Ah, breaker one-nine, this here's Rubber Duck...

What the heck happened to the Convoy?

ATA: ATA Truck Tonnage Index Plummeted 3.6 percent in November.

Quotes:

“November 2006 marked the single worst month for for-hire truck tonnage since the last recession,” said ATA Chief Economist Bob Costello. “Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear. The most troubling number is the 8.8 percent contraction from November 2005, despite the fact that year-over-year comparisons are difficult due to the very robust volumes during the same month last year. One month certainly doesn’t make a trend, but if we continue to see year-over-year reductions of similar magnitudes in the next couple of months, it could indicate a greater economic slowdown than economists are projecting at this point.”

----------------------------------------------------

All jokes aside, the peak in truck tonnage was around January of 2005 [see chart on linked page], which is a few months before the housing situation reached it's own climax. The downtrend from Jan 2005 to now is pretty clear, and the recent numbers don't suggest a near term turnaround. Focusing on energy, in addition to the fuel that trucks themselves burn, the fact that there is less truck traffic (less trucks hauling stuff) also indicates that the economy is cooling down. The economy cooling down means less demand for energy, which generally means energy prices would fall. Of course, OPEC wants $60 and is trying to hold it there with production cutbacks. 2007 is going to be very interesting.

Look's like we got a bit more to worry about than some Smokies.

Hat tip:

The Big Picture: Truck Tonnage Plummets.

Shark Bait 2007.

CNBC had several interviews today discussing the future for energy in 2007, the upside for select energy stocks, and the possibility of takeovers.

I've heard speculation over a takeout of Suncor (SU) before, and Tim Guinness (manager of the Guinness Atkinson Global Energy Fund) mentions it in the first video, but it doesn't strike me as likely. How can we determine an acceptable value for Suncor's 30 years of reserves? There aren't futures that far out; thirty years of production even takes you past CERA's peak and into their fabulous 'undulating plateau'. The value a purchaser could justify for Suncor would probably be unacceptable to Suncor stockholders, and a value acceptable to Suncor shareholders would probably be unacceptable to a purchaser. So I don't see it, personally.

In the second video, the analyst highlights 6 stocks he believes have significant upside. He mentions Occidental Petroleum (OXY) as a possible takeout candidate. I was daydreaming the other day and came up with the idea that Royal Dutch Shell should do an Anadarko and purchase both OXY and Nexen (NXY), which was once Canadian Occidental. That's probably a bit more bold/big than Shell is looking for. Husky Energy might be more Shell's style. I expect ExxonMobil to jump in to, but not until a whiff of recession is in the air, and I'm thinking XOM takes out either Devon (DVN) or Anadarko (APC).

Other names mentioned are Ultra Petroleum (UPL), CNX Gas (CXG), XTO Energy (XTO), EOG, and Range Resources (RRC).

CNBC Video: Tim Guinness

CNBC Video: Oil Patch Plays 2007

Goldilocks, meet Baby Bear.

I'd frankly never heard of this gentleman until about 4 or 5 months ago when I saw him on CNBC. His name is Hugh Moore, his firm is Guerite Advisors, and he appears to be gaining more notice in the press with his predictions for a mild recession in 2007 based on a model that he believes can predict recessions with very high accuracy rates. Mr. Moore claims the model has predicted recessions over the last 50 years with very few false alarms. It's not explicitly mentioned here, but I assume the model was developed with back tested data, which raises the question of whether the investigator just kept playing with the data until they got something they liked, which can lead to some questionable conclusions.

According to this interview, the data that go into the model are the inverted yield curve, housing construction rates as a percent of GDP, leading economic indicators, and their own in house indicator, 'the Guerite indicator', which he doesn't elaborate on further.

The interview is short, but his prediction is for a mild recession coming in mid to late 2007. Of the predictions for an upcoming recession, I would say this is one of the milder ones and one I find easier to mull over than the fairly dark views of people like Nouriel Roubini or, even more depressing, Warren Brussee.

CNBC Video: Hugh Moore, Guerite Advisors

Quotes:

"We don't believe in the soft landing, but then we also don't think that the world is going to hell in a handbasket either."

They Shoot Journalists, Don't They?

So, the inevitable happened, and Shell and it's Japanese partners caved in and let the Russian government Gazprom buy a stake in Sakhalin 2. Basically, they had absolutely no choice.

If you ask the Russians, they will say that the West took unfair advantage of them when they were down, and that now these deals will be renegotiated, one way or the other. And to some extent, these events are not a huge surprise, as this Russian re-nationalization of it's resource industry is just another in a fairly long line of re-nationalizations that have happened in resource rich countries.

The scary part though is that at the same time this is happening, other unsettling events are occuring inside and outside Russia, including a takeover/intimidation of the media, murders/intimidation of prominant opposition members, etc. It is basically the Wild West there, and the danger is that something spins out of control at some point, and you get serious foreign capital flight as a result. And with the general popularity of emerging markets these days, you have to wonder if something were to happen in Russia, would it trigger a more widespread sell off in emerging markets in general?

A year ago I suggested Gazprom was worthy of a speculative investment and the stock has gone up since then. There is probably more upside to this stock in the future and to Russia in general.

But seriously here: caveat emptor.

New York Times: Russians Buy Control of Oil Field.

[Note the article headline says "Russians" and not "Gazprom" in a sly reference to the fact that Gazprom is basically an instrument of the Russian government.]

Quotes:

Gazprom, the Russian energy monopoly, bought control of the world’s largest combined oil and natural gas development Thursday after a highly publicized campaign of pressure on its foreign operator, Royal Dutch Shell.

Shell’s sale of 50 percent plus one share followed months of accusations against the project by a Russian environmental regulator — a problem that President Vladimir V. Putin, in announcing Gazprom’s entry, said would now most likely be resolved.

Critics of the sale called it the first effective nationalization of a large foreign oil or gas project in Russia, which this year surpassed Saudi Arabia in oil production.

Smokey the Bear says: "Only you can prevent portfolio losses."

The stock market has a tendency to zig when everybody expects it to zag. This is partially due to the fact that when everybody is optimistic, usually they have already invested most of their money, leaving them with less new cash to invest. At the same time people tend to be most optimistic on the stock market after a period of steadily rising markets. But that may well be at a time when stocks are priced fairly richly, due to the rising market. People tend to turn most bearish on stocks after a period of steadily falling stocks, which because of falling stock prices, turns out to be the time that values are low or reasonable.

Thus, the fact that the top market strategists are uniformly bullish is...?

... a warning sign.

Bloomberg: Stock Strategists Raise Alarms With Call for Rally.

Quotes:

Strategists at 12 of the biggest Wall Street firms agree that U.S. stocks will rally next year. The last year that happened was for 2001, when the Standard & Poor's 500 Index dropped 13 percent.

....

``People are bullish, and the strategists are too,'' Bernstein, 48, said in an interview. ``We all are.'' The New York-based forecaster expects the index to reach 1570, up 10 percent from its current level, in the next 12 months.

....

``I'm an old believer that when everyone believes something is going to happen, the opposite happens,'' said David Kotok, who oversees $850 million as chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. ``That causes me concern because I'm bullish too.''

---------------------------------------------------------

I leave you with the wisdom of Warren Buffett:

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

Turn-ons: Hydrocarbons, my G4, honesty, brunettes.

Ah, okay, so that last one is mine. But whoa boy, am I a little nervous right now.

Why?

Well, first up, the Playboy interview in the January 2007 issue [link good only till they update with next month's issue] is with Boone Pickens. (Along with, natch, a cover of Pamela Anderson. Do we need to see any more of her? No.) Boone Pickens is of course these days probably the most familiar mainstream proponent of peak oil, as well as the head honcho of several very successful hedge funds focused around energy.

Secondly, the January 2007 issue of Bloomberg Markets magazine has a cover shot and profile ['Macro Man' - pdf warning] of my other favorite hedge fund manager, Peter Thiel, who's performance has also been remarkable over the past few years, and naturally his peak oil views are mentioned in the article.

Okay, so it isn't quite like Time Magazine picked James Kunstler for Man of the Year or something, and it's not on the level of the famous BusinessWeek cover proclaiming "The Death of Equities", or even the Economist's cover in 1999 predicting $5 oil as far as the eye could see.

But when two major media outlets pick up on our two favorite fund managers and prognosticators simultaneously after both having had a significant period of out performance under their belts, wow, it's really got to raise your contrarian hackles something awful. The herd, my friends, is gazing our way with a longing sort of look. We can only hope they get distracted by Miss January, who, interestingly enough, has the word "Respect" tattooed right over her.. Well, I'll leave that little detail to be uncovered in your research. Remember folks, since it's all about your investments, it's not only tax deductible, but you can actually justify it to the wife.

What does it all mean? Maybe nothing, maybe something. Keep an eye out. Stops in place. Discipline rules.

[Sidenote: Oddly enough, reading the Bloomberg profile, I discovered that Peter Thiel and I share a similar background. We were both born in Frankfurt, he in 1967, I in 1966; his family moved a lot, and he attended 7 elementary schools in different countries, similarly, I attended 5 elementary schools in assorted countries; he eventually settled in San Francisco and attended a local college (Stanford), I eventually settled in Los Angeles and attended a local college (UCLA), he drives a Mercedes McLaren SLR, I drive a... okay, so we diverged a little bit somewhere in the middle.]

I leave you with the contrarian wisdom of Groucho Marx:

"I sent the club a wire stating, PLEASE ACCEPT MY RESIGNATION. I DON'T WANT TO BELONG TO ANY CLUB THAT WILL ACCEPT ME AS A MEMBER."

OPEC: "No more Mr. Crooked Guy."

OPEC has preliminarily agreed to a further oil production cut of 500,000 barrels a day starting in February, on top of an earlier agreement to cut 1.2 million barrels a day. Apparently, they mean business on the idea of a floor of roughly $60 a barrel or so. (Most OPEC oil sells at a discount to light sweet oil like WTI, so whatever price is being bandied about in the press, most OPEC producers are seeing something several dollars below that.)

Traditionally, an output cut from OPEC was treated as a joke because there was so much cheating. (Highlighting, by the way, the lack of reliable production statistics from around the world.) However, according to the article below about two thirds of the earlier cut has been implemented, and so we are talking about meaningful amounts of oil production being pulled from the market.

I see people interviewed regularly on various business programs who say "Hey, there's too much oil, it's going to $50. (or $40 etc)." They seem to be ignoring the fact that OPEC earlier this year clearly stated it wanted $60 and that this time, they have the means and apparently the will to hold it there.

CNBC: OPEC Agrees to Cut Oil Ouput In February by 500,000 Barrels a Day.

Quotes:

OPEC ministers agree the market is oversupplied -- stocks in the U.S., its top consumer, are the highest since 1998 for the time of year -- but some fear cutting during peak demand could drive prices further above $60 and hurt consumer nations.

The opinion of leading exporter Saudi Arabia is key in determining OPEC output policy. Oil Minister Ali Al-Naimi told reporters on his arrival the market was in better shape than when ministers last met, at October's emergency talks.

"The fundamentals of the market are much better than they were in October," he said, adding: "We probably have a little work to do to make it an even better, more stable market."

"We have to work together as a team," Naimi said. "We have done well so far, we may have to do some more."

U.S. Energy Secretary Sam Bodman and International Energy Agency head Claude Mandil have called on OPEC to wait until next year before deciding on further supply reductions.

A delegate from one of OPEC's Gulf members said there was a strong case for holding fire. "No cut, compliance -- this is the view up until now from the Gulf members," the delegate said.

Gazprom issued License to Kill.

Deals, that is.

Wow, fascinating statistic from the below CNBC video: 78% of the top energy executives in Russia are ex-KGB.

And we thought the Cold War was over. Nah, it just took on a whole new meaning.

By the way, watch Mr. Shuvalov (a senior economic advisor to Russian President Vladimir Putin) being interviewed here closely. He expresses himself pretty clearly in this video.

CNBC Video: From Russia, With No Love.

Which is why I find the following interesting: When interviewed by Forbes magazine, Mr Shuvalov answered a question about ExxonMobil's status in Russia in a somewhat ambiguous way, if you ask me. Well, let's hope Rex Tillerson [ExxonMobil's CEO] is current on his pledges to the St. Petersburg ballet. [Not that they need any money over there, it just pays to hang out with the right crowd.]

Forbes: Russia's Western Strategy.

Quotes:

Q: I'm interested to hear you had such positive interactions here. A lot of people are troubled about Russia's role in the oil and gas sector--and that worry is increasing. From an investment perspective, Lukoil, TNK-BP, we're starting to see government influence.

A: Government influence in these companies?

Q: There's discussion that TNK-BP is going to be forced to give up the [East Siberian] Kovykta field. Lukoil is doing business with Gazprom. Within that context, following what happened in Ukraine, people are starting to worry.

A: TNK-BP and Lukoil, they have nothing to do with government influence. We welcome [Lukoil's] partnership with the American company ConocoPhillips. If [Lukoil has] other partnerships to exploit something new, not existing ones, it's OK. To be honest, it's a kind of nonsense. There is no government influence or interference in their business.

It's true we're working with Lukoil and Rosneft and Sakhalin and others--they were told by environment agencies to fulfill environment laws. But not the business as a whole. Again, for me, TNK-BP and Lukoil, they're completely private companies. I know the investors and the management of the companies pretty well.

There is a lot of speculation that the Russian investors of TNK-BP are going to sell the shares. It's not true. I spoke with [majority shareholders Victor] Vekselberg and [Mikhail] Fridman. Their position is that they are strong, long-term strategic investors. They are not giving up; they don't want to sell their shares. They think that the value of them is growing also. There were a lot of articles about possible change in investors, but it's not true.

Q: What about Lukoil? Is ConocoPhillips' stake safe?

A: [Looks surprised.] I think so. Why not?

Q: What is it you think we don't understand?

A: For you, I think in general Russia is an unpredictable partner. Whatever you get from my country, any kind of signal, you would like to interpret it in a negative way, because you don't understand what's going on, so any kind of information for you is bad, first, and then you would like to find justification for better things. But we may have mismanaged our explanation of what we aimed at the beginning, why we raised the gas prices, why we behaved like this with Sakhalin and everything else.

But again, we support the principles outlined in the G-8 strategy first, and we internally changed our plans for energy strategy. And we announced plans for growth to raise gas prices by 2011, to build new coal power stations. Everything is changing in Russia--and changing toward a positive scenario.

If our Western clients and consumers would like to get enough gas on time, they need to understand we need cash to maintain the reserves and exploit the fields. It's our commodity, and we would like real cash for that. We would like to be seen--and we will be pursuing this--that Russia is the most reliable partner for energy for the United States and other G-8 countries.

Q: Do you see how people can be panicked after all the scandals that happened in Sakhalin? Companies invested billions of dollars, they're working fine, and suddenly--

A: But not suddenly. First, they knew exactly what they did, and possible outcomes. Everything was obvious. I met with one of the top managers of the Shell company, and they're meeting [this] week with the minister of energy in Russia, and they're quite positive they will be able to resolve the issue.

Q: So do you think Shell will be able to stay?

A: No doubt about that. Shell will stay, and it is one of the biggest and best investors in Russia with a good reputation. We accept that Sakhalin is a very important project for Russians. There are difficulties, and they have to resolve them. At the end, it will be a successful story. Exxon had cost overruns, but Shell's was twice more than planned.

Q: So Exxon has no problems?

A: [Shakes head.]

----------------------------------------------------------------

The squeeze starts:

----------------------------------------------------------------

AP: Gazprom Nears Deal to Join Shell Project.

Quotes:

Earlier Tuesday, Oleg Mitvol, of the state environmental watchdog Rosprirodnadzor, said Sakhalin-2 had caused environmental damages worth $10 billion, news agencies reported.

He said a final evaluation of the damages would be completed by fall next year and that by March he would be ready to sue the company in Russia and in the Arbitration Institute of the Stockholm Chamber of Commerce, which settles such disputes.

Mitvol and other Russian officials say that the Shell-led consortium developing the energy project has silted rivers and felled trees illegally.

Representatives for the consortium, Sakhalin Energy, were not immediately available to comment.

Mitvol also said he planned to begin an inspection of the Sakhalin-1 project, which is 30 percent-owned by Exxon Mobil Corp.

--------------------------------------------------------------------

Oh, and Lord Browne [BP's CEO]. I suggest an appearance as Santa at the St. Peterburg's Childrens hospital, and a whole lot of Elmo TMXs.

--------------------------------------------------------------------

Further quotes from AP article above:

If control of Sakhalin-2 does eventually go to Gazprom it could set a precedent for BP PLC's Russian joint venture: Prosecutors have threatened to revoke TNK-BP's license for the giant Kovykta gas field in Russia's Far East for alleged underproduction.

Gazprom: "No more Mr. Nice Guy."

Well, it looks like it's going to get very interesting in Russia soon. This is not good news for ExxonMobil, BP, and ConocoPhillips, all of which have fairly substantial investments in Russia.

WSJ: Shell May Cede Control of Project To Russia's Gazprom. [$]

Quotes:

The person close to Gazprom also said gaining a controlling stake in Sakhalin-2 would set a precedent for Gazprom to press for control of other big Russian gas projects, such as the Kovykta field in Siberia, currently owned by the Anglo-Russian venture TNK-BP Ltd.

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Be all that you can be. Sign up for Operation Alberta Freedom now.

From Russia With Love.

Shell finally throwing in the towel on this thing and ceding control to Gazprom? Not entirely unpredictable, but wow.

Reuters: Gazprom yet to decide on Shell Sakhalin offer.

Quotes:

Russian gas monopoly Gazprom said on Monday it had yet to decide on Royal Dutch Shell's offer for it to take majority control in the Sakhalin-2 project due to ecological concerns.

CNBC Video (free for 24 hours): Gazprom to control Sakhalin-2?

Same as it ever was..

I'm not sure.. Do they start these Gulf get togethers with the same toast every year? Because nothing has changed in the past 30 or so years.

So, while on the one hand it sounds sort of newsworthy that the Saudi king suggested the Middle East is on the verge of exploding, on the other hand, when you review the names, the places - Israel, Palestine, Iraq, Lebanon - they have a certain familiar ring to them and the thought has to creep into your mind (along with that beat):

Same as it ever was... same as it ever was... same as it ever was...

What does this mean for oil prices? The usual, volatility.

AFP via Yahoo! News: Gulf summit opens with warning of regional explosion.

Quotes:

RIYADH (AFP) - Saudi King Abdullah opened the annual summit of Gulf leaders with a warning that the Arab world was on the brink of exploding because of conflicts in the Palestinian territories, Iraq, and Lebanon.

----------------------------------------------------------------------------------
[Ever wonder if this thought enters President Bush's mind? I do.

My God! What have I done?

Note: Not a political statement, just sort of a reflective question.]

PS. Select lyrics from the Talking Heads: Once in a Lifetime.

Let it snow, let it snow, let it snow..

A follow up on Chesapeake Energy's predictions for winter:

TheStreet.com: Two Resources for Energy Insights.

Quotes:

Watch the Weather

One of the more important variables in predicting energy-commodity prices in the month of December is weather. Winter officially begins the middle of the month, and bone-chilling cold is bullish for the energy markets. In fact, last year's historically warm winter was the primary cause of the swoon in natural gas prices this past summer.

Hence, all energy investors have at least one eye on the forecasts, especially the longer-range forecasts for January and February. So I decided to check in with Chesapeake Energy (CHK - commentary - Cramer's Take - Rating), the large natural gas producer, which has its own uncannily accurate meteorologists. Cheapeake's meteorologists were some of the few who accurately predicted last winter's warmth.

The accuracy continues. My sources suggest Chesapeake's forecasters were spot-on in predicting last week's cold-and-snow snap through the upper Midwest. The Chesapeake gang's forecast for the coming week suggests slightly warmer-than-normal temperatures, followed by a holiday cold snap that, if it happens, could help rally energy prices.

More important, the Chesapeake weather team sees a more normal winter season come 2007, compared with the past 30 years. That means that, when compared with the last 10 years (which have been consistently warmer than longer-term norms), winter weather should be colder than normal, a positive for energy investors.

You can keep an informal eye on the weather via these links.

Oh the weather outside is frightful..

And owning energy is so delightful..

Keep an eye on this chart, it's going to determine the price of oil and natural gas for the next couple of months. So far, we've had a couple of good cold blasts run through, but in between temperatures have been mild. Still, a lot of natural gas was burned, and it's still fairly early.

Weather.com: USA Current Temperatures.

Additional charts showing temperature deviations from normal highs and showing deviations from normal lows will highlight where we are versus prior year averages. Lots of negative numbers, particularly in the Mid-West and Northeast are good.

Bare Naked Capitalism.

Bloomberg: Cerberus May Buy Delphi Car-Parts Plants, People Say.

Ben Stein on Cavuto on Business (Fox News) keeps making this suggestion, and it is sort of interesting, so I thought I'd bring it up.

So, here's the pitch:

A money losing auto parts making operation, currently in bankruptcy, desperately in need of major restructuring, saddled with sky-high union salaries, serious pension obligations, spun off from a parent automaker (General Motors) that is in similar shape.

Sounds awesome, right? It's Delphi. (DPHIQ.PK - the 5 character symbol and .PK because it is in bankruptcy and booted off the major exchanges)

Well, maybe.

Normally, you should run for the hills from this kind of investment (I hesitate to call it an investment, let's call it a speculation.) Or perhaps you buy the bonds. Never, never, never, ever buy the stock. Except maybe this time.

All kidding aside, normally when a company goes into bankruptcy, the stock is ultimately worthless, anyone holding the stock loses everything, and the bondholders end up owning the company with newly issued stock (think Kmart). So even though you may see stocks trade during bankruptcy, it is almost always people flushing their money straight down the toilet.

However, in Delphi's case, you have a major hedge fund - Appaloosa Capital - with a very sharp manager - David Tepper - as a major holder of the stock, trying to work a deal here where the unions accept lower pay rates, various factories are sold off to interested parties, other costs are rationalized, etc. etc. [Note that the article highlights Cerebrus. I'm more interested in Appaloosa, which is also mentioned.] Obviously though, getting people to take huge pay cuts is not easy. If things go wrong, the stock will be worthless, the bondholders will end up with everything. And, we'll also note, Kirk Kerkorian, an investor who knows a few things, just dumped his entire stake in General Motors when he lost faith in their ability to make the major changes he was seeking. So Mr. Tepper has his work cut out for him.

I will note that in response to Ben Stein's suggestion to buy the stock, former hedge fund manager Jim Rogers suggested buying the bonds instead, which is safer. But if this works out for Appaloosa, the stock is going to give you much more juice than the bonds.

I leave you with the wisdom of Oingo Boingo:

There's nothing wrong with Capitalism
There's nothing wrong with free enterprise
Don't try to make me feel guilty
I'm so tired of hearing you cry

There's nothing wrong with making some profit
If you ask me I'll say it's just fine
There's nothing wrong with wanting to live nice
I'm so tired of hearing you whine
About the revolution
Bringin' down the rich
When was the last time you dug a ditch, baby!

Rock the Casbah.

Well, this is subtle.

WashingtonPost.com: Stepping Into Iraq. Saudi Arabia Will Protect Sunnis if the U.S. Leaves.

Quotes:

In February 2003, a month before the U.S.-led invasion of Iraq, the Saudi foreign minister, Prince Saud al-Faisal, warned President Bush that he would be "solving one problem and creating five more" if he removed Saddam Hussein by force. Had Bush heeded his advice, Iraq would not now be on the brink of full-blown civil war and disintegration.

One hopes he won't make the same mistake again by ignoring the counsel of Saudi Arabia's ambassador to the United States, Prince Turki al-Faisal, who said in a speech last month that "since America came into Iraq uninvited, it should not leave Iraq uninvited." If it does, one of the first consequences will be massive Saudi intervention to stop Iranian-backed Shiite militias from butchering Iraqi Sunnis.

Over the past year, a chorus of voices has called for Saudi Arabia to protect the Sunni community in Iraq and thwart Iranian influence there. Senior Iraqi tribal and religious figures, along with the leaders of Egypt, Jordan and other Arab and Muslim countries, have petitioned the Saudi leadership to provide Iraqi Sunnis with weapons and financial support. Moreover, domestic pressure to intervene is intense. Major Saudi tribal confederations, which have extremely close historical and communal ties with their counterparts in Iraq, are demanding action. They are supported by a new generation of Saudi royals in strategic government positions who are eager to see the kingdom play a more muscular role in the region.

Because King Abdullah has been working to minimize sectarian tensions in Iraq and reconcile Sunni and Shiite communities, because he gave President Bush his word that he wouldn't meddle in Iraq (and because it would be impossible to ensure that Saudi-funded militias wouldn't attack U.S. troops), these requests have all been refused. They will, however, be heeded if American troops begin a phased withdrawal from Iraq. As the economic powerhouse of the Middle East, the birthplace of Islam and the de facto leader of the world's Sunni community (which comprises 85 percent of all Muslims), Saudi Arabia has both the means and the religious responsibility to intervene.

Just a few months ago it was unthinkable that President Bush would prematurely withdraw a significant number of American troops from Iraq. But it seems possible today, and therefore the Saudi leadership is preparing to substantially revise its Iraq policy. Options now include providing Sunni military leaders (primarily ex-Baathist members of the former Iraqi officer corps, who make up the backbone of the insurgency) with the same types of assistance -- funding, arms and logistical support -- that Iran has been giving to Shiite armed groups for years.

Another possibility includes the establishment of new Sunni brigades to combat the Iranian-backed militias. Finally, Abdullah may decide to strangle Iranian funding of the militias through oil policy. If Saudi Arabia boosted production and cut the price of oil in half, the kingdom could still finance its current spending. But it would be devastating to Iran, which is facing economic difficulties even with today's high prices. The result would be to limit Tehran's ability to continue funneling hundreds of millions each year to Shiite militias in Iraq and elsewhere.

Both the Sunni insurgents and the Shiite death squads are to blame for the current bloodshed in Iraq. But while both sides share responsibility, Iraqi Shiites don't run the risk of being exterminated in a civil war, which the Sunnis clearly do. Since approximately 65 percent of Iraq's population is Shiite, the Sunni Arabs, who make up a mere 15 to 20 percent, would have a hard time surviving any full-blown ethnic cleansing campaign.

What's clear is that the Iraqi government won't be able to protect the Sunnis from Iranian-backed militias if American troops leave. Its army and police cannot be relied on to do so, as tens of thousands of Shiite militiamen have infiltrated their ranks. Worse, Iraq's prime minister, Nouri al-Maliki, cannot do anything about this, because he depends on the backing of two major leaders of Shiite forces.

There is reason to believe that the Bush administration, despite domestic pressure, will heed Saudi Arabia's advice. Vice President Cheney's visit to Riyadh last week to discuss the situation (there were no other stops on his marathon journey) underlines the preeminence of Saudi Arabia in the region and its importance to U.S. strategy in Iraq. But if a phased troop withdrawal does begin, the violence will escalate dramatically.

In this case, remaining on the sidelines would be unacceptable to Saudi Arabia. To turn a blind eye to the massacre of Iraqi Sunnis would be to abandon the principles upon which the kingdom was founded. It would undermine Saudi Arabia's credibility in the Sunni world and would be a capitulation to Iran's militarist actions in the region.

To be sure, Saudi engagement in Iraq carries great risks -- it could spark a regional war. So be it: The consequences of inaction are far worse.

The writer, an adviser to the Saudi government, is managing director of the Saudi National Security Assessment Project in Riyadh and an adjunct fellow at the Center for Strategic and International Studies in Washington. The opinions expressed here are his own and do not reflect official Saudi policy.

2006 - Building a base.

Quote from BoonePickens.com:

"If you're on the right side of an issue, just keep driving until you hear breaking glass. Don't quit."


I was reviewing a number of charts from the energy sector last night. [For charting, I like to use StockCharts.com. I generally add Full Stochastics which highlights short term moves a bit more overtly than RSI, put the size at Landscape, and first view Daily data and then Weekly to see the longer term trend.]

My thoughts: 2006 was generally an all over the place year. Some stocks are up on the year, some are down, some are roughly flat. There were a couple of large moves over the year in each direction, but 2006 was a significantly weaker year compared to either 2004 or 2005. However, I think a period of consolidation after a very strong couple of years is both to be expected and healthy. [Somewhere I had guessed that 2006 would be rough, but I'll have to add the link later, as I can't find it right at the moment..] In terms of a driving factor for this off year, obviously the questions about the economy and oil and natural gas prices that came off the boil played a major role, even as many companies in the energy sector reported record profits.

So what's in store for 2007?

As I was reviewing the charts, my impression was that the energy sector is fighting it's way back, some stocks to their highs for the year (and multi-year, or all time highs), others back towards the top end of their trading range, some to flat, and others are still trading below water for 2006. But I would say this is not a sector that has thrown in the the towel, even after a couple of serious downdrafts during the year. I don't know when the long term uptrend resumes, perhaps it did in October, perhaps it will in 2007 or 2008, but I think the uptrend will ultimately resume. [Why throw 2008 in there? I'm still nervous about the economy - the negative effect from housing has quite a lag.]

And, as a kicker, it's always nice to wake up in the morning and read an article that generally confirms your own thesis, with quotes from one of the more prescient guys in the business.

Bloomberg: Oil Shares Signal a Rebound; Pickens Predicts Record 2007 Price.

Quotes:

``I keep thinking we're right at the bottom on oil,'' Pickens, who has correctly predicted rising energy prices for the past three years, said in a Nov. 22 interview. ``I don't see why the run is over if the global economy continues to grow.''

Peter Thiel says be careful out there.

Peter Thiel runs hedge fund Clarium Capital Management and since I started this blog in Feb. 2005 his assets under management have risen from a coupla hundred million dollars to roughly $2 billion. And it ain't just dumb luck folks, as Peter strikes me as seriously sharp in his interviews, and has an impressive investment record to boot. One day I fully expect to hear Peter's name listed alongside some of the real luminaries in the history of hedge funds, names like Rogers, Soros, Steinhardt, Cohen, Simon, et al.

In this interview from MarketWatch, he explains his current views of the markets after the US elections. He sees the potential Democratic sweep of the House as a vote of no confidence on the US economy by the electorate, is worried about equities in general and also very worried about the US housing market for 2007. He continues to be bullish on energy equities, and believes that as a result of Fed moves (or the lack thereof), the US dollar may continue to strengthen.

Generally, these are the same viewpoints he has been expressing for some time, and while he was early on his calls on housing, the more we hear from homebuilders and realtors (Toll Brothers and Beazer announced new orders down more than 50% yesterday, Hovnanian today announced a loss due to land charges.) the more it looks like we may still have a turbulent adjustment period ahead of us in housing.

MarketWatch Video: Peter Thiel.

[note: although MarketWatch lists the video as available, the link no longer appears to link to the proper video.]

October's Weather Surprise.

The predictions for this summer were for an active hurricane season. Those predictions were way off, we got nothing of note.

The predictions for this winter were for a warm winter. Instead, so far September and October have been colder than normal.

[You have to wonder if these are somehow correlated; is there some change in the weather that suppressed hurricanes this year that might also have implications for the winter, perhaps for a colder winter?]

Here's a clip from CNBC discussing October's weather. Note Joe Kernen's question about what October might suggest about the rest of the winter.

CNBC via MSN Video: Weather Trends International CEO Bill Kirk.

Matthew Simmons at ASPO USA.

A video of the talk by Matt Simmons on Peak Oil from the ASPO USA Conference recently held up in Boston. Found on The Oil Drum.

A lesson in how to trade natural gas.

I'm afraid I've gone a bit coco for natural gas, and along comes this.

By this, I reference the Chesapeake Energy Conference Call, which is resoundingly bullish on the future of natural gas prices in North America, and contains solid insight into their views and recent trading of natural gas.

In addition, their weather analysis indicates a more normal winter is in store for the US, meaning something colder than in the past couple of years. This is different from the consensus that we will have a mild winter, but so far Chesapeake's call for a colder than average September and October have played out as predicted.

TheStreet.com: Inflection Point for Energy Investors.

Q3 2006 Chesapeake Energy Corporation Earnings Conference Call.

Some prior posts on natural gas:

Jim Rogers: Time to buy natural gas.

The Case for Natural Gas.

Unconventional Success in Gas Production (No Yale Degree Required).

Has Aubrey McClendon lost his mind?!

Boone Pickens Day.

Boone Pickens in NY and making the rounds of the business media today. [Note for you sticklers, yes, the CNBC studios are in NJ.]

CNBC via MSN Video: BP Capital Founder Boone Pickens.

Bloomberg TV: Boone Pickens.

Key thoughts:

He believes we will see $70 oil again before $50 oil, based on the idea that OPEC, and in particular Saudi Arabia, will remove oil from the market to defend $60+ oil. He also still thinks we will hit $100 oil in the next year based on a geopolitical event, of which there are of course several possibilities.

Oil prices are falling, but the sky is not.

What a beautiful call Jim Rogers made on natural gas!

See a recent discussion on natural gas prices here:

CNBC via MSN Video: Wild Action in Natural Gas.

You can chart natural gas prices via symbol $NATGAS on StockCharts.

Additionally, OPEC is now indicating that it will pull 1 million barrels of oil a day off the market, as I predicted they would probably have to, based on Boone Pickens call that oil was going down due to a slowing economy. Oil appears to be trading up right now, but this fairly quick action (assuming it happens), also suggests OPEC is seeing some pretty decent weakness in the market.

Another question this raises for me is if the plunge in oil is a result of a US or global recession that is developing, will trying to hold $60 make that situation worse? Assuming the plunge is warning of recession [which is not altogether clear, but has to be on your radar as a possibility], I think $60 is probably too high. But in terms of peak oil and the need to develop alternatives and encourage conservation, it may be for the best.

Finally, Ben Bernanke, Chairman of the US Federal Reserve, yesterday declared that the US was undergoing a "substantial correction" in housing. Which brings me to the following:

The yield curve is inverted, which means that long term rates are actually lower than short term rates, an unusual condition.

Long term rates are driven by the bond market, while short term rates are driven by the Fed. If the yield curve were not inverted, and long term rates had their normal relationship to short term rates, long term rates would be higher, and since long term rates in turn drive traditional mortgage rates, one has to wonder how much more "substantial" the correction in housing would be if those normal relationships were now in place.

This is a long way of saying that the Fed very much appears to have basically no way to go but down with interest rates, it's just a question of how soon.

The bond market has been of the mind that the Fed had no place to go but down for some time now. The stock market is also apparently convinced that the Fed will either hold or ease down soon, leading to a soft landing.

Inflation, by the way, does not appear to be much of a worry to anybody anymore, including the gold market, with the notable exception of the Fed, a former Fed Chair, and Mike Darda of MKM. Obviously, there is inflation out there, but it does not appear to have moved into the labor market in any meaningful way, and debt levels being what they are (generally high-ish), the thought creeps into my mind as I listen to some Fed members that perhaps they are busy fighting the last war.

Along with OPEC trying to negotiate a falling oil price, this is all going to be very interesting to watch.

Does everything fall into place just so, leading to a soft landing? I'm pretty skeptical, but I will try to keep an open mind.

Predictions for a warm winter.

I've read a few news items suggesting that energy prices fell yesterday because of a fear of what today's inventories would reveal as well as a rising belief that OPEC won't cut production meaningfully. Perhaps, but the following looks like a more likely culprit to me. Note the reference to 1998, which I'm sure put a chill in any energy trader's heart.

There is a bit of an oddity to this, in that this September was actually rather colder than normal.

SmartMoney: El Nino to Sap Storms, Warm Winter

Quotes:

Blaming faster-than-expected El Nino conditions in the Pacific Ocean, forecasters at Colorado State University on Tuesday repeated their call for below-average storm activity during the rest of the Atlantic hurricane season.

"Typically, El Nino conditions put an early end to hurricane formation in the Atlantic basin," said William Gray, a hurricane forecaster with the closely watched forecasting team at Colorado State. "This year, El Nino has developed faster than almost anyone predicted."

El Nino is a weather phenomenon involving unusually warm surface temperatures in the Pacific Ocean that can have profound consequences for climate, including warm and very wet summers in South America and warmer-than-normal winters in parts of North America.

Gray, in a telephone interview, described the current El Nino as "weak to moderate" compared with 1997-98 phenomenon, which was the strongest on record and helped sink oil prices.

That El Nino, which slashed heating fuel demand in the Northern Hemisphere, occurred just as the Organization of Petroleum Exporting Countries announced an increase in oil production quotas that proved ill-timed as it corresponded with the start of the Asian economic crisis. Crude oil prices plunged to near $11 a barrel and didn't recover for two years.

A top forecaster at the National Oceanic and Atmospheric Administration, Vernon Kousky, said last month, "There is a reasonably good chance that this El Nino will strengthen to a moderate event. For moderate and strong El Nino events, the Northeast (U.S.) has a greater chance of experiencing warmer-than-average temperatures."

Jim Rogers: Time to buy natural gas.

Here's an interesting trade.

Jim Rogers, former hedge fund manager, on Cavuto on Business this weekend:

"Two hedge funds have collapsed recently, have driven down the price of natural gas. Two things:

It's gonna be cheaper to heat your house if you use natural gas; if you don't use natural gas, switch to natural gas.

But secondly, buy natural gas, you'll make a fortune."

[Note: The transcript on Foxnews.com contains only the first comment about using natural gas in your house. The quote above is more accurate.]

------

One of the funds he's referring to is Amaranth which hasn't collapsed and is trying to stay open, though that seems a little unlikely given the circumstances, so ultimately he'll probably be right. Using borrowed money to gain serious leverage, they played natural gas futures for early 2007, in the process basically cornering the market for themselves. When they ran out of money to keep buying, it turned out everybody else had taken their toys and gone home (quite possibly on purpose), and the market plunged, leaving Amaranth holding the bag.

The other fund he's likely referring to is MotherRock LP which also incinerated itself with natural gas trades. The notable thing about MotherRock is that one of the managers was a former President of the New York Mercantile Exchange (a major commodities exchange) who probably had a little bit of experience with trading commodities before trying his hand at running a hedge fund portfolio.

So, justifiably, natural gas is considered the most volatile commodity of all, and it has certainly proved it recently, burning even those with experience. After spiking last year to $15, it's now down to under $5.

Jim Rogers is probably counting on three things to support this trade: First, that the blowup of these two hedge funds has created a temporary dislocation in the price of natural gas to the downside, and secondly that natural gas is now trading at the low end of it's range in it's normal relation to oil. This idea is also supported by energy analyst Kurt Wulff, who recently wrote "Natural gas may not have positive price momentum, but it has value at near the lowest ratio to crude oil in the 00's decade." Finally, we are just ahead of winter and natural gas has a tendency to spike sharply if you get a period of very cold weather during the winter.

A couple of things to keep in mind: This is a trade he is recommending, so you need to keep a watchful eye on your position to sell into a spike. Predictions for this winter suggest it will be warmer than normal.

If you don't trade the commodity, you could take a look at stocks that generally trade along with natural gas, some of the ones I found correlated are EGN, PXP and WMB. The larger producers of natural gas include COP, ECA, EOG, APC, XTO, CHK.

Pickens: It's the fundamentals.

I dunno, maybe he's a Star Wars fan too.

Dallas Business Journal: Pickens: 'Fundamentals' driving oil price.

Quotes:

Dallas oilman T. Boone Pickens says "fundamentals" are the reason the spot-market price of oil has fallen recently to $61 per barrel from nearly $79.

....

"What's happened is you have enough oil now to satisfy everyone's needs," he said. "The demand is dropping off; the economy is slowing down. You don't need as much oil as you needed 30 days ago or 60 days ago, so the price came down. And that's it in a nutshell."

-------

All kidding aside, the 50/50 case for recession is tilting here heavily. In the recession of 2001, oil prices dropped from roughly $40 (inflation adjusted) to around $23, or 42%. In 1990, they dropped from roughly $56 to around $33, or 41%.

So, let's see... $78 - (78 * .41) = $46.

OPEC wanted a floor of $60, they're going to have to pull oil off the market to get that one to stick. That will be interesting to watch.

What's missing from these charts?

Chart of the Day: Oil, Inflation Adjusted.

The Big Picture: The Car Dealers Doldrums Indicator.

Econbrowser: Watching housing slide.

Grey shaded areas on all of the above charts are recessions.

Oil prices, car dealer sales, building permits, housing starts, and the yield spread - suggesting the possibility of recession.

Unemployment, corporate profits, the market averages - generally not suggesting recession.

Retail sales - ?

Could go either way, just as Liz Ann Sonders said. (Her case was built on oil, housing, and the yield curve, btw.)

How's real estate doin'?

Barbara Corcoran is founder of The Corcoran Group, which is listed on it's web site as the largest residential real estate firm in New York City.

So perhaps she can give us a sense of how exactly real estate is doin'.

Not so good, apparently.

FoxNews Cavuto on Business, Recap of Saturday, September 16:

Quote:

Barbara: Home prices falling; you ain't seen nothin' yet!

Coincidentally, I happened to be in one of Corcoran's regions this weekend outside of NYC and I was struck by just how many FOR SALE signs I saw. (This was before I saw her comment, btw.)

Another casualty of a rough year.

CNBC via MSN Video: Hedge fund blows $5 billion in one week.

NY Times: A Hedge Fund’s Loss Rattles Nerves.

CNBC via MSN Video: The man who lost $5 billion in one week.

CNBC via MSN Video: Mistakes at Amaranth.

This is the third hedge fund that I can recall that blew up this year due to bad commodity bets, the others being Ospraie Point Fund and MotherRock LP. In this case it was apparently a result of a bad bet on natural gas, which spiked up during the heat wave in the summer then turned around and plunged as the rest of the summer turned mild and no serious hurricanes threatened Gulf production. MotherRock also blew up due to natural gas, I believe they had been leaning bearish when the price shot up. In this case, the trader was playing spreads on natural gas futures, which turned on him. This has shades of the Long Term Capital Management situation, where they were also heavily concentrated, leveraged, and playing spreads between various fixed income instruments based on historical tendencies, which also turned on them.

I haven't recommended buying futures and options here for the simple reason that the volatility can be very intense, even for traders with years of experience, and when things go wrong money can disappear very, very quickly. Amaranth, according to the reports, had been up 22% for the year in August, and is now down something like 35%, which is a 57% turnaround in one month, with the worst damage suffered last week.

P.S. Brian Hunter - no relation.

What's missing from this chart?

Chart of the Day: Oil, Inflation Adjusted.

The greyed areas on this chart are recessions. Notice that when we had a large rise in oil prices in a short time (circa 1974, 1979, 1991, 2000), we generally encountered a recession shortly thereafter.

Will it be different this time? The rise this time came over 3 years, rather than in a short period, but this is also the second largest rise on the chart.

Also, one other thing to note: Most of these rises were followed by sharp breaks in oil prices as demand faltered.

Stay tuned..

The real estate wildcard.

Why delve into real estate and mortgages on a blog about energy? Because the situation developing in real estate is a wildcard that can't be ignored in trying to figure out what could happen to the economy in the future.

The real estate boom of the past few years was really one for the ages. By various measures, real estate values got significantly above long term trend lines, particularly in hot areas like Florida, California, parts of the Northeast and Washington D.C. areas, and Las Vegas. Additionally, ostensibly to help people afford homes at these valuations, various forms of exotic adjustable and interest only mortgages were peddled and came into much wider use. Which makes you wonder: since fixed rates were so low during most of this period courtesy of the US Fed, why bother using these mortgage timebombs that ensure higher future payments? They were used because they made payments look affordable to people as they mostly focused on the early payments, not the potential for upward adjustments in the future. Now that people are seeing these adjustments upwards, often fairly significantly upwards, many of these mortgages are now causing people much grief, and in some cases pushing people into foreclosure as they find themselves unable to keep up with the payments.

As the articles below indicate, this is a growing issue, and will likely contribute to the cool off in housing. And an accident in housing will likely affect consumer psychology negatively.

Keep an eye on this story.

BusinessWeek: Nightmare Mortgages.

CNNMoney.com: Foreclosures spiked in August.

Courtesy of Calculated Risk, a blog I read for housing info:

USA Today: More fall behind on mortgages.

A plug for Google Reader.

Totally off topic, for those of you who read a lot of blogs, I highly recommend using Google Reader.

Clean, elegant, simple; I love it.

Liz Ann Sonders explains her 50/50 odds of recession call.

As a follow up to this earlier post, here is an interview from Friday where Charles Schwab Chief Investment Strategist Liz Ann Sonders explains her call for 50/50 odds of recession.

I think this is a pretty logical call.

CNBC via MSN Video: Charles Schwab Liz Ann Sonders.

ECRI: Premature to call a recession.

The Economic Cycle Research Institute, or ECRI, was one of the first outfits to identify the economic trouble brewing after the Internet bubble. They look at a variety of economic data, some of which is explained in the Bloomberg video below. Right now their indicators have broadly softened, but are not at a level suggesting a recession. [...yet. But we can keep an eye out and try to spot which way things are tilting.]

New York Times: A Forecast for a Fork in the Road.

Quotes:

At the Economic Cycle Research Institute, the forecasters have noticed that the last six months bear a striking resemblance to two different kinds of periods: the run-up to a gentle slowdown, like those of the mid-1980’s and mid-90’s, and the run-up to recession. In both situations, consumer expectations fall while interest rates and inventories rise, which has already begun to happen. But the two paths — slowdown and recession — historically diverge sometime after the six-month mark. Starting Friday, with the August employment report, we will begin to get a sense of which road we’re going to take.

Globe & Mail: Housing Reports a Bad Omen?

Quotes:

In a further sign of trouble, an index that foreshadows turning points in the U.S. economy suggests things will get worse before they get better. The Economic Cycle Research Institute's weekly leading index annualized growth rate fell to a 179-week low yesterday, its worst level in more than three years.

"The growth rate has been falling steadily since January," said Anirvan Banerji, director of research at the independent forecasting group, based in New York. "That suggests that as far as the eye can see, the U.S. economy will keep slowing, at least through early 2007."

Mr. Banerji said it is too early to tell if the index is pointing to an actual recession, but would not rule out that possibility. "We are certainly not seeing any indication of a revival in economic growth."

Bloomberg: Achuthan of Economic Cycle Calls Recession Fears `Premature'.

Today, Bloomberg. Tomorrow, the world.

Bloomberg with a very long article on the Peak Oil debate that hits all the highlights, and features all our favorite characters: Boone Pickens, Charles Maxwell, Matthew Simmons, Peter Thiel, Canadian Oil Sands, et al.

Bloomberg: Peak Oil Forecasters Win Converts on Wall Street to $200 Crude.

To quote Han Solo: "I've got a bad feeling about this."

Bloomberg: U.S., German, Japanese Bonds Rally as Inflation Eases.

Quotes:

The spread was 28 basis points today. U.S. two- year yields exceed 10-year yields by 8 basis points, the most since March, producing an inverted yield curve.

A yield curve is a chart of bonds of the same quality and different maturities. Inverted yield curves have preceded each of the past four U.S. recessions.

Bloomberg: Business Spending May Languish, Raising Risk of U.S. Recession.

Quotes:

``Most of the people forecasting a soft landing are counting on a boost from capital expenditures,'' says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in New York. ``I would be careful about that.'' She puts the odds of a recession at more than 50-50, ``and it could happen relatively quickly.''

Ledger Dispatch: One stock market analyst speaks her mind.

Despite the recent rally, some stock market analysts are still concerned about a possible economic slowdown that could lead to a recession. You can count Ms. Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. Inc., in that camp.

In a letter sent to Schwab Institutional clients, she makes several interesting points that might give concern to stock market bulls. She is not impressed that most economists surveyed by the Wall Street Journal are still predicting economic growth between 2.7 and 3 percent for the next three quarters and none of these experts are predicting negative growth for any one of those quarters.

She also points out that in late 2000 the consensus of economists for the first quarter of 2001 was for the GDP (gross domestic product) to grow at a 3.3 percent rate. In fact, that quarter turned out to have a -0.6 percent growth rate. Her point is that recessions usually do not reveal themselves, making them difficult to predict.

She has three major economic concerns that when added together (in her opinion) increase the chances of this country entering a recession in the near future. Her first concern is the inverted yield curve, when the 3-month Treasury bill has a higher yield than the 10-year Treasury bond.

Historically, an inverted yield may be a pre-cursor to a future economic slowdown or in a worse case scenario, a recession. However, Ms. Sonders also points out that when the Fed knowingly inverts the curve like they did in late June, the odds of a recession happening increase dramatically. There have been six such inversions in the last 33 years with five of them resulting in a recession.

Ms. Sonders also points out that the last five recessions have been preceded by spikes in oil prices and the longer we go before oil prices settle down, the harder it will be for the economy to ward off an economic slowdown. The third major concern, in Ms. Sonders' view, is this country's slowing real estate market. For this July, mortgage applications were down by almost 30 percent from a year ago. In the last several years, mortgage equity withdrawals have basically replaced wage gains as the main source of income gains, thereby becoming the main driver of our strong economy. With consumer spending accounting for two thirds of the GDP, any pull back in that area will result in some form of an economic slowdown.

FoxNews: Recap of Cavuto on Business August 26.

Quotes:

Home sales slowing down big time from last year, but so far no noticeable drop in the price of those homes. Is that next?

Sara Nunnally: In certain parts of the country you are going to see price drops. Certainly in those areas where there were sharp run ups like California, New York and Florida, which are already starting to come down. But overall, national median prices are up.

Jim Rogers: Prices in Nevada, California, Arizona, Florida, Massachusetts are going to go down a lot – thirty, forty, fifty percent. But in some parts of the country prices are going to go up. When these bubbles break, prices go down a lot. In California fifteen years ago people were mailing their keys back to their bankers because they couldn't pay the mortgage. That's going to happen again. But in other parts of the country, prices are going to be going up. If you are in a place that's got a good economy – in agriculture or mining – your house is going to go up.

....

Jim Rogers: America's in recession, and the recession is going to get worse.

The New York Sun: Dorfman: Housing Bust Could Leave Market In State Of Agony.

Quotes:

Addressing himself to the latest delirium - the biggest real estate bubble in history - the chief investment strategist of Raymond James Financial, Jeffrey Saut, is warning clients that the ongoing collapse of residential real estate has far-reaching implications for both the economy and the stock market.
As evident, though, by last week's rosy showing in which some stock indices rose 3% to 6% and turned more positive on the year, the market is essentially saying it doesn't give a hoot.
But Saut certainly does, noting that real estate has been chiefly responsible for much of the nation's economic and job growth.

....

The associate editor of Safe Money Report, a monthly investment letter in Jupiter, Fla., Michael Larson, tells me the market is on the verge of realizing the third phase of the housing bust, which he believes has very negative implications for stock prices.The first two were the stiff declines in homebuilders and suppliers of home products. Next on the list, Larson says, are the financial institutions, notably those banks and sub-prime lenders that provided the financing for super high loans on inflated properties.
Such lending practices, he believes, will invariably lead to a rash of failures among these companies and the stock market will soon begin reflecting this risk. "We could be in for a rough few months ahead," he says.

....

That's also the view of former money manager, now private investor, Neil Weisman, who thinks it will take the housing industry at least five to seven years to work off its excess inventories, rather than the one to two years many Wall Streeters are projecting.

Whiskey & Gunpowder: Increased Recession Risks!

Quotes:

In June, Red Lobster's same-store sales were down 5%, Ruby Tuesday (RI) was down 2.3%, and P.F. Chang's (PFCB) was down 1.1%. In May, the last month reported, Applebee's same-store sales were down 1.9%, and Outback was down 2.6%. High-flying and fast-growing P.F. Chang's, whose stock had risen more than six-fold from 2000 until last summer, has now tumbled by over 50% (see Figure 4). At the same time, Cheesecake Factory reported a 1.3% same-store sales decline in the first quarter and has warned that the second quarter will be flat to slightly negative. According to Cheesecake's chief financial officer, the chain has never had two negative quarters in a row. USA Today also reported that, according to Lynne Collier, restaurant analyst at Stephens Inc., in the 12 years she has covered this industry she has never seen a "downturn of this magnitude". Nine out of the ten casual restaurant chains she follows have seen traffic decline in the past three months.

San Francisco Chronicle: Williams-Sonoma cuts outlook for year.

Quotes:

Williams-Sonoma Chief Executive Officer Howard Lester said he is pleased with the company's second-quarter performance but concerned about economic issues that could put a damper on future earnings. Pottery Barn, which caters to middle- and upper-income households, has already seen a drop in demand and is particularly vulnerable.

"When we last updated our guidance in mid-July, we believed that the softness we were seeing was specific to the execution of our Pottery Barn summer merchandising strategy," Lester said in a statement. "Today, however, after five weeks in home with our new Pottery Barn fall catalog, we believe there is a greater macro-economic issue also affecting this business. To date, the consumer response in Pottery Barn is continuing to trend well below our expectations, causing us to approach the third and fourth quarters with an extremely cautious outlook."

1500 days to peak oil, give or take.

Mr. Skrebowski collects a wide variety of data on large projects to come up with his estimate. It's interesting to contrast his 2010 date, calculated from basically a ground up view, with the more bird's eye calculation of Kenneth Deffeyes which suggests 2006. Four years is a small difference, not enough to quibble over.

Adelaide Now: Oil crisis by 2010.

Quotes:

Visiting Adelaide, Chris Skrebowski, a trustee of the Oil Depletion Analysis Centre and editor of the Energy Institute's Petroleum Review in Britain, said "peak oil" was real and imminent.

"Peak oil is when flows can't meet the required demand," he said. "This will cause an economic tsunami." Mr Skrebowski, addressing a Committee for Economic Development of Australia gathering, said that of the world's 18 largest oil fields, 12 were in production decline.

Few large discoveries were being made, with the prediction of even less new oil in coming years.

"Oil supply will peak in 2010-11 at around 92 to 94 million barrels a day," he said. "We have just 1500 days to peak. Collectively, we are still in denial."

The Tipping Point..... tipped.

Ford recently announced that in July SUV and light truck sales were down 44.1% versus the prior month. GM, which fared the best of the Big Three, had a 19% decline.

Now a Consumer Reports poll indicates that the top factor in new vehicle purchases is gas mileage, which, until now, was a factor that had ranked something like 7th. One auto analyst is quoted in the story as downplaying this result, as consumers often say one thing then do something quite different. I happen to think she's wrong.

AP: Poll: Fuel Economy Big Car-Buying Factor.

And while we're focusing on cars:

NY Times: A Car-Sales Indicator Suggests a Recession Is Near or Already Here.

One indicator is not enough to go by, but the tottering housing market, high energy prices, this...

One small step for GM..

I was pretty harsh on GM last year ('Dead Man Walking'), but I am very gratified to see they have redesigned their smallest offering, the Chevy Aveo, to make it more competitive and improve the gas mileage. The older model, which only lasted 2.5 years here, was tiny in size but got rather blah gas mileage and was not competitive with the Toyota Yaris or Honda Fit. GM still has a lot of work to do, and they won't make much money off these, but I'll take this as a sign that they are waking up.

I'm still not a fan of the stock, though I do like their CFO, Frederick Henderson. Maybe if they let that guy run the show..

USA Today: GM improves fuel efficiency with new Aveo.

The Case for Natural Gas.

This clip is supposed to be about natural gas, but for whatever reason, Ian McDonald of the WSJ has chosen to highlight 3 Canadian stocks which are both natural gas plays as well as Canadian oil sands plays. Hey, I won't argue, I rather like the way he's thinking.

Maybe he's been reading a bit of Henry Groppe, who loves Canadian energy producers, or Matthew Simmons, who lauds natural gas as "the single best energy source we've ever had", or even Boone Pickens, who believes natural gas will be used as a transportation fuel as the oil gets tight. (He most certainly hasn't been reading me, but my contribution is here.)

The interview highlights stocks Encana (ECA), Canadian Natural Resources (CNQ), and Nexen (NXY).

CNBC: The Case for Natural Gas.

Stephen Leeb of "The Coming Economic Collapse" interviewed.

Dr. Stephen Leeb, author of "The Coming Economic Collapse, How You Can Thrive When Oil Costs $200 a Barrel" was interviewed by thestreet.com on the topic of his book.

His view is that unless we start getting very serious, very quickly on alternative energy, we are in for disaster as oil demand growth will outpace supply growth, particularly from China and India, and as a result, oil prices will skyrocket. He also thinks that oil is "the exact opposite of the Internet" (bubble) and there is "no end in sight" to the rise in energy companies. He's also a fan of precious metals.

StreetWatch Video: Stephen Leeb interviewed.

Help Jane, Stop This Crazy Thing!

One of the analogies that Boone Pickens likes to make relates back to when he worked in the oil industry: As an oil field got a little long in the tooth, you ended up on a treadmill of working harder and harder to try to keep production flat. Mr. Pickens believes that global oil production is now on exactly such a treadmill at around 85 million barrels a day.

Whether that ultimately proves to be to highest production figure, only the future will tell for sure, but the oil industry is certainly having a heck of a time these days, and looks an awful lot like George Jetson in the opening sequence of The Jetsons.

The latest:

Reuters: Dubai to take control of offshore oil resources.

Financial Times: BP shuts down Alaska oil field.

Boone Pickens: "$100 oil within the next year"

Top 10 Alternative Titles for this Post:

10. Got Oil?

9. Boone Pickens Declares War on Belgium.

I digress..

Video interviews today on:

CNBC: Boone Pickens.

Bloomberg: Boone Pickens.

Important points:

- Believes oil will reach $100 a barrel within the next year, "unless you go into a global recession".

- Does not buy the idea of a terror/geopolitical/risk premium in oil prices, instead he thinks high prices are simply a function of supply and demand being close to or out of balance at roughly 85 million barrels a day.

- Does not believe we are at the point of substantial demand destruction, and he isn't sure where it is.

- Believes natural gas will be used as a transportation fuel on a large scale.

- Prefers "oil sands" to "tar sands".

- Doesn't believe Saudi Arabia's figure of 250 billion barrels of reserves.

- Does believe there is 250 billion barrels of reserves in the Canadian oil sands.

- Recognizes the increase in costs of new oil sands production, but still talking about Suncor.

- Working to close slaughter houses that slaughter horses for export consumption.

"June absolutely fell off the Richter scale for us"

CEO of homebuilder D.R. Horton in Q&A session on the company earning's conference call, about 01:37:15 in.

D.R. Horton Earnings Conference Call July 20, 2006.

The stock market is telegraphing a fairly serious slowdown. Lots of bad news out there and several smart investors calling for caution. (See 'Jim Rogers: "Be very careful.") I would post the chart of a homebuilding stock, but I run a family friendly blog.

Peter Thiel predicted a housing nuclear winter leading to a recession, and uh-oh, recently long bonds are outperforming stocks, even with the idea that the Fed is still in a raising mood. (See 'Man cannot live by energy stocks alone.')

And Barry Ritholz pointed out how important housing was to the economy over the past couple of years. (See 'Half of New Jobs Are Real Estate Related' and 'Housing is Dominating Economic Activity, part 3.')

Energy stocks are cheap, oil prices are high, oil futures prices are high, demand has not yet declined to any substantial extent, but technically energy stocks are weak (See '200 Days Later' and 'Crude oil to $100?').

Caution may be the better part of valor here.

Oil Analyst Charles Maxwell on Peak Oil.

On June 3rd 2006 Weeden & Co's Senior Energy Analyst Charles Maxwell appeared on Bob Brinker's Moneytalk radio show as a guest. Charles Maxwell has been involved in the oil industry since 1957 and has solid credentials. One of the callers [Mitch in Des Moines] asked Mr. Maxwell a rather involved question about the state of Saudi Arabia's production and it's place as the dominant oil producer in the world and in OPEC, the peaking of world oil production, and how this might relate to an earlier era when the Texas Railroad Commission was running the show and US oil production peaked.

Mr. Maxwell's answer:

There's always been too much oil around the world that could be produced, and to get a reasonable return in the industry somebody had to bring supply and demand into balance.

In the early days that was John D. Rockefeller, and then of course that was stopped with the anti-trust action of Theodore Roosevelt and so on, and then we went to the Texas Railroad Commission which was a government group that did the same thing in the name of supporting the oil industry, and then we went to the Seven Sisters who tried to regulate the oil industry in the same way - not very successfully - and finally we've ended up here with OPEC trying to do the same thing.

But that 147 year history is now likely to be broken, because the problem that each of these famous organizations have tried to do, is to bring supply and demand into balance effectively by creating some kind of a monopoly that would limit the amount of supply. It was necessary because we had too much supply. Now the world is completely changed. Completely changed.

And I don't think that the majority of governments, or the majority of analysts, or the majority of the public really understand the face of the energy crisis that we're coming in to, is that there is not enough supply.

This is the first time in the history of the world that that problem has arisen; there isn't enough supply. And the reason that OPEC is now opening up their quota system and producing pretty much as much as they can, is that they too are caught up in this problem. There is just a finite amount of oil, we are using up the oil in the great fields that we've had in the past that was cheaply brought in, and we are finding a good deal less each year than we are actually using, and we will gradually reach that peak, probably in about 7 to 10 years, and the Saudis have a critical role to play.

Now you're bringing the issue up, how much oil do the Saudis have? And I think it is more, perhaps, than some analysts have recently suggested, but probably a lot less than the Saudis have been given to believe in the past that they had.

Oil industry people are notoriously unreliable in terms of their own reserves, they tend to make a political statement about reserves instead of a geological statement about reserves. The Saudis want us to believe that they have almost limitless reserves.

I've looked at the situation carefully, and I think the Saudis can produce a bit more oil, maybe 15 or 20% more oil than they're producing today, but when they reach something in the order of 12 to 15 million barrels a day - they're at 9.5 million now [note- those numbers don't appear to add up, perhaps he meant 13 million, but that's still more than 20% higher]- I think they're going to run into the inability to proceed any higher. They're going to reach a peak and they're going to hold it for a while, but they're not going to be able to help us with incremental barrels. I think that will happen in about 10 to 12 years.

So I think you're bringing up a very important point; Mr. Bush says that we're addicted to oil, and we will be hurt terribly when the Saudis are unable to produce more, because they have been the main hope that the world's oil supplies would go on a long, long time. When it becomes obvious that the Saudis can't carry higher and higher production, the world will recognize that peak oil is here.

Answering a follow up question from Bob Brinker on Hubbert's Peak and the fact that the major oil discoveries date back 35 years:

We had these great oil finds in the past, and now we're finding smaller and smaller fields, many of them, but not enough to make up for the loss of these great fields and they continue to be depleted, that is, used up, and the production from them is falling, so we can begin to forecast that without a lot of new production, and with the old production falling, we're in a pickle.

"A fundamental imbalance between supply and demand growth."

CIBC World Markets Chief Economist Jeff Rubin and Banc of America Securities Oil and Gas Analyst Bob Morris debate the possibilities of $80+ oil.

CNBC Video: CIBC's Rubin & BoA's Morris.

Jeff Rubin has been a quite bullish on oil for the last few years, for reference see 'CIBC', and 'CIBC: Conventional oil seems to have peaked in 2004.'

Boone Pickens on CNBC.

Understatement of the decade: "This whole thing is going to be very, very interesting."

Boone Pickens of BP Capital interviewed this morning on CNBC regarding his predictions for oil prices for the rest of 2006, his views on natural gas, and his investment ideas.

CNBC Video: Boone Pickens, July 5, 2006.

Unconventional Success in Gas Production (No Yale Degree Required).

The term 'unconventional' resources refers to things like oil sands, coal bed methane, tight sands gas, and various forms of shale gas, the key being that these are not the usual oil and natural gas drilling operations. Unconventional resources take different equipment and techniques, take longer to develop and are generally more capital intensive than 'conventional' oil and gas production, and yet tend not to produce at the same high initial velocities, and thus, for most of the oil industries' history have been sort of the ugly (and somewhat neglected) stepchildren.

There is a flipside to the slower production of unconventional resources though: Production tends to be more even over the life of the resource, and the lifespan tends to be longer than that of conventional resources.

Though much of the focus these days is on oil and the possibility of peak oil, it's interesting to note that the last three major US takeovers in the energy industry revolved mainly around gas resources, including unconventional resources. This reflects both the fact that most of the easy oil and gas is already either gone or spoken for, and the fact that the US natural gas market, though well supplied at the moment, over the longer term will likely reflect increasing tightness as demand rises and US production struggles to keep pace, and so far at least, the much ballyhooed rise in LNG imports appears to still be a ways off.

Unocal, which was taken over by ChevronTexaco, owned some nice natural gas assets in Asia. ConocoPhillips purchase of Burlington Resources (BR) revolved around onshore US based production of natural gas, and BR had both conventional natural gas and unconventional gas production. Anadarko is now about to purchase both Kerr-McGee and Western Gas Resources (WGR), two deals which again focus on natural gas, with a mix of deepwater production and unconventional gas production (coal bed methane from WGR).

The focus on gas resources in recent deals, together with recent insider buying at gas producers Chesapeake Energy, XTO Energy, McMoRan Exploration, and a bit at Quicksilver Resources, are a clear signal that energy insiders are bullish that gas production is going to be a profitable enterprise in the future, and that unconventional resources have really come of age.

For further info on the recent deals:

The Oil Drum: Drilling on Wall Street.

For further info on the recent deals and some stock ideas:

Jubak's Journal: What $21 billion can teach you.

CNBC Video: Jim Jubak on Anadarko Deals.

Jubak highlights the stocks KWK, EOG, and UPL. ECA, SWN, and XTO are other possibilities to look at.

Unforgettable.

Some spectacular moves today, particularly in the coals, the refiners, and oil service.

I highlighted the positive comments of the CFO of Halliburton a little while ago, and now a couple of coal CEOs have issued a similar set of bullish forecasts.

Reuters: New long-term contracts to boost coal miner profits.

Quotes:

Soaring electricity demand and sky-high oil prices are driving up the price of coal and producers are set to benefit as they negotiate new long-term supply contracts, two major U.S. coal miners said on Wednesday.

"A lot of legacy contracts are expiring soon and that has great implications for our bottom line," said Steven Leer, chairman and chief executive officer of Arch Coal Inc.

....

Considering the prospects of long-term global energy shortages with oil at $70 per barrel, "this is the best environment I have ever seen in more than 20 years.

"I have never seen the coal industry in such an enviable position as a producer. Coal will be the backbone of electricity generation for the next 25-30 years," said Leer.

Canadian Oil Sands - the Next El Dorado in North America?

Dr. Michael Economides, a petroleum engineer and Professor at the University of Houston, has recently suggested that the Canadian oil sands could be the next El Dorado in North America.

This comment comes, interestingly, from a gentleman who believes peak oil won't hit until roughly 2050 and that both Saudi Arabia and Russia will eventually increase production substantially. His other views: He's bullish on natural gas, believes that Venezuela's Hugo Chavez is the biggest threat to the United States and it's oil needs, and is convinced that Chinese demand, geopolitics and OPEC's inability to raise production in the short term are the main cause of high oil prices, not an imminent Hubbert's Peak of global production.

While his views thus differ substantially from peak oil proponents including Boone Pickens, Kenneth Deffeyes and Matthew Simmons, in seeing huge potential in Canadian oil sands, Dr. Economides joins a chorus of oil industry types, analysts, and investors.

On the potential of Canadian oil sands I highlight, in no particular order, the comments of:

Boone Pickens, Jim Rogers & Charles Maxwell
Donald Coxe
Peter Thiel
Raymond James
CIBC
Leigh Goehring
Stephen Leeb
Martin Whitman
Henry Groppe
Jim Cramer
BMO Nesbit Burns
CERA (yes, them)
China

For a list of stocks and a little bit of back story, here's my take.

In terms of technical analysis, the main oil sands stocks [Suncor, Canadian Natural Resources, Canadian Oil Sands Trust, Nexen, Imperial Oil, as well as to a lesser extent Encana, PetroCanada, Opti Canada, Husky Energy] held up well recently and continue to have some of the stronger charts in the energy sector.

For Dr. Economides' recent viewpoints, please see:

Resource Investor: Peak Oil Debate Digresses Into Global Warming Argument.

Resource Investor: Energy GeoPolitics: The Impact on Prices and Supply of Oil and Gas.

PS. After posting this, I went over to The Oil Drum and the top article turned out to be the con argument on oil sands, the problem of the natural gas input requirements. This is a legitimate concern. If you are worried about that, then I would focus on Encana, Canadian Natural Resources, Nexen and Opti Canada. The first two have substantial natural gas production themselves [not necessarily in the same region, but it helps offset the cost pressures if they produce the same product], and the last two are working on a project where they should be able to produce gas they can use from the oil sands itself, thus reducing their need for natural gas input and lowering their costs substantially.

PPS. There's also a water issue, but that never stopped anybody. For reference, see Chinatown.

Quotes:

Noah Cross: Either you bring the water to L.A. or you bring L.A. to the water.

....

Walsh: Forget it, Jake. It's Alberta Chinatown.