Friday, January 18, 2008


A regular reader says that he keeps looking for the big turn I have called and he is having trouble seeing it. I understand but it is still upon us.

The problem is that the big turn is showing up in a big drop in what was on fire. Baidu has fallen about a hundred points in no time. Oil stocks were the big losers yesterday and of course the big investment banks have taken it on the chin. The big turn is obvious for the past winners. It is not yet obvious which groups will lead to the upside when this "crisis" is over.

The big turn will be all the more obvious when the price of oil finally drops out of the stratosphere. Bush was criticized for "begging for lower oil prices". He did what he wanted to do, which was to "do something" before the big decline hits. In both 2008 and 2009 about 7 million barrels per day will come on line, about half from Opec and about half from the rest of the world. The new oil coming on line is more than enough to drop the price by a bundle. The big drop will be a much bigger stimulus to the economy that will the tax packages about to be proposed by Bush and Congress. Furthermore, the big drop will not be a one year, one time deal. The big drop in oil prices will last many years.

Shale oil projects are starting to move forward. The US holds more shale oil than all the oil that has ever been used. At $50 and above, many of these deposits are very profitable to extract. Tar Sand Oil from Canada is being produced for less than $40 per barrel. We many not know how low the price will go but do know that more and more tar sand oil will be produced at $40 a barrel if other supplies are not found. The most recent discovery in the Gulf is in deep water but deep water oil is a lot cheaper than tar sand oil!

The big turn is here. It is showing up all around the world. The German economy has slowed as have many others. It is made clear that the rest of the world has slowed when we note that China is slowing. Bigger than the decline in oil is the decline in interest rates. The value of trillions and trillions of assets are now being discounted at substantially lower interest rates. Home mortgage rates are at the lowest levels seen in three years. Home building has slowed to the slowest rate in 16 years. It certainly appears that the FOMC is helping the "big boys" by delaying the decline in Fed Funds for as long as possible. The public sees little reason to buy now if they think prices and interest rates are likely to fall more. If the FOMC were to aggressively lower interest rates, the turn would be obviously here.