Posted by: thefinancedude | May 28, 2008

Two Pennies – May 27, 2008

Is the Oil Market Manipulated?


From MoneyEnergy on May 23, 2008:

“Do you think the oil markets are being manipulated?
Media talk about “supply threats” and other obstacles in Nigeria etc. are easy straw mans to prop up in order to explain the price of oil.

As long as oil’s traded in greenbacks, the price of oil reflects the weakness in the greenback. The price of oil doesn’t go up as much against the pound, or gold.”


However, there are very few people who benefit when prices rise as fast as they are.  Kings, sheiks, perhaps oil execs and I’m open to discussion of who benefits from higher prices.  Collusion would serve a very small group who would stand to endanger the larger whole.  We don’t understand basic paradigms as easily as we believe we understand complex ones.  Energy is the basis for all life.  We could pull up a formula from science and convert those BTU’s in a gallon of gas to calories to put the value of gas into perspective. The fact that humans discovered millions of years of solar energy in the form of black goo propelled our numbers exponentially.

From here I get one gallon of gas worth 124000 BTU’s and from Google I get one BTU = 252.1644 calories. In total a gallon of gas is roughly worth 31268385.6 calories.  The purpose of all this is to understand how valuable this one gallon is relative to a person.  You need roughly 2K calories to maintain bodily functions.  You must take in more than that to not kill yourself if you’re working real hard and converting those calories into useful energy. At $4/gal it’s roughly .25 cents a cup and worth MORE than the Starbucks coffee you were paying more for. That is why gasoline is aggressive at the moment.  Yes it is in a bubble, but that does not affect the fundamentals in place.  Remember Keynes when he warns…”Irrational markets can last longer than you can stay solvent.”

Consider the oil men we have elected.  They think they know oil, but in fact they know oil markets of the past.  Our brain is wired to react, not to assimilate data and draw meaningful conclusions.  Consider both DICK and BUSH went to the Kingdom of Saudi Arabia (KSA) to basically plead for them to do something.  They have a long history that Bush believes will pay dividends now.  Turns out he cashed in a long time ago when he invaded Iraq and now there’s hell to pay.  KSA can’t increase their production beyond three years ago.  When KSA peaks, the WORLD peaks.

One last point, yes oil priced in anything but a dollar would have insulated you from this problem.  Case in point check out the graphs below…

Oil in Euro's/Gold

So yes, our dollar is the problem mostly.  However there are always several layers of analysis. If you’re really worried about manipulation of the oil market, consider OPEC’s decision in the late eighties to nearly double their reserves as a unit in a high stakes poker game designed to flush out USSR which it did resulting in their demise in the early nineties.

Posted by: thefinancedude | May 22, 2008

Two Pennies – May 22, 2008



This week has seen a dramatic surge in oil contracts dated as far forward as 2016. Futures have moved higher than the spot price, a rare event known as “contango”. This can cut both ways: either as a sign of an impending supply crunch years hence; or that the futures market has become unhinged from reality.


Almost all emerging nations have to slam on the brakes in coming months to curb inflation before it starts spiralling out of control. Inflation has hit 30pc in Ukraine, 22pc in Vietnam, 8.5pc in China, and double digits across most of the Gulf.


The countries that account for the most of the growth in oil demand over the last two years are almost all nearing the limits of easy economic growth.


Oil wells follow a simple production curve whereby at some point they begin to produce less than before forming a bell curve.  Logic will bring you to the conclusion that since each little well follows a bell curve, the sum of them all forms a bell curve. 


We’re on to something now.  Discovery of more oil than the year before peaked in 1980.  We have been discovering less and less oil for nearly thirty years.  Over that time other countries have begun to contribute to the demand for crude.


When you reach the apex of the curve you’ve reached roughly half the total supply available.  The first half was easy to find; just stick your finger in the ground.  The second half is harder and costlier to extract (middle of the ocean, 2 miles deep).  Therefore the only direction prices may move is higher, due to higher costs to secure it.  Throw in the dollar being trashed (everytime i-rates get cut) and we arrive at oil prices today.


We’re missing the entire point of high prices on crude.  We need to step back and examine historical changes in energy availability and plan accordingly.  Trolleys will once again ride as a supplement to dense urban transit networks supplement again.


Top banks call for relaxed writedown rules

The IIF’s proposals, which were sent to US and European central banks, governments and accounting watchdogs, underline financial groups’ view that the credit crunch will inflict long-lasting damage on their business.

So in effect the bank is saying, if you don’t allow us to move the goal posts once again, we will not be able to score another touchdown.  So tell me why we should save you to keep this charade going?  Are you hoping to be the last one in the last chair?  The only solution to this is learning from this mistake.  We repealed all the banking laws in the mid nineties and they all competed to naturally to be the most cost efficient, not risk adverse, which required economy of scale. 


However when one becomes too big they are not allowed to fail and instead the mal investment that got them into it continues until they make the problem bigger with governments helping hand.  We’ve been doing this reflate at all costs since the eighties.  It’s not working so those who can’t comprehend change – step aside.  We should separate the banks so this RISK is FULLY contained and we don’t worry about a bank failing and bringing the entire economy down with it.


The economy is like an organism moving vital fluids around to consumers.  The mistake is building an organism that resembles humans in their concentrated frailty.  The economy, if resembling a creature such as an octopus, would be able to absorb losses anywhere and everywhere without the greater whole affected.  It would be a minor issue to let a simple bank or [fill in the blank] fail then to continue putting tourniquets attempting to keep the whole sum alive.


The IIF’s paper says: “The writedowns required under current interpretations may be substantially in excess of any actual or reasonably probable loss on many instruments”.


I hope someone in academia can do some type of analysis on the differences between these two methods.  I suppose it’s already underway since the obvious need for a good comparison is a daily joke.


However, accounting standard-setters in the US and Europe so far resisted pressure to relax fair value rules. Other regulators have also criticised financial companies for proposing rule changes that would reduce the impact of a crisis triggered in large part by their aggressive lending and underwriting practices. The IIF declined to comment.


The IIF will output their spin, but they won’t defend any failings on their own behalf.  This is what we’re rewarding.  The Banks are Pavlov and we’re the damn dog.  Every time a warning bell goes off, we don’t salivate, we’re being cut off. We use our brains to make the drugs aka money aka credit – last longer.

Posted by: thefinancedude | May 21, 2008

Two Pennies – 5/21/08



Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.” Since January, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60 per cent, while near-term prices have gone up 35 per cent.


That trend was exacerbated by T. Boone Pickens, the influential investor who believes world oil production is about to peak as aging fields run dry. He warned that oil prices would hit $150 a barrel by the end of the year. “Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87m,” Mr Pickens told CNBC. “It’s just that simple.”


Mr Pickens’s view is still in the minority in the oil industry. But concerns over future oil supplies are fast moving into the mainstream and influencing investors.

This comes as demand, especially from China, is set to continue to grow, while that of the US slows. Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.”


I think the writing is become clear.  We are not running out of oil anytime soon, however we have run out of cheap, easily accessible oil we’ve enjoyed for the past one hundred years. The next twenty will be the worst yet.  Zero point energy research namely the Aether Physics model, may prove fruitful and the path to a future of energy independence.


Anyone who believes oil is gushing out from everywhere is insane.  This isn’t a bad thing.  We are using almost four times as much per capita as other developed nations.  Our free ride is over.  We’ll suffer now, to emerge from this in the future.


AAA Can Do Better


Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

The products were designed for institutional investors. In the recent credit market turmoil, those who still hold the products will have suffered some paper losses while others who have bailed out have lost up to 60 per cent of their investment.


“However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.”


S&P stood by its ratings, saying: “Our model for rating CPDOs was developed independently and, like our other ratings models, was made widely available to the market. We continue to closely monitor the performance of these securities in light of the extreme volatility in CDS prices and may make further adjustments to our assumptions and rating opinions if we think that is appropriate.”


At first I thought this was crazy!  Then I realized they are a sanctioned monopoly without competitors.  Fitch was smart enough to realize they were in over their heads and bowed out.  So Moody’s was only able to get these their coveted AAA with a software glitch, yet S&P stands firm on their model is correct.  Between the two of them it’s clear both have lied and are in damage control mode.  Since no other companies are allowed to put their stamp of approval on debt, we’re stuck with inept choices not to different from political runs for the highest office – a lesser of two evils.


Why are we advocating MORE regulation to fix any of this? Free markets don’t fail.  They allocate resources most efficiently and create winners and losers.  Attempting to change this course serves only to distort the level of loss and gain.  Government regulation is nothing more than one person, or maybe a panel of a whole three, decide how they can take from us all to give to a few.  How does that parallel American values? Since when do we advocate free lunches when something goes wrong?  You mean we can eliminate consequences to our choices?  You can in Amerika at the moment.

Posted by: thefinancedude | May 20, 2008

Two Pennies


The Senate agreed on a bill to help home owners.  Bush is declaring he’ll review and probably sign into law.  Great news, right? Let’s break down some numbers.


The Senate bill would create an affordable housing fund, financed by the government-sponsored mortgage-finance companies, Fannie Mae and Freddie Mac, and that fund would be used in its first year to provide about $500 million for the foreclosure rescue effort.


“The primary goal here is to keep people in their homes, but also to establish a floor, a bottom to all this,” Mr. Dodd said. The foreclosure aid is tied to legislation creating a new regulatory agency to tighten oversight of the government-sponsored mortgage financiers.


I’m going to overlook the ridiculous idea that more government watch dogs will watch the government sponsored housing crooks more closely.  Who’s going to watch the watch dog then?


They are committing $500M in the first year, and it’s just about half over.  Pandering?  Probably.  But let’s assume not.  So this $500M will be divided into as many homes as possible if we’re trying to help as many people as possible. 


$500M could help 5000 people with an average of $100K per home. The national median as of April was $220K per On the average we’re looking at helping maybe 2300 rounding up. The total foreclosures for 2008 are forecasted to be around a million.  Based on these numbers we’re going to help about .23% of the homeowners.  I read that 2% of us are ultimately being affected by this based on the raw numbers, so why are we in such a big fuss over this corner of the market?  Oh follow the money….almost forgot.


The Congressional Budget Office has estimated that under the House bill, up to 500,000 mortgages would be refinanced over the next five years, at a cost to taxpayers of about $2.7 billion.


$2.7B/500,000 = $5400 per home owner.  We are paying each homeowner $5400 because they and their lender can’t figure out who got screwed more. Who loses – we do.


That $500 million would be taken from a new affordable housing fund, which would collect slightly less than half a cent on every dollar of mortgages purchased by Fannie Mae or Freddie Mac.

That fund, proposed by Senator Jack Reed, Democrat of Rhode Island, would continue to exist after the foreclosure assistance plan ended, with the money directed to creating affordable housing, including low-income rental housing.


Then they want to give that money to the black hole known as Fannie Mae.  Aren’t those the ones who lost how many BILLIONS already?  Oh and the best part of government, it won’t be going away once the crisis has ended.  On one hand it takes some nerve to tell us flatly it will not be going away on the other it’s like an open dare to call their bluff. Can we?



Through most of the 1990s, auto makers sold a little over 15 million cars and light trucks a year in the U.S. market. That changed in the late 1990s: With gasoline prices low and many U.S. consumers feeling flush from the tech-stock boom, auto sales surged. Sales peaked at 17.4 million in 2000 and remained near 17 million for another five years. Heads of General Motors Corp. and Toyota said the U.S. was entering a golden age of the automobile. In 2003, Toyota’s head of North American sales predicted the industry would soon be selling 20 million vehicles a year.


They were wrong. Sales started falling in 2006 and this year are expected to be right back where they were in the 1990s, at just over 15 million. Last week, market researcher Global Insight Inc. lowered its 2008 forecast for U.S. vehicle sales to below 15 million. Global Insight now believes sales won’t reach previous highs again until 2012, a year later than it had previously thought.


Volume is a more important barometer than sales can ever be.  Any measurement of money carries an intrinsic problem we all feel today, namely inflation. People want to buy as much as they can leverage.  Middle class tries to emulate the upper by squeezing into car payments they can barely afford not to mention those who did the same in respect to the GREAT deals on SUVs.  More like another sucker debt trap depending on how much its utilized.


For the foreseeable future the majority of us will be trading down.  The entire expansion from the fifties has surpassed the golden age we still believe we’re in.  These days we’re spending more money to stay in the same place.  Roads and highways are in disrepair and maintenance is shirked in favor of government slight of hand pointing to the new stuff they just built for us.


Its over. While Europe the wise elder decided to build out mass infrastructure for all, we resisted once we could ignore the obvious.  There will be an end to the finite resource known as crude oil.  When it happens was irrelevant.  The time to act has past.  We will react violently when the Cheney defined American way of life become fully negotiable.


If you sit down and do the math, you might be spending 25% of your paycheck to secure your paycheck.  What if you took a job you loved that paid 25% less, but was 1/10 the distance?





The trucking firm Jevic Transportation Inc., of Delanco, announced today that it was ceasing operations after 27 years, a victim of high diesel and insurance costs as well as the tightened economy.


“When you are a carrier, you see the recession coming before anyone else,” he said. “Customers are shipping less.”


“For many motor carriers, fuel is now equal to labor as the highest expense,” she said. “The trucking industry spent $112 billion on fuel in 2007, and we’re on pace to spend $141.5 billion in 2008.”


Besides new business systems, Jevic added other distinctive innovations: Its drivers carried business cards, just like senior managers. It was known for good pay and benefits, and thus had little difficulty filling the ranks of its drivers.


Moreover, it made a point of bending over backward to get new customers, and to keep them in the fold.


Corollary to the above point.  Mass transportation is the current marginal form of transportation.  People will be switching to it as they get squeezed out of their autos.  Business is similar in that they must ship goods, rather than their labor.  They too are making marginal changes to their business model to cope with rising costs.  At some point, the marginal truckers will be eliminated in favor of moving back in time, namely freight rail transportation.  Wonder why Buffet bought so much RR stock?


Trucks are being forced into transporting local, last mile delivery.  Meaning the majority of domestic goods transport will be done via rails with the last mile delivery being carried out by an eighteen wheeler.  JIT inventory will be made mostly obsolete and business schools will search for ways to make it work until they realize it was all predicated on cheap energy and really little else.

Truckers are less efficient in terms of energy use and wear and tear on the roadbed.  Reducing the time they are on the road should help reduce maintenance costs of the roads in addition to alleviating some carbon output, albeit marginal most likely.  All the marginal truck & air freight is pretty much been eliminated over as we ascended to $3/gal.  The next leg up will produce more losers and fewer winners but we can’t stop the market.  It would be too easy to say this train has left the station, but it did and those positioning themselves will be rewarded.




Posted by: thefinancedude | March 28, 2008

BSC Bailout

Is any other taxpayer out there paying attention to politician’s intent on bankrupting this great nation? I’m not the sharpest tool in the shed, but I can read.  Worse, I can read a lot and comprehend most of it.  Apparently I’m ahead of just about everyone else then because what the Federal Reserve Bank has done by backstopping the Bear Stearns deal is a complete and utter violation of the Constitution. 

I know the Constitution is SO boring it’s almost a waste of our time to discuss, right?  Article one section eight outlines the financial arrangement between government and the people.  The three separate branches don’t share equal power and Congress is the only one allowed to appropriate monies. That is, until they authorized the Fed in 1913 to take over handling the supply of money.  For every dollar you have in your pocket, it is intrinsically worth less than face value. Let me explain. 

The Treasury authorizes Treasury bond sales to the Fed in clear violation of the Constitution.  The FED prints up money in exchange for a piece of paper that yields interest income from the Treasury. If the Treasury, that is the taxpayers, are in need of money, they are BORROWING it from the FED, not coining it as outlined in Article one, section eight. So your dollar in your left pocket is really only worth the face value minus the interest cost. Ever wonder why inflation exists? This money is no longer tied to ANYTHING of value and therefore is fiat – printable at the discretion of politicians and private bankers. 

By bailing out BSC, the FED has authorized an appropriation on behalf of American taxpayers without Congress even wincing. The executive branch, through the Treasury, has declared they have the power to appropriate our tax dollars.  So let me get this straight…A private bank and the executive branch has authorized tax payer money to be spent in complete violation of the basic framework PROTECTING citizens FROM government.  Go back and read the PURPOSE of the Constitution to understand why this is such a magnanimous event. 

Every member of Congress has taken the oath of office declaring to defend the Constitution.  Obviously CONgress hasn’t held up to their oath and it’s the citizens’ fault.  We are deluded by our own grandeur and have lost our focus.  The easy answer is to claim nothing is wrong so when the smoke clears, culpability will be shared by everyone equally and used as justification for failing to act. It’s time we all begin tuning out the sound bytes and we start tuning into the facts.  The fact is fiscal year 2006 interest payments on our national debt cost us $406 billion.  The operating budget of the government in the same year was $2.5 trillion.  We’re spending nearly 20% of our operating income on servicing debt and have NO plan on paying it back.  Can you get away with that?

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