing !!!

Options Trader: Friday Outlook

Phil - you are always good for a read, but the anti-IOC rhetoric is getting to be a bit much. You have relentlessy failed to get it that more product is heading East - because they are prepared to pay more. No amount of US based BS is going to change that oil product flows to those who are willing to pay, and pay more to protect their future. If the US investment strategy in energy remains none at all, you can hardly blame the big oil boys for doing what they have to do for their own interests. Your country is bankrupt, both morally and financially, but again the Oil Co's did not do that, your own country men did that to themselves. Admittedly as things get tough, higher oil prices are to no one's advantage, but please try to get an egg in front of this chicken. Opec is next week, and one wonders how the investment portfolio is looking for some of the sovereign funds long on US and EU assets. Shutting back oil supply again to prop up pricing would be such a shot in the foot on losing capital, so here is hoping that the desire for a return to global prosperity keeps the pumps running and the market well supplied in spite of the possibility of lower short term revenues.
As for the Chinese operating in Iraq - supported by Russians, well perhaps someone else should share the load in getting shot at. I am pretty sure its no fun, no matter where you come from. If they manage to improve the flows from Iraq, it will just make the overall balance that much more manageable for everyone. Why the great bias that it has to be done by the USA if you feel so badly about these US based IOC's?
As for the politics - as an outsider it does seem important, but as smart people recently pointed out , like drunks on a booze binge, it only matters if someone can get folk to dry out a little, and manage the realities of living within their means.

Preparing for the Fall

Oil knows nothing - but the speculators chasing the price seem to know something. Just for the saying, what is short is refining capacity - not oil, and what is long are customers outside of the USA still willing (and I did NOT say capable) to pay for it. This can only break when a) subsidies on fuel start disappearing and b) countries start offloading their USD links, both directly in terms of currency and in terms of trade.
The markets will wobble and sway their way downwards as the pont of indifference between losing your cash on inflation or losing your capital altogether varies based on sentiments and manipulation of central bankers.
If you have the cash in hand - you may have to do a little hard work these days - and directly find, buy and manage companies with positive cash flow - using actual money. These are the only guys who will be the winners. The rest of us will be fleeced to pay off the bankers and the feds of this world - as they both need each other to survive, and they have the rules on their side to make sure they survive, and at your expense.
What is needed is a clear and delivered message of putting interest rates UP - to put some back into the US $. It will flush out the bad loans and all those who took a fat chance will pay for their mistakes and (unbacked) greed.
If this does not happen, it will be a slow slide to hell, and you will pay for it anyway in stagflation. However the bankers and the Fed will always prefer the slow boiled frog to the quick leap into the fire -the first way they get to stay in their jobs and plead that they had no choice. The result is the same - but the process even more protracted and painfull. Easy money is over - the system is striking back. Have an nice day.

The Minotaur, the Labyrinth and the Icarus Rally

Face the market (reality) by letting interest rates increase (medicine) to stiffen the back of the US$ (moral integrity) - it will kill the inflation (cancer) , but it may also kill the patient ( US consumer). In the same analogy if you let the cancer persist it can only get worse, spread further, and be even more irrepairable if allowed to continue - and then eventually the patient dies anyway - just after an even more protracted and painfull death.
Maybe just the USA is in denial over having a cancer that needs to be treated. Funny things these analogies, they really do get you thinking.

Look to the Markets to Assess Inflation

Simply add the thought that oil at $100/bbl today is the same value arguably as oil at $60/bbl, based on old exchange rates US$/Euro. The conclusion then is that it will be US equities that have a problem, not the rest of the world- as it is only the US (and US peg countries) really seeing the inflation.
Maybe you could do the same analysis, but from the perspective of the Euro ? I for one would be most intrigued to the outcome.
Perhaps also add to this the inflationary impact all those extra petrodollars will have - unless GCC/Opec players switch to Euro's or a basket of currencies.
So many options - so little time !!!

Big Ben Panics and Gold Responds

Leo - I was afraid that someone would answer just as you have. Everything one (ethically) stands for tells one not to be so cynical, but reality laid out as it has been this last week, stripped naked of its misleading perceptions or false hopes makes it difficult to come up with any other conclusion.
Under this understanding - what happens to asset inflation and living cost inflation ? Are you saying that living cost inflation has to kick in to cover the cost of the "free" money being dispensed so liberally, or that the gap will be covered by having to produce more to be paid the same or less than before i.e that higher productivity is the way that living cost inflation will be kept under control? With interest rates not changing much, is the assumption then that asset pricing will have a soft landing - i.e a gentle deflation, or a stage managed slow increase that the investor is still willing to stay in the market. I guess as you say - it is business as usual - but you know you are paying the price while being productive and working for a living. It seems to me that the flexibility to manage such a tightrope have been significantly reduced - so we should expect volatile times - no-brainer for that one.

Big Ben Panics and Gold Responds

Tell me the Fed loans have to be repaid in the short term, and cannot just be rolled over indefinitely - please ! Does this also apply to the ECB - are these short term loans or liquidity injections for free ?
Why does American sub-prime get all the blame - surely each and every entity with a positive cash flow has been pumped up as investors compete and chase up the asset price leveraged by cheap credit (hedge funds ?)- perhaps with the knowledge of a Greenspan "put", that has now become Benanke free cash from helicopters. If risk and the real cost of money has been underpriced and hidden by skillful (and plain deceitfull) packaging of unpayable debt in "mark to model" scams, then we have a general asset bubble - not just housing in sub-prime in America. I hope we are talking jail time here - not just "oops" we made a very profitable - thank you- mistake !!