The Triple Play: Oil Addicts, The Credit Crunch and Deflation

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Includes: AKS, APA, BP, CLF, COF, COP, DBO, DIA, DNR, OIL, PQ, SPY, TAN, USO, X, XOM, ZEUS
by: Brian A. Davis

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