AUSTRAILIA: OIL PRICES WILL GO DOWN

Australian expects oil price to decline

I agree with Australian Treasurer, Peter Costello that oil pirces will decline. The place where we disagree is in how low they will go once the supplies are increased. He says we will never see oil at $20 or $30 a barrel again. I say oil from tar sands is profitable at $30 per barrel and there are tons of it available.

David Lynch talks about oil production peaks in the following articleNaturally, we are not going to go directly back to $30. It will take time for the new supplies to be developed. Also, China, which has reduced its usage of oil in the past twelve months, will increase its use over the next many years on average. India will also increase its usage but India has planned a new refinery that will cost half a billion dollars.

Of course the construction of refineries do not argue for reduced prices but the construction of sour crude refineries shows that $30 oil is a reasonable target. Saudi Arabia is footing a big chunk of the bill to build and to expand sour crude refineries. This oil can be refined for less than the cost of tar pit oil.

The results of the vote in Iraq will be known next week. There is a good posibility that an Iraqi refinery will be built soon!

Seeing families going to the polls in Iraq was a moving experience. It is no easy task forming a democracy. The Iraqi people want and deserve the right to run their country. The constitution calls for the sharing of the oil wealth. With a constitution in place, the wind may largely go out of the insurgents sails. God Bless America and God Bless Free Enterprise!

CHART: TIPS EXPECTED INFLATION

There are many good inflation gages around. The one above is frequently posted at the Macroblog site. My favorite is to plot the futures contract on the long bond by the futures contract on the CRB. The reason I like the futures is that it makes sharpe peaks and valley's at turning points. Right now has made a pretty sharpe peak at around 2.9%. The next move appears to be down.

GOOD NEWS FOR STOCKS! Stocks do well during times of moderate inflation. Some bloggers are currently obsessed with the appearance of high inflation. However, the sharp run up caused by the hurricanes will be followed by the sharpe drop afterward. For example, gasoline prices have declined 28% in recent weeks.

The more important thing to note is the pessimism caused by the high oil prices and other bad news. The pessimism has reached levels that have pushed the market down like a coiled spring. I have been talking about the BULL MARKET for a good while. I cannot say that the BIG BULL IS HERE. HOWEVER, I AM CONFIDENT THAT THE TIME IS NEAR.

CLEAN AND QUIRKY CARS

Clean and quirky cars to dominate Tokyo show | Tech News on ZDNet

It seems to me that the best idea to come out of the Tokyo Motor Show is the Mazda Hybrid. This car runs on gas, hydrogen or electricity. The idea is to use hydrogen when available. In the next decade, it is anticipated that the zero emission hydrogen fuel cell will be in mass production. One problem is the chicken or the egg problem of developing a network of refueling stations.

The Mazda Hybrid is a neat solution. It would use hydrogen as often as possible but owners would not have to worry about making trips to places where hydrogen is not yet available.

By the way, if you don't believe oil will every return to $40 per barrel, then you don't believe in the law of substitution or the ingenuity of markets. I do believe. Thirty years ago, we used oil for many industrial processes and even to produce much of our electtricity. Today, we use more available and lower cost fuels to supply these needs. Now that oil has ratcheted up another knotch, oil will be replaced as the primary fuel for transportation as well.

Change takes time. Oil prices started the steep incline almost three years ago. Since that time, China has gone from annual increases in the use of oil at 14% reduced to zero! That number is correct, China will acutally use less oil this month than it did in October of 2004. Other very populous regions, such as Indonesia and India, have recently cut consumer subsidies. The G20 nations met this week and agreed to find ways to conserve energy.

The new democracy of Iraq, having agreed on a formula for the sharing of the oil wealth, will likely more than double production over the next few years. Hydrogen cars (alternative fuels), conservation and new production will eventually take the price of oil back below $40 per barrel. Airlines that have cut other costs will see profits hitting the bottom line when fuel costs go down. One should buy in anticipation. The major beneficiaries of lower oil will include CAL and AMR!
Hybrids Hit the Showrooms
Tokyo Motor Show
Mazda SENKU.

WOOD STOVES! NOT AGAIN

Rutland Herald: Rutland Vermont News & Information

WOOD STOVES! NOT AGAIN!

Vermont Castings reports sales of wood stoves, up 50%! Since the 1920's, America has reforested 80 million acres of trees, halleluia! Our coutry reduced pollution by turning away from the buring of wood for fuel. It is much smarter to burn coal or nuclear fuel inside a controlled power plant than to light millions of fireplaces each day.

One point here is that folks are taking extraordinary folks to reduce the consumption of gas and oil. The action highlights again the false savings pushed upon the country by those who understand the environment but not economics.

Economics is the science of scarce resources. The reality is that the price of scarce resources makes the market use these resources in a rational way. Yes, some goods are public goods and some goods are private goods. Clean air is a public good. There should be a cost imposed on private indivuduals who "consume" our clean air.

The answer is not to fight nuclear power plants or oil refineries. When we prohibit the production of low cost electricity, folks will be forced to turn to wood stoves and other extremely dirty and extremly inefficient sources of energy.

The good news is that wood stoves are not the only substitutions taking place. For example, Chevron has started construction on its gas to liquid plant in India. When carbons such as coal and gas are converted to liquid, pollutants can be filtered as a part of the process.

We need to permit the construction of refineries. As good citizens of the planet earth, we must insist on the production and burning of clean fuels. The air in the USA is cleaner now than 5 years ago but more progress is needed. We will not get there by taking the backward step of burning wood instead of building refineries.
Fireplace Lowdown
Preventative Action

Bloomberg.com: Australia & New Zealand

Bloomberg.com: Australia & New Zealand

It is interesting to hear folks say silly stuff. For example, many folks think the major airlines have been foolish for not hedging their fuel costs. The attitude is a bit like asking the 50 year old widow whose husband recently dropped dead of a heart attack why she did not buy a 5 million dollar life insurance policy the week before he died.

It is true that after the price of a commodity spikes to new levels, users tend to start hoarding. While the price was very low, the users saw no benefit in hoarding. Of course, this pattern is exactly opposite of rationality. If you can buy very cheap, before a substantial increase in price you are ahead of the game. However, commodities tend to revert to the mean price.

In 1999 oil was too cheap. The drilling industry suffered. Oil traded as low as $12 per barrel. The industry recovery took a very long time. Oil finally traded around $18 per barrel by 2002. For about 10 years, it would have been foolish to hedge. Once the price jumped to $60 per barrel the thought ran wild of why don't we hedge against additional increases. There is a financial cost to hedging so the $60 hedger only "wins" if oil trades consistently above $62 during the duration of his hedge.

Again, the oil price will eventually trade below the mean price. Because the supply demand curve for oil follows the unstable coweb pattern similar to the pattern for farm products, no one can estimate the mean price very well. Even the best in the business can only wildly guess at the future price.

When volatility is high the risk is high and the cost of "insurance" is high. The price of volatile commodities will decline just as rapidly as the recent increases.

Bloomberg reports that the price of copper dropped today. While one day does not make a trend, the world wide stock markets are suggesting slower growth ahead. The combination of slightly higher long bond rates and declining stock prices suggest that inflation is going to consume a slightly larger portion of nominal growth and that growth is going to slow.

It may take another bump or two in the fed funds rate to turn the pattern around. Another bump or two in cooperation with bumps in other nations (South Korea raised rates a couple of days ago), should be enough to slow inflation, rally the bond market and set stocks on fire. I am tempted to suggest ten year bonds at 4.45%.

With the slowing of the hot economies (such as Australia, China, and New Zealand), the potential exhist that ten year rates will decline below the fed funds rate. Should this happen, in addition to making a profitable bond trade, the investor should be able to catch the exact market bottom. In other words the news of the inverted yield curve could cause a wave of panic selling.

As usual, one should guard against getting too cute. Short term moves are impossible to call. Intermediate term moves are easier and long term moves are no problem. From here, long term investors should be in stocks, intermediate term investors should be as much as 70% stocks and short term investors should stick with money market accounts.

Bloomberg.com: Top Worldwide

Bloomberg.com: Top Worldwide

Bloomberg reports that Australian Employment Unexpectedly Declined by 42,300. This is the first decline for this booming economy in 10 years. Resource rich Australia has benefited from the super growth of China.

This is the kind of bad news that is very good news. The US stock market needs this and additional indications that the world economy is not growing too fast. The world needs a little breathing room for resources to catch up with demand.

There are many indications that demand growth is slowing. When the evidence becomes over whelming, the Federal Open Market Committee (FOMC) will stop raising short rates. The counter movement today was in the ten year bond rate. The rate is pusing 4.5%, not a high rate but the increase shows that growth, inflation or both are still possibly too strong for comfort.

Chart of the Day - www.chartoftheday.com

Chart of the Day - www.chartoftheday.com

Today's Chart of the Day is a good one. It shows the strong relationship between the Fed Funds rate of change and the S&P earnings rate of change.

In the mid 1980's and again in the mid 1990's the earnings growth peaked but the stock market rallied because the Fed Funds stopped going up. Does this situation have a familiar feel to it?

S&P earnings growth has been unusually strong for the past couple of years. The growth rate is unsustainable. However, the leveling off of earnings is likely to be accompanied by a leveling off in Fed Funds.

Remember, the market does not need interest rates to go down. Should the Fed signal that it will likely stop raising rates anytime in the near future, this market is primed for a super jump.

Again, the current earnings rate on stocks is better than 7%. The rate on 10 year bonds is less than 4.5%. Stocks can climb in value by 35% or more and still be at attractive evaluations relative to bonds!

Many active traders are now sitting in a net short position! They are actually betting on the market going down. Betting on a down market has historically been a very tough bet to win. I can't remember the exact odds but the one year odds are about 70/30. Even the daily odds are something like 53/47 against.

The good news for investors is that those who are betting against the market today will buy massive amounts of stock when the market takes off. At first they must buy back the stock they have sold short, then to recover their losses they will feel the urge to buy extra stock on margin on the way up.

The reason the moves off of bottoms is often so volatile is because short sellers are at great risk when the market starts to rise. They must eventually buy back the shorted shares, no matter high high they go or how many times the shares are split.

It is time to prepare to be aggressive buyers. The market needs only a small catalyst to start the stampede. A move large enough to spooke the short sellers is all we need to be off and running.