Wednesday, December 31, 2008
Monday, December 15, 2008
Saturday, December 13, 2008
Next year a wave of bankruptcies in the world economy
Mr. Faber also says that many asset markets are oversold, so a rally could be expected, especially in commodities. Although equities could rally, they will will not rise in real terms.
He also makes an awesome point about stocks being in a secular bear market (the last bull rally lasted since 1982 to 2000) However, commodities are in a secular bull market since 1998-2000, so this correction in commodities is akin to the stock market crash of 1987 (in other words, commodities although in a secular bull market, have experienced a downturn)
He recommends shorting US gov't bond and buying corporate bonds (very oversold) Marc is also bearish on the Chinese economy in the short term.
Part I
Part II
Friday, December 12, 2008
A Nightmare Before Christmas
Like many pragmatic economists I have always warned that rapid expansions of government debt would result in inflation and higher interest rates. The explanation was always simple: rising supply of government debt inflates the money supply and weakens the government’s ability to service its debt through legitimate means.
But In recent months, government has flooded the market with hundreds of new Treasury obligations and telegraphed its intention to increase the deluge even more. In response, both bond prices and the dollar have risen. This benign reaction has led many to the happy conclusion that the doom and gloomers are wrong and that bailouts and economic “stimuli” can be financed with deficit spending without any adverse consequences on interest rates or consumer prices. Recent action in the foreign exchange markets suggests these hopes will prove illusory. The renewed strength in gold, together with the long over do rupture of the correlation between the movements of foreign currencies and U.S. equities, is further evidence that recent market dynamics are changing.
When the financial crisis of 2008 kicked into high gear in September, the U.S. dollar began to rally furiously. While America’s economic ship was sinking from stem to stern, its currency was becoming the must have asset for public and private investors around the world. The dollar benefitted from the positive flows that result from massive global deleveraging. Treasuries got an added boost from a reflexive flight to “safety.” As a result, politicians were able to fill out their Christmas wish lists with complete confidence that Santa would deliver. However, as these dollar-positive forces appear to be giving way, the Grinch is about make an unwanted appearance.
Last weekend Barack Obama announced his intention to implement a New Deal-style stimulus and public works program. What he somehow forgot to mention is that the United States is wholly dependent on the willingness of foreign creditors to supply the funds. But a weakening dollar makes continued foreign purchase of U.S. Treasuries a much more difficult decision.
Once the dollar begins to collapse beneath the weight of all this new deficit spending, accumulation of contingency liabilities, and the socialization of our economy, commodity prices and interest rates will head skyward. In addition, once all the going out of business sales at U.S. retailers are over, and excess inventories have been reduced, watch for big price increases at the consumer level as well.
Once the government runs out of foreign and private sector bidders for new treasuries, the Federal Reserve will be the only buyer, and the hyper-inflation cat will be completely out of the bag. Sensing this, the Fed has recently indicated a desire to begin issuing its own bonds. However, since dollars are already recorded as liabilities on the Fed’s balance sheet (dollars are in actuality Federal Reserve Notes) the Fed already issues debt. The difference now is that they are proposing to issue interest bearing debt. Perhaps the Fed feels this will make holding its notes more appealing. However, since the interest will be paid in more of its own script, I do not believe this con will work.
In the end, rather than filling our stockings with Christmas goodies, our foreign creditors will likely substitute lumps of coal. Of course given how high coal prices will ultimately rise as a result of all this inflation, in Christmas Future perhaps our stockings will be stuffed with nothing but our own worthless currency. It might night burn as well as coal, but at least we will have plenty of it.
Tuesday, November 25, 2008
Faber on TARP: 'the best option is to do nothing'
For example, our own central bank is increasing the money supply (AMB) roughly at a 1400% compounded rate. You can take a look at the money supply here
Sunday, November 23, 2008
Strong Rebound Coming - Dr. Doom
Marc Faber has an excellent track record in making long term predictions. Back several years ago, he predicted Citibank to touch the $1 per share mark (Citibank right now is $4 per share and heading lower)
Sunday, November 16, 2008
Energy Stocks are very inexpensive right now
by Alfonso Colombano.
As you may all have seen in the news, Warren Buffett increased his investment in ConocoPhillips.
Warren Buffett uses what's called Value Investing. Value investing consists of buying good quality companies at very cheap prices (think about it as getting $1 bills for 10 cents!) Moreover, Warren's average holding period for a stock, in his own words is "Our favorite holding period is forever."
Energy stocks, especially large cap companies, are being sold for fire-sale prices. For example, ConocoPhillips is selling below book value (market cap is $70.65billion vs. book value of $92.8 billion). Usually companies sell many times above book value (remember that US GAAP uses historical cost) Because these assets were bought many years ago, if you can find a company that is selling below book value, then it's very undervalued (because of inflation, these assets today are worth much more than when they were bought)
Another measure of undervaluation in energy stocks is market cap divided by proved reserves. Currently ConocoPhillips has 10.6 billion of BOE(barrels of oil equivalent), roughly selling for $6.66 per barrel! ExxonMobil is selling for $5.35 per BOE! This is not unique to these stocks, but it's a sector wide phenomenon. For more info on this, click here
Price Earnings Ratio (commonly called P/E ratio) for energy stocks are, I would say, near historically lows (For example, Exxon was selling close to 36 P/E in 2000). The lower the P/E ratio, the more undervalued a company is. COP is selling for a P/E of 3.89. In comparison the avg. P/E for the Dow Jones Industrial average is roughly 13. During the tech bubble, companies were selling at P/E ratios of 40 or even higher. Even if earnings were to go down, say 50% down because of lower crude prices, P/E ratios would still be extremely low.
Moreover, dividend yields, a measure of undervaluation, are at an all time high for energy companies. Again, COP has a 4% dividend yield. Shell and BP have dividend yields of 6% or higher right now. For smaller companies or energy trusts, dividend yields are in the range of 20% upwards.
Lastly, the vast majority of energy stocks have excellent operating cashflows and higher than average cash balances compared to other sectors. In other words, most of these companies do not depend on credit to fund their day-to-day operations.
To finish this article, I would like to share with you some of Warren's quotes:
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. "
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. "
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. "
Agree, disagree? Drop me a line
Saturday, November 15, 2008
World Energy Source Interview with Jim Puplava.
Wednesday, November 12, 2008
Peter Schiff vs. Financial Experts in 2006 and 2007
Peter Schiff was the economic advisor to one of the presidential candidates during the primaries."
Friday, November 7, 2008
Making Financial Sense of the Coming Energy Crisis
I encourage of all our readers to visit Mr. Puplava's website and listen to his weekly broadcast. His website is www.financialsense.com
Sunday, November 2, 2008
America's gasoline shortage is a bigger threat than Financial crisis
Sunday, October 19, 2008
Good and Bad Credit
"There are two kinds of credit: that which would be offered in a market economy with sound money and banking (good credit); and that which is made possible only through a system of central banking, artificially low interest rates, and fractional reserves (bad credit).
Banks cannot expand good credit as such. All that they can do in reality is to facilitate the transfer of a given pool of savings from savers (lenders) to borrowers. To understand why, we must first understand how good credit comes to be and the function it serves."
Continue Reading
Friday, October 10, 2008
Jim Rogers on Wall Street
Wednesday, October 1, 2008
Monday, September 29, 2008
People who predicted the credit crisis
Also, some reputable financial gurus like Jim Puplava are predicting a hyperinflationary depression by 2010. Here's Jim's "Big Picture" segment from last Saturday.
On the politicians' side, Congressman Paul also predicted the crisis with Fannie and Freddy.
What do all of them have in common? They follow what's called the Austrian School of Economics Business Cycle theory, which can be found here.
Saturday, September 27, 2008
Adjusted Monetary Base
The Chart above shows the Adjusted Monetary Bases. Look at the growth between May and Sept. Roughly 9.20% growth in less than four weeks! That's what I would call hyperinflation. This is extremely important since the Fed had pursued a more or less stable AMB growth.
Being that the Federal Reserve has entered a stage of hyperinflation money creation, this would not allow for crude prices to go down significantly (absent Fed intervention, because of the underlying recession, commodities prices would fall)
From Gary North:
" Ben Bernanke's helicopter has finally lifted off the pad.
The FED is in panic mode. It is inflation the monetary base at an astounding rate.
This is the very early phase of the big bank bailout.
I think this is the turning point. From now on, Bernanke will imitate Greenspan in 1987, 1999, and 2001.
Monetary inflation has begun. It won't stay at this pace. No country can survive anything like this. But it shows where we are headed.
The FED has to get the Congress to intervene and save the banks. If Congress refuses, mass inflation is inevitable. There is a market for Treasury debt. If Congress authorizes the sale of Treasury securities by raising the debt ceiling, the FED can back off. If Congress refuses, then it's "mass inflation, here we come."
I think Congrress will buckle. But I could be wrong."Thursday, September 25, 2008
Chavez: China, Venezuela to plan two refineries
Eric Watkins
Oil Diplomacy Editor
LOS ANGELES, Sept. 23 -- Venezuelan President Hugo Chavez said his country and China plan to construct two refineries, one in each country, with a formal agreement to be signed soon.
"Venezuela has enough oil to last for 200 years," Chavez said. "And the Chinese are already working to tap that."
Chavez said the refinery to be built in Venezuela will be built in the Orinoco basin, but he did not provide details of where the Chinese facility would be constructed.
China is a key link in Chavez's aim of developing new markets for its oil exports, and Chinese demand has been growing in the past year.
Earlier this month, China National Petroleum Corp. subsidiary PetroChina Co. said it would need to import more Venezuelan crude to feed its upgraded 180,740 b/d Liaoyang refinery in northern China.
PetroChina has completed upgrading a vacuum distillation unit at the refinery that will enable it to process 70,290 b/d of Venezuelan high-sulfur crude.
CNPC said the refinery had received 388,490 bbl of Venezuelan crude for a trial operation during August and will increase its runs in the future.
In August, Petroleos de Venezuela SA Vice-Pres. Eulogio del Pino said the state firm is sending about 360,000 b/d of crude to China. Del Pino said PDVSA aims to increase those shipments to 1 million b/d by 2012.
Venezuela's shipments to China have surged this year. In May alone, Venezuela supplied 14.1% of China's product imports, up from 3.1% in April, according to figures from the Organization of Petroleum Exporting Countries.
In the first 7 months of 2008, Venezuela exported 5.18 million tons, or 38 million bbl, of crude to China—an increase of 93.8% over 2007.
----
This, among other reasons, is why the US should increase domestic crude production. Relying on suppliers like Venezuela is not sustainable not only due to geopolitical conflicts, but actual operations of PDVSA. PDVSA has been highly mismanaged, and has not reinvested back into the business. Natural declines coupled with lack of investment will reduce Venezuela's oil exports to the US.
Wednesday, September 24, 2008
The Idiocy of Wall Street: Applauding Its Own Demise
"We were told less than six weeks ago by the Congressional Budget Office that the taxpayers may have to spend up to $25 billion dollars bailing out Fannie Mae and Freddie Mac. Secretary Paulson and Federal Reserve Chairman Bernanke assured us that beyond that, all was well. Why is anyone still listening to Paulson and Bernanke?
The resulting central-bank-induced disequilibrium relationships between price and risk is bound to generate massive movements in the prices of debt instruments back to their equilibrium relationship, a process that in its infancy has already destroyed the capital of the world's private-banking systems.
The federal government — through the Department of the Treasury and the Federal Reserve — is now committed to assuming the entire credit risk of the financial-services industry of the United States, and quite possibly much of the industrialized world. The US government itself is already insolvent in an intertemporal sense, with a budget deficit over time of $30 trillion in present discounted-value terms. How the federal government's assumption of the American and world financial systems' risks is supposed to be credible on a long- or even medium- and short-term basis is totally unclear.In a bubble, asset prices are by definition far above equilibrium values. The federal government is now committed to guaranteeing the difference between the real equilibrium values of all debt securities and their stated/nominal value, which was created during the greatest credit bubble in history.
That difference between nominal and equilibrium/real value must by definition be a massive number because of the extent of the credit bubble, on the order of $5 trillion dollars in the United States alone.
Unlike the short-attention-span monkeys of Wall Street, the reasonable analyst will conclude that all the federal government's options for making up the difference between nominal and real values have bad implications for Wall Street.
Continue readingTuesday, September 23, 2008
One of the reasons the Financial industry is doomed to a decline
The chart above is one of the main reasons I think the financial sector will not do well at all. We can clearly see with this chart that consumers are already in debt, so the financial industry's growth they experienced since 1980 cannot be sustained anymore. Between 1980 and 2008, total household credit outstanding grew from $1.3 trillion to more than $14 trillion, a ten-fold increase!
As I have mentioned before, employment in Financial companies will experience a decrease.
Disagree? Agree? Drop me a line
Here's the link to that chart and the data behind it: http://research.stlouisfed.org/fred2/series/CMDEBT
Saturday, September 20, 2008
Price Gouging?
by Alfonso Colombano
Our warmest sympathies go to those who lost their lives and homes in Galveston and all along the Gulf Coast. I hope that Southeast Texas gets back on its feet as quickly and pain free as possible.
Every time there is a devastating natural disaster, just as we witnessed this week with Hurricane Ike, we hear claims on the media about “gouging” First of all, what is “gouging”? How do you define it? Is it a profit level about a certain percentage?
To begin with, almost all transactions, except for taxes of course, are voluntary in nature. Why do I say that? Because valuation is subjective, in other words, the buyer of goods values the goods dearer and the seller values the money more. Otherwise, the transaction would not happen. If one part or the other is taking advantage of the other party, then the transaction would certainly not happen.
What does this have to do with gasoline prices? All week long, the media have been claiming that “consumers are being gouged with gasoline prices” First of all, gasoline prices were destined to increase due to extremely low levels of gasoline stocks (we were close to an 8-yr low) Moreover, the biggest reason for high gasoline prices has been due to the shutdown of refineries in the Gulf Coast (last I heard, about 13 out 20 Texas refineries were shutdown) Back from Econ 101, a decrease in supply, given the same level of demand, or perhaps an increased demand, simply means that prices will go up. If politicians “do something” about high prices, they will simply worsen the problem by implementing any sort of control.
The response by politicians, whatever it might be, worries me a lot. Absent major disruptions like hurricanes, thankfully, we haven’t had any gasoline shortages or lines at gas stations. In the 1970’s, when politicians implemented energy price controls, shortages began. Can you imagine trying to evacuate a hurricane and not having gasoline to flee? Or not being able to have gasoline for your generator? As we speak, companies , such as ExxonMobil, are rushing in to ship as many refined products into the gulf coast area as possible. Why do they do that? Because they’re kind hearted? No, because higher margins attract supply from other places, which is what we need right now, more supply.
Moreover, gasoline production regulations have crippled our gasoline supply (the last refinery in the US was built in the late 1970’s) Adding fuel to the problem, no pun intended, is the plethora of different gasoline specifications. Gasoline from say, California, cannot be shipped to the Gulf Coast under their current condition, must be reformulated through expensive processes. These constrain the ability of companies to have a single market for gasoline in the US (commonly called boutique gasoline specs) and having large economies of scale.
Lastly, the consequences for freedom are quite big. Being that gasoline is a scarce commodity, like everything else, in a free market, its natural ration system is through prices.
What we can currently do to lessen the problem is use less. Until companies can get their refineries back online, we should do everything we can to decrease consumption. From driving less, carpooling, to combining trips, consumers can help alleviate this problem. The only long term solutions to lower gasoline prices are less consumption and more supply. Don’t fall for politicians “solutions”
Sunday, September 7, 2008
Monday, September 1, 2008
Locked in shale, riches beckon
Energy services companies among those eager to tackle natural gas work
By BRETT CLANTON Copyright 2008 Houston Chronicle
Oil and natural gas exploration companies aren't the only ones licking their chops at emerging shale formations in Texas and other states that may hold vast untapped supplies of natural gas.
Major oil field services firms, including Schlumberger, Halliburton and Baker Hughes, also see big opportunity and are jockeying to get their share of the work.
To those firms, the complex shale formations could bring a windfall of new contracts that call on specialized technologies, which have become indispensable in these frontier areas.
Perhaps nowhere is that truer than in the Haynesville Shale play, a major discovery in northwestern Louisiana and East Texas. Not only is it estimated to be the nation's largest natural gas field and the fourth-largest in the world, it may be among the most difficult of its kind to unlock, creating high demand for sophisticated service work.
US Stocks of FInished Gasoline
Tuesday, August 19, 2008
The Great Oil Bubble?
Supply and geopolitical issues will not go away in global recession
BY TONY ALLISON
The markets are rejoicing as the “great oil bubble” loses air and rapidly heads back to its proper double-digit price. The rejoicing may be a bit premature as the underlying supply and demand fundamentals do not appear to support “proper” prices for oil.
Between 2004 and 2007, global oil consumption grew by 3.9%, driven by emerging giants China and India (40% of the world’s population) and other rapidly growing emerging economies. While consumption has exploded, production has not kept pace. Non-OPEC production growth has slowed well below historical averages. And the only country with significant spare production capacity is Saudi Arabia. Unfortunately, Saudi spare capacity is not independently verified, and the vast majority of their current production is from the giant Ghawar oil field, a dowager now 57 years old which still produces nearly 5 million barrels a day.
“Saudi Aramco is injecting a staggering 7 million barrels of sea water per day back into Ghawar, the world's largest oilfield, in order to prop up pressure. It accounts for 30% of Saudi oil reserves and up to 70% of daily output. Doubts grow about Saudi as Global Swing Producer," Aberdeen Press & Journal Energy
It is interesting to note that the above article appeared in April 2004. Time is not on the side of Saudi Arabian spare productive capacity.
Surplus Capacity Remains Low
World surplus production capacity remains low. The estimated 1.35 million barrels per day in June 2008 is equivalent to less than 2 percent of consumption, an amount well below the 1996-2003 annual average of 3.9 million barrels per day. This puts upward pressure on prices and leaves world oil markets vulnerable to supply disruptions.
Even if world GDP were to slow significantly, oil consumption may not fall off the table. Per capita oil consumption is growing in the Middle East, China and India. If these areas continue to subsidize the price of gasoline, then demand may stay strong, even in a slowing global economy.
Disturbing Findings
The historically conservative International Energy Agency (IEA) ha
s issued some disturbing findings in its latest report. It notes that global production cannot keep up with demand, and the trend is getting worse. It predicts global oil depletion at 5.2% this year, versus 4% last year. Over 3.5 million barrels per day of new production will be needed each year just to hold global production steady. With Ghawar, the world’s largest and one of the oldest fields now producing less than 5 million barrels per day
(approximately 6% of global daily production), where will this new production come from this year, and in every succeeding year? What if the global depletion rate is over 6% next year, equivalent to Ghawar? This is the crux of the issue. Finite supplies will never be able to meet infinite future demand.
Increasing Reliance on OPEC Production
Sunday, July 27, 2008
Despite energy, Houston is not immune to U.S. economic woes
Copyright 2008 Houston Chronicle
Credit markets tightened, housing sales slowed, gasoline prices rose and job growth pulled back.
But the booming energy sector helped get the Houston area through the second quarter.
So what can Houston expect for the rest of the year?
As we do each quarter, the Chronicle asked some experts to tell us what they think. Here are excerpts of responses from a banker, two economists and a chief operating officer for a local economic development group.
Q: What's ahead for the area's economy?
A: The area is not immune to problems that are national in scope, the experts said.
"We're seeing some signs of slowing that stem from two sources: tight credit in the wake of the subprime mortgage debacle and growing consumer caution as inflation heats up," said Tracye McDaniel, chief operating officer of the Greater Houston Partnership.
ContinueSunday, July 13, 2008
Oil Prices and Monetary Inflation
Video
Saturday, June 28, 2008
Chinese car sales
For comparison purposes, China consumes roughly 1.8 barrels per capita per year. The US consumes roughly about 25 barrels per capita per year. In my opinion, even though commodities might be overbought in the short term, long term, we could see oil prices as high as $200-$300 per barrel.From Casey Research:
"Record oil prices have failed to temper the enthusiasm of Chinese auto buyers. In 2006, 6.2 million cars were sold in China, enough for the Middle Kingdom to surpass Japan for #2 in total vehicle sales (the United States still sells twice as many). In the first five months of 2008, Chinese auto sales show no signs of decelerating, up 17.4% from the same period last year.
The rise in Chinese auto sales has been so dramatic that projections by China’s government for auto sales in 2020 were already exceeded by 2005."
Continue reading
Sunday, June 22, 2008
4 Texas Electric companies failing
Fortunately, it has been small companies so far. However, Texas over-reliance on Natural Gas could prove a big problem in future years (Natural Gas closed at $13.02 on Friday, up from $7.60 a year ago, a whopping 71% increase)
Moreover, I strongly believe Natural Gas is currently under priced (on a Barrel of Oil Equivalent, NG is selling at $78/bbl), and within 2-3 years, we could see NG mirroring today's crude prices (say $15-$20 range per MMBTU).
There is an excellent article in the Chronicle that talks exactly about this:
"The electric market turmoil that brought down four electric retailers with more than 40,000 customers among them stems from a combination of factors: a rise in wholesale power prices, mostly because of a big run-up in the price of natural gas, Texas' main generation fuel; some companies' failure to hedge properly against those increases by entering into long-term wholesale contracts; and sudden price spikes that left them scrambling to meet financial obligations to the state's grid operator."
continue reading
Wednesday, June 18, 2008
Energy Sector: Economic Growth Drives Demand
"As the cost of crude oil has soared in recent years, the amount produced hasn't kept pace with demand. Worldwide oil production has barely budged, despite record prices. Since 2004 the price of oil has gone from $33 per barrel to $132 – meanwhile production has risen just 1.8 percent, to 84.6 million barrels per day. "
continue reading
Tuesday, June 17, 2008
Texas Electric rates
YTD, we have averaged about a 20% increase in rates in a year. This is due mostly to natural gas prices going up significantly. About 59% of power plants in Texas are run on natural gas, while coal's share is about 27%.
Natural gas closed today at $12.96 per MMBTU (roughly 973 cubic feet)
For example, Gexa Energy's fixed plan is offered at $0.17 per kw/h. Last year, Gexa offered the same plan for $0.141 per kw/h, an increase of roughly 20%. Other smaller providers have had bigger increases.
Meanwhile, companies like Dynegy have plans to build coal power plants (coal is the cheapest fuel for power generation) Dynegy's added power capacity would be a welcomed relief to all Texas residents, but not everyone wants these power plants to be built.
Links: www.powertochoose.org
http://tonto.eia.doe.gov/dnav/ng/ng_sum_lsum_dcu_nus_m.htm
http://www.wtrg.com/daily/oilandgasspot.html
Wednesday, June 11, 2008
Deflation: Making Sure "It" Doesn't Happen Here
One of the biggest reasons for high commodity prices has been monetary inflation in the recent years. All central banks for the past 5-7 years have increased their economies' money supply substantially.
Ben Bernanke was claiming that we were in a deflationary environment back in 2002 (even though money supply was still increasing)
Here's a quote from Mr. Bernanke:
"...Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services..."
Then people complain about high gas prices.
Energy Bull Market Fundamentals Remain Strong
This is an excellent article written by Chris Puplava from financialsense.com.
http://www.financialsense.com/Market/cpuplava/2008/0423.html
Tuesday, May 13, 2008
Welcome to the Energy Association blog!
I am very excited about this blog (hats off to Adam Valentine for the idea). I will be keeping the blog updated as well as take charge of the "Energy Advisor", a biweekly newsletter with current content from Oil & Gas.
If you have any suggestions, please drop me a line.
Have a great summer break!
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