Oil as an investment

Yesterday I bought oil as an investment. Or at the very least it will act as a hedge against increases in energy costs. I plan build a position in oil in small increments over time as the opportunity presents itself.

I think this is a 12-18 month trade. There are a couple of different reasons for this.

First, the price of oil is depressed in the short term b/c of the global economic slowdown. Remember, the price of energy reacts quickly to changes in the supply/demand relationships b/c of storage costs. Recently, supplies have been building up so the price has been declining. I dont think this can last given OPEC is trying to cut back production, economic recovery expectations, and potential for Middle East conflict.

Second, the price of oil is also related to the value of the dollar. The dollar has strenghtened recently b/c its perceived to be somewhat of a safe haven amongst its global currency counterparts. When this trend reverses, oil prices should head higher.

At current prices of $40/bbl, I dont need oil to head much higher than the high $40s before I start to get decent returns. A price of $50 w/in 12 months would be a 25% annual return.

Not bad.

On the flip side, there is potential for prices to head lower from here. If that happens, I would look for another bottom similar to the one we are in now and buy a little more again.

Goldman reports earnings tomorrow morning.

Could it be that even God will be watching CNBC tomorrow morning at 830am?

That's when Goldman Sachs will report its first ever quarterly loss in its 80+ yr history as an investment bank.

A fitting end to the latest go-go Wall Street era.

The market has a consensus earnings number in mind. CNBC reports on it here.

Even though earnings are a lagging indicator, most of the market will be looking to see how bad the earnings number is tomorrow morning.

It will be viewed as a barometer for how bad things really got in the fall of this year and perhaps even as a signal of how bad things are going to get early in 2009.

Stay tuned.

Barack Obama provides some details on economic recovery plan in weekly webcast

Good news! Barack Obama is effectively the President already.

That's right. You dont have to wait till Jan 20, 2009 as I previously thought. He is pretty much running the show already.

Remember Barack's first press conference where he said "we only have one president at a time in this country"? He was right. It's him.

After that first press conference he went to visit W in the White House and his tone dramatically changed after that meeting. Does anyone want to bet that W in so many words acknowledged that Barack Obama should be more involved going forward?

He knows the people want him to take charge and he is delivering. Listen to him speak. When was the last time we had a President who was intelligent enough to think about a problem from many different perspectives?

I will give you a hint... think Bubba. Yes it was Bubba despite all his shortcomings.

I would really like to say it was a Republican president b/c the economist in me says I am more closely aligned w the conservatives b/c its the GOP that typically supports free market ideologies.

But it would be a lie if I did that.

Ben Bernanke and the rest of the feds might as well drop money from airplanes... that's the only thing left to do at this point

U.S. Recession officially started in December 2007

The National Bureau of Economic Research (NBER) claims the current recession in the US officially started in December 2007.

You can read the article here.

This is interesting partially b/c the NBER did not follow the typical definition of recession this time around. Typically, a recession is declared when we have had at least two consecutive quarters of negative GDP growth. While this is not the official definition it certainly is one that I and many other people thought to be a widely accepted one.

This time around dating the recession back to 12/2007 really has more to do w the peak in employment during the last bull market which occurred back in late 2007.

It is also interesting b/c it makes the recession 1 yr old already. Psychologically that is a long time. And it may well be late 2009 before the recession is declared over.

There is a strong possibility this could be a 2 yr recession which is long by post-WW2 standards.

American consumerism gone MAD! Wal-Mart worker trampled to death on Black Friday.

This is horrible. It's makes me sad to thnk we live in a society where something like this can happen.

Gas is $1.78/gal in my neighborhood. What's the price where you live?

Dont get me wrong, I like low gas prices just like the next guy.

But we shouldnt let the current low price of oil fool us into not doing anything to increase our fuel efficiency over the long-term. Otherwise, we havent learned anything.

And if as a society we lack the conviction to do this on our own as individuals, then I would go so far as to say the government should heavily tax gasoline and use the proceeds immediately to develop alternative fuel technologies.

If we dont do this, OPEC will do it for us by cutting back supply and driving the price of oil higher. The Saudis have openly stated they would like to see the long term price of oil much higher than it is today.

Would you rather spend more money on gasoline and keep the money here in the US or would you rather send the money over the middle east?

It's our choice.

Market Perspective 11/25/2008

Here is my take on the markets this week -

• GDP number for Q3 2008 was revised down to -0.5% from 0.3%. Not a big deal in the grand scheme of things.
• Most other data revealing the state of the economy right now (i.e. 4Q 2008) suggest SERIOUS negative economic growth. Think something like -5% annualized. The last time we saw data this bad was 1980-1981.
• Unemployment data deteriorating at an accelerated pace. Peak unemployment very likely to be 8.5-9% in the first half of 2009. This number is moving fast. Keep an eye on it. We are in a heap of problems if the peak number moves past 10%.
• Most economists now saying 2009 is lost which means it will be 2010 before the economy even thinks about getting better.
• Watch out for what happens w the automakers. They will likely get the $25bn they need from Congress, but not w out strings attached. We should all hope they get this money right now if for no other reason than not giving them the money at this very moment in time will literally send the economy into a death spiral. This is not what we need right now. Long term, we should focus on the problem of the automakers as a country but we cant just let them go cold turkey. We have to downsize the automakers in an orderly fashion over the course of several years.
• One big thing the market was looking for was for Obama to step up to the plate and take more control over the economic situation. Previously he said he wasnt the President until Jan 20. The market didnt like that. We want him to announce his economic team which he did this week and last. Since W is pretty much a lame duck at this point, everyone was loking to Obama to be more vocal about his intentions on Jan 20. Obama got the message and has been more active about communicating his intentions on how to deal w this economic crisis. Market rallied on this news.

If you have been watching the stock market recently, you know the market has been forming something of a bottom at recent levels. This bottom is a very delicate one in my opinion. Any news that the deterioration is accelerating is going to be a problem for the markets to handle. Automakers need to get their money w strings attached.

Cross your fingers...

The Old TARP Bait and Switch

Yes, ladies and gentlemen the Bush Administration has once again pulled the old "bait and switch" on the American people.

A couple of months ago, this administration was talking about the troubled assets on the bank balance sheets. They wanted to create a market for those assets by purchasing them. One last time, they resorted to fear mongering by telling the public of serious consequences if we didnt do anything. They said this was critical. Congress gave them what they wanted to the tune of $700 billion dollars.

Then, they figured out what everyone already knew. There was no way to figure out what the assets were worth b/c the market for them was broken in the first place. So, paying market price wasnt going to work b/c it would put the banks out of business. And this is what they were trying to avoid. When they finally realized this they decided to change the plan and provide the banks w/capital at overpriced valuations.

Then last week Paulson changed the plan completely to now focus on consumer assets. What this really means is more free money for the automakers. More artificially easy financing for US consumers so they can buy US autos from companies that really should fail. For all of you who are against the bailout, you should be ticked about this. For all of you who supported the bailout b/c it was needed to save the financial system, you should be ticked b/c the automakers could very well get another freebie via TARP w no strings attached.

Watch out. This is not what most people thought the TARP was going to be.

Yes, Kashkari Is A Chump (?)

Take a look at this video of Neel Kashkari, who is the person currently in charge of the TARP program for the federal gov't. By now, most of you have seen the video. In case you were wondering, yes I would classify Kashkari as an American Desi.

Regardless, Kashkari was definitely not prepared to testify before Congress. There were several occasions during the testimony when he didnt know what to say. Perhaps he was caught off guard by the reception he received. I wonder what he expected.

At one point during the interview, he said he didnt think taxpayers money should be used to support banks that were going to fail. Huh? I thought one of the reasons the gov't bailout is in existence was to save the banking system! So if these banks weren't going to fail, then why did they need the money in the first place?

He didnt have any good responses to questions about why AIG execs were taking govt bailout money in one hand and then going on expensive business trips at the same time. Taxpayers should be outraged their money is being used to save companies where the execs are going on expensive business trips in exotic locations.

It was an ugly session for Kashkari.

The Automakers Should Be Forced Into Bankruptcy

The automakers should all be forced into bankruptcy. There I said it.

Someone mentioned to me earlier today that if GM were forced into bankruptcy today the immediate impact would be an unemplyment rate of 9.5%. To me, this does not seem too high a price given that we would be able to fix the auto industry as a result.

Every 10 years or so, the CEOs of all the US automakers go to Congress w hat in hand and ask for billions of dollars w no strings attached. And Congress gives it to them. This is ridiculous.

Here is what I think they should do:

• force all 3 US automakers into bankruptcy
• force them to combine to make 1 automaker
• cut capacity by 50%
• provide funding to the company under the above conditions
• fire all executives and replace them - these guys have proven they are not capable of running their companies
• provide additional benefits to all displaced workers for a period of 4 years so they can go back to school, pay the bills, relocate etc.
• nullify all contracts that dont makes sense in bankruptcy including union contracts that overpay workers for what they do.
• create the most fuel efficient fleet in the country.
• develop alternative fuel sources and these sources must be a certain proportion of all vehicles produced.

The average assembly line worker at a US auto plant makes $65/hr. The average assembly line worker at a Honda/Toyota auto plant in the US makes $25/hr. This ridiculous situation is the direct result of unions that insist on too much pay/benefits at the expense of the employer. Dont get me wrong, I think unions are useful but in this case they brought about their own demise and they should get what they deserve.

This is the only way to fix the problem. Let me know what you think.

Market Perspective 11/7/2008

Today the unemployment rate for October 2008 was announced at 6.5%. As I said in previous post, I would have been pleasantly surprised if the number was below this and disappointed if the number turned out to be above this. To me, this number shows the pace of the deterioration in the economy has accelerated a bit. We are probably on pace for a peak unemployment rate of about 8%. I would expect this to occur sometime in the first half of 2009. I would expect an unemployment rate of 7% by the end of 2008.

There has a been a lot of news recently about the CEOs of the big 3 U.S. automakers going to Washington looking for bailout money. Basically, they will go bankrupt if they dont get some kind of monetary assistance from the government. Obama responded appropriately by saying he would support assistance but not w/out strings attached in the form of higher fuel efficiency standards, retooling for alternative energy, etc. I do not support handing over money to the U.S. automakers w no strings attached. These companies have proven time and time again they are not capable of running themselves. This industry is a real disaster. It's a real shame this industry is too big to fail b/c that's exactly what I would let it do if the consequences were not so disastrous. We really have no choice but to help. In return we should inflict some real consequences on the incompetent management at these companies and also force them to transform themselves into an industry that helps the country reduce our dependence on foreign oil. The failure of the U.S. automakers is a disgrace given they are asking for money yet again.

As you might tell, the issue of the U.S. automakers is a sensitive one for me.

My $0.02. on that one.

Finally, the Dems have been talking about a second stimulus package for the economy sometime early next year. The size would be something like $500-600 billion w 50% in the form of middle class tax cuts and remainder as public infrastructure projects. I support this idea. Most studies show money from tax rebates is saved not spent on consumer goods so the money most likely would not have the desired effect on the economy, but the govt usually applies this method b/c it's the most direct. And if they spend the money it's probably on foreign-made consumer goods which means the most of the money will not stay in the U.S. if it's spent. The infrastructure spending is good b/c it keeps the money here, creates jobs, and helps to keep our roads, bridges etc. working but the drawback is that it takes a while to have the desired effect. I still support the money for infrastructure as I think it would be more effective at this point. In the end, there will be a mix of both types of stimulus, but the size of the package seems like it will be big.

Market Perspective 11/1/2008

The market rallied this past week basically b/c the economic data was not as bad as everyone thought it was going to be. At least it wasnt bad for now. Most people, including me, think the news is going to get worse. The question is how much worse and this past week it seems the market found a reason to be optimistic.

Q32008 GDP only came in at -0.1% and I say only b/c the consensus estimate was 0.5%. The really bad news was that consumer spending was something like -3.0%. The last time we saw numbers like this was 1990-1991, 1980, and 1974. If you are a student of economics or remember these times, you know what I am talking about.

Anyway, for next week the market will be focused on jobs numbers including the unemployment rate for October 2008. I will be pleasantly surprised if the unemployment rate remains below 6.5% and disappointed if the number is higher. A higher number would indicate to me the pace of deterioration is perhaps faster than we thought. However, I am expecting 7% unemployment by the end of the year.

My $0.02.

You Will Find Some Really Good Deals in the Next 12 Months

Let me say a few things before I begin this post: I do not have tons of money sitting around waiting to be spent. There are a lot of people who are struggling right now and millions of people will lose their jobs in the upcoming year.

All that being said, if you are not one of those people and were planning to purchase anything over the long term and dont need to borrow money to do it, you might be able to save yourself a lot of money by planning carefully. In the past several weeks, I have noticed the first signs that good deals may be coming.

For example, this week I saw a 7 day Norwegian caribbean cruise on sale for $299. I am pretty sure this is a good deal. The last time I saw something like this was the fall of 2001. This also happens to be the last time I went on a cruise as prices increased dramatically once the economy got going again. I am betting that deals like this will be plentiful this holiday season on everything from vacations to consumer electronics.

The only catch is you have to feel comfortable spending money at the very time when the economic news is bad. For many people, this is a difficult if not impossible thing to do. Always save first and then spend wisely.

There are many sites on the internet where people share info about getting products/services for less. The one I look at the most is Slickdeals.

Market Perspective 10/24/2008

Today was supposed to be the day to end all days in the stock market, but I guess the world somehow decided it wasnt going to end today. It was the first day since 1997 (I believe) that stock futures were trading so far down that the levels were indicating that the circuit breaker rule on the NYSE would be triggered. In a nutshell, the circuit breaker rule indicates that under certain circumstances if the market trades down past a certain level, trading can be halted in order to give everyone time to cool off. Most people thought the Dow would trade off 1000 points on the open based on stock futures and what had happened overnight in overseas trading. Well, none of this really happened.

Midway through the morning we got some decent news on existing home sales which were up 5.5%. Most people right now are trying to put together all the data in order to figure out how bad the recession we are in right now is going to be. There is a lot of uncertainty right now about the depth of the downturn.

Market Perspective 10/17/2008

Early this morning we got some bad news on the housing market showing housing starts and building permits at multi-decade lows. From my perspective, the market sort of took this in stride although the intra-day volatility continued. At this point, the market I dont think is really trading on housing market data. Rather at this point, it's probably going to be the jobs related data that drives the market.

Volatility continued throughout the day. One of the big stories continues to be oil prices which are literally plummeting before our very eyes. The driving factor behind oil prices in the low $70s is simply a slow down in economic activity. For the near term world consumption of energy may drop off. One interesting observation is that OPEC is going to meet soon to decide what to do about the falling price of oil. They dont like the fact that oil could head to $50/bbl. They will probably cut production in an effort to keep oil prices well above current levels as they know that at these levels, oil prices are probably not a deterrent to economic activity. This is part of the reason we need to get off foreign oil. We are not in control of our own destiny.

Market Perspective 10/16/2008

After last week in the market, this week seems like sort of a walk in the park. I mean, at least we havent seen 5% declines on a daily basis. I guess that's a good thing. So this is what it feels like when 300 million people get a hang over all at once. Make that 6 billion people or however many people are on earth right now.

What is becoming quite apparent to most of us now is that a lot of the "economic growth" that happened this decade wasnt really economic growth. It was just the illusion of growth that happens when you borrow more and more money from someone to buy things. The only problem is that eventually you actually have to pay the money back and then you realize that maybe borrowing the money wasnt really worth it. But its too late now.

So the deleveraging of the market continues as painful as it is. The speed of the decline in the market over the past 6 weeks has simply been stunning. I dont think anyone really expected it to unfold like this. Anyway, I think we are at point now where the stock market has declined enough to accomodate a good deal of negative economic data. So, it remains to be seen exactly how bad the data will actually get.

What is unfolding right now in the equity market feels like the 3rd bottom of the year w/the first two occuring in Feb/March 2008 and the second in May/June 2008. What remains to be seen is whether this is the final bottom of the cycle or if there are more to come in equities. Certainly we are close to the bottom we hit in the stock market during the short-lived 2001-2002 recession.

Either way, if you are a long-term investor then you have to consider to yourself whether the current levels are attractive from a long-term perspective. If you will be needed your money w/in the next 5 years, you better not put it in the stock market.