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Oil’s Not Well

Submitted by ilene on 10/18/2010 15:27 -0400

Oil’s Not Well

After a really fun Friday where we had another couple of massive index puts pay off in the morning, on Saturday we reviewed our October’s Overbought 8 list, with half our trade ideas already past our 50% targets and 3 of the 4 remaining spreads on track. In Member Chat, we discussed the possibility of a pullback in oil next week as the barrel count on the NYMEX is dangerously high with over 600M barrels currently scheduled to deliver to Cushing in the next 90 days. Cushing has a capacity of about 40M barrels a month and they are full but, even if they weren’t, 480M barrels need to be dumped and rolled into Feb, March and April contracts between now and the year’s end.

The November contracts settle on Wednesday, the 20th, and any traders caught holding those "hot potato" contracts have to figure out what they will actually do with millions of barrels of oil. Right now, there are 141M barrels earmarked for November delivery and, if this month is typical, only about 20M are actually needed. 141,000 contracts (1,000 barrels each) were traded 210,000 times on Friday as prices fell from $84.12 at 3am (Asia trading) to $80.75 into the NYMEX close. It is easier for a NYMEX trader to drink a barrel of oil than fob off his contracts to some other sucker during a glut - or something like that is the old biblical saying…

What I love about investors and the MSM in this country is their ability to completely ignore the fact that, ultimately, someone must consume the oil that is leading the inflationary drive in the economy. Actually, we shouldn’t blame oil (I said as much last week) but, as I also said last week, QE is the wrong kind of inflation because we are not giving any money to the workers. Ultimately, it’s the workers who have to buy food and fuel….

One thing people don’t realize from a global perspective is that gasoline prices are subsidized for India and China to the tune of nearly $40 per barrel so China’s 11Mbd of fuel subsidies is bleeding Beijing by $13Bn a month and that goes up $3Bn a month for every $10 increase in the price of oil over $80. India uses less than 1/3 the amount of oil China does but still, subsidizing $3Bn a month does sting just a little. In the US, the consumer bears the full brunt of the 140% increase in the price of crude since Jan ‘09 and that $50 a barrel is whacking US consumers for $1Bn PER DAY! A $365Bn annual habit of money we literally burn up in smoke!

It’s easy to see the damage that is caused by rising energy prices because we use X number of gallons of gas every day. Corn is up 35%, wheat 50%, cotton 40% - as if you can arbitrarily just ratchet up the prices and consumers will magically keep paying. Last week we noted a trend in which 10% (ten percent) of prescription renewals are being left at the pharmacy because people simply can’t afford them any more. Even with insurance, the co-pay alone is too much for 4.4% of the people to come up with. These are the choices the bottom 90% are being forced to make while the top 10% party in the markets like it’s 1999.

But it isn’t 1999. In 1999 tech companies were hiring Americans and American factories were humming as we produced computer chips and sock puppets. People got jobs with dot com companies and bought 3-pound portable phones and fancy cars and our government was running a huge surplus as the demand for homes was on a roll. 11 years later - this is NOT 1999 - we’ve gone straight to hell since then and you can blame 9/11 or you can blame Bush or you can blame Bush for 9/11 or you can blame the tax cuts or Greenspan’s overreaction on rates (the one Bernanke is repeating now) or you can blame an overall lack of foresight for not putting our surplus in some sort of "lock box" when we had the chance.

George W. Bush, Henry Paulson, recession, great depression, economic crisis Whatever you think caused it, I’m hard pressed to see how suddenly we are repeating the run from Feb 1998 to March of 1999 when the market flew up 50% (S&P 1,200) and then continued on 20% more, all the way to 1,550 before we began our 45% pullback. 9/11 didn’t cause the crash, we were down at 1,100 on September 4th. In fact, it was kind of a "flash crash" as we zoomed back to 1,150 by Thanksgiving but the next year we dropped all the way to 800.

Like the 2008 Financials, many of the 1999 dot com profits were false and empty, based on smoke and mirrors so the jobs quickly disappeared when reality hit the fan.

The government spent TRILLIONS bailing out the banks and bailed our our auto companies only enough so they could sell their assets overseas - if any jobs were created or even saved, we’re hard pressed to find them. Obama came in promising to have his own shovel ready and the only thing that’s been shoveling in Washington for the last two years is the same exact BS they’ve been feeding us for the previous eight. This is no way to rebuild an economy folks!

What we have going on right now is what I predicted would happen on December 27th of 2009, when I wrote my "2010 Outlook - A Tale of Two Economies." We have a clueless top 10% partying on as if the World revolves only around their net worth while the bottom 90% of the people tumble into the abyss - getting a little poorer and a little madder every day. So far, the Republicans love it as the "throw the bums out" mentality looks to spell victory in the upcoming elections but this is not the sort of anger that is likely to abate when a few more empty promises are made on the campaign trail - as John F. Kennedy once warned: "Those who make a peaceful revolution impossible, make violent revolution inevitable."

As I said in December, the plan was going to be to do NOTHING to fix unemployment or housing or the deficit. Just business as usual to start the new decade off. My cynical comment regarding not "wasting" money on helping the poor was:

If we give money to the world’s 6Bn poor people, they’re only going to go and buy bread (or dare I say cake) and maybe shoes or clean shirt and mostly they will buy them at Wal-Mart or, even worse, make it themselves and there’s little profit for us in that. By keeping the vast global wealth "in the family," so to speak, we can sell IPods and Hummers and luxury homes and diamonds and gold and other high-margin, unnecessary items to each other that allow the corporations we invest in to make obscene profits which, in turn, makes us EVEN RICHER!

So let’s not kid ourselves that anything in this country is being done for the benefit of the 90% who serve us. We provide the basics and there are even many fine companies who can make money selling those basics like KO, MCD, JNJ, WMT… that we can invest in.

We rode the wave up through April, got short and then went long again in July and now we are short again but I promised that I’d try to kill a few brain cells this weekend and see if I could get into more of a party mood but I am telling you IT IS HARD. There is just so much reality out there, it’s very hard to get bullish up at our 10% lines. Sure, as I said in the October Eight post, we could flash up to 11,500 to complete the Beta 5 pattern that Lloyd seems to be running this quarter but what about earnings? What about the Financial mess with the Foreclosures? What about the Dollar? What about rising commodities and what about the possibility of terrorism?

Are these all things we are prepared to ignore as if it were, in fact, 1999 and we lived in blissful ignorance of potential market dangers? Older is not wiser for stock traders as we tend to repeat the same mistakes over and over again until we learn to be a little cynical. As I said to Members on Friday afternoon: "That’s what scares me though. Another global shock and people panic into the dollar and the market collapses.

It might happen, it might not but, at the top of a 15% market run in just 6 weeks - don’t you think it’s wise to error on the side of caution? 1999 was NOTHING like 2010. Russia defaulted on their debt in 1998 making the dollar strong and sending oil down to $20 a barrel, that put hundreds of Billions of dollars INTO the hands of consumers. Asia’s economy was melting down in 1998 and in 1999 Brazil also floated their currency to boost the dollar. Unemployment was under 4.5% and America had just passed a balanced-budget amendment and THAT’s What sent the Dow up 50%. THIS IS THE OPPOSITE!!!!

So we are still hedging our upside plays and we spent a great deal of time in Member Chat this weekend talking about scaling into positions and setting stops. There are now brakes on the market and, in theory, that can let us invest with a bit more confidence but, in practice, they haven’t been tested so we’d like to see how they perform under pressure before we start investing without a net.

We also talked about the Dollar, Inflation, gold, China and, of course, the foreclosure situation, which Barry continues to cover in great detail as well. We got really bad consumer confidence numbers last week and Rasmussen Reports that 32% of homeowners now expect home prices to drop next year. This is the most pessimistic Americans have been - EVER - and Charles Hugh Smith predicts "The Coming Collapse of the Real Estate Market." I find this interesting as, in theory, if inflation is in the cards, then THE BEST thing to invest in is real estate although, maybe not.

Even if you lock in a 5% loan on a $300,000 home with $60,000 of cash and carry a $240,000 mortgage for less than $2,000 a month and 7 years of 10% house inflation/reflation doubles the price of the house, you only get net $340,000 back for your $60,000 deposit plus $24,000 x 7 years ($168,000) in payments clears $112,000 less taxes fees and expenses. At the rate they are running inflation now - that’s a pretty crappy rate of return! How much will, say $80,000 be worth in 7 years? Probably a lot less than $60,000 is worth right now.

I touched on this in "Interest Scams and How to Avoid them - Mortgage Madness" where I also outlined 3 techniques for knocking $100,000 in payments off a $200,000 mortgage so PLEASE - read this article if you have a mortgage! That leaves us though, with the burning question of what the heck should we do to stay ahead of inflation? I don’t know. I wish I did but this is a tricky topic and there are a lot of variables and we’ll have to study the situation closely over the next few weeks. One member suggested revisiting our list of Dividend paying stocks but I was not joking when I said last week that the dollar has been dropping at a rate of 2.5% PER MONTH - dividends don’t help you there.

By the way, in case you weren’t motivated to click the picture - this is a very funny video of Donald Duck cartoons spliced to follow the rantings of Glenn Beck!

****

For a 20% discount to Phil's Stock World, click here.

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Mon, 10/18/2010 - 21:32 | 660065 breezer1

is this true???

http://emsnews.wordpress.com/

tell me its not so...

i have followed the ' culture of life" for several years and while i do not always agree with elaine's view of the state of the world she deserves acknowledgement for her work.

Mon, 10/18/2010 - 23:48 | 660357 ilene

Thanks for the notice -- Elaine had given us (PSW) permission but by an oversight, the attribution was lost, will attempt to fix...

Mon, 10/18/2010 - 20:18 | 659905 doolittlegeorge

oil goes up because of QE not because "there's this huge surplus of oil." when was the last time a "glut became a glut"? his name was Paul Volker and interest rates were collapsing after hitting 20 percent. what we have now is the "maddening price correction thing" when "governments give away money for free." sure "we have more oil" but then "we have more price, too." VISCIOUS. or is it vicsious? maybe it's viscous? in any case "natural gas is dirt cheap." this is a market phenomenom and "money goes to where it won't be raped." in short "only in something new can you beat this game." that is how you beat this game btw.

Mon, 10/18/2010 - 19:12 | 659748 maddy10

RE in Farmland with its own electricity and water is a great investment

Price of tillable land will go up as demand for food and agri products rise

Price of Agri products rise as population grows

You will have something to live off if the world shuts down-

If evrything goes well you can still keep it/rent it out someone.

Mon, 10/18/2010 - 19:14 | 659757 The Alarmist

Gee, are you suggesting we have seen peak RE?

Mon, 10/18/2010 - 17:24 | 659403 Diogenes

Something wrong with this guy's arithmetic, as usual when a stock guy talks about real estate.

Take a $300,000 house and double it in 7 years. That makes $600,000. If you sell it take off the $240,000 mortgage and you net $360,000 on a $60,000 investment or a return of 500%.

Now take the payments. If you didn't own the house you would have to rent someplace so the $2000 a month payment is a wash. If you already have another house, rent this one for $2500 to cover the mortgage and insurance.

This leaves out some details like the principal paid down on the mortgage, the fact that the interest is deductible, and the fact that you can shelter income on depreciation but it also leaves out repairs.

The point is stock guys always underestimate the potential of real estate and overestimate paper investments. Real estate right now is a better bet than stocks.

Mon, 10/18/2010 - 19:57 | 659856 WSP

After intensive study and trading of "paper" stocks, I am qualified as a "stock trader" but am not currently active as I never like musical chairs and that is all the market is now---fundamentals and technicals do not matter. If you like musical chairs, going long is the “sure thing”, but the music could stop at any minute since this is an artificial market propped up by the Fed and HFT. Bottom line is if you know how to read balance sheets and income statements and analyze companies, it is hard not to be a short seller, and short selling is nothing more than a roll of the dice when competing against Benny and the Jets and an ignorant public that will pump their money into their retirement funds each month because Money magazine says you should and it has worked in the past.

With that out of the way, I agree that Phil's analysis leaves out much in the "real estate" as an alternative investment, however, while you are correct that you must take into account the positives of depreciation, income sheltering, etc., much of this will be offset by repair expenses and corrupt property taxation, and all of the other “roach” fees that are never ending when you are the direct owner of real estate. In the end, most investors consider the positives of real estate, but never consider the new roof and the other countless expenses one incurs owning real estate (just as the idiots that bought houses they could not afford on low variable rate loans). Moreover, with corrupt governments all over facing pressure to continue paying off the corrupt unions that continue to extort money from the taxpayers via local governments, property taxes only have one way to go----UP and I almost NEVER see that factored into real estate cash flow analysis. Insurance is taking a big bite now too because since insurance companies have not had their obligatory 12-15% annualized gains during the past 10 years, their projections for their bonuses have not met expectations, so in order to continue outrageous executive compensation, insurance premiums for investment real estate have sky rocketed. And don’t forget most investment real estate projects carry a much higher loan rate than the published homeowner rates.

In reality, the best way to make money in virtually all markets now is with OPM (other people's money). In real estate, you can make a fortune setting up local trusts, etc., whereby you charge management fees to manage the property but pass on all the losses and expenses to others. Would I do it? No, because I wasn't raised to lie, cheat, and steal (use other people's money to enrich myself knowing they will lose). However, there are tons of people out there managing REITS and other real estate investments who are making a mint, and if you have no morals, it is a great business to get into. The investors get lots of tax write-offs through continual losses, and the managements of these ventures make piles of money in one fee after another and/or the printing of stock options for themselves if the investment is publicly traded. The government is happy because money is getting spent (and wasted) while tax dollars continue to flow to the corrupt local governments.

Bottom line here is there are very few good "investments" in a corrupt economy and no amount of analysis can compensate for thate. You either have to be on the corrupt side of the trade via money printing (the Fed), stock printing (stock options), investment management (mutual fund fees and other improprieties like trading against your clients, front running, etc), property management (REITS, excessive fees, kickbacks to local friend businesses, etc.), or an attorney (scum) that sorts it all out. We no longer have a free market, and for most, sitting on cash losing 5-10% per year is better than "investing" it to lose the same 5-10% while contributing to the corrupt system because by contributing to the corrupt system, you are only perpetuating it. The system is broken and everything needs to stop in order to force the criminals out and to get a real return to free markets whereby everyone plays on a level playing field and everyone has to take losses with the gains.

The ideal situation is to pull all assets from the corrupt system and contribute to it as little as possible with the hope and optimism that at some point it will collapse and people will demand reform that ensures that everyone compete on a level playing field. Idealistic, yes, as that will never happen, but at least return to free market principles where everyone is allowed to fail.

Mon, 10/18/2010 - 22:04 | 660122 RockyRacoon

The ideal situation is to pull all assets from the corrupt system and contribute to it as little as possible with the hope and optimism that at some point it will collapse and people will demand reform that ensures that everyone compete on a level playing field.

Check! And double check. From the looks of it I'll not be returning in my lifetime.

Mon, 10/18/2010 - 19:21 | 659778 pitz

Are you nuts? Real estate is a paper asset until its price declines to the intrinsic value of wood, paper, and rock. Then, and only then, does it become a real asset, subject to inflation.

Another way of looking at it -- actual, and real businesses, actually generate capital, while a house is an inanimate object and does nothing but waste away.

$300k house doubling to $600k in 7 years is completely unrealistic. If you're lucky, the price will keep up with inflation. But for most, the price doesn't even keep up with inflation.

Mon, 10/18/2010 - 21:59 | 660110 RockyRacoon

Real estate is a paper asset until its price declines to the intrinsic value of wood, paper, and rock.

Not so long as it has utility. My car has utility. A person has to live someplace, whether in a mortgaged home or a rented unit. The utility is its added value over its component parts, and that utility has a dollar value. A car is more than a pile of rubber, metal, cloth and fluids.

Mon, 10/18/2010 - 18:01 | 659535 Horatio Beanblower

"Real estate right now is a better bet than stocks" - only if one knows who actually owns the house for sale and if one ignores the potential for a much needed -30% correction in prices.

Mon, 10/18/2010 - 20:08 | 659889 doolittlegeorge

they're called "Real Estate Investment Trusts" and also "Master Limited Partnerships." Others call them "Railroads" and "mining companies." I don't think the "equity guys" have a "hard time understand real estate." House flipping? Well...I like where you're going with that...

Mon, 10/18/2010 - 16:48 | 659225 kaiserhoff

Capitalism is the unequal sharing of blessings.

Socialism is the equal sharing of misery.

Winston Churchill

Mon, 10/18/2010 - 16:36 | 659173 Traveler-2

To stay ahead of inflation, one invests in commodities (like oil, grain, etc.) and value money, like gold and silver.

What is the big, agonizing question?

Mon, 10/18/2010 - 16:28 | 659157 Robslob

Follow the credit contraction trail...it will not lead you to the yellow brick road...

Mon, 10/18/2010 - 16:12 | 659109 Vampyroteuthis ...

Good article. One problem though. When the SHTF moment occurs, it will be DEFLATION not inflation as everyone defaults.

Mon, 10/18/2010 - 17:58 | 659531 blindfaith

OK all you deflation folks...how come everything I see, touch, and smell is going higher and higher....by the day?

For God's sake folks look around...did your RE taxes go down? your cable bill? your telephone and cell bill, how about school?, how about those grocery bills? insurance? how about a traffic ticket? or a ball game ticket?

SOMEONE show me where anything is going down. Go On DO IT!!!!

YOU by your futures for grain, oil, gold, and everything else to force it to go up, not down.

Housing prices is NOT deflation, it is price correction after a bubble. Did any one say after the dot com bust that IT WAS deflation?

NO. And if you don't think you are already in the middle of out of control inflation then explain to me why the dollar is loosing value faster than you guys can make your bets to make a profit.

You had better get ahold of your brains, because people without incomes don't buy squat. And when all these saviors running for office get in and cut spending and unemployment, etc...you had better be out of your great commodities cause they are going to dive.

Safe harbor, there is none.

Mon, 10/18/2010 - 20:42 | 659960 Landrew

Get smarter! My utilities are going down in cost. I phoned my phone company and told them I had a better offer, done 25% off. Called my sat. company told them I have a better deal, 15% off. Called my dsl provider 45% off. Garbage company 30% off. Shop for gasoline at a station that rebates 1.5% for cash. I wait for sales on all goods. Deflation is here to stay, at least for the first round of collapse.

Mon, 10/18/2010 - 20:41 | 659959 Landrew

Mon, 10/18/2010 - 20:09 | 659876 gmrpeabody

+107.5

Mon, 10/18/2010 - 19:12 | 659749 The Alarmist

I concur that nearly everything I bought in the US last time around was higher in price than the time before. Aside from housing and wages, where is this fabled deflation? A little deflation might actually sugges the Dollar had regained some credibility as a store of value.

As for your conclusion, try not to be so sunny and optomistic, eh. Don't want everyone to run out and suck on the business-end of a shotgun, do ya?

Mon, 10/18/2010 - 16:26 | 659150 oddjob

I think deflation as a result of default is wishful thinking.

Mon, 10/18/2010 - 19:34 | 659809 LiquidBrick

I think deflation as a result of default is wishful thinking.

I think strategic default to recover the loss of equity, the dollar and protest illegal bailouts while faux fiat wealth is wiped out is an absolute guarantee.

You can't have a pandemic of deleveraging without collateral damage - default - and subsequent hyperdeflation.

A friend of mine in the diamond district is teetering on defaulting right now on his 1st/2nd simply because he is 100K under water and knows he can live rent free until he feels like doing a loan mod for 3% or less if he feels like being a nie guy, otherwise they could take his house in 2015.

Mon, 10/18/2010 - 17:07 | 659331 Vampyroteuthis ...

Here is my basic deflation argument. In an Austrian prospective, credit and currency are interchangeable. The US has ~$53 trillion in debt, public and private. The amount of M2 floating around out there is ~$9 trillion even with Bennie running his printing press. When everyone starts defaulting on their loans, the debt or credit vanishes as if was never there. The currency is valued as a combination of credit and currency in the economy. Massive amounts of credit vanishing is going to make those real dollars more valuable in the short run.

Over several years, it will become toilet paper after everyone has defaulted and goes bankrupt.

Mon, 10/18/2010 - 19:05 | 659727 maddy10

All these arguments are a waste of time since the situation is the same in all the nations of the world; everybody has printed money way beyond their means.

Expect a sudden transfer into a new system by design with things anew and same people in place with new credit.

watchout for G20 meet this week!

Mon, 10/18/2010 - 16:22 | 659143 Robslob

While everyone prepares ( as told to by Ben &Co) for inflation I prepare for deflation simply because IF we do have inflation it will last about as long as me having sex...lmao

Oil’s Not Well

Oil’s Not Well

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