random thoughts...

Shorted Best Buy (BBY) and Circuit City (CC) today. Two reasons: 1. A picture of an endless line of unsold Ford Explorers (confirmed by the closing of Ojai Ford). 2. A confirmation of consumer weakness in August.

This is an offshoot of the domino strategy. First housing fell, then auto sales. They are both still down and the consumer is weakening further.

Took 18% profit on Seadrill (SDRL.OL). I will look to buy again when oil weakens further.

I still see further economic weakening in the next six months. The fed will bail out housing, banking, the consumer, etc., further exacerbating the dollar bubble. Inflation will retrench, and commodities will soar.

In the near future, I think there could be a sharp little correction in the market to price in the coming economic weakness. After that, the market should do very for a few years.

PDC's long-term outlook

"LNG demand in the Atlantic, mainly propelled by the needs of the U.S. and the U.K., will grow at an average annual growth rate of 14 percent from today to 2015." - Poten & Partners.

another tidbit from Barron's...

43% of U.S. bank assets are tied to real estate. This suggests that the Fed will bail out the banks by lowering rates. When will this happen? Next year. Will this feed inflation? You betcha. But the Fed wants inflation, because that way, we just inflate our debt away.

confirmation

I read this quote on Poten & Partners today:

The statistical correlation between oil prices and OPEC output is 80%
indicating that relative relationship between China’s demand and oil prices is as
strong as that of OPEC production and oil prices.

I consider this a validation of my working assumption that China and Asia set commodity demand and prices for the rest of the world.

another bet!

A couple of days ago, I made another bet with my friend Al. I bet that gas prices would fall from $3.00 a gallon to under $2.40 between now and at the end of the year.

The prize is a round of drinks at a martini bar.

fintrend's inflation predictions are coming true!

Now, how can we invest on this basis?

Back in July, Inflationdata predicted that inflation would fall in September and October, only to skyrocket in November and December. So far, so good. Everything is going according to plan.

When they made this prediction, I decided to remind myself to check on it. If they were right, the correct move would be to look for an opportunity to buy gold at a 3-6 month low. Right now, gold is at a 3-month low. That gives me about a month to get gold at a 6-month low. It also help that gasoline, natural gas, and oil are dropping precipitously.

This should be fun to watch.

el nino

El Nino has formed in the Pacific. This weather condition causes decreased hurricane activity in the Atlantic (which we are already experiencing), drought in Australia, the Philippines, and Southeast Asia, and mild winters in North America.

Meteorologists say that they won't know if this years' El Nino will be a strong one until the fall. By the time they can tell, it will be too late to make any investments on this basis.

My bet will be on the weather being severe. The reason is that the hurricane season has been extremely mild so far.

What kind of effects will a strong El Nino cause? Rising crop prices and lower oil and gas prices.

This forecast doesn't look good for PDC. Well, there's not much I can do but look for opportunities to buy it really cheap, and wait for next winter.

staying the course

I want to remind myself of the assumption/rule I set up recently. Namely, that commodity prices are set in Asia. However, natural gas and gasoline are prices here, because of local and political forces. If natural gas falls, I will look to increase my investment in PDC if it should test its yearly low. As oil falls, I think Seadrill or the tanker stocks stand great chances of being bargains. Don't forget the rumors that 20 VLCCF's were chartered for storage that could be dumped on the market.

Remember, the long-term trend is of demand from Asia. The IMF just reported that global growth is strongest in China and Japan.

I was betting on high commodity prices (in dollars) providing an incentive for China to let the yuan rise in value. If commodity prices fall, I will have to get rid of my Asian currency position. In this scenario, falling prices will fuel further growth, which will keep commodity prices from falling too far.

Oil for $15 a barrel?

"Analysts Predict Plunge in Gas Prices". Wow. Really. I guess waiting for gas to fall from $2.40 to $1.60 on the NYMEX before making that prediction was just "confirming the trend" or something. Could I please be an analyst? I could even have a code name, like Captain Obvious.

Time to look for buying opportunities, over the next few months.

sweet. meet me at Brewsky's after work!

If only this were true of bloggers.......

What's in store for oil prices?

Oil prices are coming down.

Is it time to rethink the future of oil prices? Since the Asian crisis forced oil down to $10 a barrel in 1997, Asia has set the price of oil. The Financial Times reports that "To guard itself against a sudden oversupply in the market Opec is already producing 500,000 b/d below its quota of 28m b/d. " Hmmmm.... I wish I knew that a month ago.

Barron's reports that the "inverted yield curve signals a slowdown, not inflation."

What about the global yield curves? More on that later.....

In the meantime, the lesson to be learned is that demand from Asia sets the price of oil.

Seadrill

I have just updated my Seadrill (SDRL.OL) spreadsheet, which I am using to predict Seadrill's future dividend. Unfortunately, I can't upload the spreadsheet to the blog. However, the biggest change was that the spread between 2010 low end estimates and my guess of 2010 revenues keeps closing. For 2011, I estimate that Seadrill will have revenues of almost $3.2 billion. The company is worth 7.1 billion today. I see this as a significant undervaluation of the growth inherent in the company.

Employment and wages...

Wage increases: Q1 9% rate
Q2 4.9% rate

Observations: 1. These increases are double the GDP rate.
2. The're also higher than real inflation.

Conclusions: 1. These wage increases will feed inflation.
2. This is good for housing (people will have less trouble
covering increasing mortgage payments)
3. Good for consumer spending.

Big picture market strategy

I have lots of points to make.

1. I noticed a loose correlation between the San Diego housing chart and the Dow.
From 1983 until the crash in 1987, the Dow more than doubled. Most of this gain was in '86 and '87, just when the housing market was bottoming out. The crash of '87 and a weak market through '91 corresponds to a huge housing boom. Then came the housing bear market from 1991 to '96. In L.A. the loss was over one third in real terms. Then came the Dow bull market of the '90's, which saw the Dow more than quadruple. The peak came in late '99 and hasn't been eclipsed since. Is it a coincidence that the housing market took off in 2000?


Conclusion: sometime in the next 6-12 months, the Dow will see the best buying opportunities of the next decade.
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Question: Which is bigger, inflation or the housing bubble?

A contributor to Barron's has suggested that Bernanke has temporarily given up trying to kill inflation because the 10-30 year section of the yield curve has stubbornly refused to believe in it. Well, maybe his best bet is to let the monster get up and scare the bond market into backing him up. Right now, the housing bubble is definitely bigger, and could very well cause a recession that would swallow inflation.

Thought: Big Ben can't save us from both inflation and the housing bubble. One of them will cause a recession. So, the correct bet to make is on a recession, even more than the bursting of the housing bubble.

What are the prospects for a combination of recession and inflation?

I would say their good for two reasons. A recession will cause a drop in the value of the dollar. At the same time, inflation is being driven by commodity demand from China and India.

more housing market analysis

This article makes the valid point that housing prices are losing ground to inflation. However, house prices don't have to drop to take an enourmous amount of liquidity out of the market. Seven million houses sold last year times $225,000 equals 1.6 trillion, or 13% of GDP. There are probably as many houses as families in the U.S. or about 100 million. Every percentage point that housing prices drop takes 225 billion off household net worth balance sheets.

However, we do have to remember that this is America, the world engine of capitalism, innovation, and entrepreneurialism. Worker production and corporate profitibility are at record levels. During the last bubble the Nasdaq lost half of its value, and the Dow 30%, causing the 2001 recession. In my mind, the 2001 recession was extremely mild. This is a phenomenol loss for such a small recession, but I think the next one will be a little worse, considering that home prices affect consumer spending more directly than stock market gains. Much of those market gains were locked away in pensions, 401(k)'s and IRA's.