Tuesday, February 26, 2008

The News on the Web is Suddenly Tuned Up on Agriculture

Whatever your feelings on the U.N., much of their work is non-political and of real merit. Like their work on hunger.  Read what the U.N. has to say about what high commodity prices for wheat, soy beans, and corn mean.

ANd what would an article about commodities be without bringing up China's "exploding" demand. Whenever you read or write about China just be sure to use words like "exploding", "voracious", and "insatiable" and you will sound like you know what you are talking about. I say, can you imagine? Those bloody Chinese want to spend some of the hard earned money they have on things like good food! Egads!!!

And now Venezuela is threatening to cut off FOOD exports...

And we might have to replace the "O beautiful, for spacious skies, for amber waves of grain" in "America the Beautiful". America is running out of those "Amber Waves of Grain" in part perhaps because one too many of those "poor, huddled masses" showed up and went "forth and multiplied". America is no longer the bread basket to the world. We might not even be the bread basket to the East Coast if we keep up our denial of the effects of the exponential function on population.

Call me crazy, but as I have said before, Americans will prefer eating to driving.

Ah, don't worry about it. This is all just alarmist B.S. There's nothing to any of this! There is plenty of oil in Alaska and grain in Nebraska. The problem is those dirt bag speculators!!  There wouldn't be a problem if it weren't for those capitalist bastards!  

Besides, we eat too many carbs anyway.

Yours for a better (newer, thiner you!) world,

Mentatt (at) yahoo (d0t) com

Consumer (not so) Staple

The following is a guest post by Dr. Saif K. Lalani.

As always, nothing on this is sight is to be construed as investment advice. Further, I do not censure or edit guest posts in any way. I am precluded from being too specific, others are not.

By Saif K. Lalani

"Consumer (not so) Staples

The market anxiety over the past few months has given rise to a different breed of investor. With bond yields offering a mere pittance, and a majority of stock sectors looking vulnerable, investors are increasingly turning to “consumer staples” companies. However this may be mistake of magnanimous proportions.

“Consumer Staples” refers to a group of stocks that sell a group of “non-discretionary” products. Things we have to use regardless of how we feel, or how much money we make. However with the arrival of peak oil this will be put to a severe test at multiple levels.

It is a common belief that we “need” a new razor after every three shaves, that we “need” to have beer every Friday evening. With the US consumer now about as tapped out as Bernanke's ability to solve problems with rate cuts, rising prices of food and energy will force cuts in other areas. If everyone decided that the old razor could manage an extra shave… that would shave off 33% of Gillette's razor sales. Skipping the Friday evenings once a month would have a similar effect on restaurant and beer sales.

In the past whenever the consumer was under stress the ever-increasing loads of credit came to the rescue. This time however credit is being cut drastically. Banks across the board are doing this. (American Express has gone to such extreme lengths that the CEO was spotted using a VISA card.) Add to that the fact that this cycle of rising commodity prices has just begun. I could name you 30 commodities that would never be able to satisfy demand if China ever even tried to consume as much as the western world on a per capita basis. India's booming economy is another problem. The rising prices along with cutbacks and increasing unemployment means that consumer staple companies will have little ability to pass on price increases leading to marked margin compression. For example,, look at what has already happened to Starbucks and Hershey. Rising Milk and Cocoa prices have demolished both companies. Starbucks boldly tried to increase prices and saw it's same store sales growth flatline. Starbucks is not included in the consumer staples group but it serves to make a similar point. The stock is down 60% from its highs. For more entertainment read the recent reports from General Mills, Tyson foods, Constellation brands, Kellogg, Kraft and Dean Foods.

There is another emerging trend that is going to work against the consumer staples. Anyone who has gone to a grocery store even once has noticed the huge differences between brand and non-brand items. As prices increase people will be forced to switch to non-brand names. Maybe some will not switch while others will switch only in a few products but the effect will be large enough. A majority of listed companies are those that make brand name products. Sure a few companies will survive and few will thrive but if you are going to blindly purchase consumer staples mutual fund or ETF’s, I promise it will be painful.

Barring the energy and precious metals sectors there are no safe sectors. Diversification makes you look extremely smart when you do not know what you are doing. That is what your investment advisor is aiming for. I have been long oil since it was $40 a barrel and gold since $450 and silver since $8. Never diversified beyond commodities and will never need to at least not until the entire world wakes up to them and starts buying them like they did tech stocks in 2000."

Saif K. Lalani
Apocalypse maybe...

In an earlier post I had disparaged the idea that the American Energy Crisis could lead to food shortages.  

"I know that a lot of the peak oil blogsphere is filled with disaster scenarios, but I sincerely doubt this is the most likely outcome. That argument that we will experience immanent agricultural disaster due to declining energy inputs is just not that likely. The markets are efficient enough to redistribute those inputs away from Suzie-Cuzie’s trip to the mall and into the farmer’s tank and fertilizer bin. Yes, food is going to get much more expensive, and yes, this will fall disproportionately on the poor. But the aggregate AMOUNT of food available to Americans is not the problem, but rather how to pay for assistance to the poor." (click here to read article full article)

Whoops!  Perhaps I should not have been so strident in my opinion at the time.

Also in a recent post I linked you to comments by the CEO of Potash, the world's largest fertilizer company (click here) that if the world does not rack up record crop production, right away and from now on, the world will experience famine.  Under no circumstance do I think I am the smarter guy in this space, and will defer to Mr. Doyle.  Frankly, I believe William Doyle is making sure he is in a position to say "I told you so" rather than having to fall on his sword.  I sincerely doubt that these remarks were "off the cuff", but rather were a long considered public warning.  Considering Potash's data resources you would have to be 9 cents short of a dime to ignore this if you were a political leader/policy maker (or a parent).

The seriousness of Doyle's comments are more apparent after some further consideration of his choice of words.  Since it is not possible to have record crops year after year after year, what Doyle is clearly saying is that in his opinion, and by definition the opinion of Potash, Inc., the world will experience famine at some point in the very near future.

For arguments sake, let us accept his comments at face value, and let us consider this:

Gold traded above $950 per ounce recently.  1 ounce of shinny, yellow metal is worth $950 in a fair and open market.

Corn traded above $5 per bushel recently.  I wonder how many American's even know what a "bushel" of corn is?  No, it is not those baskets you might remember from your childhood (if you are over 45 that is).  A bushel of corn is defined as 56 lbs of dried, cob free kernels.  

In a food/energy crisis what would you rather own?  1 ounce of shiny gold or 56 pounds of dried corn?  Forget for a moment that an ounce of gold is worth 190 times more than 56 pounds of corn in dollar terms...  You would go with the corn, right?

So, which is the better investment at these prices?

Mentatt (at) yahoo (d0t) com

Wednesday, February 20, 2008

Serious Agricultural Troubles

For several years I have been writing about significant challenges to the world food production system. In my post before this one I lay out the simple equation that is at the base of the problem. Now here is the CEO of the world's largest fertilizer company telling the media, and having it reported on the FRONT PAGE of Bloomberg News, MSNBC, and the Washington Post, that the world could have FAMINE if the world does not continue to produce record crops of wheat, corn, rice, and soy beans each and every year, from this point forward. (Click link to read article)

I am very relieved to see the CEO of Potash Corp. come clean on what the world is facing. When I began to suggest this to my clients, partners, and prospects, well, not a few rolled their eyes and thought I had lost it.  I have not lost it - my problem is that I CAN COUNT.  And so can Potash's CEO.

Food, for the most part, like money, does not grow on trees.  You need LAND, LABOR, WATER, FERTILIZER, PESTICIDES, TRACTOR EQUIPMENT.  Well, we have NO MORE farm land, and we have decreasing inputs of energy that labor, fertilizer, pesticides, and equipment requires...  AND

This is serious stuff.

As farmers cut back on corn acres planted to increase wheat and soy bean acres planted look for corn to shoot the moon over the next year.  Farmers are going to plant what they perceive will yield them the most dollars per acres, and with wheat and soy beans at today's prices... But we already have very low inventories of corn.  If corn acres planted falls to wheat and soy beans, corn production falls.  Ergo, my money is on corn. 

Yours for a better world (with kitchen gardens in every yard),

Mentatt (at) yahoo (d0t) com

Tuesday, February 19, 2008

I love to say I told you so...

Wheat!!! I have been writing about the coming wheat shortage for 2 years. FINALLY, the USDA and Goldman Sachs are coming around to my way of thinking.

Here is a simple equation:  Grain to bio-fuels - farm land lost to deveopment + higher fertilizer costs + higher diesel costs + 75 million more people each year wanting (can you imagine) to eat = WHEAT SHORTAGES!!!!  Wanna see me do the same trick with corn?

``The supply shortage has been much more acute than what we had expected,'' said Ruifang Zhang, a commodities analyst at Goldman in London." (from the linked article) Really? What WERE you expecting? Just how many Iowa State University agriculture grads work at Goldman? My bet is a great many less than Ivy League liberal arts majors... but I digress.

You ain't seen nothing yet as that term applies to wheat, corn, soy beans, and rice. Prices are going much higher, so much so that this will become a major political issue - one that will make $8 gasoline seem trite.

You heard it here. In a few years you will hear it from Goldman Sachs.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Monday, February 18, 2008

Opportunities do Present Themselves...

"No bastard ever won a war by dying for his country. He won it by making the other poor, dumb, bastard die for his country." _ General George S. Patton

The current situation in the municipal market may (or may not) present an excellent opportunity for a nimble trader. Certainly, the commodity market has been a trader's dream of late.

If you read that this or that might get "killed" in the market, there is no need to run away. It is time to take a closer look: Qui Bono? (who benefits?) Is there an opportunity to go long there? Who is harmed? Is there a way to play the short side?

Let's look at: Coal - Prices have soared recently. Of course, Natural Gas ("NG") has benefited from the price rise of Coal, but NG is trading at or near 18 month highs. WIll NG keep going? Maybe. A disciplined trader might be willing to go long, knowing he will hit the bid if the trade does not go his way. What else might benefit? Fertilizer prices are up big as a result of the rise of NG, which is up big as a result of Coal... Corn cannot be grown in the absence of fertilizer, and any decline in fertilizer usage will impact corn production... Isn't corn the primary ingredient for ethanol in the U.S.? And aren't there a lot of ethanol plants coming on line that are scheduled to use vast quantities of corn and a considerable percentage of the U.S. crop? Maybe corn is the play... Don't we use a great deal of NG, and coal in the form of electricity, in the process of producing ethanol? What about Uranium? That commodity has not performed very well lately. Will it? All of these dots are connected somehow. Connecting them correctly will make you rich, and even in an energy crisis it is better to be rich.

"I've been rich, and I've been poor. Rich is better." Joe Louis, Heavyweight Boxing Champion

I trade for a living, I write this blog to vent my spleen. There's a big difference. I may point out the idiotic BS that our media, politicians, policy makers, and regulators spew forth like the aftermath of a scat film gone awry, but I ALWAYS try to profit from it. I don't feel vindicated by winning a debate or an argument, only when I risk my capital based on the opinions I have formed and come out with a tidy (or an obscene) profit.

"The American Energy Crisis" is going to change the economic fortunes of ALL Americans, some for the better, most for the worse. I prefer to be in the former camp.

Over the next few years the winners will be those who recognized the problem, saw the opportunities, AND ACTED. The folks that believe "that "THEY" will figure something out" will be impoverished and intent on blaming someone for their misfortune.

But let us define winning: If you are in or approaching your retirement years, your agenda will be different from a 50 year exec at the peak of his earning years. Generally speaking, the older you are the more you have to concern your self with "return of your capital, not return ON your capital". Winning for you will be in not losing your assets to market dislocations, "Black Swan Events", and hyper-inflation. And because of the risk, commodities cannot be more than a 10% - 25% of your portfolio. You are stuck with income producing securities such as Treasuries and high dividend blue chips (think natural resources) and annuities from the big insurance companies. The blue chips could lose nominal value, but the nominal value of Treasuries and the Annuities are guaranteed. Of course, even governments and the most financially solvent insurer could conceivably default (after all, nothing is certain but death and taxes), but it ain't bloody likely. If you are over 65, it is better think in terms of an orderly liquidation of your assets over your life expectancy.

Say you are between 40 and 60 years of age, with a net worth between $2 and $20 million. Hard to believe, but this is the group that will be MOST IMPACTED BY THE ENERGY CRISIS. The folks with the 9 figure net worth's in this age group will likely remain wealthy enough for the rest of their lives (provided their wealth is not leveraged to something that goes "BOOM!" Diversification is an important concept, just ask any Worldcom or Enron stockholder). The folks in this age group with $500k in a 401k and some equity in their homes will be just as pressured as they always were - pretty much living paycheck to paycheck until that paycheck is taken away, at which point they do not have the resources to do anythings about it except to cut their lifestyle to a point they can afford... Its the 2 to 20 net worth crowd, the middle class millionaires, that have enough resources to protect but not enough to afford to lose it. So this is you - what do you do? I can't give specific advice but I can say that some assets hold value better than others. South Florida luxury homes are a poor store of value while productive farmland is likely a good store of value. Precious metals beat dollars stuffed in a mattress. Commodities beat financial assets for the most part, but you can't put all your money in commodities, so you are STUCK in that you will have to hold some financial assets in order to maintain liquidity to pay bills, etc... Can't help you with the specifics but I will say that if you choose poorly you could really, really, really get smoked. Some financial assets benefit from high commodity prices... you can figure that out. Oil services companies, Oil & Gas producers, gold and silver miners, etc... these companies hold more appeal to me than, say, airlines, or travel and leisure, or high P/E tech.

If you are between 30 and 40 and haven't had enough time to put together a significant portfolio I suggest having wealthy parents. For those under 30, you should revel in your youth - your generation is going to be significantly less wealthy than your parents. So be young, have fun, and take good care of your health.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Sunday, February 17, 2008

"In the Halls of Justice the only justice is in the halls." - Lenny Bruce

One of the "unintended consequences" of any significant energy supply shortfall is sure to be an explosion of litigation - at least initially.

I know a good many of my readers are Wall Street brokers and salespeople as I have exchanged email with many of them. If you are in this line of work you know that everybody loves you when you are right, but they develop amnesia when a trade, or an entire market, goes wrong. An energy driven market crack-up is virtually assured in the coming years, and I think not that far off. No, I don't know exactly what it will look like - hyper-inflation, deflation, currency collapse, earnings collapse, etc.. - but I can guarantee you that whatever it is, it will be your fault and you will be subject to litigation. So get your ducks in a row right now.

I have begun to see disclosure language in some of the mutual fund company's prospectuses; a client faxed me a couple of pages from The Gabelli Funds with language stating that the U.S. needs a Manhattan Project style government funded project, among other things, to solve the problem (and you know that I do not perceive this as a "problem" to be solved, but rather a "condition" to be lived with, while we will solve the myriad smaller "problems" that were solved for us with cheap energy sources) in one of their prospectuses.

Everybody will be looking for SOMEBODY to blame. If you are a broker, financial planner, investment advisor, etc... you will definitely get your share of blame, and litigation. Think hard about this, it is worth the time. Document risk disclosure regarding energy shortages, and perhaps diversify into companies and industries that might/would benefit in the environment I envision. Don't risk dollars to make pennies, and that is exactly what business as usual in our industry means.

I am sure that this problem will present itself to other professions... you will have to interpret the implications for your particular business or profession.

I can tell you that we are very concerned about this on the brokerage side of our business and are making changes accordingly. I think it will really pay to be proactive and not reactive. Most of us cannot claim "Force Majeure", although a more perfect example of that term I cannot think of.

Yours for a better world,

Mentatt (at) yahoo (d0t) com
The "safe" municipal bond market might not be so "safe".

I wrote this post 1 1/2 years ago.

be the beginning of something big. Or maybe not. There are 2 sides to every trade. A Winner, and a Loser!

The debt auction market in the U.S. is the largest Ponzi scheme in the history of the art. As long as new buyers come along to buy out the (previous suckers) maturing bonds, everything goes swimmingly. When those buyers don't show up... well, just check out what happened in the muni auction market last week. Buyers were not willing to commit capital to bail out the previous dimwits.
("Dimwit" is how I would define anybody willing to hold U.S. dollar denominated debt for the paltry interest now received for holding what is essentially toilet paper. That's just me.)

This might not be a big blow up, but that remains to be seen. In this environment, it pays to view all credit instruments as toxic waste until proven otherwise.

Yours for better world,

Mentatt (at) yahoo (d0t) com

Saturday, February 16, 2008


The following is a guest post from Dr. Saif K. Lalani

(Disclaimer: I am precluded from making any specific recommendations in the securities markets. Dr. Lalani is not, and I have left his commentary intact. The following does not constitute investment advice in any manner, shape, or form. And yes, I own corn futures personally and in the fund.)

What can 5 "Bernanke Bucks" do for you?

Corn is the largest US crop in terms of dollar value. It is one of the things we can proudly say that we export. It also happens to be one of the 4 commodities that is set to go ballistic in 2008/2009.
Why? Read on.

Our policy makers have figured out that fighting the housing crisis and coming up with a productive energy policy was not a challenge worthy enough. How indeed could they make things worse? After all they are paid for a reason right? After months of contemplating they came up with the answer. If they could make food extremely expensive (along with everything else), then they would have a real challenge worthy of their mighty incompetence. And so they did.

The US energy bill has mandated huge amounts of bio-fuels to be part of our energy mix over the next 15 years. Ethanol distilleries are being set-up to absorb more than 40% of the US corn crop this year. If that does not scare you then perhaps this will. The US is by far the largest corn producer and exporter in the world. The US is often called the Saudi Arabia of coal. Well, in oil terms the US is the equivalent of - Saudi Arabia plus Russia plus Norway plus Iran and Iraq - for corn. The US single handedly exported 70% of the world's corn in 2006. My friends, that 70% is about to disappear. There is no nation on this planet who can compensate.

According to University of Iowa, the breakeven prices for Corn planted after Soybeans is about $4.00 a bushel. For Corn planted after Corn it is about $4.35. For Soybeans it is about $8.00 a bushel.

Considering the average yield of about 150 bushels an acre for corn and 50 bushels per acre for Soybeans you have earnings per acre of about:

$150 for Corn planted after Soybeans
$100 for Corn planted after Corn
$250 for Soybeans.
At current prices.

Now in 2007 farmers planted the largest corn crop ever. So most of the corn farmers are considering planting falls in the Corn after Corn category. Sure, you can switch acres around but there aren't enough acres around unless we develop three dimensional planting. Now if you were a farmer and had planted the largest corn crop ever and had to choose based on those margins what would you choose?
And remember there is also wheat, which is far more profitable than either of these choices competing for acreage. It is also highly likely that University of Iowa's calculations for breakeven costs may be on the conservative side. As Natural Gas prices break out to the upside we may see even higher prices for Fertilizer (required by corn, especially if it is following a previous corn crop).

So here you have a commodity where you can buy the long-dated futures for $5.00 a bushel where the downside seems to be extremely limited in the medium term. In addition you have demand in China growing at 15% plus a year. Sure demand growth may slow but 5% of a large number is still significant, especially as we have no capacity to increase supplies.

Corn is also an important commodity for other reasons. It is an easy way to hedge against a dollar collapse as well. Being an international commodity, corn prices will shoot up during a dollar crisis. Corn also enjoys strong political protection as U.S. Senators from the Midwest have a vested interest in keeping farmers happy. Finally, Corn has something that gold and silver do not. Unlike the latter, corn can actually be eaten. It is hence an excellent way of hedging your rising food costs for life. Do not be dettered by the fact thqt corn has risen over 100% since 2006. Corn at $5.00 is the equivalent of gold at $500 an ounce. Corn is still 70% below its inflation adjusted all time peak of $15 a bushel. And that is using the government inflation figures, which frankly are about as useful as Jim Crammer's rants. Using real inflation figures from Shawdowstats.com corn would have to climb over $40 to exceed its previous high. With every arable piece of land being used and India and China consuming increasing amount of poultry (which requires corn feed), a perfect storm is brewing for agricultural commodities in general and corn in particular." - Dr. Saif K. Lalani

Friday, February 15, 2008

North America Oil Import Crisis 101

As my regular readers know, I believe that a structural supply/demand imbalance will have a significant impact on the prices of crude oil, natural gas, agricultural commodities, precious metals, the U.S. Dollar, and other commodities linked to the energy sector over the next several years.

The U.S. imports nearly 60% of the oil and a significant portion of the natural gas it consumes, and imports 25% - 30% (Source U.S. Department of Energy) of the world’s exported oil with less than 4.6 % (Source U.S. CIA Factbook) of the world’s population. I firmly believe that the top oil exporting nations will have less oil available to export as a result of higher domestic consumption and flat or declining production. With less imported oil available to the U.S. the supply/demand balance will be brought into equilibrium by significantly higher prices for crude oil. In the case of North American Natural Gas, the future supply picture is quite bleak, and it appears that North American production of natural gas has peaked. There is little possibility that U.S. imports of liquefied natural gas (“LNG”) will be of sufficient volume during the next 10 years to overcome the deficit in North American production.

Herewith are the numbers to support my contention:

The top 10 oil importing nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of barrels per day ("bpd") imports:

Rank Country Net Imports

1. United States 12,220,000
2. Japan 5,097,000
3. China 3,438,000
4. Germany 2,483,000
5. South Korea 2,150,000
6. France 1,893,000
7. India 1,687,000
8. Italy 1,558,000
9. Spain 1,555,000
10. Taiwan 942,000

Demand from China, India, and the balance of Asia, as well as the oil rich Middle East will continue to draw imports from the industrialized nations, in my opinion.

The top 10 oil exporting nations (U.S. Department of Energy, Energy Information Administration 2006 data) in order of exports:

Rank Country Net Exports 2006 (Barrels of oil per day)

1. Saudi Arabia 8,651,000
2. Russia 6,565,000
3. Norway 2,542,000
4. Iran 2,542,000
5. U.A.E 2,515,000
6. Venezuela 2,203,000
7. Kuwait 2,150,000
8. Nigeria 2,146,000
9. Algeria 1,847,000
10. Mexico 1,676,000

(All data from the U.S. Department of Energy, Energy Information Administration (“EIA”)

The oil importing nations can only import oil that the oil exporting nations export, and the EIA’s export data appears to support my (and many other folks) contention that rising domestic consumption coupled with declining production in many of the exporting nations will lead to declining aggregate oil exports – and declining oil availability for the importing nations.

Domestic consumption in 4 of the 5 top exporters (the exception being low population Norway, where production of Crude & Condensate (“C & C”) is in steep decline and exports have declined from 3,145,000 barrels per day in 2000 to 2,542,000 in 2006) is growing vigorously, while production appears to be plateauing or in outright decline, leaving less and less available for export, in my humble opinion. Venezuela and Mexico’s production are in steep decline, and Mexico may become a net oil importer within 5 to 10 years. The aggregate world production of C & C has declined from a peak of 74,298,000 barrels per day (“bpd”) in May 2005 to 72,512,000 bpd in August 2007, a decline of 1,756,000 bpd from peak month to most recent month. The peak year for world oil production was 2005 with world C & C production averaging 73,807,000. For 2007, average daily world C & C production is down to (click 1.1d) 973,093,000 barrels per day. Since 1950, and with the exception of the 1970’s oil embargos, world C & C supply has steadily grown by between 2% and 10% percent per year. Over the past 2 years, it has fallen by just over 2% from the peak month of May 2005. During this time prices have risen dramatically and supply has been unable to maintain its historic growth.

Demand appears to be inelastic, as since 1999, C & C prices have risen nearly 900%
(from trough to peak) and demand has increased during this time by approximately 15%.

This is not to imply that the world is “running out” of oil in the near term, but that the world will be unable to increase the amount of C & C it produces for a time, which will then be followed by a period in which C & C production will go into terminal decline. An environment of constrained oil and natural gas supply will benefit certain commodities, industries, and companies while placing other industries and companies in an extremely challenging environment. Understanding this issue might be the difference between losing your life savings to either market disruptions or hyper-inflation (or for that matter deflation, though I think in the U.S. case it would be more hyper inflation of commodities and chronic deflation in all sectors having to do with housing).

I firmly believe that rising oil prices will have multiple secondary effects including, but not limited to:

A concomitant rise in prices of all other fuel sources including coal, uranium, and Natural Gas, and;
An increase in prices of certain agricultural commodities which rely on fertilizers and pesticides, and;
A decrease in prices of certain metals which are used in infrastructure, and;
An increase in prices of certain metals used in energy related infrastructure, and;
Strengthening of the currencies of certain oil exporters versus certain oil importers.
The collapse of the U.S. Dollar.

The answer to the Falling value of the U.S. Dollar is not the other major currencies. ALL CURRENCIES CAN FALL IN VALUE TOGETHER. How? AGAINST THE THINGS THAT THEY CAN BUY. Oil, Natural Gas, Corn, Wheat, Soy Beans, Silver, Gold, Palladium, etc... will rise in price versus ALL currencies if Oil production goes into decline.

"When you find yourself in a hole, stop digging." - Anonymous

Leveraging up to expand your business will lead to disaster in this environment, as will holding U.S. dollars as a store of value (and suburban real estate).

I am of the opinion that although the average American investor is quite literate, unfortunately they are quite innumerate - so much so that the average American investor is not even capable of defining the term. With that in mind let's go to the online encyclopedia, Wikipedia.org, for a definition:

Innumerate: marked by an ignorance of mathematics and the scientific approach

If you are an investor, educate yourself and take action. If you are innumerate, don't sweat it. You can become numerate with a little effort and a high speed connection - and rather than trusting me, another Wall Street huckster with an agenda, click the links, read my sources, and come to YOUR OWN conclusions. But like it or not, the above numbers are as hard as rock. And there are no pipelines coming into earth from outer space, so we are going to have to live with the fact that there will be less oil available for import in the very near future.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Thursday, February 14, 2008

North American Natural Gas Crisis 101

While the U.S. imports over 60% of the liquid fuels (oil and NGPL's) it requires, the U.S. only imports 1% to 2% of the Natural Gas ("NG") it requires in the form of LNG. Yes, the U.S. imports a good deal more NG from Canada by PIPELINE, but that export partner is unable to increase its NG exports to the U.S. because, it appears, from data supplied by the U.S. Department of Energy that both U.S. production and Canadian production of NG peaked in 2001.

It follows that if the U.S. wants to increase its use of NG it will have to buy it in the International markets in the form of LNG as there are no pipelines stretching under the Atlantic and Pacific oceans.

Electricity is generated from Coal, NG, Nuclear, and Hydro power (and a very small amount of Oil). If the U.S. wants to increase its electricity generation, then the U.S. must increase the use of at least one of these energy sources.

Folks, it has been years since the U.S. added a nuclear power plant, and it has been years since the U.S. has constructed significant coal fired power capacity (there have been some, but total MegaWatt capacity was insignificant). There has been a conspicuous lack of Hoover Dam projects... That leaves NG. Substantially all of the new electricity generating capacity added in the U.S. since 1996 has been NG fired.

Now, let's add it up...

No new non-NG power plants + Declining NG production in North America = Less electricity generation capacity OR an increase in LNG imports.

Any Questions? (Please! Don't confuse the distant future with the present. Of course we will build nuclear power plants - some might even come on line by 2020. Wind and Solar? Too little, too late for this round. But what do we do in the mean time?)

The problem is that in order to get the LNG tankers to land on our soil we will need:

A. The capacity in the form of LNG re-gasification terminals, and;

B. To be willing to pay a premium over other LNG importers to entice the tanker to the U.S.

Here comes "The Rub".

With Oil at $94 per barrel (that is the front month WTI as I write this, Louisiana Light is more like $98 in the spot market, so the $1.175 Billion figure is somewhat understating the issue), and importing a net figure of roughly 12.5 million barrels of oil per day, the U.S. BORROWS $1.175 BILLION each and every day of the year to fund its oil purchases.

This borrowing of money, and printing of dollars, is what is laying low the U.S. currency. Since I have laid out the case why, if anything, the U.S. will try to become MORE ENERGY DEPENDENT by increasing imports of LNG, further increasing U.S. borrowing to fund its International energy purchases, just how is it that the U.S. Dollar avoids a collapse?

Here comes the really good part...

It is the price of the marginal supply that sets the price in the market. The U.S. will have to compete with the Asian nations for the LNG and LNG is trading, right now, in some markets north of $15 per mcf. Prices in the U.S. as we speak are $8.35 (Henry Hub Spot).

While the world watches breathlessly the oil supply problem, it is at least as likely that the knock out punch, at least as far as the U.S. is concerned, will come from NG.

My associate at the Sleepy Hollow Funds, Dr. Lalani, likes to point out that the U.S. wastes tremendous amounts of electricity and could conserve greatly to ameliorate the electricity issue...

Great. Like shutting off the lights at the Empire State Building? Turning off street lights? Shutting businesses earlier? All of which WILL happen eventually.

Why not just stand the U.S. dollar up in front of a firing squad at dawn tomorrow?

Yours for a - better views of the night sky without all that pesky light pollution - world,

Mentatt (at) yahoo (d0t) com

Wednesday, February 13, 2008

This is hysterical!

I am simply embarrassed for the journalist that wrote the story.

Demand for oil in 2008 will be above 2007 demand IF THE OIL IS AVAILABLE. If it is not available, we can't demand that which is not there.

To read this article one would think that the world was about to experience an oil GLUT. Yet total OECD oil inventories, as measured in "days of supply" is at the lowest level in in years.

The WTI crude front month contract closed at $92.79! Does the reporter realize that 5 years ago the OPEC price "band" for its average price for all grades was $20 to $28?

OPEC likely cannot increase production. Even if they could, it might be dawning on them that it is not in their best interests to do so. If either case is true, this is it. The U.S. economy is sitting on the oil import crisis time bomb, and the fuse is lit. Still, even so, the sensation will not feel explosive, more like Chinese water torture.

Of course, I could be wrong and OPEC has plenty of spare capacity... Then why are we making that huge investment to wring oil from the Tar Sands of Canada? If OPEC has so much spare capacity, why destroy the environment of Alberta, apply to build nuclear plants there (in order to cease using Natural Gas to as a heat input), drill in 7,000 feet of water and 23,000 feet of rock and earth off the coast of Brazil and the Gulf of Mexico, and use THE VERY FOOD WE EAT as fuel? Come on, would ANYBODY do ANY OF THAT if we could just buy the Oil from OPEC? NAFC. (That's a technical term - Not A F%$^ Chance).

If I blew in this reporter's ear he would thank me for the change.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, February 12, 2008

My Epiphany

I spent today presenting our new hedge fund to investors. I liken it to a Broadway actor on his 7,000th performance of "Cats". I have said this stuff so much, I am starting to get sick of hearing it myself. Still, each time, the presentation requires that I sit through the initial "But I thought we had plenty of Oil" or "but what about nuclear?" And I have to patiently disabuse them of their (from my view, that is. Still, I recognize that my vision might not be completely accurate) misinformed opinions... ugh!!!

So here was my epiphany:

I was speaking with a businessman who have I great deal of respect for. This guy was up to speed on all the issues - and was not concerned in the least. Why not?

And then it occurred to me - He was not a trader, investor, broker, etc... His concern was payroll this friday, the health insurance bill, and the rent. In his business, he has never been required to forecast economic conditions, interest rates, earnings... 6, 12, 18 months from now. He has never come to work and watched his life's work get destroyed because some finance minister somewhere just announced a currency devaluation, or there was an assassination, or hurricane, or locusts, drought... WHATEVER rock that people in our industry did not turn over that led to their demise (OK, I am being dramatic here, but work with me. In our business, you are only as good as your last trade, your last quarterly performance, your last good/bad call... all of which is normal in the securities industry. Now throw in the fact that you put essentially ALL of your assets into the portfolio... Just ask the guys at the Amaranth Hedge Funds). No, this fellow was not a corporate CEO (those guys worry holes in their stomach, too), he was a successful private business owner. Never in his life did he draw out a forecast past the end of this quarter. He was too busy surviving here, and now, and living the good life.

If he were REQUIRED to draw out a 5 year plan, he might feel differently, or if he had ever lost everything he had on a bad bet, or if he had watched an entire department get walked out the front door by security guards who then unceremoniously cut up the newly departed's corporate IDs with a pair of scissors... but this was not in his experience. He was focusing on today's sales, next week's bills, and this weekend's beer.

And I don't blame him.

99% of the people do not have the resources to put themselves in a position to benefit from the U.S.'s energy pickle, and the 1% that does have the needed resources might make the wrong decisions regarding how best to handle the opportunities and risks.

Maybe it IS better not to know.

Yours for a better ignorance is bliss world,

mentatt (at) yahoo (d0t) com

Sunday, February 10, 2008

Wheat, Corn, & Rice are the major food staples for the world. This is serious stuff.

"Feb. 11 (Bloomberg) -- Wheat futures in Chicago rose by the daily limit for a sixth day, breaching $11 a bushel for the first time as the U.S. forecast its lowest inventories in 60 years.

U.S. stockpiles will drop to 272 million bushels at the end of May, 6.8 percent less than expected a month ago and down 40 percent from the prior year, the Department of Agriculture said in a report Feb. 8. Inventories will be the lowest since 1948 when farmers grew less and shipped more wheat overseas to help countries to rebuild after World War II, economists said."

I don't make this stuff up. We have a food production problem, an energy problem, a currency problem, a trade deficit problem, we are at war, and the voters in the American presidential race are more concerned with the symbolism of the shade of the candidates skin, the contents of their underwear, or their lack of conservative credentials than with a pesky problem like not enough food or fuel.

Call me crazy, but that just doesn't compute.

Speaking of not computing...

The world financial markets are getting beat up, economies are hitting the skids all over the western world, and the price of Oil is having a hard time staying below $90 per barrel (as I write this the front month WTI contract is trading at $92.09 on ACCESS). Shouldn't oil be getting killed in a recession? The media tells me it will, CERA tells me it will, but the futures market says no. I'm going with the guys who actually have skin in the game.

Yours for a better low carbohydrate world,

Mentatt (at) yahoo (d0t) com

Saturday, February 9, 2008

The U.S. Defense Budget is Unsustainable

Sustainability is the new watchword. Well, that and "Green". Sit through commercial TV for an hour or so and you will see what I am talking about.

The U.S. Navy should be renamed the "U.S. Petroleum Protection Force" as the Navy's job is primarily to maintain security for the floating oil inventory held in world's tanker fleet. If you added the cost of tax payer money for this fleet gasoline is already well over $6 per gallon in the U.S.

"Whatever your opinion of the War in Iraq, the most strategically significant result of the war has nothing to do with Iraq. Admiral Michael Mullen, the chairman of the Joint Chiefs of Staff, has admitted that the U.S. military commitment to Iraq and Afghanistan “may have undermined the military’s ability to fight wars against major adversaries….” The U.S. military has changed its focus, losing sight of the real enemy – the most dangerous enemy of all.

The danger from Russia and China is not well understood. To complicate matters further, there is a new, rising incompetence in Washington. There is blindness in the governing class, a lack of understanding, an unwillingness to work with facts, a falsification of meanings, and fatal disregard for historical truth. Enemies are not recognized as enemies. Subversion is not recognized as subversion. Madness goes about in the guise of political correctness.

There are, of course, flashes of truth and moments of recognition. On the night of the Feb. 5th presidential primary, Republican Senator Orrin Hatch told an interviewer that he feared America could lose the economic wherewithal to sustain its armed forces. The interviewer completely ignored the senator’s statement. It wasn’t something journalists are ready to take seriously. Even so, the senator offered up a warning. He had begun thinking about the military budget and the prospect of declining revenues. You might say that the “writing is on the wall.” The U.S. dollar is falling, the banks are in trouble, the stock market is ready to tumble, the housing bubble is bursting. What will happen to the economy? What will happen to the military?

In recent testimony, National Director of Intelligence Michael McConnell told Congress that Russia, China and OPEC could use their growing financial power to advance strategic goals damaging to U.S. national interests. According to McConnell, American intelligence was concerned “about the financial capabilities of Russia, China and OPEC countries and the potential use of their market access to exert financial leverage to political ends.” In other words: The enemy has cash, and cash can buy people and companies. " J.R. Nyquist

Senator Hatch, however you view his politics, can count. In the absence of energy inputs, the U.S. will simply be unable to sustain a military budget anywhere close to its current size and scope - which is not enough, at this moment, to protect the nation from a coordinated effort of our largest "competitors".

Why did no one in the Mainstream Media scratch their head when President Bush was rebuffed by Saudi Arabia? They were too busy scratching their politically correct butts.

The combinations and permutations of various outcomes to the U.S. energy crisis will be powerfully felt in our nation's politics in the very near future.

Yours for a better world,

mentatt (at) yahoo (d0t) com
he Rich Man's Housing Crisis

Large, expensive houses will decline in value more precipitously than utilitarian housing in an era of declining energy availability and increasing food and energy prices.

The financial markets and the credit markets have only just begun to wreak their havoc, and that havoc will impact the wealthy in ways that might be incomprehensible at this moment. But just ask any Florida homeowner of "luxury" or "executive" residences how the sale of their home is going. The short answer is there is NO MARKET for these properties... and I in my opinion, there never will be. Once the oil import and North American natural gas production twin crisis's hit, Corporate America is going to take a hatchet to their payroll, Wall Street is going to be renamed Floor Street, and Real Estate agents are going to skip being called "waiter!" (because restaurants will be deserted) and go right to migrant crop worker.

(Disagree with my vision? Tell you what - I will tell you what futures contracts I am buying in the commodities market. You take the other side of the trade. It is a zero sum game, so whatever I lose you stand to make - or the other way around.)

At the same time the equity in your home goes to zip-ity-do-da, the source of you wealth might be headed there, too. Own bonds? Hyper inflation and the dollar crisis will convert them to toilet paper. Own equities? Better be gold miners and energy companies - the rest are circling the drain. Own a private business? Hope it is not leveraged, dependent on cars for customers or employees, or discretionary. Not going to be a lot of use for the millions of financial planners, brokers, insurance salesmen (folks, I am in the financial services business - that career path is doomed), real estate agents, lawyers, hair stylists, retailers, etc... are any of these types your customer? Well, they are going to have a great deal less discretionary spending money than they have now.

Someone is going to be left holding the bag. It doesn't have to be you.

Yours for a better world

Mentatt (at) yahoo (d0t) com

Friday, February 8, 2008

Did you duck, or is that shiner something you are proud of?

The worst week for the U.S. stock market in 5 years ended with nothing resolved.

The front month WTI crude oil contract rose $3.66, finishing one of the most volatile weeks in oil trading in recent memory. The financial press blamed the rise on the possibility that OPEC would require importer customer to pay in Euro's rather than U.S. Dollars.

The financial press has a warped sense of cause and effect, and this report continues that trend. The funny thing is, there just are not enough Euros around to replace the Petro-Dollar as the oil trade currency, and if there were, can you imagine the import inflation of the Persian Gulf nations? Last time I checked, their currencies were still pegged to the U.S. Dollar... It then follows that either; A: the press is wrong (as usual), or; B: OPEC was just jaw boning the price back to a more "acceptable" level, or; C: none of the above and it was just the Oil market reacting to an over sold condition. I am going to go with "C" until proven otherwise.

Coal continues its meteoric rise. Can Natural Gas be far behind? Not likely, unless you intend to pull an Abe Lincoln and start reading by candlelight.

"And The Hits Keep Coming"...

Farmers will, no doubt, chase last years commodity winners, wheat and soy beans, at the expense of corn. At some point, however, you simply don't have enough acres and available fertilizer to keep this game of musical chairs going - hence the greatest bull market in agricultural commodities since "The Flood" (you know, the one Noah made famous).

American's have this sense that it cannot happen here, and if that includes you, you would be incorrect. It can. It might not, it does not have to - it is not ineluctable... but it can CERTAINLY happen here. And if this inventory trend continues it WILL HAPPEN HERE. That's it. Either the production and inventory trend reverses... or the U.S. will experience EXTREME increases in the prices of wheat, corn, milk, eggs, bread...

It seems that the supply/demand equation of many commodities - Oil, Natural Gas, Food Grains... are balanced on the edge of a knife, and that is a tough place to stand. Some of these are going to fall off that knife's edge - and into the abyss.

"And that's the way it is"...

Mentatt (at) yahoo (d0t) com

Wednesday, February 6, 2008

"A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently and die gallantly. Specialization is for insects." -- Robert A. Heinlein

Couple more days like today and many investors just might feel like dying - gallantly or otherwise.

While front month Crude Oil continues to slide, later month delivery contracts are not falling very much. Front month might be down $14 from its peak, but crude for December 2010 delivery is no more than $3 or $4 from its high. Why? Lots of reasons. Here is one possibility...

Over the next several years the market, by necessity, must "discount" (take into consideration) a "Black Swan Event".

Here is a definition from Wikipedia.org:

"In Nassim Nicholas Taleb's definition, a black swan is a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations. Taleb regards many scientific discoveries as black swans—"undirected" and unpredicted. He gives the September 11, 2001 attacks as an example of a Black Swan event."

I have been harping on Natural Gas ("NG") lately, and with good reason (see my earlier posts). Now, apply a significant hurricane in the Gulf of Mexico, a terrorist attack, or maybe even an accident like a LNG tanker explosion and NG is $50/MMBtu instead of $8/MMBtu. No, you cannot invest in the hope that a "Black Swan Event" ("BSE") will strike, but you have to insure your portfolio because, I can assure you, a BSE will occur at some point in the future. This is one of the primary reasons portfolio theory insists that investor's diversify.

No, you can't plan on a "BSE", but you can "tilt" your portfolio into the areas that are attractive now and would hold or increase in value if one of the more likely BSE were to take place.

Mentatt (at) yahoo (d0t) com

Tuesday, February 5, 2008

Natural Gas at a cusp

As I write this, Natural Gas ("NG") trades at roughly a 50% discount to oil in BTU's. A better comparison would be heating oil or gasoline - finished products - because NG can be taken from the well head and burned at an electric plant or at your home. Crude cannot be used until it is processed into finished fuels. The discount might be nearly 60%.

This will not last. The U.S. Department of Energy's EIA's data shows imports from Canada in decline and U.S. production falling since 2001. Canada has no ability to export more NG in the future under any circumstances. This will force the U.S. to compete for Liquified Natural Gas ("LNG") in the world export markets, and we all know what that means: The marginal supplier sets the price - and that's if we could get it, and we can't. The supplies aren't there, the infrastructure isn't there, and the MONEY isn't there. Think about it: This would mean that the U.S. would have to issue MORE IOU's to the various international energy suppliers; that the U.S. would be MORE energy dependent on the very folks we dislike and antagonize so intensely.

Oil and North American NG prices should move to BTU parity because:
1) increased LNG usage in Asia where they are paying $15 NG equivalent
2) Increased NG usage in NG exporters (Russia, Iran etc)
3) decreased drilling for NG in North America.

A) Coal prices have set a new floor for NG.
B) At 110 per ton (current prices) NG price floor would be $9.50 in the long run.
C) Coal prices could double from here easily with Australia's mines struggling.
D) Demand for coal is growing at 8% per year in the developing world (where the population growth is).
E) Nuclear plants have a long lag time and that situation is worse.
F) Slower drilling has not fully impacted us yet. 6-18 months for full effect of slowing Canadian and US drilling.

In addition, NG is simply the best hydro carbon fuel available. Coal is an environmental nightmare we are only now awakening to. Oil imports into the U.S. are unlikely to increase by any meaningful amount, and in fact could decline precipitously at exactly the same moment that NG supplies fall (and prices rise).

Folks, this is serious stuff. I cannot give specific advice in this forum, but the opportunities are staring you directly in the face. And not just the opportunity to profit, but the opportunity to avoid significant losses. The U.S. economy cannot expand without the ability to grow the generation of electricity.

What was the last thing Mrs. Lincoln said to the President?


This is, yet again, another excellent opportunity for you to do the same.

Mentatt (at) yahoo (d0t) com



The ISM number came in today... and it was an unmitigated disaster.

My call on escaping a recession, even in nominal terms, appears to be on very thin ice.

It is important in trading and investing to have the ability to change your mind, admit you are wrong, and regroup. Small loses are never a problem - BIG losses are the problem. Insisting that you are correct in the face of mounting evidence to the contrary will lead you to ruin.

Accordingly, it would appear that the odds of a recession, as measured by the data collecting agencies of the Federal Government, are now well above 50%. This is especially troubling because our government regularly understates the GDP deflator (inflation).

Yours for a better world,

mentatt (at) yahoo (d0t) com

Monday, February 4, 2008

Natural Gas

"Utilities Turn From Coal to Gas, Raising Risk of Price Increase"

North American Natural Gas shortages might be here before Oil shortages, or worse - they might arrive simultaneously.

But coal is no longer the option many were led to believe.

There are tremendous opportunities in the offing, but the there are some very real economic disasters that will be visited upon us (Americans). Yes, we will be forced to "power down" over the coming decades. There will be winners and losers in the process, despite the probability that socialism creep will be the new political environment (more on that later).

I have no idea why the American Mainstream Media is so grossly misinforming the American People - but they truly are.

America has a SIGNIFICANT oil import crisis brewing, and there is simply not enough coal, natural gas, nuclear power, ethanol, gerbils on treadmills, political flatulence... to make up for the soon to be missing BTU's. Placing your hard earned assets into the companies and industries that are sure to get demolished in this environment is just plain silly. Use your common sense, and don't believe one word coming from Wall Street or CNBC.

Yours for a better post CNBC world,

Mentatt (at) yahoo (d0t) com

Saturday, February 2, 2008

Housing Meltdown

Finally, the housing situation is sinking in...

Read that link.

Maybe? No maybes... Gonna happen, no matter what... only question is the time it takes to unfold.

25% nationwide, 40% to 50% declines in markets like South Florida.

The Fed's attempt to inflate is going to work alright - just not on real estate. It will work on commodities.

Yours for a better world.

Mentatt (at) yahoo.com
The Euro is the next sucker's bet

For those who have been reading my stuff for the last few years you know I have been telling people that the U.S. $ is doomed. I gotta lay off the hyperbole.

The dollar will continue to lose purchasing power, but not as fast as the Euro will from this point onward. Keep that in mind when listening to the "international play" coming at you from Wall Street. My good friend and fellow hedge fund manager Dr. Lalani likes the currency's of the oil exporters (with the exception of Mexico), and I couldn't agree more. But the Euro makes up more than half the Dollar index, and any move down versus the dollar will increase the index.

Also, as I have said many, many, many times: "Markets zig and zag, they don't zig and zig". We have had one hell of a ZIG in precious metals (and other commodities, and one hell of a ZAG in U.S. equities and the U.S. Dollar. Nothing moves in a straight line. NOTHING. After the zig comes the zag (calling the turn is bit tricky). If you can't call the turn, at least don't zig after a market has been zigging. Finally, I am not suggesting that you short ANYTHING. Shorting requires EXTREME discipline, something the average individual investor is sorely lacking in. What I am suggesting is that on any pull back in precious metals that that would be the time to add to positions.

This is not to say that I think the commodity bull has stopped running - far from it. But silver and gold are NOTORIOUSLY volatile. I would not be surprised to see each of them retrace 50% form their eventual highs. The problem is calling the high, and at that I am no better than you are.

Friday, February 1, 2008

Whither Oil Prices?

U.S. oil supply and consumption data argue heavily against a U.S. recession. Look, I don't make this stuff up. Just click the link and look at the supply/consumption data yourself. If the U.S. were in a recession, would year over year oil consumption 1/07 vs. 1/08 be up roughly 1.4 %? Not unless we had one REALLY big oil spill.

Further, I was the dummy that said last year we would be in a recession by the end of '07, or early '08. I was close, but no cigar. Recessions are caused by tight money policies of the Federal Reserve and Fiscal discipline on the part of the Federal Government. It is an election year, and if anything, our officials cannot be accused of being tight with money or very disciplined with their spending habits.

On another note...

For every buyer, there is a seller. They can't both be right. Welcome to the markets - I don't care if it is stock on the NYSE, corn at the local farmer's co-op, or the corner newspaper guy. Even in positive sum markets, on any individual trade your win is somebody else's loss.

There are also 2 sides to every investment decision. Stay with me...

The IEA claims that there is no immanent peak in oil production. They blame the lack of production on a lack of investment... Now, I ask you: If you were an oil company, would you increase investment in exploration & production if you felt the oil was not there to be found? Would you buy your dog a kitty cat scratching post?

Somebody get those guys at the IEA a V-8!

Yours for a better world,

mentatt (at) yahoo (d0t) com