Wednesday, December 24, 2008

Just when you think things can't get worse, they drop a piano on your head

Oil fell $3 today.  12 more days like today and oil will be at ZERO.

After we blew out of our Oil positions this past July, the commodity floor broker for our fund asked me when I would be willing to go back in.  I told him I would get excited about Oil again under $80 (we sold when the front month was about $132, on its way down from $147 although our contacts were for 2010).  At $80 he called me and said "OK, it is $80".  I told him it is still going down.  He asked me when I would be willing to take a position.  I said "when it stops going down".  He replied, "how will you know it stopped going down?"  I said, "when it starts going up".

Oil has not had an up week since then (actually, it had 1 up week).

If REAL unemployment hits 15%, which I think is quite possible, Oil could fall under $30.  That would be a hell of a price to pay for cheap oil, but it could happen.  It would mean that gasoline is down around $1 per gallon, but no one could afford it.

The depletion rate from the world's exiting fields is, according to the IEA, around 9%.  IF THAT IS TRUE, sometime in the next 36 months the U.S. would experience a significant Oil shortage irrespective of 15% unemployment (and unemployment won't stay there... Obama's team made it clear they would employ half the country to dig holes in the ground, and the other half would be employed to fill those holes back in).

The world burns 30 billion barrels of Oil per year.  2008 has been an excellent year for Oil discovery - the highest estimates I have seen is 8 billion barrels of ultimately produced Oil.  Hmmm.... if we use 30 billion per year, discover 8 billion per year, have demand decline by 4%, and deplete the world's 75 million of C & C production at 9%.... how long before the demand axis is superior to the supply access?  Not very long.  

That does not mean that Oil could not go to $20 per barrel in a deflationary spiral.  It just means that the probability is very, very low.

When the turn comes, it will be the opportunity of a life time.  Surviving until then is the problem.  Think about it:  Trading Oil from $35 to $70 is the same as last year's $75 to $150, and a lot more probable.

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The Bank of Spain's Chairman sees things my way.  Nobel Laureate Paul Krugman, too.  There are too many optimists out there trying to convince you that we will turn the corner in a couple of quarters.  We MIGHT be able to re-ignite inflation and destroy the US$ in a couple of quarters (and maybe not) but in real terms we will still be sucking wind.

There ARE opportunities for investors; they just aren't where the man on the street is looking.  I will give you a hint.  Why would you buy common stock in a company when you can buy senior debt, at a discount, and get a current yield of 8, 9, 10% +...  with the added upside that if the company actually survived you would make a capital gain on the difference between the face amount of the bond and what you paid for it? And I am talking name brand companies here.  I don;t give specific advice in this forum, but if you can read this you can search these out in Moody's and Standard & Poors at your local library.


Good Luck!

Mentatt (at) yahoo (d0t) com

18 comments:

Dan said...

Relax it’s going to get a little better- before it gets worse. Enjoy the Indian summer while it lasts.

The Mad Scientist said...

I totally disagree.
There are a lot of positives.
Corporate cash to debt is at the highest ratio in 50 years.
Credit card charge offs while rising are still much lower than the entire 85-95 decade.
Stock valuations measured by P/S or P/E are the lowest in 20 years.
Stock Market Value to nominal GDP is at the the lowest in 50 years.
Sure stocks can go lower but theya re one of the best classes to protect against the avalance of paper money coming to a theatre near you by next fall.

bureaucrat said...

Stocks cannot produce profits when no one has any money, the credit cards are all maxxed, and no bank wants to lend. It is obvious that, the Fed and Greenspan having now caused this entire problem, the solution must obviously be (in their minds) to take all interest rates to zero, so that jumping back into the S&P 500 is your only remaining investment choice. That's dirty and it puts the risk back on the average American investor, who I'll bet is getting tired of all these rich people playing their "debt is good for you" games. Yeah, we'll have to consider dividend-paying stocks soon, given we have no other choice, but not because of this amazing economy of numbers that we dumb dopes just aren't smart enough to see.

The Mad Scientist said...

"no one has any money?" Maybe. Net household wealth even after this huge destruction is still pretty decent. If we do not see the catastrophe which everyone is predicting we will see people starting to spend and banks starting to lend. That is all BS about banks not willing to lend. 2 different independent studies in the last 2 months showed that banks were willing to lend but just more appropriately assessing risks.
This problem has snowballed because of the constant barrage of Paulson and Bernanke and senators on the news telling everyone how bad things are.
How many banks have gone down this year? Compare that with previous crisis. Many Stocks are at valuations not seen since 1982 and long term interest rates are 1/5th the levels.
If it was not for peak oil the whole market would be a great buy at these levels. But since peak oil is already here only resource stocks should be bought.

bureaucrat said...

See you at the end of 2009. :) I admire your optimism though.

Dan said...

If they lent at historical norms then there is too much manufacturing overcapacity. Those stocks look expensive to me, and the will get more expensive for a spell then…

The Mad Scientist said...

Yes Bureaucrat. In the end reality is the ultimate judge.
Meanwhile I give you this as an exmaple of how insane the markets have become
http://ispeakofpeak.blogspot.com/2008/12/of-uncle-sams-but-not-of-mcdonalds.html

bureaucrat said...

To "Mad":

Yep, I'm reading your blog as well, though I'm a little concerned about your refusing to give your "real" background. My best zinger line for the fundamentalist Christians when they ask me if I've been saved is "why does God hide?" You must have some reason.

I also own a little MCD and a whole retirement account-full of Treasury debt. Everything does indeed get insane sometimes. But while alllll the suckers are busy panicking, I'm hoping to rob them blind. :)

The Mad Scientist aka Saif lalani said...

Why Bureaucrat I am not trying to hide anything. I just created my blog and I am adding stuff to it as time goes on.
That comparison to God was uncalled for :)
My background is in Microbiology and I help run Greg's hedge funds. I do not want to put my real name on my blog simply because I have family that keeps googling me and I am not interested in them reading the blog.

Greg T. Jeffers said...

Bureaucrat

Good luck with the Mad Scientist. He is one of the smartest people I know.

Don't feel bad... I gotta work with him everyday... He has this maddening habit of actually thinking and researching...

bureaucrat said...

Sort of an alter-Jeffords. ;)

He seems to see things differently though, so far. I wonder if he turns on a dime also when there is "new data". Hahaha!

The Mad Scientist said...

I am his optimistic half. For the record I believe that a LIQUID fuel crisis is all we have. All the problems are easily solvable.
Should post on my blog about that today.

The Mad Scientist said...

to both of you G and B, let me ask you,
1 year after the market peak in the 30's how many people saw the great depression coming? The answer probably 10 in the whole world. Not a single newspaper called the downslide in equities anything but a correction. Here everyone and I mean everyone sees a great depression coming. All newspapers predicting it Really we ll can see the great depression coming?.Kinda like we all saw $200 a barrel oil this december, we all know how that turned out.

Donal Lang said...

hey Greg; congrats on the new daughter. It's always good to get in touch with reality now and again.

Hopefully she'll look like her Mum! ;-)

Greg T. Jeffers said...

Bureaucrat:

See what I mean? Of course he is correct in regards to sentiment indicators now vs 1930's. Of course the 1930's did not have the info distribution system we now have.

And as for your question does he change his mind if new data comes to the fore? Of course, though he fights it a little at first. But he is young yet. After a couple of underwear changing events he will come around.

The Mad Scientist said...

Greg and I use different ways to get women and it shows.
Greg: An asteroid is going to hit the earth and we are all f**king doomed, do you realy want me to stop at second base
Girl:You are right I want you to take me and I have a couple of kinky things I want to try too.
In another place
Girl: I am going to lose my job and things are going to be terible
Saif:No you wont things will be great
Girl:How?
Saif:I will explain it to you and make sure you are feel ok, but I cant think with your clothes on

bureaucrat said...

Wonderful ... I've fallen into a fraternity skit on Saturday Night Live. :)

The "Austrian Economists" (whoever they are) saw this "Great Recession" we are in now, because they seem to look at real human economic behavior over hundreds of cycles -- stuff that always happens and doesn't change much. I no longer make predictions, cause I'm always wrong, but when "the Austrians" say that injecting a whole lot of cash and credit (like is being done now -- $8 trillion+ worth), is going to create massive inflation someday, cause it always has, I do believe them. Mish is part of my embracing this way of thinking (his deflation call was the first and has been proven best so far), but there are others. I think Matthew Simmons is also a singularity crying out alone in the wilderness. If I can invest successfully by seeing the "big picture," I feel right knocking Jeffers for his "change with the wind, or the data, or whatever" way of thinking. :) In the 1920s, everyone was drunk on success. Today, the belief that "we'll get thru somehow" is even stronger. Will that be our downfall this time?

Greg T. Jeffers said...

SCREAMING LOL!!1