Saturday, October 6, 2007

I received an email today from a rather bright young fellow who asked me how long it would be before Wall Street is looking forward to the EIA monthly world oil production numbers the way the look forward to the various reports coming out of the U.S. Department of Commerce, et al.

An excellent point; and to answer your question… soon, I would imagine.

Taking this to its next logical step… it would seem that at that time wealth, power, and money would flow in different directions than is now the case. At this time, Wall Street still appears willing to pay a premium for “growth” (of earnings I presume), after all, the average multiple for tech stocks is what? 40X? What multiple will they command when growth appears to no longer be possible? 4X? 3X? And what of the value of the long term bonds and other debt instruments of the airlines, auto manufacturers, mortgage lenders, Investment Banks, etc… if the long term view is one of perpetual energy descent? What are the legal, legislative, and political implications of this magnitude of defaults? It hurts my head to try and wrap my mind around this.

The EIA’s own data show a substantial decline in oil imports for the U.S. from 2006 to 2007, nearly 3%. If I read the data correctly, it would appear that for the month over month September 2006 to September 2007 imports declined nearly 7%! That might explain the remarkable drop in crude inventories and finished products of late. If this trend should continue, and I am not saying that it will or won’t, this winter will be somewhat problematic – at least for CERA & Daniel Yergin, Michael Lynch, Steve Forbes, Larry Kudlow… (Actually, I think these guys have been pounded into submission at this point. I just can’t help myself.) as well as for folks who heat their home’s with oil. For the moment, a BTU of Natural Gas (“NG”) is half the price of a BTU of oil, but that will change.

I want to stress how fast markets can change – sometimes overnight – and this is just the kind of data point change that can demolish the best quant model money can buy. So watch the data carefully, have a plan, and a plan B, and don’t deny to yourself what your own eyes are seeing.

Forget the production numbers (sort of). Pay extremely close attention to the import numbers, tanker rates and traffic, and the value of the U.S.$ versus not only the dollar index (remember, our trading partners will eventually try to protect their export markets by printing and devaluing thier own currency just as the U.S. has done) but versus precious metals as these will be far more telling than gross world production.

I know this sounds pecuniary… but I am not running for office nor do I pretend to have a macro solution(s). I am far more interested in the potential micro solution(s), which has/have a much greater potential for success.

Mentatt (at) yahoo (d0t) com

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