Friday, August 29, 2008

The Politics of Energy

It is no coincidence that the Republican VP candidate is from the largest hydrocarbon producing state.  This will give McCain, as a very astute fellow pointed out to me today, the opportunity to go to Alaska with Governor Palin, be "won over" about drilling in ANWR and elsewhere, and come back to the lower 48 with this "epiphany".

Also, it is no coincidence that she has about the same big time experience as the top of the Democratic ticket - that was the point.  Obama and Palin are both GLARINGLY short on foreign policy experience, and I would not welcome a Commander in Chief Palin any more than a Commander in Chief Obama at this moment.  Again, I think that is ALSO the point.  After all, the odds are that a white, 72 year old, American male in McCain's condition AND position will live long enough to finish out a 4 year term.  Look at our previous 5 presidents.  Longevity comes with the job, it would seem.  The vice presidency is the perfect place, or at least one of the best places, for on the job training for the presidency.  One would have to agree that at the very LEAST Palin would get a couple of years under her belt before she would have to take on the top job.

Not so Obama.  He is at the TOP of the ticket.  Why is he so "special" in comparison to Palin? A couple of years ago he was a state senator and she was the mayor of a small city.  Hardly the stuff of presidential timber.

No, Palin is not going to be bringing over the hardcore feminists that backed Hillary.  Those folks were never in play.  Working class catholic mothers, on the other hand?  All she needs do is connect with a couple percent and this show is over.  McCain seems to understand that it is all about WINNING, and the Democrats seem to have believed that this was going to be Camelot, The Sequel.  Both parties seem to be suffering from the MTVization of politics.  Ever more style over substance.  Not that Obama and Palin are not both perfectly well intentioned folks of the highest moral character - they are.  But let us not forget that if Obama was a white guy from Chicago and Palin a white guy from Alaska... well, my bet is neither would be on a major party ticket.  Second and third string players are being moved up on the depth chart based on nothing more than the color of their skin and the content of their underwear rather than the content of their core competencies, to paraphrase a great man.

And if McCain died 35 days into office?  I cannot even imagine a Palin administration dealing with Russia and China, etc... and I feel the same way about an Obama administration.

The sad fact is that both parties, Republicans and Democrats alike, owe their continued existence to ONE ISSUE:  Abortion.  Our country battles this out every 4 years, each party's champions come forward to wrest control from the other - not on national security, not on energy, not on healthcare, not on the trade and budget deficits, not on a myriad of other very pressing issues - based on this ONE ISSUE.

I can absolutely, positively guarantee you this:  the energy issue is going to knock the 2 front teeth out of the abortion issue, and SOON.

I can't wait.  It can't happen soon enough.

Yours for a better world,

Mentatt (at) yahoo (d0t) com

McCain - Palin

Well, it is official.  McCain - Palin.

It remains to be seen, but at first blush... I think a brilliant political calculation McCain's part.  If O'Bama was not regretting the absence of Hillary on his ticket, I think he might be now.

I am stunned.... didn't know McCain had it in him.  So much for the "McSame" moniker.  

Not that Palin has any more experience than O'Bama.  They are both 3rd stringers when it comes right down to it.  But that is where we are at in this political season, trying to one up each other on the basis of skin tone and gender rather than competence and experience.  But it makes for great theatre, so we got that going for us...

If the Dems lose THIS year, a year in which the country HATES its incumbent Republican president, well, it is a sad indictment of how silly and immature their partisans really are.  It was almost impossible for them to lose, considering voter registration numbers, and it looks to me like they pulled it off.

As Archie Bunker once said of the New York Giants football team during their 1970's disasters:
"Edith, once again, the Giants snatched defeat from the jaws of victory."

Welcome to the White House, President McCain.  

Mentatt (at) yahoo (d0t) com

I'm Back

I watched the Obama speech last night.  As the picture becomes clearer for me it has occurred to me that Barak Obama is a very good man, a decent human being, and a GREAT politician.  I may not agree with all of his positions, and I know, like most politicians, he is FOS on many of the promises and issues he claims he can do something about and knows he cannot...

Still, Obama will likely, and probably should be President one day.  But as a war time commander in  chief with 142 days of Washington experience? 

Obama would have WALKED straight into the White House if Hillary were his VP.  I don't think he passed her over.  I think she turned him down.  Either way, if Hillary were on the ticket, top or bottom, the Democrats don't even look back.  I am anxiously awaiting the truth as to what happened in the VP stakes.

Now it is up to McCain.  I think his best bet is a woman or a Jew for VP.   A Sarah Palin or Joe Lieberman would make this a very tough, up hill battle for the Dems.  I love a good fight, and so I am hoping for a Palin or Lieberman.  

Strategically, Palin might be a counter weight to Hillary in 2012.  If Obama loses, we might have 2 women nominated in the same year for President!  Wouldn't that be interesting.

Back soon.

Mentatt (at) yahoo (d0t) com

Monday, August 25, 2008

A couple days off

I won't be posting for a couple days.  Gonna take some time at the beach... see you next tuesday...

Mentatt (at) yahoo (d0t) com

Saturday, August 23, 2008

Biden - Obama

Too bad Joe Biden isn't at the top of the ticket.  I might have voted for a Biden-Obama ticket, but can't see myself voting for rock-star-in-chief Obama.  Biden has 35 years of Senate experience. Obama had just 142 days before he began to run for President.  The Democrats are the greatest self destruct machine ever assembled.  Had they nominated Hillary, they likely would have won.  My money, at this moment, is back on McCain.  I am curious to see what the line is at Ladbrokers, the U.K. gambling house.

Biden was the second best political pick for Obama - Hillary would have been the better pick - but Biden was a very sensible pick.

Now its McCain's turn.  If he really wants to win, he will choose Lieberman as his running mate. Doing so would deliver Florida to McCain, but it would really piss off many in the Republican party.  I would like to remind McCain: Its about WINNING.  No one has to tell Obama that.  Obama is, without question, in the top 3 campaign politicians of the past 50 years.  

Neither one of these guys has touched the real issues facing America.

So here goes:

Dear Mr. President:

Welcome to the White House.  Its good to be King.  Now you need to get to work to save the U.S. financial markets as well as the U.S. $ (not to mention our civil rights and freedoms) from an energy crisis of our own making:

1. You must lower the Federal payroll by 1/3 - yes, that means MASSIVE layoffs.  The Federal Government must be cut to the bone.
2. You must raise the retirement age to 70 for Social Security and Medicare.
3. You must enact a tax on gasoline, diesel, electricity, and natural gas that really forces the American public to use less - much less.
4. You must privatize Fannie Mai & Freddie Mac, and let the market let things fall where they may
5. You must enact an income tax on the CEO's of PUBLIC corporations that confiscates 99% of everything over $5 million per year in compensation.  (Notice I said PUBLIC companies.  IF you are smart enough to found the next Google and you do not need to access the PUBLIC markets, you may make as much as possible without said tax.  But we gotta stop paying the f%$#ing CEO of Freddie Mac $25 million to fail to see the housing crisis, or $165 million to CEO Stan O'Neil to destroy Merrill Lynch while the rank and file at WalMart does not have health insurance.)  Adjust it for inflation.  Trust me, $5 million per year leads to a very, very comfortable life.
6. You must find a way to provide health insurance for each and every American - it has been a silly debate and has held the U.S. back - but those who smoke, drink excessively, are overweight, use drugs, drive without seat belts, etc... should pay many multiples more for their insurance than those that accept their responsibilities.  (So, you're fat smoker?  Quit smooking, loose some weight, or pay up.  Pretty simple.  BTW, you will live longer, and happier, and you won't need Viagra.)
7. The U.S. must have public transportation as the centerpiece of our new economic plan!!!
8. You must let Ford and G.M., etc... fail, if need be.  No tax payer bailouts for ANY for profit corporations.  Personal responsibility for ALL, not just the little guy.

You must do all of this in less than 4 years because any President that actually tried this as an agenda would not get a second term... hell, he might not live through the first term.

But he would get his profile on Mt. Rushmore and his picture on the $20 Bill (who cares about Andrew Jackson anymore?).

Yours for a better world,

Mentatt (at) yahoo (dot) com

Friday, August 22, 2008

Sitting this one out

I am not long Oil the commodity (but I am long the equities).  

I thought we had put in a bottom at $112 and now, well... I must not be that sure, or I would be long. I am having a great deal of difficulty with this, and when you can't get your arms around something in the markets, it is best not to guess.

I am also STUNNED by how well the broader U.S. equity market has held up considering Fannie & Freddie about to go down and our major corporations are out pandering themselves for capital from the sovereign wealth funds.

Jeffrey Brown recently said that it might be a "race to the bottom between the U.S. economy and Oil imports" (that was not the exact quote, but close enough).  I believe that there might be some wisdom in that thought, and accordingly I am going to take another week off and wait for more data.

The EIA Nat Gas production data DEFINITELY does not coincide with the Texas Railroad Commission's data, as "DownSouth" from the so eloquently, and brilliantly, pointed out recently (and I checked, he is correct in the discrepancy).  The EIA consistently adjusts their production numbers after the fact... At the moment it would appear that we are "neither here nor there".

Yesterday's spike and today's crash in Oil leave me with no "warm and fuzzy feeling" about a bottom OR a top.  The inventory data, prior to wednesday argued for a bottom, and then over 9 million barrels shows up in the crude numbers.  Weakening U.S. demand would normally be absorbed elsewhere on the globe, as with the addition of 70 million new members of the human race each year to feed and supply it has been rather difficult to have a global decline in aggregate production, but maybe weakness in the entire OECD will overwhelm that for several quarters.  

Or maybe I just had the filings in my teeth rattled by the inventory numbers, yesterdays rally, today's decline to have any confidence in picking a direction in the short term.

Either way, I am going to keep my chips off the table for a couple of days.

Good Luck,

Mentatt (at) yahoo (dot) com

Thursday, August 21, 2008

Gallows Humor

Fannie & Freddie "have $223 billion of bonds due by the end of the quarter, according to data compiled by Bloomberg".  Know what that means?  It means that the U.S. Government Sponsored Entities are going to be Government Agencies sometime before the end of October.  No one is going to fund that rollover without an EXPLICIT guarantee from Uncle Sam.  It also means that housing will decline in price, in real terms, until the median income can support a mortgage that can service the median home.  Since "real wages" in the U.S. are falling, and will continue to fall for quite sometime, it means many years of economic pain for the U.S.

Fannie & Freddie should be made into Poster Children, and their poster should hang in the office of every politician elected in the U.S., every bureaucrat, and every government agency - local, state, and federal with the caption:  

"Unintended Consequences"

If Fannie and Freddie did not exist, housing would be affordable to Americans, and our economy and currency - our very way of life - would not be in jeopardy.  You can thank the socialist, do gooder, c&^% s*&cker, left wing jack asses in our political past for destroying the well being of their own constituents.  Because this is going to hurt the poor and working classes a great deal more than the rich.

(Ah, but there will always be some well educated, miscreant scumbag willing to take advantage of the poor and working classes to advance their political careers - Senator Chuck Schumer and Congressman Bart Stupak come to mind - by promising them freebies and love and care from Big Brother.  Never mind that we can't pay for it and the withdrawal symptoms are going to hurt far worse than the illness they were trying to assuage.  Never mind that the real money that funded their candidacies came from the very folks they were supposed to protect the "little guy" from.  Where was Chuckie Schumer when Stan O'Neal got his $167 MILLION severance package for destroying Merrill Lynch?  Where was the OUTRAGE?  Old Chuckie was not going to take Wall Street's excessive compensation on, he was getting to much money from the s&%t stains at the top.  Oh no, old Chuckie directs his ire at "The Rich" folks making over $200,000 per year (LOLOLOLOLOLOLOLOL!! in NYC that ain't even middle class!).  But the guys stealing $100 MILLION per year got a pass.  Reminds me of the George Carlin routine about religion.)

But I digress...

THE wipe out in the mortgage market has not even gotten here folks.  I guess in some ways maybe this is some strange blessing in disguise vis a vie America's oil issue.  The brake on the economy is giving the U.S. an opportunity to fully address the "Oil Train", and that train has left the station and is due here quite soon.  What will we do with this window of opportunity?  


America may be in complete denial about the certainty of a geological peak in oil supplies being  either here or near, but the authoritarian regimes around the globe are most certainly not. These regimes do not need to hurry the process.  This is more like an anaconda slowly squeezing its prey than tiger tearing its dinner to pieces.  

The financial squeeze play that the Treasury and the Fed tried to engineer is over.  The other side of the "squeeze" is now firmly in control.  The equity markets are likely to be an extremely challenging place to be long, with the possible exception of energy.  Of course, even energy equities can get dragged down in all of this...

It is going to be an interesting winter in terms of heating oil supplies.  Hunger and cold are far more politically explosive than freedom fries and gay marriage.  At $5 per gallon for heating oil, there are going to be some cold, pissed off folks in the north country.  

Good thing the election is in early November before it gets too cold.  I would love to hear how Obama's "hope and change" or McCain's "service and experience" pitch works out if the election were held in mid February.

BTW, did I mention that Oil put a low in?  

Yours for a better world,

Mentatt (at) yahoo (dot) com

Wednesday, August 20, 2008

Bearish Report, Oil Rises

The report today was somewhat bearish.  SOMEWHAT (the gasoline inventories are declining far too fast; the refiners are going to have to make some spread soon), still the price closed the day up well over a $1, after having been down more than 1$.  My take has been, and will continue to be, that we have put in a bottom (unless we get more threats from Obama to remove 50 million barrels from the SPR and put it on the market, or the oil import picture changes) in Oil prices for this cycle, and the energy equities as well.  The system can't continue to have these kinds of draws in gasoline, and not be building stocks of heating oil and distillate for the coming winter.  Further, the crude oil import number was, by my reckoning, IMPOSSIBLY high.  And I don't think I am the only guy who thought so - ergo the higher price for crude.

Gold & Silver?  Still in shock as to the price decline in silver... but, my bet is that we have put in a bottom, or are in the process, for these commodities as well. 

I haven't gotten any "fan" mail lately about my call on Fannie Mai & Freddie Mac, Lehman, and the rest of the financials.  Look, I am sorry if you went long, and stayed there. You f*^%ed up. There is NO HOPE for these companies, or this industry.  Wishing (wishcasting) doesn't work; it is all over but the gun shot to the back of the head for these guys.

So... If the financial system is coming unglued... (and it is) what does that mean?

It means you gotta tune in tomorrow.  My job as the kid's taxi driver calls, and I gotta hop.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Tuesday, August 19, 2008

If You Ain't Scared... You Ain't Paying Attention

Fannie Mai & Freddie Mac, nearly down for the count last month, survived with the help of a "standing 8 count" engineered by the finance hair club for men.  It did not work, and they cannot survive.  Government manipulations in free markets NEVER work.  EVER.  Are you listening, Mr. President-elect to be?

The head fake from the U.S. $ really spooked the leveraged folks in the commodity's markets, but some of those markets had gotten WAY ahead of themselves and now it would appear have gotten WAY behind - again.

The race to ZERO by the major currencies is still on.  The U.S. $ simply must give up much of its purchasing power, and American's much of their lifestyle, if the U.S. is to balance its budget & trade deficits.  There will be more head fakes along the way.  If I could call them with any accuracy, would not need my day job... but the long term structural issues are there for all to see.

Housing will not be "bottoming" in 2009.  It may hit bottom in 2009, or 2010, 2011, or 2012 for that matter, and stay there for 10 or 20 years.  Hitting bottom and "bottoming" are 2 different things, aren't they?  "Bottoming" implies a return to an upward trend in prices, an outcome I would have serious doubts about.  

Commercial property values are also about to be "marked to market" in a most unsettling way.


Commodities are all about Oil. Oil, in US$ terms, is all about interest rates in the U.S.  If the Fed decided to bring Oil to $80 or less, they could do it.  A 5% Fed Funds rate would do the trick nicely.  On the other hand, a 5% Fed Funds rate would demolish the banking industry and slaughter the housing market and bring the the U.S. into a 1930's level recession.  Hardly worth the price of "cheap" Oil, wouldn't you say?

If the Fed keeps the Fed Funds rate at 2% through 2009, Oil will likely head over $150 in 2009.

On the OTHER other hand, if Oil imports into the U.S. decline by another 7.5 % in 2009 from 2008 (as they have so far in 2008 from 2007), Oil prices will likely top $150 irrespective of the Fed Funds rate.

Keep your eye on the data.  And then, question the data.


I am looking forward to the EIA Oil inventory numbers tomorrow, even though the EIA has been AWFUL of late in reporting accurate data (just look at Nat Gas inventories and production data.  They simply do not add up under any circumstance).  The problem with AWFUL data collection and reporting, is that at some point the "truth will out" and the swings in the market to adjust for incorrect assumptions will be something to behold - IF you are on the right side of the trade.

Good Luck

Mentatt (at) yahoo (d0t) com

Sunday, August 17, 2008

No Manipulation

ALL paper currencies go to ZERO, there are no exceptions.

The RACE to the bottom has twists and turns, and at the moment it appears that the other major currencies are gaining on the US$ in that race.  

So if all currencies are going down in purchasing power, why are Gold and Silver going down with them?  Markets are not perfect discounting mechanisms in the short term.  It would appear that far too many people had leveraged bets on an immanent US$ collapse at the wrong time.  They are now exiting the trade en masse, and it is likely to get worse before it gets better.  Markets tend to overshoot, and opportunities will present themselves at some point.

Commodities are, for the most part, not buy and hold instruments.  This may not include bullion but it certainly would mean ALL futures contracts.  Every time you enter into a futures contract, there is someone on the other side of that trade.  Do you really think that you are going to be right, and the other guy wrong, every time you trade? Really?

Commodities are a Zero Sum Game.  For every winner there is an equal and opposite loser.  In order for the pros to make a living at this, they need a constant supply of new meat to beat up and send home a little lighter in the pocket.   We, on the other hand, want to avoid that at all costs.

When a trade is going against you, exit the trade!  Don't hold losers and hope they come back.  If it is going against you, you were wrong in your analysis, and it is time to stop the pain.  If you cannot do this very simple thing - admit you are not always going to be right - then don't enter into any trades.  You are not a trader.  You are the new meat about to go home a little lighter in the pocket.  You know those folks that are always right, have never been wrong, and would blow up everything in their lives in order to "win" an argument or debate?  You won't find a lot of them working as a professional trader.

Good luck!

Mentatt (at) yahoo (dot) com

Thursday, August 14, 2008

Markets Zig and Zag, They Don't Zig and Zig (part 223)

No dramatic market move lasts forever. Up, down, sideways, if the move is a steep one, the market will invariable overshoot, and when the change happens, it usually fakes you out of your shoes.

I hate to trade Nat Gas. I call it the "career ruiner". Nat Gas has taken more guys off the field in stretchers than any other commodity. It ain't even close.

Nat Gas is good stuff. Composed primarily of methane which contains olny 1 carbon atom per molecule, Nat Gas is much easier on the environment when compared to coal in BTU's.

Nat Gas ("NG") has gotten KILLED. Now I am one of those guys who thinks the market is always right, no matter how wrong you might think it is. I have been wanting to go long NG for weeks now, and had lost money long NG earlier in the year. But once bitten, twice shy as they say. And thankfully so, I would have lost money - again.

Inventories of NG are 15% below last year's inventory levels, even though the EIA reports that production is up 8% in 2008 over 2007. Now something is wrong with this picture. Not sure what it is, and if anybody out there has something intelligent to add, please email me directly. But when market's get this far into the Zig, the Zag is usually somewhere in the near future.

This is how I feel abuot Silver and Gold. I don't trade palladium or platinum, as the auto business is their big industrial market and you know how I feel about the future of automobile manufacturing. I have been bullish on the Metals for many years now. I have been getting email from folks asking me if the bull market in Silver and Gold is over. I guess with the recent correction (in the case of Silver collapse might be a better word) people think this is it.

I don't think so. The sell off in the CRB index has been brutal, with fund liquidation weighing heavily on the market.

So, if I am so smart, why didn't I see this coming?

Because it is not possible. If anybody saw this coming, then the market would have corrected earlier, when the folks that sold in July moved their sales up to June. Markets go down from selling pressure, not from talk. The sell off in precious metals was probably 1 standard deviation away from the mean price for the year. Pretty normal, unless you are long. Will there never again be a 1 standard deviation to upside away from the mean? Of course not. The question becomes, what will the mean be?

With the exception of Oil the other day, I have never called a bottom or a top on anything in this forum, and I am not willing to call one now in Gold and Silver. But we are close. Not the least of which is that Oil will put the bottom in for Gold and Silver.

So why would I own them now? Because the U.S. Oil import crisis is in full swing, and some of the smartest guys I know have a RELIGIOUS belief that "somehow" it will get fixed. Over the next 18 to 24 months, those guys are going to come to their senses, in my humble opinion, and rush to the other side of the boat. IF you want to be able to sell something to these guys as they pile into it, you gotta own it before that time. Before the masses see it. Before Wall Street's brokers see it.

Some of these guys argue that the trade is over for energy and the precious metals. These are the same guys that MISSED the trade over the past 5 years in Oil, Gold, Silver, Corn, etc... in the first place. Why would you listen to them now? Maybe you think it is their turn. If that is true, you should be buying the Financials, Fannie & Freddie, the Airlines, the Travel & Leisure sector, Homebuilders, etc... and shorting Oil and Gold. I think that would be suicide.

Individual investors are not very good at investing. Individual investors don't like to buy low and sell high. The like to buy high and sell never, buy high and sell low, buy low and ride it high but ride it all the way back down again in the proverbial round trip. Still, they expect their timing to be perfect, and when it isn't they punish themselves by refusing to look at the data, refusing to do their homework, their research. When they hear 2 opposing sides, they figure its a hung jury, or that both sides are idiots. This is a critical moment in the history of investing. This is the moment in time when you must really do the homework you never did, and REALLY understand if this Oil thing I speak of is true - or not. Because, if it is true, half meassures won't work.

For over 5 years folks in my camp have been saying that the U.S. faces a serious Oil import crisis, and in fact, the U.S. imports of Oil has declined 7.5% for the first 220 days of 2008 vs the same period in 2007. Folks in the media have a new mantra "demand destruction", and they got it exactly backwards. It is the supply that has gotten destroyed, and demand can NEVER exceed the supply. For now, this media mantra has had an effect on market particiapnts. However, I am convinced that the decline in Oil imports will continue next year and the year after and the year after, etc... from NOW ON. When the market comes to this conclusion, the effect will move heaven and earth. That does not mean we won't have sell offs and corrections - but the "trend is your friend". Disregard that old saying at your peril.

Especially in light of a 7.5% decline in U.S. Oil imports. (Just scroll down to the first page of Table 1 and look for "Total Net Imports.) Because, in my HUMBLE opinion, nothing else matters.

Mentatt (at) yahoo (d0t) com

EIA Short Term Energy Outlook

The U.S. Department of Energy EIA Short Term Energy Outlook is available.  Though there forecasts have usually been wrong (they continually underestimated prices and overestimated supplies during the 2002 - 2007 period), I thought it very poignant that they are now publishing that their forecasts COULD BE WRONG because of "accelerating declines in some older fields", exactly what we have been shouting about, and they have been ignoring, for years.  Here is the paragraph (link is above):

Non-OPEC Supply. EIA is revising this month's outlook for non-OPEC supply growth in 2008 compared with last month's, largely because of project delays in Asia, lower output growth now expected in the Former Soviet Union, lower growth in Canada caused by the upward revision of 2007 data, and reduced production in Azerbaijan due to the closure of the BTC pipeline. If new projects come online as now anticipated, total non-OPEC supply is projected to rise by about 510,000 bbl/d in the second half of 2008 and by 850,000 bbl/d in 2009 compared with year-earlier levels. This compares with a 330,000 bbl/d decline in non-OPEC supply recorded during the first half of 2008. Non-OPEC supply growth through 2009 is expected to be led by Brazil, the United States, and Azerbaijan (Non-OPEC Oil Production Growth). Given recent history, possible additional delays in key projects as well as accelerating production declines in some older fields cannot be ruled out. For example, Russian oil output was down by almost 1 percent in the first half of the year, raising the chances for the first annual decline in output since 1998. As a result, net non-OPEC production gains could be less than the current forecast, leading to both higher demand for OPEC oil and higher prices than currently projected.

Anyway, since I beat them about the head and shoulders when they whitewash over the salient issues, it is only fair that I give them some kudos when they get it right.

It is really worth the time to read the report.

Meanwhile, back at the ranch...

The EIA will release its Natural Gas Inventory report at 10:35.  I have no prediction on what it will look like, but if the build continues to underperform last year's injection, then SOMEONE really needs to take their reported numbers on Nat Gas production, consumption, and disposition apart, because once again... the numbers just don't add up.

Mentatt (at) yahoo (dot) com

Wednesday, August 13, 2008

US$ rally over, Oil Bottom In*

Never used an asterik in this Blog before. First time for everthing, I guess.

The inventory numbers came in, and they were nothing short of horrific. Read it for your self.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 0.4 million barrels from the previous week. At 296.5 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 6.4 million barrels last week, and are in near the lower boundary of the average range. Both finished gasoline inventories and gasoline blending components inventories decreased last week. Distillate fuel inventories decreased by 1.7 million barrels, and are in the upper half of the average rangefor this time of year. Propane/propylene inventories increased by 2.0 million barrels last week but remain below the lower limit of the average range. Total commercial petroleum inventories decreased by 5.4 million barrels last week, andare in the lower half of the average range for this time of year.

Here are the numbers. So much for "Demand Destruction". Gasoline inventories are down 12 million barrels from this time last year, over 10%, and at a time when we need to be BUILDING inventories of heating oil, we are still having draws in distillates.

I must admit that I missed the Strategic Petroleum Reserve threat, but the more I think about it, the more I think it really is just a threat.

Even a President Nancy Pelosi, and when it comes to economics and energy a bag of hammers would kick her ass in a game of checkers, would not be so dumb as to actually pull that trigger. Well... she IS that kind of dull... but hopefully the folks at the DOD and the CIA would point out to WHOEVER is in the Oval Office that once you pull that trigger, you now have emptied the last bullet from the U.S. energy gun. We shot our load on ethanol... nuclear has been a dud... the other alternatives are a decade (or 2) away... would any President, even a liberal Democrat, (even the BUSH administration!) be silly enough to take our last pawn off the table? After all, all OPEC would have to do is take 1 million BPD off the market for a measly 50 days, and we are right back where we started.

Look, the Democrats are "kinder and gentler", and America desperately wants a reason not to vote for a Republican (and rightly so - they want to punish the Republicans for the ineptitude of the past 8 years), but the Democrats really are the second team when it comes to the hard decisions, likely because many of their constituents need protection in a competitive world. Still, my bet is they would come to their senses before doing anything so dumb. My bet is that was just campaign politics on the part of Obama (And my hat goes off to him. Republican opperatives are infinitely smarter than their counterparts, with the exception of Clinton's first term team... now those guys (Carville & Co) were SCARY!). The funny thing is, he sort of stole the idea (I believe) from Newt Gingrich, of all people! Not that this silly idea has not been knocking around the Democratic circles for a while, but Gingrich's famous speach unwittingly gave Obama some excellent cover. Like him or not, Obama is neck and neck with Bill Clinton as the best campaign politician of the last 50 years. JFK wasn't even close to these guys.

But I digress...

ALL of the commodities got a bid today after the 10:35am oi inventory report hit the web. ALL commodities are now driven by Oil, one way or the other. Just pull up a day chart for DBA, the Powershares agriculture fund. Notice anything?

Energy equities, Oil, and precious metals are again the place to be. The U.S.$ is back to having to justify itself, and that is only going to get worse as the price of Oil goes up and inventories in the OECD, and the U.S. in particular, g0 down.

Fannie and Freddie are sunk. Glug. Lehman's body was found hanging by a rope in the garage; they cut him down, and are applying CPR, but even if they can resuscitate Lehman, its too late. Lehman might live in a vegetative state, but I think you can put a fork in it. Citi will only survive because the Feds are going to defend Bank of America, JP Morgan Chase, and Citi. SOMEBODY has to be able to hold payroll deposits without defaulting before the funds clear. Can you imagine 10 million worker's payroll checks bouncing because of the FDIC's $100k limit on protecting deposits? Well, these are the banks that hold those payroll monies.

The US $ had its dead cat bounce, but it is over. Get while the getting is good. The sell off in Oil is over, and that was what was supporting the US$. Now we need to look out to the Credit Default Swap nightmare, because that train has left the station, and it is on its way here.

What to do (and don't). Don't try and expand your business. Instead, take every penny off the table and buy hard assets. Don't hold US$s. Don't hold corporate bonds (Just pretend that Wall Street bond salesmen are selling MALARIA, that will help you get in the right frame of mind). DON'T buy brokered CD deposits!!!! Don't hold banks! Shrink your overhead! Do not be tempted by Real Estate, it has a LONG way to go (DOWN)!! Prepay any tax liabilities to avoid holding over 100k in any bank except the big 3.

Looking at the above supply data from the U.S. Department of Energy ANY unexpected, uncalculable event (hurricane, act of war, accident) could drive oil well over $150, maybe over $250. If you want to be long US$ with this hanging over your head, you need to take a refresher course in probability theory. Skip the course. Exchange $'s for hard assets.

And stay away from Wall Street salesmen. They are infected and highly contagious with Mad Bullshit disease. If their silly "asset allocation" model of business was worth a shit, then why did hedge funds conquer the financial world (at their expense)? If G.M.'s Volt was worth a shit, why isn't G.M.'s stock price going to the moon? The markets are not perfect discounting mechanisms, but they are better than the media, and INFINITELY better than Wall Street salesmen.

Good Luck

Mentatt (at) yaho0 (d0t) com

* if the SPR is tapped, the bottom is not in

Tuesday, August 12, 2008

$500 Billion here, and $500 Billion there... pretty soon you are talking real money

I have been posting for sometime on the Mortgage/Housing Crisis.

I have posted that aggregate mortgage write downs will land between $1.5 Trillion and $3 Trillion, and perhaps, just perhaps, more.

Well, we are officially 1/3 of the way to my lower range number. $500 Billion in write offs and counting. There is NAFC we don't get to the $1.5T. The 64,000 question is do we get to the $3T?

I think we do.

Mentatt (at) yahoo (d0t) com

Dollar Rally Over, (or nearly so)

The U.S. $ rally of the past 2 weeks is over. You saw it. Wow, the Euro is only $149! Think that is a bargain? You haven't been to Europe lately, have you.

"Correlation does not imply causation", as anyone with a modicum of mathematics in their background has had ground into them.

Still, in my business, we MUST seek the cause, and make our bets accordingly.

So, here is what I think:

I think the pre-election strategy of threatening to release oil from the U.S. Strategic Petroleum Supply, and; threatening to make Oil futures speculation more difficult and fraught with regulatory liability has had the desired effect - Lower Oil Prices.

The unintended consequence has been to strengthen the U.S.$ - TEMPORARILY (and if they meant to do this, I would be REALLY impressed, but considering interest rate policy I doubt that the US$ rise is any less of a surprise to the Fed than it was to me).

Why do I say temporarily? Has anything changed vis a vie our interest rate policy? Deficit spending? Can the U.S. economy survive the decline in its cheap-dollar-supported exports? NAFC. Ergo, this is temporary.

This has created some of the best opportunities in precious metals since Noah built himself a boat, not to mention the equities of Oil & Gas producers and the Oil Services complex. Can't name names, but I am LONG the group.

The U.S.$ is in just as bad of shape as ever, and the Fannie and Freddie bailout IS coming, and with it the bailout of the rest of the mortgage market. You have an opportunity here, and I think it is the LAST at these levels - use it wisely.

You heard it here first.

Mentatt (at) yahoo (d0t) com

P.S. Wall Street's money managers and salesmen will be telling you the all clear signal has been sounded. It hasn't. These guys should come with a Surgeon General's Warning: I am as dumb as a box of rocks.

Watch what the hedge fund guys are doing, and it ain't buying banks.

P.P.S. I got an email from an individual castigating me because Lehman is still in business, and Fannie and Freddie have not been nationalized yet, therefor I am an idiot, am ugly, and my mother dresses me funny. Talk about unreasonable expectations... Still, Lehman will not survive, and neither will Fannie or Freddie. Just take a look a their stock prices - this despite the fact that Paulson got the "baszooka" he wanted to bluff away the bad guys.

P.P.P.S. If I knew WHEN ANYTHING was going to happen EXACTLY, I wouldn't need my day gig, now would I?

Monday, August 11, 2008

Close, Very Close

The Oil market is close to a bottom, UNLESS the U.S. releases Oil from the Strategic Petroleum Reserve - or threatens/promises to. Short term bottom or long term bottom remains to be seen, but my bet is Oil does not break $107, and when the rally comes Oil could move $15 in 1 week, and $25 in a month. August is a notoriously difficult month to be long Oil, and this year is proving to be no exception. But winter is coming, it has not been called off. The refiners MUST buy crude now in attempt to beef up stocks of heating oil and other distillates, and in fact distillate inventories are about 6 million barrels ahead of last year, while gasoline is 6 million behind, and crude about 43 million behind.

So why was the sell off so bad? I dunno, why was the rally so good (if you were long, that is)?

Let us get back to the numbers. With gasoline so expensive, why do we have less in inventory than last year? If their was in fact demand destruction, shouldn't this stuff be piling up? And what is up with the doubling of "Blending Components" over the past 4 years? " Blending components" means, for the most part, ethanol. Ethanol was not part of "Total crude and petroleum products" 4 years ago (just click the data range to the right of the table). So the 5o to 60 million barrel increase in blending components is ALL ethanol. Shouldn't we subtract that amount from the Total (988,327,000 - 60,000,000 = 928,327,000) in order to compare apples to apples? And since most cars cannot use E85 all that ethanol is illusory in terms of petroleum inventories. I can't find a first week of August from 1990 to present that has fewer barrels in inventory.

"On the other hand" Oil might not be at a bottom with the potential of an Obama victory. A President Obama would most certainly follow through on his campaign promise to release 50mm barrels from the Strategic Petroleum Reserve. This is a "one off" event but must be taken into consideration. Of course, OPEC WILL ABSOLUTELY respond and take that 50mm off the market over time. Aside from being the DUMBEST idea since the Edsel, from an environmental (those 50 mm will wind up in the atmosphere), economic (this is a patch, not a solution, and only stretches the rubber band that much further), and national security (the SPR was designed for supply interruptions, not high prices and political payoffs) point of view, I have NO DOUBT Obama would carry through with that particular promise.

As you can see, there are a lot of moving parts here.

So, until the end of the sell off in Oil, the commodity markets are going to be too treacherous a place to participate in. And we won't know where oil bottoms with the threat of government intervention in the markets, futile though it might be.

Still, in the end it is all about Oil imports. They either rise, or they decline - as they have for well over 1 year. No point in being a hero. All will be revealed in due time, and somewhere in there I am going long Oil into the U.S. Great Oil Import Crisis of 2010 - 2012.

Good luck!

Mentatt (at) yahoo (d0t) com

Oil Down in a Shooting War

Oil is selling off in the middle of a shooting war near an important pipeline.  This, despite the worst weekly selloff in YEARS.

This just ain't a good sign.

U.S. Oil inventories are 50 MM barrels below last years levels (all commercial products).

So, maybe this has nothing to to with the U.S.  Maybe, just maybe, that other big consumer of Oil, China, is also heading into recession.

Wouldn't that be fun?

Mentatt (at) yahoo (d0t) com

Sunday, August 10, 2008


In contemplation of the past 12 months events it occurred to me that high Oil prices will NOT bring about demand destruction.  It will bring about demand shift.

High Oil prices will not bring the world economy to a crash.  It might bring the U.S. economy, and much of the OECD nations to a significant recession, but much of what is lost in the OECD will just be moved over to the Oil exporters.

So, what's the answer?  Move to Dubai.  Their economy is going to do just fine. (only half tongue in cheek)  

Sorry, I am back...

Every time you fill up your car, or heat your home with oil, much of the money you paid will wind up in an exporting country - boosting their economy, their auto fleet, the size of the house of the oil field worker in that country along with his heating bill, fattening his bank account with extra cash that is now the basis of his discretionary spending, spent on flights from an Oil field in Siberia to sunny beach in Greece which consumed more of his nations Oil that they now cannot export here. Wheh!

Our pain is their gain.  Isn't that free market capitalism?  Isn't that what we fought numerous wars and slaughtered hundreds of MILLIONS of innocents for?  Isn't that what we wanted FOR them?  To be like US?  Well, we did it.  Only now we don't like it.

I listen to U.S. Secretary of Energy Samuel Bodman, who for the most part is an entirely reasonable fellow in a very UNreasonable position, lecturing the Oil exporters such as Saudi Arabia, Russia, Venezuela, and even Iran, that by subsidizing their citizens gasoline purchases they are putting the world economy, and peace itself, at risk.

Then, I read this.  Let me help you zero in on the offending paragraph.
But House Speaker Nancy Pelosi plans to have the House vote on additional aid when lawmakers return in September from their summer vacation. She believes more is needed to counter higher gasoline prices and other costs.
Dear Nancy:

Aren't you suggesting that the U.S. "subsidize" the public's gasoline purchases?  Isn't that exactly what you just said?  How, exactly, is that any different than gasoline selling for 39 cents in Saudi Arabia?

There is a reason that California will be one of the first financial collapses in the U.S., and that reason is their sh-t-for-brains body politic, the first in Green, most in hypocracy, last in capacity for abstract thought, Jag Offs that decry the environment but can't seem to notice that their state CREATED the American love affair with the Automobile.  Do I have to recount the movies, songs, and TV shows that celebrated the F$#@@!ing car, the very instrument of our impending environmental destruction?  ("Fun, fun, fun, till her daddy takes the Tbird away!") Should I mention that , by the way guys, your airports are among the busiest in the world?  I mean, you guys DID hear that jumbo jets consume a great deal of oil and inject a great deal of carbon into the atmosphere, right?  It was in ALL the papers.

This is what the late, great George Carlin described as being "stunningly full of shit".  

But at least Nancy Pelosi's FOURTH car is a Prius.  So we got that going for us.

How do people fall for this Sh-t?


Lest you think I am picking on the Jerks on the Left, let point out the latest B.S. from the Jerks on the Right:

Read the above link again.  OK?  Who's job is it to make sure Wall Street doesn't get so drunk that they drive the freaking car off the cliff?  I gotta be careful here.  I work in the regulated securities business and these guys are as mean as snakes when it comes to registered personnel that publicly criticize them.  I will say that the agencies and SRO's that are watching over this spend all of their resources monitoring all the unimportant stuff.  They have a limited budget, and they were busy making sure that Brokerage firms were making copies of copies in triplicate coded red, green, and then blue.

Was that politically correct enough?  

The regulators have NO ONE doing a cost/benefit analysis on any of their activities.  When the Credit Default Swap nightmare takes down the U.S. financial system you will know why.  


Everything, the U.S. $, the equity markets, the mortgage market, housing, etc... depends on Oil prices.  Oil prices depend on inventories, inventories depend on supplies.  Keep you eyes on the DATA, not CNBC.


In case you don't think we are in real trouble, here is a little fun fact to know courtesy of Wharton Professor Lawrence G. Hrebiniak:

"We just finished paying off the bonds that were created to pay for the Viet Nam war a couple of months ago."

Yours for a better world,

Mentatt (at) yahoo (dot) com

Ill Intentions

While you and I head to the beach, pool, mountains this weekend, a shooting war has sprung up not 200 miles from NATO's lines in the FSU republic of Georgia.

This is serious stuff.  Russia HAS no Loyal Opposition.  No peaceniks.  No San Francisco Left.  Russia is ALL business, murderous and barbarous, and MUCH more dangerous than the FSU.  In this moment of the "Chess Game", this most recent move is ALL about Iran.  And Russia is now CLEARLY supporting Iran with military assets, just in case anybody in Washington missed it.

This is Russia's moment.  The OECD countries are in a terrible economic position, and hence a weakening political position.  It has been my position that:

 an energy crisis = a food crisis. 

The price of oil isn’t merely about oil. It is about food, the U.S. dollar and power-politics. Westerners, however, are always “mystified” when the Russians seem to act contrary to their own economic interest (as if economic interests were the only interests). It is true that Russia has benefitted from high energy prices. More significantly, Russia will benefit even more when the U.S. dollar collapses. - JR Nyquest
You see, I am not the only guy that thinks the U.S.$ is on the ropes (and yes, it is still on the ropes despite the fact that the Euro is now falling versus the U.S.$.  Who said either one of these currencies survives?).  The difference is... I am just trying to make a living forecasting what's next in the markets... While Russia is trying to destroy the U.S. via its currency and the world wide price of oil.  Think me dramatic?  Yeah, well I think only a FOOL thinks that Russia is any improvement over the old U.S.S.R.  The guys running the Russian show have consolidated their power, jettisoned property, political, and human rights, clearing the decks to take full advantage of the energy crisis facing the U.S. over the next 5 years.

This is the world we live in.

Mentatt (at) yahoo (d0t) com 

Saturday, August 9, 2008

Oil, US$, Euro, Gold, Nat Gas, etc...

Still want to be a trader when you grow up?

Oil, Gold, Ag, Nat Gas, Silver all down.  Silver alone lost over 12% LAST WEEK.

I wrote this post on April 8, 2008.  The key point in the post was this:

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.

Well the Euro is correcting, and the correction in commodities ain't over, so if you were hoping for a V bottom monday, you got a better chance of an early visit from Santa.  Commodities are NOTORIOUSLY volatile.  There is no such thing as BUY AND HOLD in this market, with the exception of fully paid for bullion.  Speaking of bullion (Gold and Silver), and you know I am a BIG bullion fan, the end of the Euro bubble and the correction in the rest of the currencies is going to make it rough for "Gold Bugs" for the time being.  And NEVER listen to those Gold Bug Jag Offs and their ridiculous analysis which I can some up like this:  

"If Gold and Silver prices go up, the markets are behaving correctly and all is right with the world.  If Gold and Silver head down, or in last week's case get walloped, then it is a huge Government conspiracy to get you out of gold and into the currency."

Not that I saw this past week coming in the Gold & Silver markets.  I didn't.

Oil followers have their fair share of loonies, too.  I got dozens of emails from folks asking me if the Oil price decline was engineered by the Bush Administration to help McCain's campaign.  These folks gotta get a grip!  The world Oil market is the largest, most liquid market on the planet. The Bush administration can't find its ass with BOTH hands, but suddenly they are competent enough to engineer a world wide decline in Oil prices.  

Some of the folks I emailed back said I was being naive, that the Saudi's were releasing more oil, blah, blah, blah...  "Amateurs talk strategy, professionals talk logistics" is a famous military saying.  Well, logistics matter in Oil, too.  These guys are saying that the Bush Administration manipulated the world tanker fleet, pipeline flows, and production flows from the world's exporters - perfectly timed to coincide with the Presidential campaign!  Must be fun to be so detached from reality.

If any of the above were true regarding the Oil markets, we would have seen an increase in inventories - they decreased; and, the U.S. would have experienced a pick up in imports - and imports declined.  So why did the price of Oil go down?  

Sorry conspiracy theorists, the Oil market was over bought, and now is likely oversold (and it can get much more over sold).  That is how markets work.  The Oil market is, in fact, controlled to a large extent by OPEC, but if you say that OPEC engineered this for Bush and McCain, you gotta have rocks in your head.  All of the OPEC countries, not just Saudi Arabia, would have needed to COOPERATE to drive up Oil to nearly $150, and then put increased supply back on the market, allowing for and calculating the time element of the world's tanker fleet all timed perfectly for the American elections!  The law of unintended consequences would negate any potential benefit intended to any particular party.

Back to the real issue:  Oil was $10 in 1999.  Oil is $115 as I write this.  Notice a trend here?

I can see the headlines in August 2010 or 2011 now:

"Oil prices collapse $65 in less than 1 month!  The Oil bubble has popped!  Oil down to $225 per barrel and falling!"

2 years ago, oil fell from $80 to just under $50, rose to $147 at the peak and fell to $115.  During the past 25 years or so, the average decline for crude during the "shoulder period" (the "head period" is peak summer driving and winter heating, the "shoulder period" is the time in between) has been about 26%. If this year met that average we could expect a $38 decline, peak to trough, or $109 per barrel. I would be very surprised by a decline to $100 or lower, but it could happen.  I would give that a very low "probability event horizon".  Any individual stock can go to ZERO. Commodities, while far more volatile than stocks, cannot.  It just feels like it when you are long.

Now, some of the rise in Oil was related to the decline in the U.S. $ in relation to the other major currencies.  The currencies were never worth what their exchange rate implied.  If you think the U.S. has some whacked out social programs, Europe makes us look positively fiscally disciplined.  On the other hand, the U.S. portion of worldwide military spending is over 50%. That is a HUGE drag on the US$ that won't be going away anytime soon.  The U.S. spends more than 3 X on Law Enforcement, "Justice", and the U.S. prisoner population than the Euro zone does.  This is another HUGE drag on the U.S.$ (and just look at what us taxpayers get for our money!).

What I am getting at is this.  ALL currencies are going to lose value in the aggregate as measured by purchasing power.  Right now, looking at the Gold & Silver market for last week, that might sound silly, because if that were true, why is Gold going down?  

In 2000 Gold was $350 per ounce and front month gold is $864 as we speak.  Notice a trend here?  True, Gold has lost 15% from its peak - welcome to the markets.

Trading and investing is notoriously hard on the nerves.  This is one of those moments.  Commodity trading is even worse than stock trading.  And, if you use LEVERAGE it can kill you, especially if you are one of those folks that cannot admit you are wrong every once in a while.  

SO, to sum it up...  EVERYTHING revolves around Oil.  No exceptions. 

If Oil supplies to the U.S. are/become no problem, total imports will rise, and the price will fall back to $50, the housing crisis can be easily resolved, the U.S.$ will rocket higher, the banks re-capitalized, the Dow would break 20,000, and SUV's will once again  conquer the planet.

If Oil supplies continue to decline to the U.S. the opposite will be true.

Which way do you think its going to go?  Then lay your money down.  If you are not a participant, you are nothing more than a JAFO  (Just Another F@#ing Observer).  In the markets, elections, and life JAFO's just don't matter.  Not that JAFO's aren't perfectly fine human beings, they just don't matter and have no impact.  (Actually, they do.  Most JAFO's I know do an AWFUL lot of talking, shouting, and screaming about their ridiculous opinions - in which they have no confidence or they would take action and put some skin in the game.  The bluff & bluster is all show, no dough.  All Hat, No Cattle.  Kind of like people that define themselves as "Country", but never milked a cow, grew a crop, slaughtered a chicken, or owned a horse.  I live half the year with a bunch of suburbanites outside of Nashville that think because they know the words to a couple of "Country" songs, well, they must be "Country".  Very strange.)

None of this will occur in a straight line.

Which, by the way, is what makes trading worthwhile.  Think about it.  The economy is affected by the AVERAGE PRICE of Oil in any given period.  The economy has no idea that a couple thousand barrels of oil changed hands at $147.  NONE.  ZERO. ZIP.  The economy knows only the average price of oil during any given month, quarter, year, or decade.  A TRADER does not give a good tootie about the average price, he only cares where he bought it and where he sold it.

Next year, I think the price of Oil will average $150 give or take, and I think it will have 1 standard deviation of $50, implying $100 low and $200 high.  I am very interested in those 2 numbers, whereas the $150 average (or whatever it is) is the ONLY number that Fed Chairman Ben Bernake and U.S. Treasury Secretary Hank Paulson really should care about.

Now if I am wrong about the AVERAGE price but correct about the high and low prices, I can do well in the trade.  It does me little good to be correct about the average and wrong about the standard deviations.

There is, in my opinion, NO WAY, that the U.S. economy can handle a $150 Oil average price in 2008, and that is why you are witnessing the fall in Oil prices.  The U.S. will need time to adjust, smaller cars, more foreclosures and house abandonments so that workers can live closer to work, or more commercial abandonments so that workers can work from home.

Read that last line again.  The key word is "Abandonments".  There will be plenty of abandoned homes built out in the middle of nowhere and requiring a long car commute.  Additionally, when companies allow and individuals have NO CHOICE but to work from home, there will be considerable abandonment of  commercial properties.  Still want to buy Real Estate?

(You know what they call 1 million Real Estate brokers lined up at the unemployment office?  A good start.)

$200 Oil IS coming, but sustained $200 per barrel is a ways off.

Lastly, the recent rally in financial stocks is giving folks an excellent opportunity to get while the getting is good, in my less than humble opinion.  If you think that the mortgage crisis has passed, and that housing prices have bottomed you can ignore me here.  Otherwise, it is time to exercise the "Sell" key on your keyboard.

Good Luck!

Mentatt (at) yahoo (d0t) com

Friday, August 8, 2008

No time to be a hero

The commodity markets are getting KILLED, and the Euro is about to join the walking dead after a long run in the sun.  


Yes, Peak Oil exists. No, that does not mean Oil cannot go even lower.  Oil could easily break down to $100 or back up to $130.  That means don't trade.  Guessing is no way to make profits.

I have been saying for sometime that I would get exited about Oil somewhere between $110 and $120.  That does not mean that I am willing to go reaching for a falling knife.  Let it stick in the floor and rattle around a bit.

I think Oil will head well over $200 in the next couple of years.  Does it matter is I pay up a little bit?  Not if it saves me the aggravation of watching it sink while I am long.  Trading is about ridding winners, not ridding losers.  No matter what you "believe".  Believers lose money, traders that get off of losers make money.  

Try this sometime.  Just to prove a point.  Go long a VERY small position in whatever.  IF it goes your way, ride it until it starts to roll over, head fake or not - then sell.  Conversely, if it goes against you, sell and then go short.  Even though you are a "believer", go short.  Cover when you it turns up in any meaningful way.  Don't "paper trade", that won't prove the point.  The point is this. Emotions make trading hard.  The best hedge fund guys have ICE WATER in their veins.


"The bears are in control of commodities" a trader friend of mine from New York remarked to me this morning.  "I feel like I just stepped into the shower of a Turkish prison", he continued.  Wisdom and wit go along way as a trader.  

He and I shared the view that EVERYTHING revolves around Oil.  

Here went our If/Then sequence....

If Oil heads lower/Then the Stock Market heads up

If Oil heads higher/Then in addition to oil, go long Silver and Gold.

If the Euro gains MUCH more versus the US$/Then the ECB is into currency debasement much like the U.S.  If that is true/Then at some point Gold and Silver will get their Mojo back.

If Oil heads back up over $135/Then pressure will be back on the US$ (Which brings us back to a race to the bottom between the Euro and the US$.  A person could go crazy with all of this.)

So, it would seem, it is all about Oil.  And at the moment Oil his heading down.  While I always say markets zig and zag, they don't zig and zig, sometimes you gotta wait for the Zag.  This is one of those moments.

Just look at the Financial Index, it is up as I write this, even though Fannie and Freddie are back to their lows and by all appearances are going out of business.  Uranium stocks have been murdered, even though many in power are advocating a major nuclear push.  And Natural Gas is getting cheap enough on a BTU comparison to compete with Coal in electricity generation.  The Oil service and drillers, are trading at 6 to 8 times next years numbers, even though "Drill, Drill, Drill" is the new mantra in Washington.

None of this argues for a low yet in Oil prices.  That does not mean Oil can't turn any minute, but I am standing out of the way of the commodity.  I am long the equities, will stay that way even if oil pulls back further.  In other words, I am as dazed and confused as anyone else at the moment.  The best course of action is to at least "Do No Harm".

Good Luck,

Mentatt (at) yahoo (d0t) com

Accordingly, I am going to take a few days off and let the dust settle.  

Thursday, August 7, 2008

Lost in the Shuffle

Asia stock markets at 2 year lows.  American markets teetering.  Fannie & Freddie collapsing.  Oil is still $120 per barrel, double last year's price.  Unemployment and new jobless claims at rising.

Yet the U.S. Dollar has been rallying, and not just against other terrible currencies, but against the precious metals as well.  GO FIGURE.  Actually, I have been figuring, and it appears to me that the Euro has peaked (and that could change quickly), that the next ECB move is a cut (which is what I thought 8 months ago, and I was wrong).

Still, my money will continue to be on Oil, Gold, Silver, Corn, and rentable, productive agricultural property, though nothing is working at the moment.  Gold and Silver could come under further pressure.

I would like to say "don't fight the trend" but holding U.S.$ is not an answer as a store of value.

There are no good answers at the moment...

Good Luck!

Mentatt (at) yahoo (d0t) com 

Follow Up

A couple of days I wrote a post about a shooting incident in Pembroke Pines involving a Customs Officer who was shot to death.

The story gets stranger, and something is not quite right. Here is a follow up to the original.

It is now reported as ROAD RAGE, and that the deceased and the shooter exchanged obscene gestures while driving on the same road. The shooter pulled into the post office, and the deceased pulled into the same post office parking lot, where the 2 continued to argue. At that point, the shooter took a weapon from his waistband and fired one shot, killing the deceased.

Here is where it gets weird:

The "Bad Guy" had a pistol license. Obviously he had no criminal record. The "Bad Guy" was also, GET THIS, an elderly kidney dialysis patient on his way to get treatment!!! This was no thug, this was an frail and elderly man confronted in the parking lot by, what has been reported, a screaming, aggresive, and by all accounts burly man. It is true that the shooter left the scene. Only to be arrested 2 blocks away at the dialysis center! Turns out, the center operates on a tight schedule. Dialysis patients DIE if they miss their treatments

Then the police claimed that the deceased was "on duty". Read the article. The deceased's DAUGHTER was the key witness, and she is 12 years old. Do all customs agents take their daughter on "Duty" with them? Give me a break, the guy was not on duty.

Stunningly, I was not the only citizen to pick up on the outrageous level of resources apportioned to this incident. Thousands of Floridians have written the local newspaper to express their displeasure. Not the least of which was that many felt intimidated by the police during the operation, and I can personally relate - I am terified of the police in South Florida due to my own experience with them on a recent "drag net". At least as much so as I am afraid of the real Bad Guys. And I am a well-to-do, middle aged, white Republican type - I can't imagine how young black men feel.

I was thrilled that I was not the only local who pointed out the unfairness of it all.

As for the facts of the case. Had the deceased been the old man, and the shooter the Customs Agent, you can be sure that no charges would have been filed. Law Enforcement personnel shoot people. Even for road rage.

I am not excusing the shooter. I have no idea what transpired. But this event simply does not add up to" "Punk shoots cop. Cops get Punk. Punk goes to electric chair." Law Enforcement personnel are not granted privledges to torment civilians while off duty. Florida law is very specific about not requiring an indivudual to retreat when threatened.

I wonder if the shooter has the money to afford they legal team he would need to air this out.

What does this have to do with Energy? 500 person law enforcement activities will be a thing of the past in the very near future.

Thank Heavens!

Mentatt (at) yahoo (d0t) com

Wednesday, August 6, 2008

Fannie and Freddie, 2 new government agencies

Freddie Mac reported financial results today that were not abysmal, they were necrotic. Freddie is dead; Fannie, too. There is no hope for anything but a full government takeover/bailout/nationalization/whatever.

Buying a home in one of our most populous states will be financial and economic FOLLY for MANY years. Buying a home in California, New York, Florida, Michigan, Mass. - you know, the high tax states with serious socialist tendencies and a state employee payroll that could choke a horse and a pension/retiree healthcare liability that will drown any that don't choke - makes you a TAX TARGET. A State can charge sales tax on rent, but if it gets too high, the renter can quite easily vote with their feet and move. A homeowner will be STUCK, often unable to sell and at the mercy of the local taxing authority. These city/county/state governments have made some serious promises, and they will need to crank the whip on YOUR back in order to extract the money necessary to meet these obligations, obligations that have been piling up for years and years with local governments making ever bigger promises and taking on ever larger liabilities to pass on to future governments and future TAX TARGETS.

"Don't do it, Rambo!!" You are better off sitting this one out as a renter in many high tax states, ex-urbs suburbs, etc... Buy productive farm land in low tax states. You don't have to be a slave.


The U.S. Dept. of Energy's EIA made their weekly status report on U.S. petroleum production, inventories, imports, etc...

Now look down to Table 1. Notice "Total products supplied" has fallen 3.6% for the first 213 days of this year versus the same 213 days last year? Now look one line down to "Total Net Imports" - down 7.3% for the same period. Prices have doubled since the first 213 days of last year, but imports are down.... HMMM....

What else would Jeffrey Brown's Export Land Model look like as applied to the U.S.? And what will the U.S. economy look like next year, if imports fall ANOTHER 7%? What will the price have to rise to in order to ration this falling supply within the market (not talking about government rationing. That is rationing by "inconvenience". I am talking rationing by PRICE.)?

And how does G.M. and Ford survive a couple more 7% import declines? They don't. Americans will not NEED one single more internal combustion engine in order to finish off the declining fuel supply. Some may WANT one, but that wanted vehicle will out live its fuel supply. Same with the mortgages on those houses the mortgagor won't be able to get to with the car he doesn't have fuel for in the future, which brings us back to Fannie, Freddie and the rest of the banking system.

If you really want to know, all you gotta do is read that file every week. If that decline rate remains constant or accelerates, things are going to get really weird, really fast.

Good Luck!

Mentatt (at) yahoo (d0t) com

Peak Middle Class

Before I get into my "Peak Middle Class" diatribe...

The markets have been doing their best to make me look dumb.  Happens all the time.  

I cannot imagine how the Fed's admission that they cannot raise rates has caused the recent rally in the U.S. $ and the massive decline in commodity prices of late.  No clue.  I know the market is always right, so when it stops making sense, you have got to just get out of the way.  Energy equities have cratered while banks have surged.  In this regard, I take my hat off to the Fed.  I thought they were powerless and clearly I was wrong.  The old saying "don't fight the Fed" is ringing in my ears at the moment.  Some of the energy equities might deserve their new valuation.  The Big Oil Co's, the ones that can't seem to say the words "Peak Oil" but keep missing their production numbers - they don't look like great long term investments at the moment.  Not that they might not have "trading buy" stamped all over them...

Usually things that don't make sense don't last very long in the markets.  Investors, by and large, are for the most part pretty sharp.  But things don't change over night, either.  Also, Oil seems to move EVERYTHING in the commodity complex.  

Speaking of Oil... why would Oil for delivery in 2016 be $4 lower than Oil for delivery next month?  If you believe in "Peak Oil" opportunities abound.


In doing my usual reading it occurred to me that the "Peak" is probably in for the Middle Class ("MC").  Pretty simple really.  In the U.S. the population of people unemployed, seeking government assistance, losing their homes, (the SOL) etc... is increasing and their numbers are coming out of another demographic - the MC.  In an environment of declining Oil imports into the OECD countries, and the U.S. in particular, will this population ever be able to reverse that trend?  NAFC.  

There are not enough "Rich" falling into the MC to make up for the MC's that fall into the SOL.  
The political implications could not be more stark.

Folks in the SOL are going to demand services.  Extended unemployment, Medicaid, Food Assistance, etc... from state governments that have over promised retirement pension and healthcare benefits to current and retired state employees.  These 2 groups are populated with "Believers" that the State can and will provide.  

Taxes to fund this mess come from the MC.  Didn't we just agree that they their numbers are shrinking?  So now we have an EXPANDING group of VOTERS that fully EXPECT that their new Lord will provide, and a decreasing group of VOTERS that are expected to work harder to pay their "fair share", even though they cannot make ends meet.  

This is going to be interesting.  


I live in Florida, and we have a law here called the "Stand your ground" law.  Simply stated the law says that individuals do not have a duty to retreat when threatened or confronted.  And that if they feel threatened they can use force to neutralize the threat - including deadly force.  Forget for a moment whether you agree or not... that is the LAW OF THE LAND.

Stay with me, I am going somewhere with this...

OK so far? Stay with me...

So far no witnesses have come forward. We have no idea what might have happened in this incident.  I already mentioned that Florida has a "Stand your ground" law.  Now, I do not wish to speak ill of the dead, and I have NO IDEA what transpired, but isn't it possible that the Customs Agent bullied or threatened the other man?  Are Law Enforcement personnel perfect?Come on, they suffer from alcoholism, divorce, depression, etc... to greater degree than the general population.  Are they above the law?  (Well, yes, but that's not the point...)

Stay with me...

If you or I had been shot in this incident, would the government mobilize a 200 HUNDRED MAN DRAGNET and 2 Black Hawk helicopters?  Not a F%$##!!! chance.  Is this Customs Agent more important than you or me?  Does have special rights?  You bet he does.  He is the GOVERNMENT.  He has STATUS.  He was not killed in the line of duty.  He was shot in an argument at the post office... Maybe he had a little anger problem, who knows?  

So here is my point.

Our Federal, State, and local governments are bleeding from every orifice in the body politic. Do you have any idea how much this 200 man mobilization cost the tax payers?  If it was, in fact, a crime by all means law enforcement should attempt to apprehend the perpetrator.  And if these 200 members of Law Enforcement wish to volunteer their time to get the bad guy that killed their friend, by all means, I would applaud their effort.  IF, IN FACT he is a "bad guy", and was not simply defending himself from a bigger, more aggressive threat in the parking lot at the post office.  Either way, I wouldn't give 50/50 odds he gets taken alive...

I would be very willing to wager a significant amount of money that if this was an unpaid venture, their would be a handful of volunteers, not 200.

Government has an open purse of tax payer money and no one is managing the cost/benefit analysis.  New roads are going in, even though total vehicle miles are down. Money is being thrown at Fannie Mae, Freddie Mac, GM, Ford, this, that and the other thing.

And not ONE of these powers that be gives a rat's ass about you.  Go ahead, get shot at the post office.  We will SEE how many government employees are out looking for the "bad guy".

Yours for a better (where Federal Agents are no more important than you and me) world,

Mentatt (at) yahoo (d0t) com

Monday, August 4, 2008

Starting to get interesting again

With oil down so hard I am starting to get the warm and fuzzies again.  I posted on June 28 that i just could not get excited about Oil at $142 per barrel, but that $120 would be interesting and $110 would get me aroused...

Oil's move from $70 to nearly $150 needed a good correction. 50% of the move would put oil under $115, and I would think that an attractive valuation, given declining future export supplies.

The first 500,000 barrels per day decline in oil supplies to the U.S. has been bought and paid for.  The easy stuff has been cut out.  What about next year?  Will another 500k - 700k decline in oil supplies be balanced at $125 per barrel.  VERY, very doubtful in my humble opinion.

Remember, it is the price you pay for the fundamentals underlying the investment that counts.  Oil inventories are as tight in terms of "days of supply" as they have EVER been, and the net long position by speculators in NYMEX Light Sweet Crude Oil at the's website (commitment of traders) has not been this low at anytime that I can find in over 1 year.

I am not suggesting you go out and reach for a falling knife.  But markets Zig and Zag, they don't Zig and Zig.  This has been one hell of a Zag.  The zig always comes out of nowhere.


The broader stock market did not benefit from the drop in the price of oil.  This just ain't a good sign.


So much for the rally in financials like  Lehman and Merrill.  It is all over but the gun shot.  Somebody give the guy with the blindfold a shot of whiskey and get it over with.


Tough week for Barak Obama.  Israel seems to support McCain over Obama, and that will have serious implications for Obama with South Florida's Jewish voters.  Without their vote, he can't win Florida.  Without Florida, he could very well win the popular vote and lose the election.  If he loses Ohio... I don't think he can get to 270 electoral college votes.  But what the heck do I know...

Yours for a better world,

Mentatt (at) yahoo (dot) com

Sunday, August 3, 2008

Watch This Video

Our friend, Jeffrey Brown, otherwise known to Peakniks everywhere as "westexas", recently spoke to the scientists and matheticians at Sandia Labs. A more intimidating audience I could not imagine. Still, at the end of the presentation, I think they were more scared of Westexas (or his message) than the other way around.

He sent me the link and I hope you will take the time to watch it. I understand that it is better in FireFox, which is how I viewed it. This is incredable stuff. Jeffrey and his team deserve a great deal of credit and our thanks.

For those of you not familiar with Jeff's work, please visit his Export Land Model at Wikipedia.

Yours for a better world,

Mentatt (at) yahoo (dot) com

Saturday, August 2, 2008

And The Hits Keep Coming

The Financial World is coming around to the situation California and New York. The negative feedback loop that are these states funding mechanisms are going into the vortex - and they ain't coming out any time soon. When they do, in a couple of election cycles and periods of extreme angst and denial, it will all be a mopping up job. Neither state is biologically capable of making the tough decisions, and implementing them, that would be of real service in this time of transition. Their bureaucrats and politicians are still fighting the last war. Nobody has picked up their head and looked around - or they would have noticed that both sides have been defeated. Its the vultures who will win this one.


Why can't I get a gig like CEO of Merril or Freddie Mac?

And why is it Merrill has learned nothing from Enron? Moving obligations off balance sheet for non-OPERATIONAL purpose does not cure the F%^^&$*~~ING problem, Mr. Thain. From the New York Times:

It (Merrill) had ridden them from 100 cents on the dollar to 22 cents, but
now it would unload them for little more than a nickel, with the possibility of getting the rest of the 22 cents later. It would give up any claim to profits from a rebound.

The Market LOVED it, at least for a day. Jim Cramer got on his soap box and declared this was the bottom of the CDO market and gave the all clear to own the banks. But after some hard examination under the light of day, it seems that selling $30 BILLION worth of CDO's and getting only 5 cents on the dollar for them, with the PROMISE of 17 cents more IF everything works out OK was not what the market had in mind. Imagine that.

I am here to tell you that everything will NOT work out OK. This portfolio Merrill just off loaded will not survive the Great U.S. Oil Import Crisis of 2009 - 2012. Nor will the portfolios of the other major banks.

And you know what that means.

Good Luck!

Mentatt (at) yahoo (dot) com

Friday, August 1, 2008


Those who have been reading my blog know that I have said many, many times before that the world already has enough vehicles to finish off what is left of the world's oil supply. In truth, we would not need single unit added to the world fleet to do it.

Aug. 1 (Bloomberg) -- General Motors Corp., Ford Motor Co. and Toyota Motor Corp.'s July U.S. sales declined as record gasoline prices damped demand for trucks and a slowing economy kept consumers away from dealer lots.

Sales fell 27 percent from a year earlier, GM said today. Ford reported a 15 percent drop, while Toyota's fell 12 percent. Honda Motor Co. said it sold 1.6 percent fewer vehicles, and Nissan Motor Co. posted an 8.5 percent increase.

Ford, GM and Chrysler LLC, more dependent on trucks than Asia-based competitors such as Honda, have led the industry's eight-month sales slide. Automakers haven't been able to meet demand for smaller, fuel-efficient cars as $4-a-gallon gasoline and a 1.9 percent second-quarter economic growth rate pinched consumers.

``The numbers I've seen look pretty bad,'' George Magliano, an auto analyst for Global Insight Inc. in New York, said in an interview. ``There is something more going on here than just the economy. I think the high gas prices are changing consumers' mindset about buying cars and they are just staying away.''

Now read that last paragraph again. Is this guy suggesting what I have been shouting into the wind for years? That it is dawning on the American auto consumer that any new vehicle he/she buys from this point forward will survive its fuel supply? Because once the public figures that one out, all hell is going to break lose.

Good Luck!

Mentatt (at) yahoo (d0t) com