Wednesday, April 30, 2008

Statistics don't lie, People do

There are some serious benefits to Obsessive/Compulsive Disorder. I never get bored reading the myriad reports coming out of the U.S. Department of Energy.

Take this report for example. I dare you to read it. After you get through the verbage you will come to "Table 1". Notice line item "Other Liquids New Supply". That is the ETHANOL component.

Now let us go back to paragraph 4 in the report:

"Total products supplied over the last four-week period has averaged nearly 20.7 million barrels per day, up by 0.5 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, up by 0.4 percent from the same period last year. Distillate fuel demand has averaged about 4.3 million barrels per day over the last four weeks, up 0.7 percent from the same period last year. Jet fuel demand is 4.2 percent lower over the last four weeks compared to the same four-week period last year."

The report claims that "Total products supplied... (were) up by0.5 percent compared to the similiar period last year. Hmmmm..... Ethanol supply was 352,000 barrels per day, total supply 20.7mm, ethanol made up 1.7% of total products (up from a negative number the year before, whatever that heck that means), it follows that TOTAL PETROLEUM SUPPLIES fell 1.2% for the same 4 week period, 2008 over 2007. The 1st quarter of 2008's petroleum supy actually fell by more... (Stay with me, don't let your eyes glaze over just yet... if you want to make money trading in the markets you gotta do your research. You gotta listen to what "they" aren't telling you. After all, EVERYBODY can hear what "they" are trying to convince you of.) Ethanol contains about 66% of the BTU's of gasoline per unit of volume... so even if you count the ethanol increase the TOTAL BTU AVAILABILITY has not increased year over year, BUT YOU HAVE CAUSED FOOD PRICES AND NATURAL GAS PRICES (Natural Gas is the primary energy input for producing corn ethanol) TO SKYROCKET .

Who thought that one up? Wow! Let me stand back in awe! What a beautiful mind! NOT! (Well, except for the crazy part).

The data supports the Export Land Model contention of Jeffrey Brown, and kudo's to Dr. Tad Patzek of Cal Berkley, Physics. His excellant paper: "Thermodynamics of the Corn-Ethanol Biofuel Cycle" was met with derision when it was published in 2006. Now it would seem Dr. Patzek has not only been fully vindicated, but that we have wasted presious time and resources - sort of like convicting the wrong man (Dallas P.D., are you listening?), you harm an innocent soul unconscienably, and you let the bad guy go free to harm another innocent soul. Way to go, guys!!

The market is going to figure this out eventually, probably fairly soon.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

"Whenever you find yourself on the side of the Majority, it is time to pause and reflect" - Mark Twain

It seems I have some high status company in my vision of much higher oil prices.

OPEC's president is warning of $200 per barrel oil. OPEC is not in the "happy" business. OPEC is a stone cold political operation and they are now laying the blame of future $200 per barrel oil at someone else's feet, namely the folks who let the U.S. $ collapse.

T. Boone Pickens, who was an oil Bear recently (his prediction of falling Natural Gas and Oil late last year and early this year led several potential partners for my hedge fund to take a pass. "After all, Greg, Boone is a BILLIONAIRE, he must be smarter than you every time, all the time". Too bad. They missed the best trade of my career) but has recently come around to the prospect of higher oil prices, perhaps as high as $150 by year end.

So, remembering the wisdom of Mark Twain's famous quip, what am I doing now? My usual: I worry (and I have a full head of grey hair to show for it). But I am not going to do much at the moment. Oil prices could certainly come in, and I will miss the trade. I am leveraged to the gills, so any correction might cause me to lose the last few black hairs I have left. Still, despite the new found company of brand-name big hitters, I remain long and (hopefully) strong.

Not enough folks have stopped calling it a "top" for it to be one.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Sunday, April 27, 2008

"The New Politics of Hunger"

This was the lead article on the front page of MSNBC today.  

Look, you know I have been ranting and raving about "food and energy", "food and energy", "food and energy" (G-d help me, I sound like a tin hat economist with their "supply and demand" mantra")...  but give that article a close read. Beyond the obvious, there are some serious implications for world TRADE in the middle of all of this, not least of which the value of the U.S. $.

If the U.S. continues its ethanol mandates it is very likely that the country will no longer be a corn exporter sometime between 2010 and 2012.  On the other hand, if the U.S. does not continue its ethanol program the country will not have enough transportation fuel (Please!  I am well aware that ethanol is probably not even energy positive, or slightly so.  I am talking transportation fuel - I will get to how Natural Gas fits in all of this shortly).  Now that's a conundrum!!

But wait! It gets better... U.S. Natural Gas ("NG") inventories are at their lowest in terms of "days of supply" in at least 6 years, hence the recent run up in the price of NG.  However, said recent run up in price leaves U.S. domestic NG prices at about 60% of what Japan is paying for Liquified Natural Gas ("LNG") imports.  At some point in the next year or 2, baring a MIRACLE, the U.S. will have to compete in the market place for those LNG tankers to deliver their cargo HERE, in the U.S.  

So let me ask you a couple of questions:

Does any rational person think that those LNG tankers are going to show up here unless we out bid the other guy?  And isn't the price of NG in the U.S. going to be set by the MARGINAL supply?  Wouldn't you define the LNG tankers product as the MARGINAL supply?  Won't the addition of another wealthy bidder (the U.S.) in the world LNG market increase the price of LNG (all else being equal)?  Won't this raise LNG, and hence NG prices in ALL importing nations (again, relative to market conditions as then exist absent the new U.S. participation in the LNG market)?

Now let us connect a few dots, shall we?

We have rice and grain shortages the world over, some of it spreading to wealthy nations like the U.S.

T0 grow rice, corn, wheat, and soy beans at the quantity we have become accustomed to (now I sound like a divorce lawyer), farmer's need fertilizer.

Natural Gas is the primary feedstock in the manufacture of fertilizer, and Natural Gas prices have risen substantially since the Northern Hemisphere's LAST GROWING SEASON.  So the recent price increases DO NOT REFLECT the recent hike in production costs for food.  Not to muck this up with too much data, but diesel prices and pesticides (made from oil) have increased by over 50% since the last growing season

I have laid out the case as to why NG prices, and hence fertilizer prices, could move much, much higher, and I have already tied much higher fertilizer prices into higher food prices, and perhaps LESS FOOD.

Of all the grains CORN requires the most nitrogen fertilizer (ammonium nitrate), and the U.S. is the LARGEST PRODUCER AND EXPORTER OF CORN in the world (forget the dubious moniker "The Saudi Arabia of Coal", the U.S. is certainly "The Saudi Arabia of Corn").  However, as I stated earlier, the U.S. is expected to consume all of the corn it now exports to make ethanol.

28 million Americans are already on some form of governmental food assistance program.

The current rice shortage is small potatoes (no pun intended) compared to what's to come as NG, fertilizer, and diesel prices move higher, and the corn normally exported to other nations by the U.S. is consumed in its domestic ethanol production program.  Of course, the nations that sell us our fertilizer might not be happy about getting U.S. $ for their valuable product rather than food to feed their people, so there might be a couple of kinks that need to be worked out of the trade model I am suggesting...  at which point the U.S. might cut back on its ethanol production and trip over a lack of liquid transportation fuels driving up the price of oil and further increasing the trade deficit... and speaking of the Trade Deficit, just where is the money going to come from to purchase that LNG we will be needing?... and won't all of that continue the pressure on the U.S.$ which will cause Oil and LNG import prices to increase in $ terms, and won't those prices increase put further pressure on the $, repeat ad nasseum... a  person could go nuts thinking about this...

Uh-oh... too late,

Yours for a better (their taking me away, haha!) world,

Mentatt (at) yahoo (d0t) com

My Contra Indicators are in the Red Zone Again

One of my best contra-indicators (a contra indicator is an indicator that is either usually wrong or whose presence indicates immanent disaster in a particular market) just made me think that a run to over $150 per barrel for oil is likely by year end.

My contra-indicator, actually there are 2 of them, are a couple of Wall Street salesmen.  They don't know each other.  I am the "first degree of separation" for them.  I had a short conversation with one several weeks ago and the other last week - and here comes the contra indicator:

They both said they didn't think Oil would go to $150 per barrel.  Not this year, not 2009, not 2010.

I asked them how they came to that conclusion.  Here comes the good part:

"I, I, I... I just don't THINK so.  I just don't THINK so" (emphasis added)

Now, I know for a medical fact that both of these individuals are congenitally incapable of any form of abstract thought, and have been since the day they passed their test for a securities license.  Self made millionaires both, But not because they did any original research.

These guys have been wrong on oil for several years now, so I know I should be concerned that eventually, like a broken clock, they will be on the right side of the trade.  There is no perfect indicator, contra or otherwise.

Still, I actually DO think.  and...

for the December '08 WTI contract:

50% probability the contract trades for $150 to $200 before expiration;

30% probability the contract trades trades $100 to $150 before expiration;

20% probability the contract trades under $100 before expiration

And because I will continue to, you know, actually think... I reserve the right to change my mind on a moment's notice.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Thursday, April 24, 2008

This is what the beginning of FOOD SHORTAGES would look like

Reports have come in from all over the world, the web, CNN, CNBC. MSNBC on rationing of large food staples such as rice, wheat, and cooking oil at Costco, Sam's Club, and Walmart thoughout the United States.

The U.S. will not be experiencing "food riots" anytime soon (unless we engage Iran militarily, at which point I would not count on those diesel "warehouses on wheels" showing up at your local grocery store... there are events that would prove me wrong but which, I believe, are highly unlikely. I hope those are not "famous last words"...), but let me ask you a question:

What else would the BEGINNING of food shortages look like? (I wouldn't envision Darth Vader running through the parking lots of gorcery stores impaling folks and making off with their bags of cheeze doodles...) What did the beginning of the U.S. energy shortage look like? (Don't think we have an energy shortgage? Ha! We have a significant shortage of $1.50 gasoline...) Let's look back all of 4 years:

Oil broke $40 per barrel in early 2004, and the oil companies and Wall Street and the U.S. Department of Energy all told the public "not to worry", things would be back to normal soon. At $50 per barrel oil was declared to be in a bubble. At $60 per barrel, "remain calm", Hydrogen technology will save us (seen any Hydrogen around lately?). At $75 the U.S instituted the ethanol mandates, which had the undesirable unintended consequnce of significantly contributing to food price inflation. At $100, the public STARTED to hear talk of how there is plently of oil, but we are running out of CHEAP oil. At $120, the media, Big Oil, and Government broke out the "Bubble of all Bubbles" propaganda... which is where we are today.

Now oil is something we can conserve, something we CAN get by with less of. What about food? Can we "conserve" food? Be "Green" on food? Ration food?

Let me ask you another question:

Should we/you risk it? What if "they" are as wrong about food as "they" were about oil?

Just go to Google. Type in "World grain Invenories 2008". READ. ANY QUESTIONS?

Now calculate the effects of 75 million more folks showing up on spaceship Earth each and every year, a new United States every 4 years, and explain to me where the energy and food is going to come from to feed, and warm, transport them all? BTW, care to explain how 4.5% of the world's popualtion (the U.S.) is going to continue to consume 25% of the world's energy? Forget justifying it, just tell me how the U.S. could POSSIBLY enforce it. NAFC (That's a technical term used in many E.R.'s for patients that ain't gonna make it... Not A F%#$!! Chance).

Everything from the drop off line at little jimmy's school to trips to Disney World are going to come to a screeching halt SOMETIME in the next several years (want to buy some swampland in Florida near Disney?).

Speaking of Florida... or any other hurricane vulnerable area... Take a good look at the file footage from New Orleans and Katrina. Now mix in a shortgage of diesel fuel and gasoline, a housing crisis, a recession, and a hurricane... shake vigorously... and out comes a 4 million person refugee camp, in the Florida heat, no less.

BTW, have a nice day!

Yours for better (slimmer, trimmer you!) world,

Mentatt (at)

Sunday, April 20, 2008

The Silence is Deafening

Over the past 4 or so years I have communicated my position on U.S. oil supplies, oil imports, and the U.S.$ to my brethren on Wall Street.  I have traded email barbs with good humor.  Now, with oil prices substantially over the $100 mark, I find the silence DEAFENING.

Allow me to shed a little light on Wall Street.

Folks who make a living in the U.S. financial markets are TERRIFIED of the energy issue, and so MUST DENY IT.  Their commissions and fees DEPEND energy prices declining, and doing so before the reason they do decline is the lack of supply decimating the economy and hence their demand.  This is the FINAL game of musical chairs for this generation of market participants.  

Reality does not give a good fart about what you perceive, what you want, what you hope, what is convenient.  "Faith" should be confined to the things nobody really believes in.  

Life has been, and always will be, a competition for survival and primacy (argue the point if you like, but those who do will likely not be the folks who pass on their genes, evolutionary dead ends).  The energy condition will continue to present opportunities, though the opportunities presented might not be what you originally wished for.  Well, that's just too bad.  When I was a kid, I wanted to be like my hero, Bobby Mercer, the Yankees' center fielder.  Problem was, I couldn't hit a beach ball with a bat.  I still got an athletic scholarship to a major university (I was just a journeyman but I had fun) , but it sure wasn't in baseball.  Sometimes you have got to make adjustments.  Bobby Mercer or Micky Mantle (I know I am dating myself here) aside, most of us have to make a continuing series of adjustments in order to succeed.  That is where businessmen and investors are right now - at the cusp of an important decision to make of one of those life altering adjustments.

I doubt this is THE BIG ONE.  Oil prices will give and take up and down on their way higher - but the writing is on the wall, so to speak.  All of the B.S. Wall Street is feeding 45 year old businessmen about "Retirement"!!  What a laugh!!  By the time this age group arrives at the age where they might need their money the U.S. currency will have devalued another 75% to 90% from here!!  Maybe people are not so dumb.  Maybe THAT is why we have a zero savings rate.   

But if you are reading this blog you are probably not among the Zero assets crowd.  So here is my advice:

1.  Spend everything you have on all things you ever wanted to do.


2. Convert most of your financial assets into hard assets.


3. Some combination of the 2.

Mentatt (at) yahoo (dot) com

Wednesday, April 16, 2008

The $ Plumbs New Low

Even a U.S. Dollar "Bear" like me thought that the dollar would get some relief.  Perhaps it is not to be.

Crude oil prices are soaring.  Higher oil puts pressure on the $ with its concomitant increase in the US Trade Deficit, as the $ falls it pressures oil prices higher in $ terms, which, in turn, puts further pressure on the $...

I thought the ECB would have cut in the next 90 days or so, supporting the $.  Perhaps I am wrong, and the Europeans have decided that they would rather be able to buy oil than sell chachka's to the US.  

Menatt (at) yahoo (d0t) com

Tuesday, April 15, 2008

"Corn, Soybeans Rise on 'Buying Panic to Avoid Food Shortages"

That was the title of this linked article on the front page of Bloomberg News.

We have been forecasting a very "challenging" environment for agricultural production and the food supply for several years.  Back in 2005, my friends and colleagues on Wall Street would tell me to "tone it down, you sound like some kind of nut".  That may or may not be true, but the food crisis that is rocking Asia right now could easily be visited upon North America sometime in the next decade - and as early as 2010.

Already 28 million Americans receive food assistance, slightly less than one out of ten Americans - and thankfully, we are currently capable, but just barely, of rendering that assistance. This could change quite suddenly.

While the price of crude oil has risen over 10 fold, 1000%, in less than 10 years.  Natural Gas has gained "only" 400%, and it is Natural Gas that is the primary feedstock for fertilizer.  This important input, and its important correlation to total food production is under great pressure, and that pressure is increasing.  Americans should look overseas to see what their own future might (will) hold.

Mentatt (at) yahoo (dot) com

Sunday, April 13, 2008


Food.  Food, or should I say lack of food, has laid low kingdoms and empires.  Napoleon famously said that "an army marches on its stomach".  In the past several days the U.N. and the IMF have had press releases on the seriousness of the world's food situation, and articles have made the front page of the New York Times, Washington Post, the WSJ, etc...  This is serious, and this problem just isn't going to go away.

In early 2005, while researching energy opportunities to invest in, we stumbled across some rather disturbing data on grain inventories.  This was long before ethanol became a household word, and before the Federal mandates that would later sop up far too much of the U.S. corn crop.  What we stumbled on was fairly simple and straightforward, really.  That within a decade, give or take a couple years, the world's grain inventories would fall to zero.  Now I fully expected that there would be some actions taken by the markets and governments in that time frame that would alter the slope of the line on the XY chart.  Still, the trend line was unmistakable, and I wrote about it on several occasions.

The trend line is worsening (as measured by those who might want to eat).  That is also quite unmistakable.  So much for my expectations that SOMEONE might step up and do something.

Mentatt (at) yahoo (d0t) com

The U.S. Equity Market's Many Signals

While record "short" positions and the extreme negative sentiment of market participants have historically signaled a bottom, I am not ready to put my hard earned money into U.S. equities (with the exception of certain commodity based equities) just yet.  Aside from the fact that I am no better than anybody else at calling bottoms, I don't see a need to make such a call in any event.  I like to buy stuff when it is going up (after it has gotten killed) and short stuff that is going down (after it has had an "unsustainble" (by my definition, whatever that is) run to the upside.  As we speak, the U.S. equity market is not their yet.  That could change at anytime, or not for some time.  

Keep your eyes on the data.

Mentatt (at) yahoo (d0t) com

Friday, April 11, 2008

"G.E.!!! We Bring Good Things to Life!!!"

The jury is still out on the veracity of that particularly popular advertising slogan of GE's of the 1980's and early 1990's...  Maybe they did... and maybe their products will produce so much atmospheric CO2 that G.E.'s Connecticut offices will be under 6 feet of water from the encroachment of Long Island Sound.  I wouldn't presume to say, but some awfully smart folks (the kind we trust billions of dollars and dozens of lives in the U.S. Space Program to) sure seem to think so.  Being a betting man, I ain't betting against these guys in favor of a bunch of innumerate politicians, whose background is in the Law.  Nothing against the Law, mind you, it is just that that particular skill set leaves one ill equipped to determine a course of action in response to input from folks whose training is in physics and mathematics.  Nor would I retain a physicist to represent me in so much as a traffic ticket.

But I digress...

GE, with nearly $170 BILLION in revenues, representing over 1% of U.S. GDP, appears to be in the midst of its own recession.  Can the U.S. not be tracking G.E.?  I doubt it.

GDP will track the direction of Oil imports, and Oil imports are down.

Time to get your boots on, because the B-llsh-t is gonna get real deep.  The financial media has done the average investor a significant disservice.  Nearly 2 years ago, the price of oil declined precipitously to the mid $50's.  The media was RIFE with stories of ethanol supplies and hydrogen vehicles and declining oil demand... and "Average Joe" investor fell into their spell:

"The Oil bubble has popped!  Is it time to buy the banks?"  Proclaimed the talking heads on CNBC.  

Fast forward to today:  You don't find many stories supporting those silly ethanol claims, instead it has become obvious, even to the financial media, that using food for fuel has had some unintended consequences -  namely skyrocketing food prices.

If I had given that kind of advice at that time - I might be spending the next several years in litigation.  The media has no such liability.  Like the old adage "no responsibility without authority", the financial media does not operate under any condition other than to entertain you, and to present themselves in a way that does nor offend or damage their REAL customer - the advertisers.

The broker's were already spinning the GE debacle.  "Technically, blah, blah, blah..."  B.S!!

GE is so large and unwieldy to understand that I respectfully submit that no "analyst" covering them has a better handle on their earnings and revenues outcome(s)by using a micro, bottoms up approach on the company itself than does a general macro analyst doing top down work on the entire U.S. economy,  (Yes, I am aware that G.E. is THE multinational, but work with me, I am getting there) and projecting those findings onto GE.

Did I mention that, statistically speaking, it would be IMPOSSIBLE for GE's earnings to have been as smooth and reliable as they have been without significantly "managing" those earnings?

GE's revenues increased nearly 8%, so why the decline in earnings?  Maybe, just maybe, the inflation and money supply pressures within the economy as reported by the U.S. B.L.S. are not quite as accurate as they could be.  Maybe inflation is more than the 6.3% wholesale number being reported for 2007.  Maybe real inflation was more than the 8% revenue growth reported by GE.  And maybe the real inflation rate of G.E.'s costs of goods sold rose even faster.  After all, there is no reason to doubt that the earnings "management" GE is famous for did not continue to occur this past quarter.

The S & P 500 is down about 9.3% over the past 12 months.  Inflation was over 6% by any reasonable measure, and some credible sources estimate inflation estimate inflation far higher.
So in "real dollar" terms equities are off some 15.6% over the past year, and the worst of the foreclosure crisis, banking write downs, and the great credit default swaps "unwinding" has not arrived yet.

If you want to be a better investor/trader I have a tip for you:

Whenever you are watching the talking heads and their guests on the various financial media outlets, visualize these folks wearing striped prison garb with a stenciled number on their chest with a ball and chain around their ankles and a "Pinocchio" nose that grows as they speak.  

It always worked for me.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Thursday, April 10, 2008

The Trade Deficit, the Monkey on our Back

February's Trade Deficit Widened "unexpectedly".

"Unexpectedly" to who, exactly?  Not readers of the American Energy Crisis.

And by the way, it wasn't the rise in the price of crude oil's fault - but only because imports went down hard - also "unexpectedly":

"The month's quantity of crude-oil imports fell to 286.5 million barrels from 322.2 million in January, while the price of a barrel of oil rose to a record $84.76 from $84.09 in the previous month."

Kudos and all due respect for our friendly neighborhood super-geologist Jeffrey Brown, the guy who came up with the "Import Land Model".  Looking at the recent inventory and import data, the U.S. appears to be in the beginning throws of the oil import crisis I have been ranting and raving about.

We'll know soon enough.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Wednesday, April 9, 2008

Where is Joe Kernan and Larry Kudlow?

The CNBC commentators who have vociferously beaten oil "bulls" about the head and shoulders for the past 2 years are strangely silent.  Why didn't Larry Kudlow have his favorite "expert", Daniel Yergin of Cambridge Energy Research Associates, on his show tonight?

Hey, Joe and Larry, oil hit $112 and change today!  Oh, I forgot, you guys TALK, you don't actually RISK.  

I had a good laugh today reading UBS's research report for oil over the next quarter.  They say we could hit 80 by the end of Q2, but, get this, they were courageous enough to say that they could be wrong because of geo-political reasons.

Dear UBS:

I will save you the ink of what might be wrong with your prognostications, and inform you what, exactly, is wrong.

You can't count.

That's it.  That's your problem.  You don't know how to count - and you don't want learn.  That would be very bad for business.  Because if you actually knew how to count you would have to step up to the microphone and tell your clients that we have a serious energy crisis brewing that is going to wipe the floor with their financial assets.  You figure that, since it is going to happen anyway, might as well keep up the whole Emperor's New Clothes gig.

There is a substantial difference between a trader and an analysts.  

A trader can, and must, admit when he is wrong, or he won't be trading for long.  Believe me, traders are wrong all the time (take me, for example), and they take their losses and go back to the drawing board to figure out what went wrong.  Analysts DEFEND bad decisions, and they keep defending them until death do them part.

Want to trade?  Practice taking losses.  Winning trades are EASY.  Its your losers that make or break you.  Analysts wouldn't know anything about this - after all, they might not always be right, but they ARE NEVER WRONG.

Yours for a better (post buy, sell, or hold) world,

Mentatt (at) yahoo (dot) com


Tuesday, April 8, 2008

The only currency worse than the US$ - The Euro!!

The housing market in Europe is starting to wobble.  For now the ECB is holding onto their inflation fighting mantra, but the fat lady is getting warmed up and may have even begun to sing.

When, not if, the ECB begins to cut rates the cover will be Europe's housing situation... but the real reason will be to help the U.S. Fed bail out the the American banks and help support the $.  In the long run that strategy is doomed, and I hope to profit handsomely from it, but in the mean time the strategy will more than likely get a little traction and I think you have to pay attention to the probable short term outcomes - not least because they might cause you to take your eye off the ball for the real, long term play.

If you have been reading my stuff you know I hate the U.S. $, and I have for years.  I gotta say that the Euro, at today's exchange rate, is even less appealing than the U.S. $, and if the ECB begins to cut, the Euro could plunge vs the $.  Also, you know my saying: "markets zig and zag, they don't zig and zig and zig" - and the commodity markets have been zigging pretty hard again.

When the ECB cuts that first time and the Euro sags and the Dollar moves hard to the upside it is VERY likely that many of the commodities are going to get rocked.  I am preparing now for that opportunity.  I don't give specific advice in this forum, but you can figure this one out.

As my fellow Guru and Master of Time, Space, and Dimension, the good Dr. Salani always reminds me:  "At the moment you SHOULD be buying, you really won't want to".  Well the opposite also holds true.  Sometimes you gotta clear the decks to be in a position to be able to catch "chicken little" by the neck.  When the ECB cuts, there will likely be a host of commodity "chicken littles"...  Don't miss this, and don't listen to the gloating jackasses on CNBC declaring the commodity bull market dead on that day.

You heard it here, before the ECB makes its move.

Yours for a better (entry price after the ECB cuts rates) world,

Mentatt (at) yahoo (d0t) com

P.S. The ECB's recalcitrance will come to bite them hard.  By keeping rates high relative to the U.S. they have, in my opinion, caused themselves some real harm.  Then again, the ECB does not have the same mandate as the U.S. Federal Reserve.

The 800 Pound Gorilla in the Room

I am fantastically impressed with our collective ability to ignore the 800 pound gorilla sitting squarely in the center of the American (and the rest of the West) living rooms.

Climate scientists have made it pretty clear that we MUST stop nearly all carbon emissions in my lifetime (I am in my late 40's).  I believe that their probability models are close enough that we should not, and won't, challenge them.  Any rational examination of the facts would lead most thinking persons to the conclusion that the best way to sequester carbon in the earth is to leave it there, unburned. 

If A = B, and B = C, then A = C - remember that one?

Coal consumption injects the most carbon atoms into the atmosphere per unit of useful energy supplied.  Methane injects the fewest.  Pretty simple, really.  Methane has only 1 carbon atom per molecule.  The various coal grades have a whole bunch (that is a technical term).  Like it or not, mankind et al, is going to have to come to grips with the less energy provided by coal to generate electricity.

Less electricity means less economic output no matter how you slice it.  Now my good friend Dr. Salani disagrees with me somewhat because we waste so much electricity power that we (read the U.S.) would be able to conserve and still grow GDP.  Maybe for a year or 2 or even 3, and only in the U.S.  (The rest of the world does not have 10 foot flat screen T.V.'s in their living room for the dubious purpose of watching American Idol or reruns of Gilligan's Island.)

So here comes the 800 pound gorilla.  The West's economic system is built around the presumption of continual growth - in GDP, money supply, price inflation, population, etc... - and that growth will simply not be possible with a decline in electrical generation.

This is not to say that in the coming decades wind, solar, nuclear, won't contribute significant electricity generation.  Maybe they will.  But I would not bet my hard earned money that it will be enough and in time.

Financial assets will bear the brunt of our recognition of the 800 pound gorilla in the room.

Mentatt (at) yahoo (d0t) com

Sunday, April 6, 2008

Anecdotal but powerful

Yesterday I had the privilege of spending $81.47 to fill up my Ford Freestar MINI-VAN.  This is no SUV, and although it has a rather large tank (regular gas @ 3.419 and the van took nearly 24 gallons) even I was taken back with a bit of sticker shock... When, Horrors!  I called for a pizza delivery last night and, get this, my usual $11.75 pizza was now $13.75 for delivery, but I could still pick it up for $11.75.  At 10PM watching a DVD with the kids in my P.J.'s?  I did his business a favor and ordered delivery (nothing more frightening than seeing a middle aged man you don't know in his skivvies... and by the way, real men drive mini-vans).

How will police officers, firemen, school teachers, etc... you know, families making $50k to $100k per year finance their car payment, mortgage, property taxes, and gasoline and feed a family of 4?  The short answer is that something just isn't going to get paid for.  Remember, America has a ZERO savings rate.  Like the poorest of the poor around the world, Americans live completely hand-to-mouth.  A salesman that used to work for me called one day last week to complain that he and his wife's (and she is a stay at home mom for their 2 young children) monthly gasoline bill was over $750.  That got me thinking... This was your average middle manager at Corp USA, probably making $85,000 per year

Mortgage    -             2000
Prop. Tax    -              650
Car Payments (2)         700
Insurance    -                600
Utilities       -               500
Gasoline      -               750
Food            -             2000 

Total                          $7200  ($86,400 annually)

But where is the line item for taxes? Repairs? The kid's braces? Do they expect to take a vacation?  What about roof repairs?

If my pizza delivery guy is any indication, high fuels bills will need to be passed on to consumers that:  live too far from where they work to cut their gasoline bill much, can't re-negotiate the mortgage (and they can't sell in order to move to a cheaper home), are not going to receive a property tax cut anytime soon, (maybe they can turn off the lights when they leave a room)... and I doubt they are going to want to eat less, meanwhile food prices are rising significantly... And the Fed Chairman, Congress, Wall Street, the President, the Main Stream Media are trying to convince you they can overcome this with a couple more interest rate cuts or a "change" at the White House?  Don't even get me going about the Trade Deficit, Medicare, Social Security, and the rest of the B.S. that the United Socialist States of America has promised to its portly, greying populace (that pretty much describes me, anyway).

But let's face it: If you are reading my blog you are more than likely a member of the "investor" or "capitalist" class, so maybe you are under the impression that this is not a problem that directly concerns you...

Egghh!  Wrong!  Thanks for playing!

Just what is the source of your wealth?  Financial assets in the U.S. markets?  A privately held business that relies on the aforementioned "consumers" (G-d, I hate that freaking term)?  Are your employees zero saving Americans?  Won't they need a fat raise to keep coming to work? Maybe you own some commercial real estate... (HAHAHAHAHA! That stuff is going to make houses look attractive in the near future).

All of these assets are likely to be worth CONSIDERABLY less in a year or 2.  Not that I have the answers...

3 years ago I wrote to some South Florida Real Estate investors and told them that the coming energy and housing train wreck would be like a sandstorm that stripped all the skin and gouged out both of the eyes of 98% of investors, and 2% would "only" lose half their skin and just 1 eye... BUT, "the one eyed man is KING in the land of the BLIND".

Yours for a better (optically challenged) world,

Just call me Blinky...

Mentatt (at) yahoo (d0t) com

You say "to MAY toe" and I say "to Ma toe"...

We don't have a housing crisis!!

A housing crisis would mean we don't have enough housing and people are freezing to death on the street.  WE HAVE A FINANCIAL CRISIS CAUSED BY OVER-LEVERAGING HOME MORTGAGES ON OVERVALUED PROPERTIES!!!!

There is a significant difference between the 2.

The Financial Crisis will not be over for years, not months or quarters.  Just do the math: The median American income is insufficient to cover a mortgage payment, property taxes, and insurance on the median price American home.  It follows that the problem will not go away until either home prices fall enough, or incomes rise enough, to bring the 2 into balance.

Last time I checked the employment situation in the U.S. would be hard pressed to convince anyone that we will solve the issue with rising incomes.  Ergo, it will be falling prices.  And more financial crisis.  And more bank failures.  And more layoffs in construction, mortgage finance, real estate brokerage, retail, etc... And more ill conceived regulation and market interference from the "I'm from the Government and I am here to help you" crowd.

You heard it here first...

Places like Florida and California will not see their housing markets bottom until the lot value associated with the housing site is given a ZERO VALUE and the improvements (the house itself) are given a reasonable discount to its replacement costs.

I watched in horror over the last several years as Florida developers used the following reasoning:

Well the "knock down" cost me $600k, so I will have to build a $1.2mm structure and ask $2.5mm (with property taxes of 2.1% of the purchase price... egads!).  Now the market is SATURATED with $2.5 million houses...  This market will not clear until the lot is valued at ZERO, the structure at $800k and the builder's $700k profit  is eliminated.

That's how markets work.  These homes had construction loans.  Now they need permanent financing.  How long can the builders fund their losses?  What will the banks sell these properties for out of foreclosure?  Guess how many realtors put pen to paper and brain to calculator?  I'd be willing to bet - NOT A ONE.  "No man can understand what his salary (commissions) requires that he not understand".

And here comes the oil import crisis.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Dead Cat Bounce

The U.S. equity markets had a pretty good week last week.

Don't let that fool you.  Bear market rally's can be vicious to the upside, and this one might be no different.  I can't make specific recommendations in this forum, but I can say that I would be using the rally to sell non commodity related equities, and even lighten up on some of my favored equity sectors.  The "True Believers" are going to get their finger nails burned off.  It is time to get REALLY sceptical.

You are going to get the full court press from the main stream media and government agencies.  Just remember, in 2oo6 these were the folks that were telling you the housing finance crisis was, what was the word?  "Contained"?  

Making money in the markets is about figuring out what conditions will be like in certain sectors 6, 12, 18 months out - and taking advantage of the other guy's inability to think.  Remember, in most markets, it is a zero sum game... housing, bonds, gold, oil, etc... all of these are zero sum investments - for every winner there is an equal and opposite loser.  Keep this in mind:

"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

Making money in Oil over the past several years was like snatching a cane off of a blind person.  The media helped to lull the average "blind investor" into a ridiculously false sense of security with stories and articles about Hydrogen cars, Ethanol, Bio-Diesel, Windmills, Solar this, Hydro that... He He He He HA HA HA HA HA!!!!  The MEDIA, GOVERNMENT, AND BIG OIL (among others) are your partners in this obscene farce - USE IT to your advantage!

Of course there will be setbacks and sell offs... but let me let you in on something... wanna know when the Oil rally is over?  When the waiter in your local watering hole and the guy that just parked your car are talking about the money they are making in Oil futures... THAT'S WHEN.

And if you're a member of the dulled and addled brained investor class?  Stay that way... I need the money.

Yours for a better "3 Card Monty" world,

Mentatt (at) yahoo (d0t) com

Saturday, April 5, 2008

Heating Oil in April

Here it is April.  Springtime.

Why is heating oil trading at $2.995 per gallon, wholesale?

You know what they say in baseball... "Wait till next year".  As in next winter.

And while were asking questions...

Could it be that high oil prices and declining oil availability are going to harm certain industries?  The Airline industry was an easy one.  Many will be harmed by this, some will benefit.  

"What good does it do to be on the side of the slaughtered."  - from the movie 'Braveheart". 


Mentatt (at) yahoo (d0t) com

Thursday, April 3, 2008

Back in the, Back in the, Back in the U.S.S.A!!!

Welcome to the United Socialist States of America. Where free market capitalism reigns supreme, unless you are a major investment bank or an individual that should be convicted of a felony for mortgage fraud.

The U.S. has, for some time now, enjoyed a topping of socialism on its capitalistic desert. Medicare, Social Security, Medicaid, Fannie Mae, Freddie Mac... Wait! What a coincidence!! These social welfare programs are all in big trouble at the same time! Who'd a thunk it?

As my partner in crime Dr. Lalani likes to point out, you can always count on policy makers and regulators to do real harm when they are trying to fix a bad situation.

I want to state the bloody obvious for those running the train set in Washington, D.C. :

If a "homeowner" put little or nothing down, they don't lose anything when they get foreclosed on!

"We have to keep people in their homes" at all costs is a tremendously stupid thing to do. One of the more rational folks/Wall Street types that I speack with points out that every time the Government interferes with the price discovery mechanism of the markets - be it Fed support of the stock market, or subsidies for "homeowners", or selling gold bullion in to the market to suppress prices - they make matters MUCH worse and drag things out for MUCH longer than they would have otherwise. The difference being that the taxpayers get to subsidize the stupid and the criminal.

Hell of a system.

Mentatt (at)

Recession? Follow the oil supply...

In late December 2007 I wrote in a post that a recession in NOMINAL terms was unlikely, unless the aggregate supply of oil to the U.S. economy declines in 2008 from 2007.

As I said in the post just prior to this one, it certainly appears that the supply of oil to the U.S. has declined and, perhaps more importanly, the effects of the rise in oil prices due to the decline in availabilty has sent the U.S. Trade Defict higher IN SPITE OF A DECLINING U.S.$

While the data might be insufficient now to call this the absolute begining of the U.S. import crisis, if you wait for the "sure thing" it will be too late (as it applies to your investments), disasterously too late.

Mentatt (at) yahoo (d0t) com

Wednesday, April 2, 2008

Text from weekly U.S. Dept of Energy Report

The following is from the U.S. Department of Energy's EIA weekly report:

(Click here to read full report including line items for all products)

"Summary of Weekly Petroleum Data for the Week Ending March 28, 2008

U.S. crude oil refinery inputs averaged 14.2 million barrels per day during the week ending March 28,up 72,000 barrels per day from the previous week's average.Refineries operated at 82.4 percent of their operable capacity last week. Gasoline production moved higher compared to the previous week, averaging 8.6 million barrels per day. Distillate fuel production remained flat last week, averaging nearly 3.9 million barrels per day.U.S. crude oil imports averaged about 10.3 million barrels per day last week, upnearly 1.4 million barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 9.8 million barrels per day, 486,000 barrels per day below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 944,000 barrels per day. Distillate fuel imports averaged 322,000 barrels per day last week.U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 7.4 million barrels from the previous week. At 319.2 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories decreased by 4.5 million barrels last week, and are above the upper limit of the average range. Both finished gasoline inventories and gasoline blending components inventories decreased last week. Distillate fuel inventories decreased by 1.6 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 0.5 million barrels last week. Total commercial petroleum inventories increased by 1.5 million barrels last week, and are in the upper half of the average range for this time of year.

Total products supplied over the last four-week period has averaged nearly 20.3 million barrels per day, down by 1.3 percent compared to the similar period lastyear. Over the last four weeks, motor gasoline demand has averaged about 9.2 million barrels per day, unchanged from the same period last year. Distillate fuel demand has averaged 4.2 million barrels per day over the last four weeks, down 3.1 percent compared to the same period last year. Jet fuel demand is 3.7 percent higher over the last four weeks compared to the same four-week period last year.The tables that follow display the latest U.S. Petroleum Balance Sheet and the most recent 4 weeks of Weekly Petroleum Status Report data. "

I think the key line in the report was:

"Total products supplied over the last four-week period has averaged nearly 20.3 million barrels per day, down by 1.3 percent compared to the similar period lastyear."

With domestic production slightly higher it follows that imports fell considerably - perhaps 2% lower for the year over year 4 week period.

Mind you prices are some 60% higher for the same year over year period. Shouldn't that have given great incentive to the oil exporters to send us more oil? After all, the dollar did not fall THAT much over the past year.

Hmmm... Remember that pesky oil import crisis I have been ranting and raving about? It sure looks like it is here, or at the very least we are standing on its slippery slope.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

The Mortgage Money Pipeline into Wall Street is Down, Permanently

For the past 20 years or so, a 48 inch "pipeline" of money in the form of fees for underwrting and trading mortgages has been coming into the New York City economy, via Wall Street, at the expense of the rest of the world. That "pipeline" has been permanently shut down. The ill effects of the "pipelines" implosion will begin to be felt about now by the local economy, and will get much worse over the next couple of years. For New York's better looking but slightly trampier step daughter, South Florida Real Estate, this could hardly be worse. To borrow a phrase from an unknown the "FIRE" (Finance, Insurance, and Real Estate) economy that is South Florida will be feel like a bucket of water was thrown on its last smolduring flame.

New York has a whopper of a Financial Services economy, and all financial roads really do lead either to London, New York, Singapore or Hong Kong. These cities receive their patronage from the hinterlands of the empire and have for decades. Maybe the decline in interest rates will be enough that the banks, brokerages, and hedge funds come up with a new set of products to take the place of the cash that once poured out of the mortgage "pipeline" - but I would not bet my hard earned money on it.

The funny thing is that now we have a moron, socialist Congressman from Connecticut, whose economy entirely depends on New York City and Wall Street proposing that the solution to higher energy prices is to remove speculative investors from the energy futures markets.

"I am from the Government and I am here to help you." - LOL!!!

Yours for a better world,

Mentatt (at) yahoo (d0t) com

Tuesday, April 1, 2008

Cambridge Energy Research Assoc. and their unverifiable data

Many of the folks reading my stuff are Wall Street salesman types.  I get a decent amount of email from them, mostly trying to point out how wrong I am and how the energy "analyst" at their firm has published "research" on the subject and how could I be so dumb?

Guys, just because one analyst says 2+2 = 4, and another says it is 5, does not mean you should split the difference, that they are both wrong, or that somehow it does not matter.

Here's what got me all worked up:

The analyst in question reports that:

"On a broader scale, we have made forecasts of capacity additions over the next five years for major oil fields in 26 countries from projects that are already under development. The total five-year addition is estimated to be 17 million BD. We have also assumed that exploration will add another 9 million BD. Factoring in a 4.5% decline rate in existing fields, the net capacity increase would be 8 million BD. If demand increases 1.6% annually, surplus capacity would grow to 7% in 2012 from 5% in 2007."

Now the analyst has some legitimate points here.  It is true that NEW production capacity could very well approach 25 million barrels per day 6 or so years from now (the analyst alludes to 26 million bpd but close enough).  He probably got that data point from Chris Skrebowski's "Mega Projects".  I gotta give credit where credit is due - the analyst can read and Skrebowski has an excellent track record and is quite detailed in his work and disclosures.  So far so good.  The REAL question is the DECLINE rates in the existing 74 million bpd producing fields.  Is it 4.5%, as CERA claims and where the analyst got his data (no production consulting firm used the 4.5% decline rate other than CERA, so by process of elimination), or is it closer to 8% or 9%, as Schlumberger contends, or 10% to 12% as some of the folks on suggest is very likely.

This is important because if CERA is right, we are on easy street for the next 5 years.  If Schlumberger is right we've got big problems.  Hmmmm...... seems somewhat inappropriate for a sell-side analyst to accept the 4.5% CERA number while dismissing the other data points out of hand... Especially when you consider an article I wrote in November of last year discussing CERA's dismal forecasting on energy prices, supplies, and production.

You see, Wall Street brokerage firm's don't have to worry about being RIGHT - they have to have a BASIS for their position.  CERA gave them that basis, it fits with what they would like to believe, and they report it with great conviction.  Does anybody on Wall Street or in the Media question CERA's motivation or track record?  Not once.  Why not?  CERA hasn't made a good call since Noah built himself a boat, but people LIKE what they have to say.

Get your boots on.

Yours for a better no B.S. world,

Mentatt (at) yahoo (d0t) com