China's Problem was Made in China - Not Imported

I am a sucker for a really good China story (I like the General Tao's chicken at Panda Express, too). There is a good piece on China HERE. The chicken, unfortunately, I cannot help you with.

Happy Thanksgiving.

Why Volatility is Here to Stay

The world is a dangerous place these days. Market participants in the stock market, the energy markets, or in agricultural commodities have seen it all - from all time high prices to crashes – in the last year. And inter- and intra-day volatility is increasing – as I mentioned in my previous post, The Vomit Comet.

Volatility makes life difficult to manage. It materially impacts the bottom lines and business plans of households and executive suites alike. I previously quoted Charles Dow in this blog by writing, “The one thing pertaining to all markets is that they will change.” I am going to break that rule in this posting, and put forward an argument as to why volatility is here to stay.

With world supply and world demand in relative equilibrium in the short run, the variables that most drive price are future demand and future supply of oil – since the world needs a lot of it and it is relatively difficult to know with certainty how much we have. (The International Energy Agency actually did a bottom up study of the productivity curves of major known fields in their World Energy Outlook. A summary of this analysis is available here.)

So assuming that the future supply/demand balance is the important metric for calculating oil price, allow me to stagger you with some really big numbers. Let’s talk population. In 1975, world population was estimated at 4.0 billion people. By 2010, world population is expected to be 6.8 billion. This staggering change is causing all sorts of problems for those economists who try to estimate consumption activity. The United Nations predicts there will be 8 billion people in the world by 2030. And the IEA says that in 2030 the world will use 125 million barrels of oil per day. Implicit in that consumption figure is a worldwide growth rate of about 1.8%. If the annual growth rate is inhibited by worldwide recession and instead is 1.6% over this timeframe, the estimate would be 3 million barrels off per day. If the industry builds infrastructure to meet the 125 million barrel forecast, prices will be depressed and bankruptcies will ensure as exploration and production companies will not be able to pay the debt service on their asset loans.

Let’s bring macroeconomics into perspective with an example almost everyone can get their hands around. My wife and I like hosting parties, and we have learned several lessons after hosing parties over the last few years. First, it always seems easier to have enough of everything when there are fewer guests. Second, it is difficult to predict how much of any particular party treat we will need. A few years ago, during the Atkins diet rage, we might have had leftovers from one bag of chips after a party of 30. But at that same party, we might have run out of mixed nuts. As our guest’s tastes have adjusted, we have had to adjust too – for fear of facing the wrath of party goers that have been inappropriately supplied with snacks.

The move from $147 to $48 in crude was based on the realization of decreasing worldwide consumption. And this major price shift affects production plans and capital projects throughout the world. The tremors associated a predicting future behaviors on a growing, crowded earth have just begun.

Merrill Lynch Economic Outlook Comments

On Deflation:

We are on the verge of entering the eye of the hurricane. The big story is that the savings rate appears to be rising from 1.3% now to over 3% by year-end, and is probably on its way to north of 5% by the end of 2009. How anyone can be talking about inflation as a “near-term” threat (please don’t talk to us about the long-run when we’ll be joining Keynes in the afterlife) at a time when the savings rate and the unemployment rate are going up in tandem? We can’t think of a more deflationary aggregate demand backdrop.

See the entire analysis here.

Commodity Volatilty Impacts Farming

The old adage is that "Farmers Hold Out for More, but Settle For Less" when marketing their crop. Today the New York Times has a piece on the remarkable market volatility impacting wheat farmers. Here is a quote:

The Kinders still have about 40 percent of their wheat, stored on the farm and in commercial grain facilities. “Farmers are terrible marketers,” said Jimmy Wayne Kinder, 50. “We fall in love with our crop.”

It was the same misguided optimism that caused homeowners to think their houses would always keep increasing at a 20 percent annual clip. Farmers across the country fell prey to it.

David Kanable at the Oregon Farm Center, a mill near Madison, Wis., was paying $7.25 a bushel for corn in June. “We never had a farmer lock in at that price. They wanted $8,” Mr. Kanable said. On Thursday, the mill was paying $3.17 a bushel.

"It's Not a Tumor!"

Infectious Greed blog reports:

"while watching the Charlie Rose interview with the automotive industry's David Cole, something occurred to us: the United States has become the world's leading authority on creating inoperable, metastasized industrial tumors. Not only this, but the creation of, maintenance of and discussion surrounding these tumors has become so integrated in the economic fabric and incentives system of the United States, that it doesn't even occur to participants that their behavior is part of a highly developed, multi-generationally optimized, metastasized tumor growth system."

Wow...I never thought of it that way. (But he's got a point.)
Sent from my Verizon Wireless BlackBerry

Jim Cramer on the MLP Asset Class

What you really need to worry about are dangerous members of a third kind of MLP: the gathering and processing MLPs that are unsafe. In general these companies collect the natural gas that comes out of a well, dehydrate it, treat it, make it worthy of long-distance pipeline transmission, and sometimes convert it into natural gas liquids, which are the feedstocks like ethane used in chemical plants.

A company like Kinder Morgan Energy Partners has a safe business because it just gets paid for pretty much running a toll road-for the volume of gas that goes through its pipes. Not so for these other, more dangerous MLPs.

Cramer's targeted sells are Duke's MLP and Williams' MLP. Personally, I think he is crazy and wrong. Fractionation is fee based - similar to pipeline ownership.

Decide for yourself. See his full "Sell Block" column here.

Christmas Comes Early

Other glorious headlines from Accuweather tonight are:

• Cold Is King
• Let's Talk About Snow
• The Lakes Are Angry
• Another Whopper of a Storm

Yes, Virginia - there is a Santa Claus and his name is Joe Bastardi!

Should We Bail Out Detroit?

Consider this article from Newsday:

The danger we face at this fork in the road is the conventional wisdom that associates more regulation with better regulation and more restrictive policies with less risk. History teaches us that the opposite is usually true and that the costs of getting it wrong can last for decades.

Bullish and Bearish Predictions - Win Some and Lose Some

The R-Squared Energy Blog has a great post about crude oil prices and the nature of predictions. The focus of the commentary is the extreme difference between the predictions of the Goldman analyst Arjun Murti (The BULL) and Deutsche Bank's Paul Sankey (The BEAR). The entire post and its links are worthwhile. This is a statement that struck me as precient.

There are some things to be said about predictions. If a person makes enough predictions, they are going to miss some - no matter how well they know their subject matter. On the other hand, when many people are making predictions, some will inevitably get it right for the wrong reasons.

Bond Family Schoolhouse Rock

See the video here, and then reminisce about Conjunction Junction.

I had to pull down the embedded video from the original post - it was about 1/2 inch too wide for my screen format.

A Heating Oil ETF for End Users

A post from Seeking Alpha talks about buying a heating oil ETF (UHN) as a proxy hedge for a prebuy:

In the summer, my local heating oil services let me "lock in" the price of heating oil if I want. At $4.25/gallon, I passed. But with oil down at $2.50/gallon, locking in the price is more attractive. Trouble is, my oil supplier ends its "lock-in" window in August.

With UHN, however, I have a chance. I'm guessing I'll spend about $1,625 this year on heating oil. Right now, UHN (which tracks the price of near-month heating oil contracts on the NYMEX) is trading for $28.20/share. So all I have to do to lock in my fuel costs is buy 58 shares of UHN, stick them in my brokerage account, and sell out in May.

Of course, it's not a perfect hedge. Local oil costs don't match perfectly with national costs, and the timing when I get oil deliveries will influence my expenses. But if oil goes back to $3.50/gallon or more, I'll make a tidy profit on UHN to counteract the rising costs of my heating bill. Is that worth a $20 round-trip on commissions? Maybe.

Daniel Yergin on Charlie Rose

National Gasoline Price Map

A fantastic graphic. Zoom out and you can see prices by state. Zoom in and you can find your county, city, or street.

OPEC November Oil Market Report

Highlights are as follows: Slowing Demand, Strengthening Dollar, Volatility Increasing in all Markets, Synchronized Recessionary Phase brutally effecting all global economies

Listen to all four minutes here.

Statistics are for Losers

Allow this post to be a little from the commodity/economy talk.

Check out Urban Meyer's take on Statistics in Football.

They say statistics are for losers, but losers are usually the ones thinking that," Meyer said. "Statistics are great. Our whole game plan is based off statistics. Our management of the game is based off statistics. Our recruiting is based off statistics. Everything we do is analyzed.