Tuesday, December 30, 2008

A Heating Oil Retailer Comments on Retail Pricing Programs

On NPR's Marketplace, Peter Bourne of Bourne's Energy in Morrisville, Vermont comments on market volatility and customer programs. Hear it here, or read it here.

An excerpt of the conversation follows:
Ryssdal: Did you learn anything this past six months with this wild swing in oil prices that you're going to use this coming summer and fall as you start pricing things?
Bourne: Every year, Kai, it's a different game. It really is never the same. What I did last year is not what I can do this year. But the one thing is, with the markets what they are, and recognize the volatility and try to make sure we don't have customers in positions that are going to be as adverse as some of the ones that locked into a fixed pre-buy this year. That was . . . they're really feeling abused. I understand that. We're feeling abused, but we're buying that oil at a price that's just ridiculous in relation to today's market.
Do you feel similarly to Mr. Bourne? What programs are you prepared to offer to help your customers next year?

The Wizards of Oil (Wall Street Journal)

Vladamir Putin, Mahmoud Ahmadinejad, and Hugo Chavez are powerful world leaders. But they sit on top of economies fueled by petrodollars. If there is one thing positive that may come from this "Great Disruption" it is that the economies of Russia, Iran, and Venezuela are suffering significant budgetary shortfalls - and these world leaders now have problems to tend to with their constituencies.

A great Wall Street Journal op-ed piece is here.

2009 Chinese Growth Prospects

Forecasts for Chinese Growth in 2009. The bullish and bearish cases are available here in this CNBC video.

Monday, December 29, 2008

Sunday, December 28, 2008

The Mainstream Media: Responsibility and Buggy Whips

In an editorial in the WSJ today, Paul Mulshine of the Newark Star-Ledger pines that the era of the newspaper is ending. I agree that it is ending, and feel sorry for folks like Mr. Mulshine - experts in journalism that are experiencing tectonic shifts in the structure of the business model that has provided their livelihood for so many years. But newspapers and buggy whips share one critical similarity. In many cases, they no longer provide a valuable service to the market.

As an example, how many times have you read or heard the mainstream media comment that the current economic crisis is the "worst since the great depression"? Too many to count, most likely. In truth, many economists compare the current recession to the one in the 1960's. By many metrics, that is a more appropriate comparison. Where have I read the information I have used to frame my understanding of the subject? The blogosphere. There are several great economics blogs (written by economists) that choose to describe the problem uniquely, not in trite and overused terms that are chosen at best because the writers are underqualified, and at worst because the paper is looking for a sensational headline in order to sell copies. Blogs are great resources to further democratize the flow of information. Gutenberg had the printing press, and Barry Ritholtz and Greg Mankiw have Blogger.

The folks in mainstream media are forced to meet deadlines and write about a breadth of topics. In many cases, these demands water down their coverage. For many years, the irresponsibility with which my local paper, the Kansas City Star, has reported business earnings has greatly frustrated me. The business page picks up the headline of the quarterly press release announcing earnings and makes a one paragraph story. For companies whose revenue is greatly impacted by commodity cost - like Farmland Industries back in its heyday - top-line revenue growth is immaterial. Yet the KC Star consistently reported about sales growth - not profitability.

In the end, folks will gravitate toward the source for news that they can understand, and which they trust as a resource for responsible information. Years ago, it was possible for journalists like William Randolph Hurst to hold sway over the way a subject was reported. No longer. Because one no longer requires a printing press to memorialize the story, and it no longer requires space on the newsstand shelf to have nationwide clout.

Now all one needs is a command of the subject matter, an articulate nature, and an iPhone.

Foreshadowing The Obama Stimulus

Larry Summers, the Harvard Economist that is heading up Obama's National Economic Council, wrote an op-ed piece in today's Washington Post. It is worth your time, as it probably was a strategic "leak" to the media regarding the proposal that will be headed to Congress in about 30 days.

A few highlights:
1) Similar to Warren Buffett's refrain regarding Paulson's TARP that "It is better to be mostly right than completely wrong," Mr. Summers states "In this crisis, doing too little poses a greater threat than doing too much."

2) As businesspeople, we understand that operating expenses are things to be controlled with fervor. For sure, some OPEX is necessary. Certainly, UPS can't deliver packages without fuel for their delivery planes and trucks. However, frivolous expenditures don't add value to the bottom line, and they represent a place where profits leak out of the income statement. Summers indirectly states that a "stimulus check" alternative would lead to this type of frivolous spending. When "Joe Sixpack" gets his $1000 stimulus and squanders it on consumer discretionary goods like hockey tickets and beer, he probably has had a good time, and he certainly injected his stimulus check back into the economy, but this expenditure represents unnecessary OPEX on the combined income statement of the United States. Likewise, folks in California using their homes as ATM's to purchase new BMW's or renovate their outdoor living spaces with custom stonework hearths also represents this type of spending.

However, we as businesspeople can also recognize the power of spending on a capital asset when that asset can provide a rate of return that is acceptable. For example, purchasing a new delivery truck that costs $80,000 but yields $20,000 of annual cash flow is a very appropriate employment of funds (a 4x multiple of cash flow or roughly a 25% annual return).
Summers attempts to compare the stimulus that Obama will propose to this type of spending. Spending to create jobs and grow the economy. Spending to ensure that the 50 years post 2008 are as prosperous as the 50 years leading up to 2008. The American dream only works in an economy with a growing GDP.

3) Summers also "slips" by mentioning Obama's tax cut plan. (Tax Cuts! That is quite a reversal from President Elect Obama's position during the campaign.)

Cross your fingers that the aptly named American Recovery and Reinvestment Plan can create inertia for entrepreneurship and begin to shift our domestic economy away from consumer discretionary spending.

Thursday, December 25, 2008

In Hoc Anno Domini

This Editorial Has Been Published Every Christmas Since 1934 in the Wall Street Journal.

Oil is a Screaming Buy

According to this analyst. Here is some Oil Price Holiday Reading.

Tuesday, December 23, 2008

Handpicked Articles Sidebar

My handpicked articles sidebar has expanded from 5 items to 10 items. I hope you find at least a few of them worthwhile each day. I sort through a lot of stuff to populate that bar, and try to add material that is well-written, prescient, and unique.

Drop me a line if there are particular article types you would like to see removed, or article types of which you would would like to see more.

As a time waster for this Christmas Eve, you might enjoy this link to a very funny site that I found in a snarky, zeitgeisty corner of the Internet.

Merry Christmas.


Monday, December 22, 2008

Selling Chryslers in Kansas

There are many indicators of overall economic health. On could look at the A2P2 Spread, LIBOR rates, 3-month treasuries, or the VIX. But there might be a better one, right here under my nose.

I live in Kansas City, a place Dennis Gartman says is a fantastic indicator of the health of the overall economy. We have a balanced economy here, some technology, some agriculture, some transportation, some energy. And Gartman says that he loves to ride with Kansas City cabbies because they will tell him (based on how busy they are) which direction the domestic economy is headed.

Maybe there is another indicator - a Chrysler flagged dealership going long 50 new Chrysler units. Yep, they are upbeat in Kansas (except when referring to the Chiefs).

Saturday, December 20, 2008

Bernie Madoff Expose

A detailed NY Times article on the rise and fall of Bernie Madoff.

Radical Debt Restructuring and a Jubilee

I love weekends. Brew some coffee, find a quiet place, and read something compelling. Here is one of the best op-ed pieces I have found since the crisis began, calling for a radical plan of household debt forgiveness - similar to the jubilee time of biblical antiquity. The author? Niall Ferguson. His resume? Harvard/Oxford/Stanford. I quote the following (Bold emphasis is mine):
Added together, the loans, investments and guarantees made by the Fed and the Treasury in the past year total about $7,800bn, compared with a pre-crisis federal debt of about $10,000bn. The Treasury may have to issue as much as $2,200bn in new debt in the coming year...

Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector? Might there not be a simpler way forward? When economists talk about “deleveraging” they usually have in mind a rather slow process whereby companies and households increase their savings in order to pay off debt. But the paradox of thrift means that a concerted effort along these lines will drive an economy such as that of the US deeper into recession, raising debt-to-income ratios.

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy), inflation or conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.

That leaves conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans, as recently suggested by Harvard’s Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years.)

Thursday, December 18, 2008

Energy Policy in China and the United States

China has been aggressively structuring deals to secure crude supply directly with OPEC member states and non- OPEC producers. Here are a few examples of deals that have been struck recently: In January, a $2 billion Kazakh oil field. Recently offering a $10 billion loan to Brazil to aid exploration. And, finally, working with Angola to cooperatively build infrastructure. Similar to ABC's 1980's sports tag line -China is "Scouring the Globe to bring you a wide variety of" energy. Additionally, China is raising its fuel tax.

Based on the above information and other similar stories, it is clear that China is aggressively taking steps to compete in a hydrocarbon economy. Is the US? The nation's first Energy Secretary, James Schlesinger, has been quoted as saying: "The United States is capable of only two approaches to its energy policy, 'complacency or crisis." One might note how the sudden drop in pump price makes folks much more willing to buy SUV's and pickup trucks.

Greg Mankiw is a Harvard professor of economics, and was appointed by President Bush to be the the chairman of the Council of Economic Advisers. Professor Mankiw recommends a significant hike to the gas tax - and has written in the Wall Street Journal and the New York Times about this approach. He calls for a significant increase (a dollar or more per gallon), phased in over 10 years. Folks that agree with him are called members of the Pigou Club. There are many respected folks that count themselves in this club - liberals and conservatives alike.

Allow me to articulate the reasoning behind my decision to formally join this club.

1) A gasoline tax is much easier to monitor than CAFE standards or a cap-and-trade carbon system. If we must regulate carbon emissions, this seems to be the "small government" way to do so.

2) A increase in gas tax, coupled with a decrease in personal income tax, effectively becomes a consumption tax. I like consumption taxes - especially in this case - because they directly impact consumption. When we inhibit consumption, we depress prices - and decrease the amount we are sending to OPEC member nations. Allow me to write this again differently - we can pay ourselves through a tax, or we can pay OPEC through increased commodity costs. Repatriating these funds seems to me to be fundamentally sound for our economy. Let's keep our hydrocarbon dollars here.

3) The market has fallen so far, so fast, we could implement a big gas tax - all at once - without feeling drastic reprocussions. After all, only two months ago the US had retail gasoline prices higher than those that would be the result of such a tax.

I do not like or support the concept of big government. But I do support a domestic energy plan that moderates the two extremes of 'complacency and crisis.'

Tuesday, December 16, 2008

A Shock to Suppliers

Crude is difficult to find and expensive to produce. Modern deep water infrastructure (platforms and gathering systems) cost billions of dollars. So the downturn has been vicious for those companies with projects on the table. Here is a good NY Times article on the subject.
"So much surplus oil is sloshing around the world right now that some companies, including Shell, are using oil tankers for storage."

Sunday, December 14, 2008

“About 2008: Sorry,”

The Economist publishes a predictions issue each year. In retrospect, their 2008 predictions were not accurate at all. In fact, the editors of the 2009 prediction issue (on racks now) felt it would be appropriate to admit this inaccuracy in their new issue. The quote: "About 2008: Sorry."

Here is one thing that they were directionally correct on (just missing on an order of magnitude, really):
“There will be a mad rush back to traditional banking.”
Considering insurance companies, investment banks, and the Detroit three have all applied for bank holding company status, I can't think of a more perfect example of a "mad rush" since the Cabbage Patch doll was the hot Christmas toy.

Oil at $10?

One analyst thinks so...and explains why in this CNBC video.

UAW Contract with Ford

The picture speaks for itself.

Saturday, December 13, 2008

Tuesday, December 9, 2008

A Smoking Gun at Freddie Mac

Check out this scanned email memo from a worker bee at Freddie Mac.

All this time, I have been hoping that the GSE's were dumb - not dishonest or greedy. My hopes were misplaced.

Monday, December 8, 2008

I took this image off of Greg Mankiw's website. (Click on it to zoom.) It is the cumulative returns by year of the S&P since 1828. 2008 is the block on the far left. The worst return on record.

Can't wait till 2009!

Sunday, December 7, 2008

Wave Power

There are prototype experiments going on right now in India. The devices are called Anacondas. you can read the entire article here.

Anaconda tubes are closed systems filled with water placed 40 to 100 meters below the surface of the ocean. The tubes — estimated at 200 meters long and 7 meters in diameter in their production form — are oriented so waves hit the end of the tubes, generating bulge waves that travel along the tube at the same speed as the waves that originated them.

The external wave squeezes the flexible tube, causing the internal bulge wave to grow bigger. The bulge wave eventually hits a turbine at the very end of the tube, generating electricity that is fed to a power system via a cable.

60 Minutes visits Saudi Arabia

In 1974:

And in 2008:

Watch CBS Videos Online

Saturday, December 6, 2008

China to Begin Retail Fuel Tax

Small Burb in Chinese Media:

China is likely to start levying a retail fuel tax from January, said a high-level official with the National Development and Reform Commission (NDRC).

The official also said the scheme prepared by the Commission has already been approved by the State Council.

"I personally think January is a good time to introduce the fuel tax," said Zhang Xiaoqiang, deputy director, NDRC, at a Sino-US Strategic Economic Dialogue meeting in Beijing.

Expectations are that the fuel tax and retail oil pricing reforms would form part of the same package. "If domestic oil prices are linked to global prices, then the government may stop the subsidies to big oil companies," he said.

Friday, December 5, 2008

BCS Computers Determine Winner of World War II

US Ranked 4th 

After determining the Big-12 championship game participants, the BCS computers were put to work on other major contests and today the BCS declared Germany to be the winner of World War II. 

"Germany put together an incredible number of victories beginning with the annexation of Austria and the Sudetenland and continuing on into conference play with defeats of Poland, France, Norway, Sweden, Denmark, Belgium and the Netherlands. Their only losses came against the US and Russia; however considering their entire body of work--including an incredibly tough Strength of Schedule--our computers deemed them worthy of the #1 ranking." 

Questioned about the #4 ranking of the United States the BCS commissioner stated "The US only had two major victories--Japan and Germany. The computer models, unlike humans, aren't influenced by head-to-head contests--they consider each contest to be only a single, equally-weighted event." 

German Chancellor Adolph Hitler said "Yes, we lost to the US; but we defeated #2 ranked France in only 6 weeks." Herr Hitler has been criticized for seeking dramatic victories to earn 'style points' to enhance Germany's rankings. Hitler protested "Our contest with Poland was in doubt until the final day and the conditions in Norway were incredibly challenging and demanded the application of additional forces." 

The French ranking has also come under scrutiny. The BCS commented " France had a single loss against Germany and following a preseason #1 ranking they only fell to #2." 

Japan was ranked #3 with victories including Manchuria, Borneo and the Philippines.

Tuesday, December 2, 2008

Crude Settles Down $100/bbl from July High (The Saga of Kurt Warner - Part II)

Today crude oil price finally eclipsed a level that I had been marking time for it to move through. On it's close today, it is now down over $100 since settling at $147.25 in July. The ferocious, unmerciful bear! Crude's fair value was doubted on the way up past $85/bbl- folks said "no way it should be this high." It was further discounted in its fall from the stratosphere to current price levels.

It made want to think of other examples of things or people that had unexpected success - or way overshot what onlookers deemed to be their potential - and then suddenly reverted back to the mean. Take a look at Kurt Warner's Bio:

Kurt Warner's baseline:
  • Attended College at the University of Northern Iowa
  • Graduated in 1994
  • Undrafted
  • Worked at an Iowa area HyVee grocery store for a year (until)
  • 1995 - when he got the call to quarterback the Iowa Barnstormers
Kurt Warner's Unexpected Success:
  • QB'd the Barnstormers for 2 years
  • Plays Backup on an atrocious St. Louis Rams team for 2 years
  • In 1999, Trent Green (the starting Rams QB) blows out his knee in the preseason, and Warner takes over
  • Has one of the most prolific seasons in the history of the NFL, including 4,353 passing yards, 41 passing touchdowns, NFL MVP, Super Bowl Champion and Super Bowl MVP
Kurt Warner's Mean Reversion:
  • In 2002, Warner broke the pinkie of his throwing hand
  • Through 2006, a series of injuries significantly limited his playing time
  • Over this stretch, Warner became a turnover machine - if he didn't fumble, he was likely to throw an interception
  • Warner had 4 more interceptions than TD's in that 4-year stretch
Warner has really turned it around in 2008 - maybe crude will too (again). And you might think that this is a weak example when related to the recent crude oil volatility. Can you think of any better worst-to-first metaphors? Post them, and let me know.

4 + 1 Market Overview

Featuring 4 things that matter a bunch to energy market prices, and one thing that should matter but is generally being missed by the market.

1) The Economy: It is official, the NBER called the recession yesterday - and post-dated it to December of 2007. The government has committed $7.8 trillion to prop up the economy - and the patient is still red-lining on the operating table. Without signs of life from the economy, it will be hard for energy prices to break the bearish trend of the last 5 months. Indeed, even China is having problems.
Currently, The Economy is bearish for energy prices.

2) Inflation/Deflation:
For years, we have been worried that low interest rates might cause inflation - that is, too much aggregate demand for a finite pool of resources which causes prices for goods and services to move higher. Currently, many observers are claiming the domestic economy is going through a deflationary period. Greg Mankiw discusses this economic phenomenon - the reduction in aggregate demand - in the NY Times. Commodities are bearing the brunt of the this deflation, with crude price decreasing $98 in the last 5 months.

However, with Ben Bernake's Fed trying to stimulate our economy with injections of cash, and inflation is an accepted side-effect. The question is: How far will prices need to fall before Bernake's policies begin to prop up the economy?
Deflationary pressure is bearish short-term for energy prices. Inflationary pressure is bullish intermediate-term for energy prices.

3) The Price of Crude:

OPEC member nations are going into budget shock - they had never anticipated that price could fall THIS FAR, THIS FAST. They will be forced to cut production at some point to gain control of the situation. Further, many of the tar sand projects at Fort MacMurray have been idled, as crude price has sunk below the marginal cost of production.
This is bullish (long term) for energy prices.

4) Inventory Balances:

The EIA reports that crude and unleaded product balances have been building for 10 weeks straight and that the inventories now sit on the high side of the 5 year average. Consumption has taken a significant hit - even in the face of lower prices.
This is bearish for energy prices.

And the one thing no one seems to be noticing:

+1) Future Growth

The world is still growing its population at an almost geometric rate, and the economies of China and India continue to develop. Certainly, the last 6 months have altered original near-term demand projections...but that does not change the fact that in the longer-term outlook, our world economy is still addicted to oil. And no one seems to be noticing!!!

Monday, December 1, 2008

Models Don't Kill Banks, Bankers Kill Banks

A post on quantitative risk analysis and its role in the current crisis at The Big Money:
Wild-eyed number crunchers, the theory goes, have unleashed monsters that they are unable to control. Buffett himself has branded derivatives as "financial weapons of mass destruction." George Soros—cited with equal frequency in the emerging genre of crisis-lit—has added that he has long avoided the use of derivatives on the grounds that "we don't really understand how they work."

Well, with all due respect to the billionaire financial geniuses of the world, I just don't buy it. Modern financial models are highly imperfect, to be sure, and we the modelers are insufferably arrogant. But models don't kill banks; bankers kill banks. We geeks may grunt a lot (we want the world to know how laborious our calculations are), but the truth is that our models aren't that hard to build, and they aren't that hard to take apart. When bankers and their advisers fail to question the premises of these models, it's usually because they find those premises quite congenial. The models merely provide an excuse to exercise a faculty for which human beings have always shown a special talent, namely, wishful thinking. What's worse, they also provide the financial community with a rhetorical device for persuading government officials that banks are, by virtue of their purported technical expertise, capable of achieving that audaciously oxymoronic state of being known as "self-regulation."