Stock Market and Political Commentary

OPEC Vows to Severely Cut Oil Production

"A top OPEC official says the oil cartel is considering a shock production drop when its delegates meet on December 17."

Back in the 1970s OPEC exercised great control over the oil markets.  Today there are many players and their influence has been diminished.  Will they be able to cause oil prices to rise significantly from the current 40 dollar a barrel range?

My guess is that it might cause a short term spike, but is unlikely to stop the market forces which are pushing oil prices lower at this time. It will likely just cause more volatility as we indicated in the recent commentary, How Low Will Crude Oil Prices Go, making it more difficult for traders as most get whipsawed out of their positions be they short or long.

RWG

Hedge Fund Disaster Now Unfolding

When bank depositors believe they may not have access to their money a "run on the bank" occurs.  It looks like the same thing is about to occur with hedge funds as they are denying investors access to their money.

"Dec. 4 (Bloomberg) -- D.E. Shaw & Co. LP, the investment firm run by David Shaw, and Farallon Capital Management LLC limited withdrawals by clients, joining more than 80 hedge-fund managers to impose restrictions in the past two months." See article. 

Under some of the hedge fund rules they are allowed to restrict withdrawls for a period of time.  But with the market falling and nervous investors what do you think will be the result of this action?

I believe it will cause even more of the hedge fund investors to demand that their money be released now.

To release money from the fund they normally have to sell stocks or commodities.  So you can see how this is another potential land mine ready to blow up various markets and take them to even lower levels as everyone heads for the exits.

Or hedge fund investors could just say they don't have a problem with their funds being held in a lockdown state during a period when asset values in stocks and commodities are getting crushed.  Some will likely take that position as they believe the market is near a bottom. 

But will they keep a stiff upper lip if the markets continue to move sharply lower?  Or will the last ones standing in fact finally throw in the towel and demand that what little money they have left be returned to them before the bear is through?

Time will tell, but that is exactly what a final capitulation looks like.  At this point I don't think we are anywhere near the final bottom in the stock market in time or price.  Others disagree and that my friend is what makes a market.

RWG

How Low Will Crude Oil Prices Go?

Today crude oil hit a new yearly low once again.  Back in June I warned that commodities were in a bubble that looked ready to pop.  Sure enough, the bubbles were pricked in July and it has been down, down, down ever since for the whole commodity complex.

And on October 10th, when oil was still near 80 dollars a barrel, I said the following:

"Some believe inflation will come roaring back because of the Fed action of pumping huge amounts of money into the system and commodities will go through the roof.  But without some type of true disaster that halts our normal supplies I think it will be a while before that happens as these bubbles have burst."

 

"But with world economies slowing market forces are now putting downward pressure on the price of oil and most likely it will drift lower for at least the next few months with occasional rallies as is the case in all bear markets."

October 10 Commentary

Now crude oil is 44 dollars a barrel after hitting an all time high of 147 in July.  So in less than 5 months it has lost about 70% of its value.  Funny, I haven't heard anyone screaming about how it will soon be at 200 dollars a barrel lately.

With economies around the world collapsing and demand for oil drying up the price of crude is in a very powerful downtrend.  I would urge you to be very careful about trying to call a bottom and go long in oil futures at this point.  But going short at these levels can be dangerous too.

All bear markets have some sharp rallies along the way, but a trend this powerful will likely not be turned around overnight without some serious supply disruptions or other catastrophes that change the dynamics of this market.

Eventually oil prices may rise again due to a falling dollar because we printed trillions of dollars for bailouts, but in the meantime those trying to trade this market can be whipsawed out of their positions and lose a lot of money. 

Bubbles are really ugly when they break and the underlying stock or commodity often goes much lower than anyone can imagine.  So just because oil is low now does not mean it cannot go lower, and most likely it will before this is over.

At the same time it is oversold to the point that short covering rallies could be huge and force even more shorts to cover their position at a loss.  The easy money on the short side has already been made; from here on in it is a big risk to trade either side of the market.

Bottom Line:  Oil will probably go even lower still before this is over.  It would not surprise me to see crude oil below $30 a barrel barring some supply shock before it bottoms. However, as we get closer to the bottom there will also likely be some extreme volatility along the way that will make it difficult for longs or shorts to make money unless they enter and exit trades at precisely the right time.

This my friend is often easier said than done. See the busted bubble charts below.

 

Crude Oil

 

http://futures.tradingcharts.com/chart/CO/W

Heating Oil

http://www.tfc-charts.w2d.com/chart/HO/W

Gold

http://futures.tradingcharts.com/chart/GD/W

Corn

http://futures.tradingcharts.com/chart/CN/W

Wheat

http://futures.tradingcharts.com/chart/CW/W

Copper

http://www.tfc-charts.w2d.com/chart/CP/W

RWG

Will Stocks Follow Oil Prices?

How low will the stock market averages go if they follow the percentage losses of oil  and many other commodities over the last few months?

Crude Oil topped out at just under 150 dollars a barrel on July 11, 2008.  Recently it has been trading around 50 dollars per barrel.  This is a loss of about 66 percent in about 4 months time.

The stock market hit its closing high on October 9, 2007 at just over 14,000.

Record highs

Closing:	14,164.53	Tuesday, October 9, 2007
Intra-day Actual:	14,198.10	Thursday, October 11, 2007
Intra-day Theoretical:	14,279.96	Thursday, October 11, 2007

More details

So if the stock market drops in similar percentage terms to where the oil market has dropped to date we would have a Dow Jones Industrial Average of around 4,815.  This would be in line with the 450 level on the S&P 500 which I have said will be the next downside target if the market falls off the 800 ledge.  It has dipped below it, but is still struggling to hang on for now.

Of course we don't know that the oil price has hit bottom yet.  The key will be how deep this recession turns out to be and whether the dollar stays strong or in fact collapses as some believe it will after this recent rally.  If that happens it would put upward pressure on the oil prices this commodity is priced in dollars and as the dollar goes down the oil price tends to go up.

Bottom Line:  We have already seen many commodities lose over 60% of their value in a few months time.  If the stock market follows this percentage loss we will be looking at a Dow of 5,000 or less before this bear market ends.

RWG

Windfall Profits Tax Still Needed?

Isn't it nice to know the candidate leading in the polls with just days to go before the Presidential election knows absolutely nothing about taxes, how markets work, or our economic system and how wealth is created in this country?  McCain has admitted the economy is not his strong suit, but he is still way ahead of folks like Hillary Clinton and Barack Obama in this area.

Clinton and Obama both professed to know better how to invest capital earned by the oil companies than the oil companies earlier this year.  They would give it to the poor your see.  That way we could all be poor as the companies lose their capital base in which to explore for and deliver oil to the markets in the future.

They didn't realize that in markets oil prices could be up near 150 in July and down around 60 in October.  They thought the oil companies were on some kind of gravy train where prices always went up.  I guess they were too busy talking about how to nationalize health care to take just a few minutes to research commodity prices and overall returns on capital for the oil industry.

But just in case they drop by I'm providing a link to the oil chart below for their convienience.  This will be a real revelation to them I'm sure.

Crude Oil

http://futures.tradingcharts.com/chart/CO/W

You see, these folks are so clueless that they don't realize the oil business is cyclical.  Sometimes they make big money and sometimes they lose big money as the price of oil rises and falls.  This is why the oil companies Return on Equity (ROE) is only around 8% which is hardly getting rich. In fact it is a rather mediocre return compared to other industries.

But the likes of Clinton and Obama believe the profits of oil companies belong to them instead of the stockholders.  This is how leaders in banana republics think. Most of these shares are owned by people though their 401k plans, but just remember they are for the little guy and punishing these companies and driving the share prices into the dirt will help them a lot, don't you think? 

So now the oil bubble has popped and other commodities and markets are getting hammered as well.  Hopefully the American oil companies will be able to use those profits to survive what may be a very difficult time in the energy business.  But if Obama and Clinton had been in power earlier this year they would have stolen billions from these companies and their very survival would be in doubt.

Does anyone believe America would be better off without oil companies given there is no real alternative in place at this time?  If so, you may want to vote democratic in 2008.

Obama Wants Windfall Profits Tax on Oil Companies

RWG

Commodity Price Update and Outlook

Written on 10/10/08

I like T Boone Pickens. He became a billionaire in the oil business and knows far more about it than me that's for sure as I don't know much of anthing about oil except change it every 3 or 5 thousand miles depending on whether you are using synthetic or not.

But he said oil was going higher when it was in the 150 range and had his money where his mouth was according to his interviews on CNBC.  He said worldwide we were using 86.5 billion barrels and only producing 85 billion barrels so naturally the price was rising and there was not much that could be done about it.  That's why he was hawking his windmill idea.

And all the analysts kept hollering about how China was using up all the oil so prices were going to at least 200.  But here we are ony 3 months later and oil is at half the price it was then.

Back in June I said the following:

"But, when I look at lots of other commodity charts they look very similar to oil.  So there is a much larger market force at work in my opinion.  When the bubble bursts, and it may be in the process of doing so now, prices could drop sharply.".

Now oil is below $80... in June and early July it was in the 135 to 150 range.  Other commodities took a similar dive.  Click on the links below to see for yourself.

Crude Oil

http://futures.tradingcharts.com/chart/CO/W

Heating Oil

http://www.tfc-charts.w2d.com/chart/HO/W

Gold

http://futures.tradingcharts.com/chart/GD/W

Corn

http://futures.tradingcharts.com/chart/CN/W

Wheat

http://futures.tradingcharts.com/chart/CW/W

Copper

http://www.tfc-charts.w2d.com/chart/CP/W

Some believe inflation will come roaring back because of the Fed action of pumping huge amounts of money into the system and commodities will go through the roof.  But without some type of true disaster that halts our normal supplies I think it will be a while before that happens as these bubbles have burst.

Once that happens it is normally not that easy to pump them back up again for a while, at least not to the old highs, so we shall see how this develops.  For the moment deflation is more likely in the next few months than inflation in my opinion as wealth and credit are contracting.

But of course if the little nutjob in Iran nukes Israel or blocks the Straights of Hormuz, etc. then prices may start heading north again.  And Russia's eonomy now depends a great deal on oil so they have good reason to want it to stay high... and if they have to do some saber rattling or take military action to do it then they just might if they thought that would do the trick.  Unless it is pretty drastic I don't think it will alter the market for long however.

But with world economies slowing market forces are now putting downward pressure on the price of oil and most likely it will drift lower for at least the next few months with occasional rallies as is the case in all bear markets.  Stay tuned.

RWG

Economic Cycles Chart - Recession or Depression?

Written on 10/01/08

If you want a good laugh find out more about what is in the rescue plan.  If it is passed as it is being presented I have little faith in the plan helping the economy and believe if anything it will make things worse.

Doing nothing in this situation is probably not right either, but the free market solutions offered by men like Wynn and Trump have been rejected and apparently are not being considered.  A few token free market solutions may be included, but nothing more than that.

The point is that when you find yourself in a row boat in the middle of the ocean then you can row or not row.  Either way it is going to be a long journey back to shore and you may not survive the trip.  But the last thing you want to do is poke a hole in the boat and I see a lot of politicians with a sharp instrument in their hands.

The people in congress who passed laws that caused this problem are now proposing a plan to fix it at our expense. I've not seen a single Congressman or Senator that has been forced to resign their position or put under oath for testimony regarding their part in this financial disaster of monumental proportions.

Based on this I believe we have at least a 60% chance of being headed into a serious recession or worse. 

If Obama is elected I have every confidence he will make the wrong decisions on everything with few exceptions.  If he is elected I believe there is a 95% chance we are headed for a severe recession or more likely a depression.

With this in mind take a look at the chart below which outlines all the recessions and depressions since our country was founded.

The depressions started in 1807, 1873, and 1929. So the span between them was 66 years and 56 years.

We are currently 79 years out from the time the last depression started and are 69 years out from the time the great depression ended.

http://en.wikipedia.org/wiki/List_of_recessions

RWG

Who Knows What?

Written on 09/27/08

Take a short quiz.... see the answers below

 

1.  The taxpayers must pony up $700B immediately or the markets will collapse and we will go into a severe recession or depression. True or False?

 

2.  If we do the bailout package immediately the market and the economy will be saved. True or False?

 

3.  Will the Kondratieff Wave, which indicates we are headed for a depression, be right once again regardless of which way we go on the bailout package?  Yes or No?

 

4.  Would we be better off to do the taxpayer bailout or just let the markets sort it out?  A. Taxpayer Bailout,  B.  Let the Markets Sort it Out

 

What do we know?

 

1.  The same people who caused this problem and didn't see it coming are now offering the immediate solution with taxpayer money and more government power.

 

2.  The total tab for government rescues and special loan facilities this year is already more than $900 billion.... and yet they say another $700B is needed.

 

http://uk.biz.yahoo.com/17092008/325/factbox-u-s-government-bailout-tally-tops-504-billion-pounds.html

 

3.   $300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.  This was supposed to fix the housing problem....

 

4.  We should immediately repeal the laws that allowed, encouraged, and even forced banks to make home loans to people who did not have sufficient income and assets to get a home loan under traditional guidelines.  As they say, when you find yourself in a hole stop digging.

 

5.  700 billion is about 2,000 dollars for every man, woman, and child in America.  So the initial tab for the bailout would be around 8K for a family of 4.  Look for additional charges later.

 

6.  In the last several years there has not been a single quarter of negative GDP.  Unemployment,  inflation, and interest rates have all been low according to government statistics.  Despite this we are now told by our elected officials, including the President, that if we don't act immediately the economy will collapse.

 

7.  Some of the oldest and largest stocks on Wall Street have collapsed this year.  Many of them are now out of business.  The banking system is under great pressure from falling real estate prices and subprime real estate loans.

 

8.  When a liberal says go left you should go right.  When they say go down you should go up.

 

Answers to quiz questions 1-4:  Nobody Knows

 

Jim Cogburn

Should I Cash In My 401K Now?

Written on 09/25/08

A friend writes.....

Should I keep my 401k in stocks or start moving some of it into bonds? My inclination is to sit tight and buy shares at a lower price, since I have 20 years before I legitimately retire.

Enjoying your posts. You should start a blog with an rss feed. I would subscribe.

My response......

Glad you are enjoying my commentaries. I really just started doing this for friends and family members that I thought might enjoy some "conversation" on real world events from someone they know.

I've recently thought about making this into a blog, but haven't really researched it.  I'm sure there are all types of strategies on this, perhaps we could get together sometime discuss this idea.

On a 401k I'm sure you know the first rule is to not take it out for a period of time that would cause you to pay penalties and taxes.  The next question would be on how quickly you could pull the money out of the market as things are happening quickly.  I would think you need to do it immediately if you are going to exit the market.

The market is in a severe downturn and if you look at a long term chart of the NASDAQ it has recently broke to new lows after some lower peaks over the last few months.  It has broken an uptrend line that goes back at least 4 years.

Once this type of uptrend line is broken you have to assume the market is headed down until it proves otherwise.  Of course even in bear markets you have some sharp rallies, but they don't last long and don't mean much.

Here is the real question which nobody can answer for sure, but let's discuss.  Are we just in a normal downturn in the market and economy or will this thing get really ugly this time?  You see, the President of the United States was just on the TV tonight essentially telling you we are looking out over a financial cliff and asking for a deal so we won't fall off the edge (he hopes).

If this turns out to be just a normal downturn that is reasonably short lived then looking 20 years down the road the strategy is normally to keep dollar cost averaging in and ride it out as it is always difficult to know exactly when the bottom has been reached until a lot of the gains on the next leg have already been made.  But my thinking is your investment money should normally be diversified with some in stocks, bonds, gold, and real estate.

Here is the problem.  If our financial system freezes up it will be hard to find a place to hide.  T-Bills are a possibility, but you will receive little or no interest on your money if you take this route.  If you have quite a bit of money you could spread it among different banks (100K max for FDIC insurance), but I'm not sure if you could break up your 401K that way.

Should this thing turn really ugly then I'm sure the market will take a terrible beating.  But consider this on bonds.  Our dollar will likely plunge as well and interest rates could spike if investors, domestic and foreign, lose faith in our system and want junk bond rates to buy our debt.  If that occurs then you will likely take a beating on bonds as well.

Last week it is my understanding people wanted to raid their money market accounts and this is what nearly led to a disaster, so be careful about putting money in a money market.

If the dollar plunges then gold would most likely be the best place to be, but keep in mind it is back up toward its high now which is over triple the low just a few years ago.  It certainly could go higher but given this big run I wouldn't put all my eggs in this one basket.

Let me try to illustrate how that normal investment ideas are not necessarily going to work if we are headed for a financial and economic meltdown.... some of which has already occurred.

Suppose in January 2008 you had just retired and had one million dollars that you had worked 40 years to save and needed for your retirement.  You wanted the money to be safe so you only wanted to invest in some of the largest and oldest companies in America. 

You decided to invest in a couple of the large investment banks, one of which had been in business since before the civil war.  You also thought a couple of the largest companies that handle real estate loans would be a secure investment too.

And to add more diversification you picked the largest insurance company in the world with all kinds of diverse operations in 130 countries.  Let's see how you did.

January 1, 2008 you bought $200,000 worth of shares in each of these 5 old and very large companies.

Lehman

Bear Stearns

Fannie Mae

Freddie Mac

AIG

If you had done this as I have shown most would have believed you put your money in safe companies that would have a zero chance of going bankrupt this year.  Yet that is basically what happened to all 5 of them.

In short, your one million dollar investment in these 5 companies is practically worthless after only a few months time.  This is the type of action you get in a very unstable stock market.

I don't want to be an alarmist on this and maybe they will agree on a package and things will not be so bad.  But I'm afraid there are some structural problems that this bailout package won't solve.

So consider these things.....

The Kondratieff Wave predicts a depression is coming and if you read that article closely, which must have been written in late 2001 or early 2002, most of what it said was going to occur did occur.  Certainly we have a mountain of debt and that is what the theory says always leads to a depression every 2 or 3 generations.

The question always is, is this time different?  It says yes, everytime has differences, but the debt problem always leads to the same result.

If Obama gets in and raises capital gains taxes and taxes on the "rich" during a weak economy I do believe we are in for a hard crash.  As you know I think he has a low probablility of winning, but it is certainly still possible as anything could happen in the next 6 weeks that would totally change the outcome of the election.

Our energy situation is one of the keys.  As long as we have energy we can work our way out of a bind even if it takes a while.  But if our energy supplies are restricted then this could cause lots of problems in itself.  This could happen in a variety of ways.  It looks like Iran is going to have to be dealt with sooner or later unless they get new leadership.  This could lead to an oil supply shock if things get truly ugly over their nuclear program.

Here is a link on our gasoline supplies:

http://news.yahoo.com/s/nm/20080924/us_nm/us_usa_gasoline_suppliesusreport

And of course Al Gore always wants to be helpful when it comes to energy...

http://www.reuters.com/article/environmentNews/idUSTRE48N7AA20080924?feedType=RSS&feedName=environmentNews&rpc=22&sp=true

On the bright side I think we will have some technology breakthroughs in the near future both in transportation and in the production of electricity through nanotechnology in solar panels.  But this will probably still be at least a few years from now so in the meantime it is not a solution.

Bottom Line:  As I said in my commentary in March, we are in for some rough financial times and if you have money you need to diversify it as much as possible to try and ride out the storm without getting wiped out in a particular investment.  As you see from the example above, if you had all your money in the market, in what would seem to be 5 conservative stocks on January 1, 2008, all the money you had invested would now be gone. 

So, don't assume any company will survive this storm because we have no way to know which ones will and which ones won't.

Don't assume traditional vehicles such as money market accounts are safe at this time.

Assume real estate values will be trending down for a while.  If you have enough money to pay off a house you plan to live in for an extended period of time and still have enough money to handle normal expenses and unemployment for a few months, then this might be one way to protect some of your money.

This way if worse comes to worse you at least have a roof over your head, whereas had you invested the money in the market or other investments you see from the example above what can happen.  Just don't count on the house for home equity loans, etc as they may not be easily available for a while.

Some gold and some T-Bills may help you diversify a bit and sleep better at night too.

J. Cogburn

Kondratieff Wave - Time for a Depression?

Written on 09/22/08

When I was working on a Masters degree back in the early 90s one of the papers I wrote was on the Kondratieff Wave.  It's a theory that says economies go through predictable cycles and that economic depressions occur on a predictable basis.

It just so happens we are due for one now.  Will this financial turmoil in fact turn out badly just as the Kondratieff Wave predicts?

"But what the Kondratieff wave is about is a study of long cycles of debt buildup and repudiation. It is not exclusively about price inflation and deflation periods. Deflation is caused in part by the debt collapse. It is also a generational thing as the next cycle of debt buildup and collapse is renewed every 2-3 generations as the previous generation that went through comparable periods dies off. The old adage that "this time it is different" means the circumstances are different, yes, but they fail to recognize that the previous period was the same in terms of excesses and therefore the end result is the same."

 

And what is the problem we have now?  Massive debt at all levels of government.  Massive debt in the private sector.  Not only debt, but leveraged debt.  Obligations in the Social Security and Medicare programs that appear to be so large they cannot possibly be paid in the coming years unless the government simply prints money and allows inflation to spiral out of control.

 

So the theory predicts this generation will have a buildup of debt and a depression will result in order to repudiate that debt.  It is a historical fact that the theory was right on the first part, i.e., excessive debt.  Now the question is whether it will be right on the second part, an economic depression.

 

Certainly we've already had a depression in a number of industries as they have been bankrupted.  Unemployment is rising fast too, but is still at relatively low levels.  Will the Obama plan to throw trillions of dollars at the problem save us from a severe economic downturn that can be defined as a depression or will it simply delay the inevitable and perhaps create additional problems, such as high inflation, before the cycle has completed?  Only time will tell.

See more details of this interesting theory at:

http://www.kwaves.com/kond_overview.htm

J. Cogburn