Tuesday, August 12, 2008


The wall of worry is tall. Americans are frustrated with Bush, Iraq, Congress and, most of all, gasoline prices. Help is on the way. Bush is leaving office, the actual fighting in Iraq is almost over and congress is almost ready to vote on an energy bill that will include permission to drill in the US coastal waters.

Airlines are retracing their path. When crude oil hit $114 on the way up, CAL sold for $19.25 per share, by the time oil hit $147 CAL was at $6.75. When crude hit $114 yesterday, CAL hit $18.30. What a roller coaster ride! If the pattern holds, CAL will be back at $29 per share when the oil price breaks $100. On the way up, oil broke $100 in February. It appears that most of the move above $100 was part of an emotional bubble that will be retraced quickly. At some point, the strong future prospects for airlines will unchain prices from oil.

You can tell you are in a bear market when the news stops "working". Today, news that Nigerian rebels attacked a refinery pipeline had almost no impact. Such news, last month, would have sent the price up $4 per barrel. While keeping in mind that prices do not move in a straight line and that a bounce is inevitable, the bounce could be from much lower prices. The spike during the Gulf War went round trip, up to down, in about 7 months. One potential fly in the soup is that the majority of Americans have no idea that 6 Naval battle groups are converging on Iran. If an actual embargo occurs, the average citizen will be surprised. On this "news", markets may reverse for a short time while the foolish go "all in" on energy investments. Few people appreciate that the US has Russia's "permission" to do what ever it takes to bring Iran to the bargaining table.

The IEA has modified its forecast for 2009 demand by slight amounts. It calls for strong demand growth in China this year and next. I don't think the IEA has even noticed the world wide dance with recession; ISM production in China has slowed dramatically but one cannot tell how much is simply the close down for the Olympics. With demand for consumer goods down in the USA, Europe and most of the rest of the world, I suspect the Chinese stock market has foretold significantly slower growth in China.

The current slowdown should be called the Breck recession, "does she or doesn't she". We have simply never before had such strong productivity during an economic downturn. It is hard to have a recession when nation after nation is producing 2% or more goods with the same amount of work. Even the smallest of factories are "leaning down", like never before. The cost of capital goods is now such that it is rational to substitute capital for labor; in China capital is being substituted for labor. China is opening power plants at the rate of one per week.

If recessions are avoided by countries with high productivity the effect on energy demand is even better. Recessions lead to a temporary decline in demand, productivity gains are long lasting forever and ever savings. When you find a better way of doing something, you are not likely to go back to the old way. Those who traded from a truck to a Smart Car will not trade back just because gasoline drops to $2.50 per gallon. Two-fifty is still high enough to make old fuel guzzling trucks obsolete.

When the market is going your way, it is appropriate to PUSH, PUSH, PUSH. Add all the money you can and buy all you can. You need to make all the hay you can while the sun is shinning. One of the things that has gotten very cheap is resort real estate. Prices are the lowest they have been in 17 years. Occupancy is very low as a result of a weak economy combined with high gasoline prices but, as always, the time to buy is during tough times.