Wednesday, January 31, 2007

The three most important things to know today.

In no particular order:

1.) China stocks are getting jiggy, too jiggy. When you see stocks move like that, you have to get nervous. Even the biggest China bull of all, Jim Rogers, is warning that investors might be in a hysterical state of mind. You never know when or exactly how one of these bubbles deflates, but deflate eventually they do. If you plan to put money there, you may want to hold off and see if you can come in after the panic.

2.) There are more funky noises coming out of the US subprime housing arena. On the other hand, there are people saying the housing market has bottomed. I think that's a premature call, and we need to see how this subprime issue plays out before we can make that call. And note the first line of the article from MarketWatch:

Rising defaults in some of the riskiest home loans offered by J.P. Morgan Chase & Co. signal a recession may be looming, Jamie Dimon, the bank's chief executive said Tuesday.

3.) Finally, it's funny how the Jack discovery by Chevron and Devon (coming to gas station near you in about, oh, 6 or so years, maybe) was huge news and the fact that one of the world's largest old fields, Cantarell of Mexico (and one very important to us) is seeing fairly steep production declines is not quite as important. While the oil market is seemingly (if you watch CNBC) focused on the weather and minute by minute updates of commentary (often conflicting) coming out of Saudi Arabia and OPEC, this news is actually more important.

Monday, January 29, 2007

Jim Cramer says "tomato", we say "tomato".

If you've watched Jim Cramer on CNBC's MadMoney show, you probably have already come to realize that the man has some form of Investing Attention Deficit Disorder. One week he loves a particular theme, a month later he hates it. Appropriately, his nickname is "The Reverend Jim of the Church of What's Working Now". And that is what I believe Jim Cramer is best watched for, to get a view of where the main focus on Wall Street is right at the moment.

In this interview, he says he doesn't subscribe to peak oil theory, but that the cheap, easy to get oil is gone and we will have to pay higher prices for oil going forward for what's left, which is in difficult, hard to find places. I can't tell exactly from this interview if Jim does not believe that there will be a peak at some point and then a downtrend in global production due to depletion, or if he just thinks that point is still a long way off. It seems to be the later.

[That's okay Jim. That's how it starts. You'll get there.]

His stocks picks here run along the lines of service companies that help find and retrieve oil from far off or deep places (think Transocean/RIG), while he does not embrace stocks with high fixed costs like the Canadian tar sands producers, coal, etc.

I disagree with Jim there, because the Canadian tar sands producers will do well in the higher priced oil environment he envisions, where they can enjoy high prices without the risks of needing to find the oil, develop the infrastructure to extract and transport it, negotiate with sometimes hostile foreign governments etc. TV: Jim Cramer on Peak Oil.


"We're not running out of oil at all. We're just running out of oil that is easy to find and easy to get at. There are vast reservoirs, vast, far more than we need for multiple years. It's just not where we want it. So I don't subscribe to Peak Oil theory. What I do subscribe to is the cost of oil is going to be so much higher that the cost of oil is never going to come back below $40 ever again."

Friday, January 26, 2007

Coming Soon: Peak Extra Light Olive Oil.

This post isn't about crude oil, peak oil, investing, or any of those things, and, as far as I know, this isn't even a market that Boone Pickens is trying to corner, say, like long dated oil futures or water rights in Texas. (But give him a few weeks..)

No, instead, this post is about weight loss, and a wacky, extraordinarily simple method that I came across recently and have been having a good experience with. I wouldn't normally pass on something like this, but it is so simple and appears to be so effective I'm frankly astounded. And like everybody else with a sedentary job and not quite enough time for exercise, I could should lose a few pounds.

It's called the Shangri-La Diet, and a wonderfully short book on it was just released. You don't really need to buy the book though, all the pertinent details are out on the web, and the basic concept can be explained in a couple of sentences.

Before I explain the diet though, let's introduce the author: Seth Roberts is an Associate Professor of Psychology at the University of California, Berkeley, with a penchant for self experimentation and some rather novel ideas. You can read some fascinating findings he made by experimenting on himself in the realms of sleep, mood, health and weight in this paper available on eScholarship.

So, more about the diet.

From the introduction to the book:

'Shangri-La? Odd name for a diet. Name of a spa, maybe. I chose it partly because Shangri-La, James Hilton's fictional Himalayan community, was a place of great peace and tranquility; and this diet puts people at peace with food. Within days after starting it, all sorts of food-related struggles (irresistible cravings, too many food-related thoughts, uncontrollable night eating) usually go away. Another reason for the name was that Shangri-La was meant to be a near perfect place and - not to boast - this is a diet with many advantages. It is simple, powerful, and does not require deprivation.'

Hyperbole? From my experience, no. [And for the record, no, I have never bought any bridges in Brooklyn.]

There is no calorie counting involved, no 'off limits' foods, no jogging, no strange Infomercial contraptions destined for a dark corner of your basement, no questionable pills, no meetings, and no expensive, cardboard tasting pre-packaged meals. None of that. (HURRAY!)

Just these very simple instructions:

Once or twice a day, depending on how much you want to lose, you should take in roughly 150 flavorless calories (either sugar or fat) and allow your body 2 hours to absorb them without any other foods/flavors.

Specifically, you either take one-two tablespoons of flavorless oil, either extra light (Note: not extra virgin, extra LIGHT) olive oil (referred to as 'ELOO' in his book) or canola oil, or 1-3 tablespoon fulls of ordinary table sugar mixed in water. You must take this on it's own, and you cannot eat anything for one hour before or after. Nothing. Plain water is okay though.

By ingesting these flavorless calories you are resetting your body weight set point, lowering it. It sounds... nuts. (Prompting no craving with me, by the way. Ice cream.. Nothing. Come up with a food - I dare you. I won't crave it.) If you want more detail on the concept, follow the links below or take a look at the book.

If your experience is similar to mine (and the author of the diet, and other people on line) you will notice after a few days that your food fullness meter has reset itself a few notches lower and you will magically (and effortlessly!) find yourself eating less at meals. Your between meal cravings go away also. And the weight will start to come off.

It is, in a word - mind boggling. Okay, in two words. Which is why I thought I'd take the time to share it.

You can read more details about this diet at the links below:

Website of the author, Seth Roberts.
Science behind the diet.
An interview with the author (mp3 format).
The Wikipedia entry (You may want to review the cons in the footnotes).
A detailed explanation from Calorie Lab.
Another blogger comments on his experience with the diet.
The book, The Shangri-La Diet at Amazon.

Anyway, back to our regularly scheduled programming..


Update: I meant to add this when I did the original post but I forgot, so I'm adding it a little later. In my experience, I also need to avoid coffee for several hours before the oil. If I have coffee say 2 hours before, it seems to send my blood sugar bouncing around at just the wrong moments and negate much of the effect. This is particularly noticeable at the beginning, I think.

Tuesday, January 23, 2007

Thank you for burning hydrocarbons.

This is kind of an obvious thought, but with President Bush set to probably talk more tonight about energy independence, and with the vagaries of the climate at the moment, the Powershares Deutsche Bank Agriculture ETF (symbol: DBA) may be a good thing to take a hard (soft?) look at. (More info here.) This ETF is composed of wheat, corn, soybean and sugar futures contracts, and sugar and corn (mainly corn here) are used in the production of ethanol.

On top of the bio-fuels aspect, you have the interesting vagaries of the climate lately that may have an impact on crop production. Australia, for example, is experiencing a long drought that in 2006 impacted their wheat production. Australia is the world's #3 exporter of wheat. They have now gotten more rain in one week in some areas than they did all last year, so things may be easing. But unusual temperature and precipitation patterns can have an impact on crop production.

On a slightly different topic, though the beginning of winter went MIA, lately it has been coldish across much of the USA, and natural gas has been moving as a result. Additionally, El Nino suppressed hurricanes in 2006 and may now be dissipating.

Sunday, January 21, 2007

Kenneth Deffeyes channels Gordon Gekko.

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.

Gordon Gekko, Wall Street.

Surely one of the most memorable movie quotes ever, who can forget Michael Douglas giving that immortal speech. The magic of Hollywood...

Ah, okay, back to business. So what's the connection between that quote and Kenneth Deffeyes? Well, nothing directly, but I got a little nervous when I read the latest update from Kenneth Deffeyes and he's plugging energy stocks like a cheap, two-bit, um... blogger.

Call me old fashioned, but I prefer my academics to stay in the mystical realm of theories, research, higher ed, learning and the occasional socialist utopian rant. When I see academics talking money and stocks and sounding all Wall Streetish, I get dizzy, start having visions of LTCM, and start worrying that we've all gone to one side of the boat again.

However, we already took a pummeling this month, and hey, it's not like they interviewed him in Playboy for Chrissakes. So I'm gonna go with letting this one pass.

Beyond Oil: Update, End of 2006.


I could, and did, arrange my own non-sucker bet by investing in several oil and natural gas stocks on a scale larger than $1000. It worked out quite well, thank you, although I have to grit my teeth during the downswings in price: Grit, grind, crunch.

As I was writing this, a statement from the Saudi Minister of Petroleum was reported by Forbes, the International Herald Tribune, and the Washington Post. He announced that Saudi Arabia will increase its oil production from 9 million barrels per day to 12.5 million barrels per day by the year 2009. I hope they succeed. Meanwhile, it keeps the other investors complacent while I buy some bargain oil stocks.

I enjoy talking with financial firms about the oil problem. It is gratifying that many in the financial community took an early interest in the consequences of a downturn in world oil production. One of the nicest compliments that I received was in Tokyo. A fellow told me that he read Hubbert's Peak five years ago, believed it, and told me that he "made a hell of a lot of money." I wasn't quick enough to ask how many zeros were in a "hell of a lot of money," but he heads the largest hedge fund in Asia.

I'm not in the business of recommending individual stocks. That requires far too much homework; I don't have the patience. Recognition is growing slowly that the world oil situation is approaching a crisis. But whenever the price of gasoline goes down, a lot of people think that the problem has disappeared.


He also points out that May 2005 is so far showing up as the peak in conventional oil production according to EIA statistics, which isn't far from his prediction of December 2005. I take that with a grain of salt since the data is murky, subject to revision, and nobody really knows the complete story about current production. If we peaked back then, then this fall to $50 is an overreaction on the downside and we should have a strong move upwards later this year (basically, Boone Pickens' position).

I'm leaning towards the peak still being in front of us somewhere, mostly because I think we will see some wild price moves in oil prices around the peak, and especially by a year or two out. Wackier even than what we've seen so far, I think.

Wednesday, January 17, 2007

Let the beatings, er, healings begin.

Every bull market has it's popular, cult like figures, and the most prominent one of this oil bull market is Boone Pickens. The bull market in oil dates a long way now, all the way back to 1998 when crude bottomed around $12 or so, and all bull markets get a little ahead of themselves and are subject to corrections.

We hit around $78 last year, and have fallen now down to around $50ish. The crude bears are out and strutting their stuff. Peter Beutel projects $20 crude in a couple of years. [I hear he's going to be interviewed in Playboy next month.. Nah, just kidding.]

Like the public marketplaces of yore, the markets of our day serve as a focal point for the public. Oil prices are now way, way down at $50~, and all kinds of sacrosanct technical trends have been broken.

The oil bulls are on the run!

For the offense of violating a trend, the market demands a sacrifice!

Something public.

Burn a witch, maybe?

Even better - bring out the oil bull and give him a public lashing!

Obligingly, the media dragged Boone Pickens out today [out of his workout, no less] and dropped hints he'd been massacred in the recent selloff (Sample quotes: 'The sharp drop in crude-oil prices is goring T. Boone Pickens, one of the biggest bulls in the energy market.', 'We've seen a huge drop, more than 16% just in the first few weeks of this brand new year. A lot of people have been talking about that steep drop, and kinda wondering what that's meant for you, because you've been bullish for so long. There've been a lot of rumors out there in the market...").

Burn the witch, they cried! Get the oil bull!

This, I believe, is healthy.

Let the healing begin.

CNBC: Boone Pickens on Oil Prices.

WSJ: Energy Bull Keeps the Faith. [$]

PS. Boone Pickens says oil will average $70 this year and would find a floor around $48. My amateur seat of the pants impression suggests to me $45 would be a floor and closer to $60ish a good average through what I think of as a consolidation phase.

Saturday, January 13, 2007

The best quote I've seen in a while.

The Wall Street Journal: Rare Bears. [$]


"With hedge funds and the pressure they're under to perform, we're getting this Texas Hold'em poker style of investing: all-in or all-out," he says.

[Quote from Vinny Catalano, chief investment strategist of Blue Marble Research.]


I don't think hedge funds are the only guilty parties here, but they are probably a little more guilty than other folks.

Anticipating these moves can make you money though. Clearly, so far in 2007, energy is out and tech is in.

Wednesday, January 10, 2007

It's gonna be a long year.

As this Wall Street Journal article points out, the first five day indicator is looking bad this year. The basis of this indicator is that in years when the first five days are positive for the market, the market has a tendency to finish the year up. In years where the first five days are negative, the market has a tendency to finish the year down. There was a lot of bullishness coming into 2007, and that can be a contrarian signal. (See 'Too much of a good thing' and 'Smokey the Bear says: "Only you can prevent portfolio losses."')

Energy in particular has gotten totally clocked out of the gate. Sure, the freakish warm weather had a lot to do with it, but I would also say the magazine indicator strikes again.

This article mentions that technology has done very well so far in 2007. In my own sector analysis work, I also find technology an interesting place to focus on in 2007. Which doesn't quite mesh with my bearish bent for 2007, but I try not to let my own peccadillos get in the way. My sector work also doesn't highlight energy this year.

By the way, check out this demo of the Apple iPhone. Wow. Keep an eye on that stock.

WSJ: A Rocky Start to 2007 for Stocks. [$]


The first five trading days of the year are over, and if they are any indication of how the Dow Jones Industrial Average will perform in 2007, traders may be in for a rocky ride.

On Tuesday, the Dow industrials fell 6.89 to 12416.60, leaving the blue-chip average down 0.4% so far this year. Since its inception, when the Dow has finished the first five trading days in the red, it has risen for the full year just 49% of the time. In contrast, the Dow has risen in 73% of the years in which it finished the first five days in the black. In all, the Dow industrials have risen 71 out of 110 years, or 65% of the time.

"The first week predicts the month, and January predicts the year," said Phil Roth, chief technical analyst at Miller Tabak. "We are solidly down the first five trading sessions, and it's starting out looking ominous." Mr. Roth said this is the time of year when stocks are "almost always strong," with new money coming into the market. But that money is not appearing, he said, suggesting investors are putting it to work elsewhere.

The broader market was mixed, pulled down by the energy sector as crude-oil prices extended last week's slide. The Standard & Poor's 500-stock index was off 0.73 at 1412.11, also down 0.4% for the year. But technology stocks were a bright spot, with the Nasdaq Composite Index up 5.63 to 2443.83. The tech-heavy index is up 1.2% so far in 2007.

Monday, January 08, 2007

Marc Faber predicts severe correction.

According to this Bloomberg article, Marc Faber predicted the crash of 1987 in the US stock market. He's now predicting a strong correction for global assets. Volatility has come in with a bang in 2007, and sometimes that's a sign of a larger move ahead.

Bloomberg: Global Markets Face `Severe Correction,' Faber Says.


Marc Faber, who predicted the U.S. stock market crash in 1987, said global assets are poised for a ``severe correction'' and says it's time to sell.

``In the next few months, we could get a severe correction in all asset markets,'' Faber said in an interview with Bloomberg Television in New York. ``In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate.''

Faber recommends investors steer clear of shares in the world's biggest developing economies after the emerging markets in 2006 outperformed their developed counterparts for a fifth straight year.


``Emerging markets could get kicked in the next three months so I'd be careful of buying Russian shares,'' Faber said. ``I'd also be careful of buying China and India shares now.''

Bloomberg TV: Marc Faber.

Sunday, January 07, 2007

Big Oil: All Hat, Not a Lot of Cattle.

Howard Simons of Bianco Research makes a point in the below video that bears repeating. Right now, the major public international oil companies are in an interesting position where they are producing huge amounts of oil every year, yet their reserve replacement ratios (what percentage of their reserves, or potential future production, they are able to replace each year) are declining. The main factor is the increasing oil nationalism that's occuring around the globe, which forces them to take smaller pieces (if any at all) of potential projects.

Last year Weeden & Co oil analyst Charles Maxwell appeared on Bob Brinker's Moneytalk radio show and in response to a caller's question, suggested that 5-10 years or so down the line ExxonMobil would split itself into a exploration and production operation and a royalty trust. The E&P would aggressively hunt for new sources of production, while the royalty trust would hold the legacy production assets and throw off high dividends as those assets depleted.

CNBC Video: Energy Breakdown.


"I would stay away from the producing side, but the service side, the drillers, the equipment, these firms are all gonna do fine. One of the things we have to remember about the producers, especially the international majors right now, is they are actually self-liquidating companies, they're not able to replace their reserves, and they're not able to acquire new reserves worldwide because of political considerations. But the service and equipment sectors can do that, so those are long term plays, and they're gonna do just fine."

Friday, January 05, 2007

ECRI: Recession is no longer a serious concern.

Lakshman Achuthan of ECRI appearing on Bloomberg TV this morning saying that their indicators suggest that recession is no longer a serious concern in the US.

I'm basically leaning the other way, but I always listen to the views of those with good track records and sound statistics, and ECRI certainly qualifies.

Additionally, he sees signs of a bottom in the housing market (though he wants to see a few months more of data), and believes, based on that bottoming and their recession call, that the Fed will not lower interest rates soon.

Earlier observations from ECRI here.

Bloomberg TV: Lakshman Achuthan of ECRI.

Thursday, January 04, 2007

Too much of a good thing.

Yesterday was an interesting day. Energy in particular took it on the chin as there is so far no winter to speak of in the Northeastern US, as well as mild winters in several other parts of the globe. The rest of the market traded kinda all over the place. Frankly, I think an important element was that so many people took time off in December combined with a 4 day closure of the market and a full moon leading to some excess pent up energy that needed to be worked off.

But in general, there was a lot of bullishness coming into 2007, and that is often a contrarian indicator.

New York Magazine cover: Jim Cramer's Runaway Bull. (see top right headline)

Article: Lucky 2007.

USAToday: Ten Reasons the S&P 500 Could Make a New High in 2007.

12 Top Wall Street Analysts Agree on Rally for 2007

The writer of the USAToday article comes to his senses the next day with this article:

Up, up, up: Beware, because no one sees a bear in 2007.

Tuesday, January 02, 2007

Resolution Trust Company here we come!

Many pundits who predict market gains for 2007 have a caveat - "as long as the housing market doesn't crack". The housing market so far hasn't cracked, but it is making some unusual noises.

One place to keep an eye on is subprime loans and lenders. Subprime loans are loans made to questionable borrowers of one type or another, and to reflect their risk (at least in theory), they carry higher interest rates. The borrowers are a little iffy and these loans are usually the first loans to go bad as the economy softens. There were an orgy of these issued towards the end of the housing bubble enthusiasm we just experienced. The market for these already showed problems in 2006, so the fact this company continued to increase it's lending even in 2006 shows somebody was asleep at the till.

But the bigger question is: who's holding these types of loans, how much is going to go bad, and how will it hit the rest of the real estate market as these types of loans dry up further and foreclosed homes come on the market.

Calculated Risk: Mortgage Lenders Network stops loans.


The rumors are true. From Reuters: Mortgage Lenders Network stops loans, sets layoffs

Mortgage Lenders Network USA, a large U.S. subprime lender, said it has stopped funding loans and accepting applications for loans, citing deteriorating conditions in the mortgage market, and has temporarily laid off about 80 percent of its 1,800 employees.

Meanwhile, some lenders have been pinched by being forced to buy back loans they sold because of rising delinquencies, and as "warehouse" lenders pull credit lines, analysts said.

Unlike most subprime rivals, Mortgage Lenders increased its lending throughout 2006. It made $3.31 billion of subprime loans in the third quarter, ranking 15th nationwide, according to data from National Mortgage News.

The firm, however, said wholesale market conditions have "deteriorated dramatically" in the last two months.


The Resolution Trust Company, by the way, was the government owned agency that tried to clean up after the Savings & Loan debacle of the 1980's.

Monday, January 01, 2007

We're Number 2! We're Number 2!

Can anyone believe that the energy sector actually finished the year okay, given what a volatile year we had? Oil prices finished the year close to unchanged, and most of the gains in energy stocks came towards the end of the year, but what the heck, we'll take it.

Sam Stovall, chief investment strategist of Standard & Poor's, recaps a couple of historical tendencies that suggest 2007 could be a positive year for the stock market overall in this interview with Bloomberg News. He discusses the energy sector, which ended the year as the number 2 performing sector in the S&P500 with a 22% return and is the cheapest sector in the S&P500 with a 9.7 forward price to earnings ratio (ie. based on analyst's predicted 2007 earnings). S&P predicts a gradually rising trend for oil in 2007, with an average crude oil price of $64.50 and price toward the end of the year of $66. Mr. Stovall makes the observation that they hope energy will remain a "page 3 story" instead of a "page 1 story" in 2007.

Bloomberg News: Sam Stovall of Standard & Poor's.


To explain the year in further detail:

The 22% comes mainly from the integrated oil majors (which I define as: XOM, COP, CVX, MRO, OXY) and select oil service names. The majors, because they have exposure to most or all parts of the oil supply chain (production, refining, distribution, marketing), are seen as better plays as oil prices fall or moderate because they can usually pick up profits somewhere along the chain. Other sectors, for example coal, natural gas, refiners, E&Ps, all did less well this year, a number with outright losses. If you own energy mutual funds, you may notice yours was above or below the 22% return, depending on where your manager overweighted or underweighted. The Vanguard Energy fund, which I use as proxy for the average energy fund, returned 21.21%.

Energy Hot Spots to Watch in 2007.

Christopher Edmonds of Pritchard Capital and highlighting the energy spots to watch in 2007 in this interview with Bloomberg News. The hot spots include Iran, Russia, Nigeria, Oklahoma, and Iraq. [Okay, one of those was thrown in to see if you've cleared your head yet from New Year's - Happy New Year, btw.] Chris suggests a 'normalized' (I assume this means the price absent a geopolitical event) price of oil is $55-65, and that if troubles develop in one of these areas, a spike to $80-100 a barrel oil is possible.

Bloomberg News: Christopher Edmonds of Pritchard Capital Partners.