'Sleepwalking Into Crisis'

Interview with former Shell chairman from The Independent. ClickHere
Here are some highlights:

He accused the industry of having its head "in the sand" about the depletion of supplies, and warned: "We may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware."

In an interview with The Independent on Sunday ahead of his address to the Association for the Study of Peak Oil in Ireland this week, Lord Oxburgh, one of the most respected names in the energy industry, said a rapid increase in the price of oil was inevitable as demand continued to outstrip supply. He said: "We can probably go on extracting oil from the ground for a very long time, but it is going to get very expensive indeed.

The latest figures from the US Energy Information Administration show that global liquid fuels production in August was almost a million barrels per day lower than the same period in 2006.

Marc Faber on Bloomberg

The always eloquent Marc Faber is much smarter than you and I. Here is his recent interview with Bloomberg. Enjoy.
ClickHere

This Trend is Accelerating

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml

Welcome To The 1970s

As you're likely aware, today the Fed cut interest rates and it's discount rate both by 50 Bps. The dollar instantly tanked. Oil shot higher. Gold shot higher.

There was a few weeks where you almost had to give Ben Bernanke the benefit of the doubt. When he first cut the discount rate in response to the credit market turmoil it seemed like a reasonable move. Greenspan would have cut the Fed funds rate. Greenspan was a complete whore. So you figure Bernanke is attempting to act more responsibly. Then he says: "It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions." Those words actually came out of his lying mouth.

Well, today Bernanke proved that he is the Greenspan incarnate. Ofcourse we've known for a long time that the Fed would panic and slash rates in the face of a slowing economy. But the circumstances at this particular moment in time are especially insidious. Oil is at an all time high! All time high! The dollar is threatening a complete collapse having broken it's last support level. Well guess what, Bernanke just pushed the dollar over the cliff.

Let's put this in context. The Federal Reserve was founded with the primary objective of price stability. Control inflation. That is the mandate. Now we've devolved to the point where the Fed apparently doesn't give a damn about inflation.

You can bet that pushing the dollar over the cliff will have ramifications. To be felt by every single citizen of this country. There is no avoiding this now. You could probably paint the scenario...I guess, in which we impeach Bernanke and start jacking up rates in the face of a slowing economy. That's what it would take and the chances of that are virtually nil. That scenario wouldn't be pretty either but it's a whole lot better than what we're going to get.

Think $5/gal for gasoline. Think about your grocery bill doubling. Think about everything in Wal-Mart going up in price by 30%. That's all in our future. Kiss the middle class goodbye. They're history.

How did this happen? Bernanke wanted to bail out Wall Street. Pure and simple. Bernanke is a tool. A puppet. We just sacrificed the middle class of this country in an attempt to insure Wall Street players get their bonuses. Labor just got screwed again.

This rate cut will not even help the housing mess. Long term interest rates will be going higher not lower. Bernanke just made things worse for housing.

If I had the choice I would move my family out of this country right now. As it stands, that option is not on the table. It will be six years until it is. By then it will be too late and we'll be stuck here. That is my fear and such is my level of disgust that I am deadly serious. I would move-right now!

Folks, I suggest you take actions to protect yourself and your family. Get out of the dollar as much as possible.

Some Truth From The Nation

Someone is paying attention. I don't have any idea who this Greider guy is but he is spot on here (bold print is mine). In addition, there is a book review from Jim Grant in today's WSJ worth reading.

The Lies of Alan Greenspan
By: William Greider (TheNation)

Alan Greenspan has come back from the tomb of history to correct the record. He did not make any mistakes in his eighteen-year tenure as Federal Reserve chairman. He did not endorse the regressive Bush tax cuts of 2001 that pumped up the federal deficits and aggravated inequalities. He did not cause the housing bubble that is now in collapse. He did not ignore the stock market bubble that subsequently melted away and cost investors $6 trillion. He did not say the Iraq War is "largely about oil."
Check the record. These are all lies.
Greenspan's testimony endorsing the Bush tax cuts was extremely influential but now he wants to run away from it.
In the instance of Iraq, Greenspan is actually correcting his own memoir, The Age of Turbulence, which just came out. This weekend, newspapers reported provocative snippets from the book, including this: "I am saddened that it is politically inconvenient to acknowledge what every everyone knows: the Iraq war is largely about oil."
Wow, talk about your "inconvenient truth." Greenspan was blithely acknowledging what official Washington has always denied and the news media faithfully ignored. "Blood for oil." No, no, no, that's not what he meant, Greenspan corrected in a follow-up interview. [Bob Woodward in Monday's Washington Post] He was only saying that "taking out Saddam was essential" for "oil security" and the global economy.
Are you confused? Welcome to the world of slippery truth Greenspan has always lived in. He was the Maestro, as Bob Woodward's loving portrait dubbed him. Wall Street loved the Chairman best because the traders and bankers knew he was always on their side and would come to their rescue. The major news media treated him like an Old Testament prophet. Whatever the chairman said was carved on stone tablets, even when it didn't make any sense, as it often didn't.
Some of us who followed his tracks more closely, were not so kind. Harry Reid, now the Democratic Senate leader, said Greenspan was "one of the biggest political hacks in Washington." Amen. I called him "the one-eyed chairman" who could always spot reasons to stomp on the real economy of work and production, but was utterly blind to the destructive chaos in the financial system. No matter. The adoration of him was nearly universal.
Until now. The economic consequences of his rule are accumulating and even the dullest financial reporters are stumbling on crumbs of truth about Greenspan's legendary reign. It sowed profound and dangerous imbalances in the US economy. That's what happens when government power tips the balance in favor of capital over labor, favoring super-rich over middle class and poor, then holds it there for nearly a generation.
Things get out of whack and now the country is paying big time. A pity reporters and politicians didn't have the nerve to ask these questions when Greenspan was in power.
He retired only a year ago, but is already trying to revise the history. To explain away blunders that are now a financial crisis facing his successor. To rearrange the facts in exculpatory ways. To deny his right-wing ideological bias and his raw partisanship in behalf of the Bush Republicans.
The man is shrewd. He can see the conservative era he celebrated and helped to impose upon the American economy is in utter ruin. He is trying to get some distance from it before the blood splashes all over his reputation. Of course, he also came back to cash in--an $8 million advance for a book that is sure to be a huge bestseller. I don't want to be unkind, but Greenspan could have avoided all the embarrassing questions if his book was posthumous.
I haven't the read it yet. I have a hunch I am not going to like it.

Full Interview w/ Jim Rogers

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vjUSJ.lwS8e0.asf

Apparently I'm Not The Only One Concerned

Think I'm full of hot air. Maybe you'll consider similar commentary from one of the greatest investors of all time. Jim Rogers echoes what I have been saying...


http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&refer=home

Wake Up!

So, my friend sent me an e-mail this morning. One of those keep-out-the-immigrants-pass-it-along type e-mails. I couldn't contain myself. Instead of just ignoring it I blasted back that illegal immigration is almost entirely inconsequential in light of the larger issues we face. Seriously, watching the news, reading the papers and listening to the conversation of others it seems as if I might as well be living on another planet. In this country we have our collective head up our collective ass.

Britney Spears' lack of undergarments gets more airtime then the legitimate threats we face. For one, the global peak in oil production. Or the fact that our Federal Reserve is in the process of debasing our currency. Really hate to say it but we deserve what we are going to get. What are we going to get? Eventually, a wake-up call to the new reality. Just because we are collectively ignoring it doesn't mean everything is going to turn out just peachy.

Global terrorism? Who the hell cares. We lost 2,000 fellow Americans on 9/11. A tragic loss indeed but an American would have a better chance of winning the lottery then getting blown up by a terrorist in this country. Meanwhile, every single one of us is going to be affected when our dollar is virtually worthless.

Here is what to expect. Incredible price increases (measured in years not months) for all the things we need to sustain our current lifestyle. Oil, water, electricity, agricultural commodities just to name a few. Now is the time for us to wake up in order to have any chance of controlling our fate. I'm losing hope.

We'll eventually be confronted by this new reality. By then it will be too late. Future generations will wonder why it is that their parents and grandparents ignored these problems. They'll wonder how it is that we could have been so irresponsible and distracted by nonsense. We are going to hand down to our children a nation in shambles. As a new father, it all makes me so angry, that I just want to reach out and shake those around me. Wake Up! Before it's too late! I want to drive to Washington and burn down Bernanke's house for what I think he is about to do. I want to see Greenspan strung up in the town square.

Dollar Cracking

Dollar index below the incredibly important 80 level. And the Fed is going to cut into this? Ha. Bring it on. I'll continue to beef up my metals positions. I suggest you have at least some exposure to protect yourself from ongoing dollar weakness.

We're Not Done

US home sales decreased 12% from June to July! That's a big number.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajD_j6XBeepg&refer=home

check, check and check

David Walker, comptroller general of the US, speaks the truth. I appreciate that increasingly rare attribute. From the FT:

Drawing parallels with the end of the Roman empire, Mr Walker warned there were “striking similarities” between America’s current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

Fast One

After being down 200 pts the Dow has rallied back to flat (now green). The bulls are attempting to again snatch victory from the jaws of defeat. "The Skeptic" still does not believe in fairy tales.

Of Fairy Tales and Weak Arguments

Global growth. Global growth. Global growth. If the moron pundits on CNBC say it enough maybe the bleeding will stop. Click your heels and hope Goldilocks can be revived. What a joke.

Look Out Below

Look here folks. You had better take precautions. Not even money market funds are safe according to today's WSJ. You see these slick wall street types on TV talking about the risk being spread out all over so no one is going to blow-up. Right. It just means this toxic waste is everywhere. It's in Germany where they are already bailing out a small bank and Paris where BNP Paribas dropped the bomb this morning that got us off on the wrong foot. I woke-up at 8ish and the futures were down more than I could ever remember seeing in a decade. Apparently the ECB had stepped in an attempt to stop the bleeding. According to the Financial Times:

"The European Central Bank might have called it “fine-tuning” but its decision to inject nearly €95bn into the eurozone banking system, the largest such intervention since the September 11 2001 attacks, is anything but. Does the ECB know something the rest of the world does not? After all, the Federal Reserve on Tuesday gave no inkling that a systemic threat might arise from the stream of banks and funds confessing to subprime-related problems."

So that toxic waste is in Europe and around the world. There's just so much of it. But don't forget here at home it's held by hedge funds, banks, insurance companies, builders, money market funds, pension funds and endowments. We are at the edge of the cliff. We are staring at the oncoming headlights. If we go over or stand flat-footed every single American will be affected. Period.

So you had better brace yourself as every asset class is being liquidated. We are still very close to the top and the hedgies are already blowing themselves up left and right. It's indicative of how much leverage has been employed.

Won't be long before cash (the dollar) isn't safe either despite the bounce today. If "The Skeptic" were to sell anything in the long-term account the proceeds would go into the GLD. Everything was sold today but gold has the best chance to protect you (after the ongoing liquidation). If you were smart you'd buy some farmland with water rights, bury some oil drums in the front yard and put some gold in a safe which you protect with a firearm. Good luck.

Disclosure: Long GLD

UPDATE: Countrywide just dropped the bomb. Look out.

Here's a Must Read

Great article. Absolute must read. Here's a latest from http://contraryinvestor.com/mo.htm

"The conceptual message seems pretty darn clear. When the rate of change in household debt growth decelerates meaningfully, the US has experienced recession. You don’t need us to tell you that this makes all the sense in the world. We’re a consumption based domestic economy that has been heavily debt financed. When the rate of change in debt slows, so does the economy. Simple enough? And what we see in the current period is a very sharp slowdown in household debt growth as of now. In our minds, this demands monitoring as we move forward."

Insert Expletive Here

This from the Daily Telegraph:

"The Chinese government has begun a concerted campaign of economic threats
against the United States, hinting that it may liquidate its vast holding of US
treasuries if Washington imposes trade sanctions to force a yuan
revaluation."

Wow. Read that one again.

Now:

"Two officials at leading Communist Party bodies have given interviews in
recent days warning - for the first time - that Beijing may use its $1.33
trillion (£658bn) of foreign reserves as a political weapon to counter pressure
from the US Congress. Shifts in Chinese policy are often announced through key
think tanks and academies.
Described as China's "nuclear option" in the state
media, such action could trigger a dollar crash at a time when the US currency
is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering
the US housing market and perhaps tipping the economy into recession. It is
estimated that China holds over $900bn in a mix of US bonds."

Great Analogy

Check out this video. This fella makes some very important points. 200 basis points? WatchVideo

Break from Doom and Gloom

There has been a lot of doom and gloom from me lately. Despite my genetic predispositions I try to maintain some balance. You need to make money both long and short. Bull or bear. In that spirit I would suggest biotech. It's working. It should be as it's a sector that won't be directly affected by the slowing economy. Or so the theory goes. Think AMLN, not AMGN.

Also, select basic material and resource plays look intriguing. Utilities bounced hard today and seem to have more upside. Check your favorite names in those sectors.

Monday Bearkill

The stock market emasculated the bears today. Dow up 286 points. Cancelling out entirely Friday's massive drop. A few thoughts:

1. For a day when the Dow was up 2.18% and the S&P 500 was up 2.42% the breadth was weak. NYSE had 1793 issues advance and 1570 decline. Not impressive. More telling perhaps was the Nasdaq which saw declines outpace advances 1617-1453.
2. There are some delicious short candidates out there. But who the hell is going to stick their neck out before the Fed meeting. No one. Therefore, only buyers today.
3. I'll be the first to admit that I've been waiting for a long time for this market to crack. I remember the other pullbacks and how every single one has been met with more strength and eventually higher prices. Obviously, betting against the bulls has a low probability of success. However, I look at hundreds of charts everyday and can tell you that damage has been done this time. I've not seen so many ugly looking charts since before the bull began.
4. The dollar index briefly dropped below 80 this morning before bouncing. Stay tuned.
5. "The Skeptic" welcomes a market rally as an opportunity to get more aggressively short. Unless proven wrong entirely in which case it'll be time to get reluctantly long...again.

Well. That's all for now. I understand that calling a top in the market or calling for a bear market is a fool's errand. You are the butt of every joke. Everyone is against you. Fine with me. Just like when I sold my home in the summer of 2005. I was ridiculed by everyone. No one is laughing now. The bulls had better enjoy this last dance because it won't be long before I'm sticking my foot up their asses. Good luck out there. It's going to get interesting.

Jim Rogers on CNBC

Here is the link to Jim Rogers' appearance on CNBC this morning. http://www.cnbc.com/id/15840232?video=456571213&play=1

Later in the day CNBC's Joe Kernen went on a rant about his theory that Jim hasn't made any money since his days with Soros and that he is a joke. Kernen speculated that Jim probably has had all his money in T-bills since the 1980s and that he has been a global bull but probably only buys one share of stock in each country just to say he owns it. He then added that Rogers has always been negative on US stocks. Kernen generally doesn't irritate me too much but this was over the top. For one thing Rogers called the secular bull market in commodities, before anyone else, when it was still in it's infancy. He also told you to get long China. Sure he has been negative on US stocks but it seems he'll be proven right eventually. You have to understand, Rogers is not a market timer or trader but a big picture thinker. Has Kernen even read Jimmy's books? I bet not.

Seriously, Kernen you just need to pipe down. You are a TV host! Not an investor, not a money manager, not a trader....and apparently not even a very bright light. Stick to the teleprompter Kernen, you dumb shit.

Bulls on the Run

Wow. That was some week last week. Tuesday it looked like the bottom might fall out. Then we had two big up days followed by the big FLUSH on Friday. Fun stuff. Volatility is back. Gets better next week when we throw the Fed meeting into the mix (Tuesday 2:15 et). That's good for 150 Dow points but who knows in which direction. The risks are heightened here not only for bulls but bears as well.

Friday's market was opened with a weak jobs number (92K is bunk), was spooked by Bear Stearns' call on which they said it was the worst credit market conditions in 22 years and highlighted by Cramer going apeshit on national TV. Link. That was classic. Oh please bail us out. PLEASE bail us out. Fed come to our rescue. All the spinsters who wrote and/or purchased this mortgage backed toxic waste should be forced to eat it. None of these characters deserve a bailout. Fine, whatever. Have it your way but it won't help much.

One thing I noted on Friday was the weakness in the dollar and the concomitant strength in gold. The dollar index is cracking 80 soon. The Fed will hit the panic button soon enough. The talk now is that they will change their stance to neutral and open the door to a cut this week. They do that and any cut will come too late. Maybe they'll cut now in a vain attempt to save the day which either shoots us higher a few hundred points or is interpreted as fear and we get destroyed. Either way, it's just a matter of time until the Fed cuts meaning dollar weakness which encourages "The Skeptic" (along with the strength Friday) to buy more gold. And silver. This is why I own it and the time I've been waiting for.

So Monday? The yen trade overnight Sunday could be a tell. We could go either way substantially. My guess is we work our way lower. Banks look due for a bounce (still wouldn't touch 'em) which could stabilize the tape. Maybe it's calm until Tuesday. Doubt it. Be careful. There are many stocks out there that have further to fall, bounce or no.

Disclosure: Long GOLD, Long SILVER

Take Heed, Ye of Bullish Persuasion

``So this bubble is the worst we've had in housing and it's going to be the worst before its over cleaning it out.'' -Jim Rogers

My man Jimmy knows his shit. A significant portion of the housing market is going to just disappear. Financing will not be available for all! As of NOW. This will result in significant consequences for the American consumption-based economy.

To anyone listening (and frankly most tune me out) "The Skeptic" would advise extreme caution going forward. DE-fense. Better to have a plan for unforeseen events, which you hope to not need, than to make one up on the fly. "The Skeptic" will be shorting stocks into oblivion from his gold-plated bunker, if necessary.

Don't Screw with Mother Russia

Seriously, I would not want to have to rely on Russia for energy. That's a bad bet. While all seems quiet now in regards to energy supplies to western Europe eventually Russia will flex it's growing muscle towards them as well. Here's a related story from the NYT:

MOSCOW, Aug. 1 — In the latest of Russia’s many disputes over energy payments with neighboring countries, the natural gas monopoly Gazprom warned Wednesday that it would reduce supplies to Belarus by 10 a.m. local time on Friday unless the former Soviet state pays an outstanding gas bill of $456 million.
The tough tactics could also affect Gazprom customers farther west along Europe’s natural gas pipelines, again raising worries about the reliability of Russian supplies and the wisdom of Europe’s growing dependence on Russian energy.

More Evidence of Slowdown Underway

July auto sales, announced today, were positively awful. GM and Ford are in big trouble. According to Bloomberg:

GM's July sales fell 22 percent, as none of the automaker's eight brands managed a gain for July. Hummer suffered the biggest losses, dropping 30 percent to 4,895.
Sales of GM's cars were off 26 percent, and truck sales declined 20 percent, including a 29 percent slide for the Silverado large pickup. That vehicle accounts for about 15 percent of GM's total sales.
``The industry has been underperforming in the past couple of months. We have housing prices and gas prices around $3 a gallon,'' Paul Ballew, GM's chief sales analyst, said in an interview. ``Overall, it's tough in the U.S.''
Ford's 19 percent July decline included an 18 percent drop in sales of F-Series pickups, the top-selling line of vehicles in the U.S.

Ka-Boom Redux

BloombergLink

July 31 (Bloomberg) -- Bear Stearns Cos., manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back.
The Bear Stearns Asset-Backed Securities Fund had about $900 million invested in asset-backed securities, including mortgage bonds, spokesman Russell Sherman said today in a telephone interview. The fund was overwhelmed by redemption requests, Sherman said.
The fund's stumble is a setback for New York-based Bear Stearns and illustrates how the crisis in the subprime mortgage market has spread. The fund had less than 0.5 percent of its assets in securities linked to loans to subprime borrowers, Sherman said. The two funds that collapsed invested almost fully in subprime bonds. Losses have spread to banks, insurers and hedge funds in France and Australia, including one run by Macquarie Bank Ltd.
``This shows you don't necessarily have to be a subprime fund now to be having problems,'' said Bryan Whalen, a portfolio manager in Los Angeles at Metropolitan West Asset Management, which oversees more than $21 billion in fixed-income assets.

The LBO Ka-Put

At this point it's not a question of whether or not the LBO boom is over (toast) but whether "done" deals will start unravelling. The TXU deal mentioned in this WSJ is from what seems like forever ago. WSJLinkHere

"The breakup fee on an LBO deal typically runs from 1% to 3% of the total amount of debt banks need to sell to finance it. Loans and bonds for recent buyouts whose financing didn't clear the market -- and that banks got stuck with -- are trading at as little as 91 cents on the dollar (U.S. Foodservice) or lower. That means the banks who arranged the financing for these deals already have taken a hit of as much as 10% on the loans.
Take the buyout of Texas utility TXU Corp., for example. Citigroup Inc., Goldman Sachs, Inc., J.P. Morgan Chase & Co., Morgan Stanley, Credit Suisse Group and Lehman Brothers Holdings Inc. agreed to provide as much as $37.4 billion of debt financing. The breakup fee that the buyers of TXU -- Kohlberg Kravis Roberts & Co. and TPG -- would be on the hook for if they walked away is $1 billion. That is considerably less than the credit losses the banks could face if the volatility the markets is experiencing now persists when the deal is funded."

Ever Notice?

Ever notice how the market seems to get marked up at the end of every month? Yep, Wall Street is a shady place. The SEC might as well just close up shop as they are obviously ineffectual. Just announce to all market participants that there is no regulation as opposed to feigning regulation and doing absolutely nothing to actually regulate.

Although, to be fair, it may not be the SEC's fault entirely. It may just be that they are starved for resources, allowed to wilt on the vine, under the current administration. Like the EPA for instance.

Monday Bounce

The bounce is here however "The Skeptic" remains a seller. Going thru my watch lists I see a handful of promising longs but a whole list of juicy shorts. There is no reason this bounce couldn't last all week long. That being said I remain skeptical of the bullish gameplan which holds that every dip should be bought indiscriminately. Every once in a while that dip leads to a complete loss of altitude. We shall see.

Growl of the Bear

It's time to put in perspective more specifically where I think we are. Following a week in which the bulls were emasculated they'll be looking for the bounce. It seems likely at this point that any bounce, while potentially violent in the short run, will be short-lived setting up a failing rally and ending the bull market. Despite ending last week in incredibly ugly fashion the Dow is near a level which could potentially offer support. The S&P however has already broken, but nearing it's 200 dma, so it's a coin flip. At some point next week we'll get a bounce and it's a bounce to sell.

The market has ignored the bad news (or what I like to call reality) for-seemingly-ever. To my eye the market and the fundamentals have never diverged to such an extreme in the ten years I've been following the market. That's a bold statement considering that I remember 1999 very clearly (though at that point I had very little idea what the hell I was doing). In '99 the valuations were more absurd but things were good in the world. We lived in a relatively peaceful world in which the US was the only world power. We enjoyed super cheap energy supplies and solid economic growth. Household balance sheets were solid. Everything was, as they say, honky-dory. Very different picture from today.

Let's step back and look at the big picture:

The Economy: It's slowing folks. The Fed bailed out the economy following the tech stock crash by taking interest rates to historic lows. This action fostered the housing boom. Rather than take our medicine we leveraged household balance sheets in the name of overconsumption. Americans have developed quite a voracious appetite for overconsumption evidenced by the fact the 70% or so of our economy is services. We no longer manufacture anything and our exports are dwarfed by our imports (you can't export mortgage brokers). During the housing boom most of the hiring that went on was in housing related sectors. That plus is now a minus.

To keep the ball rolling consumers have leveraged themselves. Mortgage equity withdrawal and the wealth effect from skyrocketing real estate values have kept consumers happily consuming. That fairy tale (the Goldilocks economy I think it's called) is over.

Real Estate/Housing: In '99 I remember my co-workers tuned into CNBC (I prefer CNBS) throughout the workday. Everyone had a hot stock and we were all going quit to be daytraders. In 2005 everyone was a mortgage broker or had a condo to flip. We are a nation of speculators. Both were bubbles. The difference? In 2007 we are stuck with a trillion dollars in suspect loans. A trillion dollars? Well really who the hell even knows but the number is BIG and GROWING.

You know all the terminology by now...ARMs, cash-out refis, flex-pay, piggybacks, HELOCs, etc...Apparently if you give the American consumer enough rope to hang himself he'll do just that. As far as the financial institutions themselves, a bull would argue that banks have done a good job of spreading the risk around by packaging these loans into securities and selling them. Great. Instead of just cordoning off the troubled banks we have bad paper everywhere. The banks themselves are still holders but so are the brokers and the insurance companies. Probably even your pension fund. This is what they call a systemic risk.

Pundits have been calling the bottom on housing for six months now. Wrong. If we're lucky we've experienced the worst of the price declines but prices aren't going to see a bounce anytime soon. There is a ton of inventory and credit will be harder to get as the lenders begin to pullback thereby taking the final leg out from under the market.

Financial Dark Matter: (term borrowed from Bill Fleckenstein) Financial dark matter are derivatives. Financial nuclear weapons. CDOs, CDS, MBS, etc... Frankly, I only have a cursory understanding of this arcane marketplace. Here's what I know. This shit is toxic. There is a bunch of it, everywhere. It's highly leveraged (like anything else on the Street these days). It's mispriced, in some cases grossly mispriced, due to faulty assumptions and we don't know who is exposed and to what degree. Oh and it's highly illiquid. It all lies cloaked beneath the surface.

The Fed: These guys are a joke. They inflated the tech bubble then bailed it out with a housing bubble. Greenspan was particularly insidious in recommending ARMs just when rates were at their nadir. Expansionary monetary policies have fostered the most well-rooted inflation since Volcker killed it in the 1970s. Even after they do their best to strip from the inflation picture everything that goes up (i.e. ex-food and energy) they still have an inflation above the stated "comfort level". Commodities are in a secular bull market. Now growth is slowing. The Fed is trapped (sooner or later). Cut in an attempt to reignite growth or remain vigilant on inflation (that pesky mandate)? I maintain that the Fed will choose to cut. Growth at all costs. The market is trained to anticipate a bailout. We've had two down days in the market and traders are already looking for a cut in rates.

Bigger Picture: Domestic oil production peaked a long time ago and global production is peaking now. We do not yet have a viable replacement for fossil fuels. Meanwhile China and India are putting new drivers on the road at a breakneck pace. Oil exporters are also using more of their own oil at home. The worldwide scramble to secure energy resources has commenced. It will remain an increasingly hostile environment.
China has us by the balls. I love how we deal with them as if we are in a position of strength. Beating them up over exchange rates though will only bring us higher prices at the Wal-Mart. The dollar is doomed anyway. China is the world's next great power. Sooner rather than later if we continue to rot from within at our current rate. We suffer from a complete lack of coherent political leadership.



So it's all somewhat depressing. Maybe I've got it wrong in regards to the market. Maybe this is a buying opportunity and we are on our way to some sort of super-charged inflation-induced equity orgy but I doubt it. Maybe the financials have their issues contained but I doubt it. Maybe we will find a wondrous new energy source, hope so. I intend to remain flexible and profit either way but I think it might be on the short side of equities as it was this last week.

Dollar Bounce

The dollar is bouncing as market participants rush for the safety of treasuries. "The Skeptic" is not a buyer. Keep an eye on the Yen which has been even stronger. Yen strength = carry trade unwinding.
Today should be interesting. Never underestimate the bulls' ability to snatch victory from the jaws of defeat.

Late Day Thought

Larry Kudlow is an asshole.

No Fear

As I stated: No Fear. None. The predictable last hour rally came through for the bulls, though 15 minutes early, and we rallied from 13,338 to 13,500ish on the Dow. Everyone is a dip buyer in this market. It works until it doesn't.

Hubris

Dow Industrials down 280 pts. and CNBC is talking about what a big up day tomorrow is going to be. Absolutely unflappable. I smell very little fear.

Skeptical Prediction

Some of these previously announced buyouts won't get done as the credit market chokes on all this supply. There are billions of dollars of deals backed up and the terms at which these deals can be completed are changing everyday. When one or more of these deals falls apart it will be a sobering reality for the bulls.

Pain Ahead

It's been awfully hard to bet against the bulls lately. Bad news hasn't seemed to matter. However, there have been some menacing trends developing. The breadth of this market has faded and the advance has been led by fewer names. Sure AMZN and AAPL shot up after earnings but the entire banking sector is dropping like a rock. Pretty hard to sustain a bull market when the financials, which represent more than 20% of the S&P, are this ugly.

Housing is a debacle. The economy is slowing. The popular viewpoint these days holds that these two facts are unrelated. Not so. Housing has sustained the economy for several years and without it the American consumer is in trouble.

Don't forget oil at $76. Collapsing dollar. Inflation problem. I could go on and on. Never have I seen such a divergence between reality and the market averages. Increasingly a market dislocation, always a low probability event, is a possibility worth considering. Be careful out there.

Dollar Index to Crack 80?

Trading 80.01. Is today the day? Or do we bounce first?

Ongoing....

This Week's Stock Pick

No pick last week. You could call me a lazy son-of-a-bitch and not be entirely inaccurate. Every week, aside from two holiday shortened weeks, since this the groundbreaking of this "blog" I've granted you a pick. Last week I was asleep at the switch. So we'll get right to it this week and maybe I'll even get a bug up my ass and grant two picks this week...but first things first.

Without further adieu... I give you GSS- Golden Star Resources. Currently trading at $4.13. The dollar is collapsing and it's time to pound the table on gold. Now, it should go without saying that any single digit midget (stock under $10) is inherently speculative. Caution is advised. Nonetheless the set-up here is too nice to pass up. GSS build a huge base between 1999-2003, then ramped to a high around $8 before collapsing back to spend 2005-06 consolidating between $2 and $4. Now it has surmounted the four dollar mark and become an obvious buy.

Disclaimer: In no way should this post or any other be considered a recommendation to buy or sell any security. Should you buy this stock based on this post you may find yourself homeless by Christmas and have to scrounge trinkets out of a dumpster to give to your children as gifts.

Disclosure: Long GSS, Long gold

Dollar Continues to Slouch...

...dangerously close to key 80 level on dollar index.

Still developing...

Mortgage Backed Stench

Recently, rating agency Moody's came around and started downgrading various sundry mortgage backed securities. As a result they are now getting shut out of rating new deals as issuers shop for the best rating. Further evidence of an extreme conflict of interest. One of many on the street.

From Bloomberg article:
Moody's has been shut out of nine of the past 13 deals as underwriters sought better ratings from rival companies, Tad Philipp, a managing director at Moody's said today in a telephone interview. The securities had a face value of more than $25 billion.
``There's no doubt in my mind that it's because of the change'' said Philipp, who included a chapter titled ``Rating Shopping is Alive and Well'' in a report released today. ``Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.''
Linkhere

Beware!

Ladies and gentlemen...the shit is officially hitting the fan. Bear Stearns has announced that their (two troubled) aforementioned credit hedge funds have essentially evaporated. The equity is gone. Ouch, that's gotta hurt. Not just Bear Stearns either. "The Skeptic" wouldn't touch (go long) any US based financial company with a ten foot pole. Not even with your ten foot pole. The reality is that there is so much bad paper that we can't really be sure where it is hiding (likely it's everywhere). Don't expect any one of the holders to own up to it either. Until they are forced to. That will happen soon enough at this rate.

After hours tonight many of these financial stocks are trading down. Bear is down $5. Funny, I recall Cramer end zone dancing about the fact that BSC, after the initial revelations, had seen a bounce in it's stock price off of the lows. So surely this subprime mess is overblown and the bears are all assholes. Wrong! This debacle is in the early innings. It doesn't please me to say so but on the other hand the perma-bulls have it coming.

Another ramification to consider is the effect this mess is going to have on the dollar. The dollar index is sitting just above 80. This is a key number. I cannot stress how important the 80 level is. In fact, the dollar index has never had a sustained move below that level. We break that and there is no support for the dollar. Where it eventually stops falling is anyone's guess but it won't be pretty. Seriously, this is a BIG DEAL! This will affect every American citizen. As the dollar collapses inflation will surge. Commodities are priced in dollars and as the dollar erodes it will take more dollars to pay for things.

The way our house of cards is currently situated we rely on foreigners to finance our overconsumption. With a collapsing dollar we will need to make other arrangements. Why would foreigners want to own, much less buy, US assets during a dollar depreciation? Any positive return would be cancelled out by exchange rates.

What can be done to avoid a collapsing dollar? The Fed can start tightening. The result of which would be a severe recession but it would save the dollar and tame inflation. If we dealt with our problems we could probably emerge in one piece after some short term pain. But is that likely to happen? No. The Fed will do everything in it's power to avoid dispensing the medicine. As recent history clearly shows, the Fed will do whatever it can to bailout risk-takers.

It would be wise to consider hedging your exposure to the dollar. You need to have a plan. "The Skeptic" remains a long term buyer of gold. Good luck.

And So It Begins

July 10 (Bloomberg) -- Moody's Investors Service lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages and Standard & Poor's said it may cut $12 billion of securities after criticism they waited too long to respond to rising home-loan defaults.
Moody's cut ratings on 399 bonds issued in 2006 and said it may reduce rankings on another 32. S&P is preparing to lower the ratings on 2.1 percent of the $565.3 billion of subprime bonds issued from late 2005 through 2006, citing a deepening housing slump. U.S. Treasuries rose, the dollar slumped and financial company shares led stocks lower.
Ratings changes ``are going to force a lot more people to come to Jesus,'' said Christopher Whalen, an analyst at Institutional Risk Analytics in Hawthorne, California. ``When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we've been waiting for.''

When you push a dollar over a cliff, does it flutter or crash?

Here's another article for you...click-here.
For those of you too lazy to read the gist is this: despite the steady appreciation in the yuan (China's currency) US lawmakers are threatening protectionist measures with the aim of forcing a accelerated yuan appreciation (and dollar depreciation). I especially like Chuck Schumer's comment, "We'll know appreciation is enough when we see it.''

Granted, this tough talk has been going on for a long time and nothing has resulted as of yet. The idea is to correct the imbalances that result in the US hemorrhaging jobs (outsourcing). The correction or dollar devaluation necessary to even make a dent would not be gradual or measured. Buy gold.

We Need Nuclear

Nuclear power is our best chance to keep the lights on long term as it's the only power generation not reliant on fossil fuels. It's not natural gas and it's not coal. Furthermore it's not dirty.
Check the articlehere. A couple points:

1. Nuclear plants are not getting built. Prohibitive costs, mostly upfront.
2. Your electric rates are going higher. We will all be paying more to plug things in.

"The Skeptic" supposes we will eventually have to come around to nuclear. Stay long uranium.

This Week's Stock Pick

This week I'm going to pick the low-hanging fruit. Right now, that's energy stocks. MUR- Murphy Oil explores for and produces oil and gas. The company sports a $11 billion market cap versus something like $487 billion for Exxon. Obviously we are talking about a bit player here.

Better yet, and more importantly to "The Skeptic" anyway, is the $45-$60 range where it's been trading for almost two years appears as if it's about to be surmounted (currently $60.81). Hopefully in convincing fashion.

There are many other names in the energy space that look promising. Some of which I follow that look especially promising right now include SWN, DRQ, SU and VLO. There are myriad ways in which to play this game.

Disclaimer: In no way should this post or any other be considered a recommendation to buy or sell any security. Should you decide to buy this stock based on this post you may suffer from erectile dysfunction.

Random Opinion

Considering the state of the residential real estate market and the ongoing subprime debacle mortgage brokers will need to consider employment alternatives. Frankly, I just don't think there are enough used car lots to take all these guys.

Beachfront Contemplation

Back from a brief vacation and feeling refreshed, if a bit sunburned. There will be further vacationing, I hope soon.

This morning on my kayak, plodding the gulf coast, I observed an area of coastline that had probably an eight foot sand cliff due to severe beach erosion. All the mansions along this part of the island were threatened to some small degree by the menacing cliffsides in their own backyards. Some yards were losing trees and shrubbery over the ledge and it made good shade for me on my reflective rest. Where the vegetation is soon to go over you can see all the roots hanging suspended.

The benefits of living on the beach would be tremendous. For people who like that sort of thing anyway. But why would you ever buy or build a house there? Erosion is a constant threat which requires dredging, which costs money. If you can find a private insurer to cover your beach property your rates will be astronomical at best. Many states are in the insurance game as well encouraging risk taking on the part of buyers and builders with artificially low rates. In other words, taxpayers get put on the hook in a big way for risks taken by a small handful of property owners. Socialization of risk.

Worst of all for these homes is just the sand and salt themselves which persistently corrode coastal structures. These houses are literally build on shifting sands. We've erected these structures and drawn maps of our coasts and islands. Problem is we've failed to recognize that these coastal areas are constantly shifting and impermanent. It is sheer arrogance to think we can dictate our terms to nature. It's the other way around and we'd be prudent to anticipate and mitigate. Man wins today. Nature will win in the long term and from now on "The Skeptic" will only rent his beach houses.

NOTE: Actually man and nature will both lose.

NOTE II: Jet-skis are for filthy buggards only. The lame and weak.

This Week's Stock Pick

Generally speaking the stock of the week is produced through technical analysis. "The Skeptic" reads the tea leaves after every market session to predict the future. Most of the picks generated are short to intermediate term trades. This week though I bring you a fundamental analysis big picture call.

DBA- Powershares DB Agriculture Fund (current price $26.70). A straight up Ag play, this fund is 25% corn, 25% soybeans, 25% wheat and 25% sugar. A direct bet on higher agricultural commodity prices. Looking ahead a few years out, this is where you want to be. Oil, water and fertilizers- required inputs to produce these crops on an industrial scale have become more expensive. This is a secular trend that will continue for many years to come.

Disclaimer- The author owns shares in this fund. This post is not intended as a recommendation and if you buy these shares you may trigger a plague, thereby reducing demand for these commodities, making this fund a big loser.

Dead End

In the small corner of the world "The Skeptic" calls home the local government plans to spend $25 million, before inevitable cost overruns, to expand a nearby road. The road in question was virtually a white elephant when it was built just over twenty years ago. Now it receives significant traffic as an outlet for new communities that have sprung up everywhere on every available piece of real estate. It all just sort of sprawls out in every direction. Our closest interstate highway is planned to widen from 4 lanes to 10 in the upcoming years. More millions to be invested in our drive everywhere for everything lifestyle.

These are just plain bad investments. Every person having their own vehicle or two, that they then have to drive to accomplish nearly any errand, is just not sustainable. No way. We are going to have to find ways to drive less and stop investing in our motoring past/present. Instead we need to invest in public transportation and rezone our communities to a walkable scale through multi-use zoning. It's painful to think we might have to change our lifestyles and sacrifice some comforts but we had better start having this conversation now when we can still plan ahead. More likely though that false comfort and blissful ignorance will persist amongst the populous until we have a full blown crisis. The crisis of course is end of the cheap oil era followed by price and supply destabilization. Technology is not going to save us.

We are at an inflection point in the history of the world. We can either look forward or throw good money after bad. Most will not want to admit that we have invested our national wealth in houses close to nothing, accessible only by car, in the twilight of the cheap oil era. Our entire infrastructure is built around our motor vehicles. We are going to need a miracle to sustain this. "The Skeptic" doesn't believe in miracles or fairy tales.

More Gross

Gross on derivatives:
You were wooed Mr. Moody’s and Mr. Poor’s by the makeup, those six-inch hooker heels, and a “tramp stamp.”

Link

Anything but Revalue

Check it out. Read this article.

This is a slow motion train wreck worth keeping an eye on. Financial dark matter, hidden from sight and illiquid, is deteriorating. The players in these complex transactions are levered to the hilt. The Bear Stearns fund mentioned in this article started with $600 million in equity and borrowed up to $6 Billion!

This hidden from view market is a ticking time bomb. The players are not marking to market their exposure so until a trade happens or a rating agency downgrades your exotic security of choice you can pretend everything is OK and continue to value your exposure to this mess at par. Hence the reason Bear would throw another $3 billion of good money after bad. Normally when a fund blows up they admit their suckery and liquidate. In this case liquidation would cause all other players to come to grips. So the market is frozen and waiting for the inevitable downgrades which are very slow in coming since the rating agencies get paid by the players.

More Pain Directly Ahead

Good article from Bloomberg. I encourage everyone to read this one.

Link

Random Skepticism

Look here. We are going to have to get our heads out of our asses in this country. We are completely out of touch with reality. Our entire way of life is unsustainable. We drive everywhere for everything and haven't invested in public transportation. We over consume and under produce. Paris Hilton is news and we are still debating evolution in the 21st century!

The sooner we acknowledge the real issues we face the better. Yet, we are clearly lacking in political leadership. We are so preoccupied with the terrorist threat but we are rotting from within.

This Week's Stock Pick

OK. I have to admit something.

Last week's stock pick was suck-ass. WMT still looks good as long as the breakout is intact but it's a slow moving ship. Absolutely a play it safe pick. With the market weak it was a conservative large cap bet with a minimal defined risk.

Meanwhile there are stocks going nuts all over. Left and right. The market is a speculative orgy. More than a few oil stocks I follow went up 10% last week. Obviously it has paid to remain bullish on that sector. Many others too. Technology offers opportunities. There are so many good ideas. All with the economy at large in stagnation. Hmm.

So let's get speculative shall we. This week I'm picking a local favorite. ALCO- Alico Inc. They are a Florida agricultural company with interests in citrus, sugarcane, cattle and sod. The stock appears to be completing a long term consolidation. Friday's closing price was $60.60 . The risk in anticipating a breakout is that you're early.

Disclaimer: This is not a recommendation. If you buy this stock based on this post you should put down the bottle and seek professional help.

Gross Turns Bearish

Bill Gross, the kingshit of all bond managers, has turned bearish on bonds. In other words, he expects higher interest rates. Consider the implications.
Link

This Week's Stock Pick

This one is totally counterintuitive.

Often the market does things which seemingly don't make a lot of sense. A stock will go up despite substantial headwinds and/or headline risk. Or a company that's executing successfully will have a stock that just keeps dropping in excruciating fashion. This is just one way the market takes money from the crowd.

Enter...WMT- Wal Mart. A company facing several headwinds in a world of rising gas prices. First off, those gas prices especially hurt the low-end, or value-conscious, consumers WMT thrives off. If any company relies on trucking it's WMT so they face price pressures there too. For good measure, they are widely hated and have little to no growth.

The share price of this underperformer is pretty much where it was in 1999. More recently, WMT has traded in a range between $50 and $41. For two years. The only excitement for the bulls was a false breakout in October of last year. Well, it just surmounted $50 again. This breakout seems more likely to lead to higher prices but you'll know it's another false signal if it closes much below $49.

Disclaimer: The author does own this stock and is not a broker. In no way should this be considered a recommendation. If you buy this stock, based on this post, the company will go out of business.

Look Out for the Resets

ARM reset schedule. Click here

Translation: More pain ahead as ARMs reset at higher rates.

Don't Walk Away from the Dollar, Run

Syria drops dollar peg. Who's next?

Link

More Statistical Manipulation

Had been intending to post something on the subject of employment statistics and their intentionally misleading nature. Fortunately, someone did the work for me. Good article- check it out.

Link

Are You Ready for $5 Gas?

You should be. It seems all but inevitable. Maybe this summer, maybe not, though the farther out on the horizon you look the greater the likelihood. Our refineries are overstretched, not to mention frequently blowing up. There is a secular bull market in oil and supply is peaking. No coincidence, I'm sure. We've picked all the low hanging fruit and new energy sources will be increasingly difficult to exploit i.e. more expensive.

Hurricane in the gulf? $5 Gas.

Add to that, a weakening dollar and geopolitical concerns. The world's oil reserves are primarily in unstable regions. Think Venezuela or Nigeria. Iran and it's proximity to the Strait of Hormuz, through which 20% of the world's oil passes. Consider too that we face increased competition for resources due to growth around the world. There are an awful lot of Chinese buying their first cars. Chavez doesn't like our foreign policy so he'll sell his oil to China.

Bad news for GM. It's time to start planning for a future with higher gas prices. This country is going to need more public transportation. We're going to need to figure out how to grow and manufacture more goods locally instead of shipping in them in from across the globe.

This Week's Stock Pick

"The Skeptic" has been wildly bullish on precious metals generally, and silver specifically, since about 2001. This is how "The Skeptic" makes his money, by seeing the future. You may ask how it is that "The Skeptic" can see the future. Well that's none of your damn business.

Silver has been in a consolidation phase for just over a year now. Meanwhile, central banks around the world have continued to print money, the silver ETF (SLV) has continued to drain supply from a tight market and there have been a range of new products introduced that use silver. "The Skeptic" has been patiently waiting for silver to end this consolidation in anticipation of an explosive move in prices. That time has not yet come but it appears imminent.

Be aware...at some point silver is going to go ballistic. In anticipation of silver completing this current consolidation "The Skeptic" is ready to start putting some money to work. As a result this week's pick is SLW- Silver Wheaton. Buying Silver Wheaton is a direct bet on higher silver prices. Just like the commodity itself SLW has been consolidating for a year. You can bet that when this stock gets a couple closes above the $12 mark it will gain serious momentum. Currently SLW is sitting right at that magical $12 mark.

Disclaimer: Author does own this stock and is not a broker. Should you buy this stock based on this post you might lose all your money and end up living in the street.

More Debate Coverage

The Democrats were in New Hampshire tonight for their latest debate. CNN's coverage was loaded with second-rate commentary. Really contrasted poorly with MSNBC's coverage of their hosted debate. However, the questions to the candidates were better than previous debates. They wasted less time, relatively speaking, with assinine questions. Here is a brief synopsis, by candidate:

Hillary- She faced a lot of jabs tonight. Everyone seemed prepared to take their shot. She did reasonably well considering. As the frontrunner she appropriately played it safe. The only thing Hillary said that made me curse at the TV was a reiteration of her whole "I didn't make a mistake authorizing force in Iraq but if I knew then what I know now..." That's balderdash. "The Skeptic" does not get national intelligence breifings, nor does he have a staff of fact-checkers, yet he still would have told you invading Iraq was a bad idea at the time. Why? Mostly common sense. So either she has bad judgement or voted as she did in pure political calculation, which is worse. She also likes to claim that no one thought Bush would use the authorized force because he claimed he would let inspectors finish their work. So she is a bad judge of character to boot.

Obama- He fared better in the debate format that he previously appeared uncomfortable with. He spoke eloquently yet offers no real leadership. He's done very little to distinquish his positions from Hillary's.

Edwards- He was aggressive. He attacked Hillary. He mixed it up with Obama. Well done. I appreciate the fact he admitted more than once he was wrong to vote for Iraq war authorization. It's an easy dig at Hillary but nonetheless refreshing. They never even covered Edwards' big issue- poverty.

Biden- Did a lot to help himself tonight. He spoke forcefully about Darfur. Appeared passionate about the issues generally. Biden is likable and intelligent yet doesn't offer much beyond foreign policy experience. In this crowd you could do a lot worse than Biden.

Richardson- Likeable but not the least bit presidential. No longer worthy of consideration.

Dodd- yawn

Kucinich- "The Skeptic" loves the fact that this guy doesn't pander. Someone in the audience asked a question about what we can do to rebuild the military, which was directed to him. Part of his answer was that we should reduce defense spending. Overall, it seemed he, along with Biden and Edwards, fared the best tonight.

Gravel- Vitriolic as ever, Gravel continued throwing bombs. I'm sure, beyond this election cycle, the parties will find a way to exclude guys like Gravel or Kucinich or Ron Paul from future debates. That would be a shame. You'll hear more truth spoken by these fringe candidates then all the others combined.

Ron Paul- The People's Champ

"I don't think we have a republic anymore," he tells me, sitting up in his chair. "I think we have a very domineering federal government, where we have a world empire we have to manage every single day."

http://www.salon.com/news/feature/2007/06/02/ron_paul/?source=whitelist

GDP Shrivels

First quarter GDP came in at 0.6%. The slowest rate in more than four years. When you consider the government's wild underestimation of inflation that GDP number is, in real terms, probably negative. So the economy contracted in the first quarter.

Signs of Impending Doom

Lake Okeechobee is on fire. For those unfamiliar, Okeechobee is the second largest freshwater lake in the continental U.S. with a drainage basin that covers over 4,600 square miles. The water levels at "Big O" are at their lowest- EVER. The lake has receded far enough for 5,000+ acres of former lake bottom to actually catch on fire. The fire remains mostly inaccessible to firefighters as they are not really equipped to fight fires in lakes.

Maybe hurricane season, which starts June 1, will bring much needed rain to Floridians.

ATM Broken

The housing ATM is out of service. Those people who have been living beyond their means thanks to a rising tide of home equity had better start saving. The whole refinance game is kaput. What are you going to do now if you've been living comfortably by using your house as an ATM? Interest rates are higher and home prices are down in many cases. Time to stop going out to dinner three times a week. Time to stop buying all that crap you don't need...and charging it.

Equity withdrawal has certainly provided a wind in the sails of our economy. Without it we won't be seeing much growth in GDP. Furthermore, most of the nation's job growth the last couple years has been housing related. Brokers, appraisers, agents, roofers, electricians. Here in SW Florida you couldn't walk five feet without running into a mortgage broker and they were generally obnoxious and arrogant about their new found success. The number of available jobs in housing related sectors will not grow but contract.

Belt tightening time. Prices are drifting lower, rates are drifting higher, there is enough inventory to choke on and lending standards are being tightened. There has already been a lot of bottom calling. Strikes "The Skeptic" as premature.

Inflation Obfuscation Redux

Link-InflationArticle

Article:
Paul Volcker, the former Fed chairman widely credited for putting the clamp on the runaway inflation of the 1970s, once referred to rising prices as "a cruel and maybe the cruelest tax, because it hits in an unexpected way, in an unplanned way, and it hits the people on a fixed income hardest."

Comment:
Just for the record "The Skeptic" will take John Williams' (of Shadow Stats) numbers over those reported by our government. At the very least, Williams is using a consistent methodology instead of moving the goalposts.
Also, inflation is the enemy of a bondholder. Of late, bond prices have traded off with yields scooting higher. We've experienced a secular bull market in bonds. When that ends (now?) rates will be heading higher for years. It should be clear the implications for a nation up to it's ears in debt.

Dollar-Induced Indigestion

Recently Kuwait abandoned it's currency link to the dollar in attempt to quell inflation there. Many countries, including many in the Middle East, have home currencies linked directly to the dollar- the world's reserve currency. We've all heard much bluster about China's similar dollar peg.

This is an event that is clearly bearish for the dollar. If other Middle Eastern nations follow suit, for instance Saudi Arabia or Qatar where inflation was 11.83% in 2006, the dollar will be in more trouble. Central banks around the world have satiated their appetite for dollars.

Bloomberg article. Enjoy.

GAO Peak Oil Study

"The Skeptic" would consider this report generally optimistic. Yet, it still makes for some disturbing reading. Here are some highlights:

Most studies estimate that oil production will peak sometime between now and 2040.

Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and the Department of Energy (DOE) projects that even by 2015, they could displace only the equivalent of 4 percent of projected U.S. annual consumption. In such circumstances, an imminent peak and sharp decline in oil production could cause a worldwide recession. If the peak is delayed, however, these technologies have a greater potential to mitigate the consequences. DOE projects that the technologies could displace up to 34 percent of U.S. consumption in the 2025 through 2030 time frame, if the challenges are met.

However, there is no coordinated federal strategy for reducing uncertainty about the peak’s timing or mitigating its consequences.

Historically, U.S. oil production peaked around 1970 at close to 10 million barrels per day and has been generally declining ever since, to about 5 million barrels per day in 2005. While recent discoveries raise the prospect of some increases in U.S. oil production, significant reductions in world oil production could still have important consequences for the nation’s welfare. The United States imported about 66 percent of its oil and petroleum products in 2005, and the U.S. economy—particularly the transportation sector—depends heavily on oil. Overall, transportation accounts for approximately 65 percent of U.S. oil consumption. New technologies have been introduced that displace some oil consumption within the sector, but oil consumption for transportation has continued to increase in recent years.

For example, more than 60 percent of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

According to IEA, most countries outside the Middle East have reached their peak in conventional oil production, or will do so in the near future. The United States is a case in point. Even though the United States is currently the third-largest, oil-producing nation,6 U.S. oil production peaked around 1970 and has been on a declining trend ever since.

Oil accounts for approximately one-third of all the energy used in the world. Following the record oil prices associated with the Iranian Revolution in 1979-80 and with the start of the Iran-Iraq war in 1980, there was a drop in total world oil consumption, from about 63 million barrels per day in 1980 to 59 million barrels per day in 1983. Since then, however, world consumption of petroleum products has increased, totaling about 84 million barrels per day in 2005. In the United States, consumption of petroleum products increased an average of 1.65 percent annually from 1983 to 2004, and averaged 20.6 million barrels per day in 2005, representing about one-quarter of all world consumption. EIA projects that U.S. consumption will continue to increase and will reach 27.6 million barrels per day in 2030.

Recently, for example, a large discovery of oil in the Gulf of Mexico made headlines; however, this potential wealth of oil is located at a depth of over 5 miles below sea level, a fact that adds significantly to the costs of extracting that oil.

Estimates of how much oil remains in the ground are highly uncertain because much of these data are self-reported and unverified by independent auditors;

For example, IEA believes that oil from nonconventional sources—composed primarily of Canadian oil sands, extra-heavy oil deposits in Venezuela, and oil shale in the United States—could account for as much as 7 trillion barrels of oil, which could greatly delay the onset of a peak in production. However, IEA also points out that the amount of this nonconventional oil that will eventually be produced is highly uncertain, which is a result of the challenges facing this production.

The timing of peak oil is also difficult to estimate because new sources of oil could be increasingly more remote and costly to exploit, including offshore production of oil in deepwater and ultra-deepwater.

Alberta, Canada, contains at least 85 percent of the world’s proven oil sands reserves. In 2005, worldwide production of oil sands, largely from Alberta, contributed approximately 1.6 million barrels of oil per day, and production is projected to grow to as much as 3.5 million barrels per day by 2030. Oil sand deposits are also located domestically in Alabama, Alaska, California, Texas, and Utah. Production from oil sands, however, presents significant environmental challenges. The production process uses large amounts of natural gas, which generates greenhouse gases when burned. In addition, large-scale production of oil sands requires significant quantities of water, typically produce large quantities of contaminated wastewater, and alter the natural landscape.

According to our analysis, 85 percent of the world’s proven oil reserves are in countries with medium-to-high investment risk or where foreign investment is prohibited, on the basis of Oil and Gas Journal estimates of oil reserves. (See fig. 8.) For example, over one-third of the world’s proven oil reserves lie in only five countries—China, Iran, Iraq, Nigeria, and Venezuela—all of which have a high likelihood of seeing a worsening investment climate. Three countries with large oil reserves—Saudi Arabia, Kuwait, and Mexico—prohibit foreign investment in the oil sector, and most major oil-producing countries have some type of restrictions on foreign investment. Furthermore, some countries that previously allowed foreign investment, such as Russia and Venezuela, appear to be reasserting state control over the oil sector, according to DOE.

Factors that create uncertainty about the timing of the peak—in particular, factors that affect oil exploration and production—also create uncertainty about the rate of production decline after the peak. For example, IEA reported that technology played a key role in slowing the decline and extending the life of oil production in the North Sea. Uncertainty about the rate of decline is illustrated in studies that estimate the timing of a peak. IEA, for example, estimates that this decline will range somewhere between 5 percent and 11 percent annually.

In addition, corn and cellulosic ethanol are more corrosive than gasoline, and the widespread commercialization of these fuels would require substantial retrofitting of the refueling infrastructure—pipelines, storage tanks, and filling stations. To store ethanol, gasoline stations may have to retrofit or replace their storage tanks, at an estimated cost of $100,000 per tank. DOE officials also reported that some private firms consider capital investment in ethanol refineries to be risky for significant investment, unless the future of alternative fuels becomes more certain. Finally, widespread use of ethanol would require a turnover in the vehicle fleet because most current vehicle engines cannot effectively burn ethanol in high concentrations.

Federal agency efforts that could contribute to reducing uncertainty about the timing of a peak in oil production or mitigating its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil issues. Federal agency-sponsored studies have expressed a growing concern over the potential for a peak, and officials from key agencies have identified options for reducing the uncertainty about the timing of a peak in oil production and mitigating its consequences. However, there is no strategy for coordinating or prioritizing such efforts.

GAO.pdf

Well Said

Excerpt from John Edwards' speech at the Council on Foreign Relations:

"The president has played political brinksmanship over the war in Iraq time and time again. He refuses to acknowledge the futility of his approach, disregards the clear message sent by the American people last fall, and falsely claims that the only way for Congress to support the troops is to prolong the war. That's just not true. Congress can support the troops and end the war, which is exactly what the bill they sent the president last month would have done. When the president vetoed that bill, it was the president alone who was blocking support for the troops. Nobody else.
Any compromise that funds the war through the end of the fiscal year isn't a compromise at all, it's a capitulation. As I have said repeatedly, Congress should send the president the same bill he vetoed again and again until he realizes he has no choice but to start bringing our troops home. "

Democrats Play It Safe

The democrats caved in. The war spending supplemental will reach Bush's desk with little more than progress reports in the way of added accountability. Democrats, facing a Memorial Day weekend with unfunded troops, made the necessary political calculation.

Apparently we will now be looking forward to September when the good general, Petraeus, reports progress and advises us on the best course going forward. Then we'll go from there. "The Skeptic" has a problem with this. First, generals don't set policy. Civilian officials set policy and generals execute. We should not be waiting around for some general to tell us what to do. Second, what do we think the general is going to say? "We can dig in and prevail victorious." No general is going to say that "we've lost." Generals get paid to fight. War is good for business.

Dubya seems determined to drop this war in the next president's lap. That could be a liability for republican presidential candidates since they are so hawkish. How do you remain a war-mongering hawk while distancing yourself from Iraq? It might be to the advantage of democratic candidates, ex. Hillary who is herself a hawk. The longer the war goes on the bigger an issue it becomes.

Sure, Hillary pays lip service to the anti-war voters but she is a hawk through and through. She only came around to her current position of opposition to the war when it became decidedly fashionable to do so. Furthermore, she wants to sustain military bases in Iraq indefinitely. So if she becomes the nominee anti-war voters could be unrepresented in the upcoming election.

Inflation Obfuscation

Last week our trusty government released it's inflation stats for April. Overall, consumer prices are said to have rose 0.4% from March and 2.6% from a year earlier. The closely watched "core" number, excluding food and energy, came in at 2.3%.

First off, it's amazing that Wall Street, and more specifically our bond markets, fail to question these numbers. Does anyone really think inflation is running below 3%? Guess it's not surprising seeing as Wall Street also buys in to this whole "core" number absurdity.

In reality, inflation is running about 5%. At least. This does not show up in government statistics because the numbers are tortured. The goal posts are being moved. We are engineering new and creative ways to eliminate inflation through statistical wizardry. Our government's numbers, in this case, are so unrealistic as to be deemed useless.

This Week's Stock Pick

Tough decision this week. "The Skeptic" sees many ways to exploit our frothy markets. The original list was 18 stocks. Brought that down to four. After further deliberation...EMC is the pick for this week. Similar to last week's pick EMC is completing a long term consolidation. In this case, very long term. EMC has traded in a range since 2003! Currently trading at 15.82, the very top of it's range, this stock appears poised for higher prices. A decisive move above 16 would likely bring in more buyers.

Disclosure: "The Skeptic" owns this stock and is not a broker. Should you decide to buy this stock you may lose money. It would serve you right.

Better Build It Higher

So there is a lot of talk of a border fence. To keep the Mexicans...I'm sorry, the "illegal immigrants" out. Apparently the Republican debate the other night on Fox featured these so-called candidates falling all over each other to build a fence. To keep out those Mexicans.

Obviously, this is not a "homeland" security issue otherwise we'd be building a wall in the north too. Maybe we could just build a bridge from Mexico to Canada, like a wildlife crossing, and the Mexicans would go take Canadian jobs.

The jobs are often described as "jobs that Americans won't do". Sure, these are menial, labor-intensive jobs but not jobs Americans won't do. Who did these jobs before Jose came across the border? No, these are jobs few Americans would do for five dollars an hour.

Before we get all high and mighty and feeling superior, we should consider that we are a nation of immigrants. We stole this land from the Indians. Maybe the Mexicans will steal it from us and build pyramids. That would be cool. Or maybe, their hard work would make America better. We need these hungry people. The rest of us are too fat, happy and entitled.

Borders are just lines on a map. Generally arbitrary. How much money are we going to waste on building a fence on ours? And don't we think that maybe the Mexicans have a ladder? They could lay on top of one another as a human ladder. Did we consider that? We are going to have to build that wall at least two families high. That's like 30 ft.

Truth is, a lot of Americans don't like Mexicans. The reality is we can't bus them all home. We can't build a fence that will keep them out. We can't stop them from multiplying. Maybe we should focus instead on teaching them English. That way "The Skeptic" could communicate to them to stop running over the sprinklers.

Televangelist Jerry Falwell Good As Dead

"I really believe that the pagans and the abortionists and the feminists and the gays and the lesbians, who are actively trying to make that an alternative lifestyle, the ACLU, People for the American Way — all of them who try to secularize America — I point the finger in their face and say, 'You helped this happen.'" - Falwell on 9/11

This Week's Stock Pick

"The Skeptic" finds little in this market to get truly excited about right now. That being said, energy stocks appear poised to resume their outperformance. Coal and natural gas stocks have been ripping. "The Skeptic" is watching several natty gas stocks that appear close to breaking out of extended consolidation patterns. One such stock is EP -El Paso. El Paso has been trading sideways for a year now. Slowly drifting to the top of it's range and in a sector that looks good is, in this case, enough to make "The Skeptic" a buyer. Perhaps the consolidation is not over and "The Skeptic" has been early in this name before. Better early than late. EP closed at $15.40 today, up a touch.

Disclaimer: "The Skeptic" owns this stock and is not a broker. Do not buy this stock based on anything you have read on this blog. If you do you are moron who would be better served indexing.

CAFE Standards vs. Increased Gas Tax

With the weak-minded Democrats in control of Congress there is a lot of talk about raising CAFE standards. For those not familiar, CAFE standards mandate the average fuel efficiency for an automaker's entire fleet of vehicles. In other words, they get to continue to sell their high margin 10 mpg SUVs as long as they sell a few compact cars too.

Congress enacted CAFE standards in 1975 as a result of the 1973 oil embargo. Passenger cars doubled their fuel economy over the next decade reaching a peak of 25.9 mpg in 1987. Overall fuel economy for passenger cars and light trucks peaked at 22.1 mpg, again in 1987. By 2004 that number had fallen to 20.8 mpg. Meanwhile, in Europe fuel economy is about 35 mpg!

Average fuel economy, in mpg, for the 2006 model year shows the big three (Chrysler, Ford and GM) at around 20 mpg and our Japanese rivals (Toyota and Honda) at around 24 mpg. So Japanese automakers are 20% more efficient. Granted, you can't really make an apples to apples comparison because these companies have a different product mix, but you get the idea. Toyota has been eating our lunch when it comes to efficiency.

So Congress, looking to appear pro-active on energy issues (bit late for that) is ready to pass a bill mandating CAFE standards. The catch is that the bill would allow the government to suspend standards if they impose severe economic hardships for automakers. Severe economic hardships are a given for GM and Ford. Look, we have to do something about our energy situation so this bill makes some sense. It's a weak attempt but an attempt nonetheless.

Problem is, this bill is another example of our leadership looking for the easy way out. Well, sorry, but there isn't one. The longer we kid ourselves the more likely we will have to drastically reevaluate when faced with a full-blown crisis. That's where we're headed. No doubt.

So what might work? Raise the gas tax! It'll never happen with the weak leadership we have, but raise it big time and we'll have a much better chance of sustaining the unsustainable. Raise the gas tax, 18.4 cents per gallon on the federal level since 1993, to three bucks. Phase it in by raising it 50 cents a year or something like that. Raising it at all is political suicide but the higher the better.

Six dollar gas?! See if we don't get our shit together then. Ford and GM, unable to sell the gas guzzlers on which they make all their profit, would be up the creek. But, that's a given sooner or later regardless. In the meantime they'd sure as hell find a way to make something efficient. Our over consumption would end as well. People would start riding bikes and investing in the public transportation we desperately need. Our government, with some of this huge windfall could do the same. Think trains. Think bike paths. Think buses. Think, for that matter, for different ways to live in which we don't have to drive everywhere for everything.

Let's be clear. "The Skeptic" abhors taxes. Period. One thing for taxes though. They change behavior. We need to change our behavior. Yet, we clearly lack the leadership to get us there.

If You Were Iran You'd Want Nuclear Weapons, Too

Right? Let's look at this from their perspective. The single greatest imperial power calls you evil, along with North Korea and Iraq, one of which, said imperialists have already destroyed. Right there in your own backyard are the imperialist forces. Your sitting on huge oil reserves that the imperialists covet.

In Iran, who do we hate more than anyone? The Jews of course. Those rotten Jews have flaunted nuclear non-proliferation treaties to acquire nukes of their own. It's not spoken about or admitted outright but it's widely accepted that they have them. If we are somehow going to achieve justice we surely need to wipe Israel off the map and we can't do that without nukes.

The imperialists claim it's appropriate for them and many others, including Israel, to have nukes but not acceptable for us. This makes no sense. Especially since they are the ones preemptively attacking other countries. Furthermore, this Bush character is batshit insane. He could do anything. We have to have nukes to protect ourselves. There is no other way to protect ourselves from the imperialists.

Releases From The Economic Front Lines

Today's economic numbers were ugly.

Retail sales, widely expected to be weak, were borderline abysmal.

The import price index was reported. The index saw a 1.3% increase (whiff....inflation).

Finally, the nation's trade deficit rose 10.4 percent in March to $63.9 billion from $57.9 billion in February. Economists expected a gap of $60 billion. Increased oil shipments drove the biggest increase in imports in more than four years.

Wow. Think about that last one for a minute. "The Skeptic" thinks yesterday's Fed communique, feigning vigilance on inflation, may be their last chance to act so tough.

President Hillary

Can Hillary Clinton really win the presidency? It seems apparent from recent polling that she can win the Democratic nomination. But can she defeat her Republican opponent in the general election? It probably depends on who that opponent is. But the likely answer is - NO, she can't.

Nothing would motivate the Republican base more, save for maybe a vote on "gay marriage" or abortion, than Hillary on the ticket. Motivated like killer vampire bees whose hive has just been bludgeoned with a crowbar.

For one reason, or another, or another many people strongly dislike Hillary. "The Skeptic" has even heard loyal female Democrats excoriate Hillary. Wow. Now that's a bold statement. She has the best chance to win the office of any woman in our nation's history and many women still hate her. Tough crowd women. They'd vote for Rudy though.

Let's just tell it like it is. Being black means Obama will not win this presidential election. Being a woman means Hillary won't either. Cynical yes, but true. The best candidate for the Democrats, the one who could both win the nomination and a general election, isn't even a candidate. That's Al Gore. Now that most people believe in global warming Al Gore is a home run. A politician who was "right" about...something (in this case, global warming).

We should place less faith in name recognition. Dynastic politics is not healthy for our "democracy". Look what we got when we went back to the Bush well. Bush, Clinton, Bush, Clinton. Scary thought.

Florida on Fire

Local newscasts in southwest Florida have been very busy this week trying to keep up with all of the brush fires. Just the other day there were five local fires ongoing. Yesterday, we were blanketed with smoke from fires burning as far away as Sarasota and Georgia. Emergency operators were inundated with calls from frightened residents who, apparently, thought their backyards were on fire. Yes, the smoke was that thick. Today "The Skeptic" drove out to take a look at the 100+ acre fire burning six miles from his house.

Due primarily to rainfall deficits Florida is a tinderbox. Throw a cigarette butt out your car window and you might burn 500 acres.

Water is becoming a big issue here. That will increasingly be the case as rapid population growth overwhelms limited natural resources. Our lakes are the lowest they've been in ages. Yet "The Skeptic" looks around and finds himself surrounded by green lawns and green fairways. It seems strikingly unsustainable. Tampa is already turning to desalination to quench their thirst. Maybe that will be an alternative for others but it isn't cheap.

Florida continues to burn. From what I see in the news Los Angeles is burning too. Seems to be, the more we burn, the more carbon we release, the warmer and dryer it gets, the more we burn, the more carbon we release. Or maybe something like that. If the reality is anything like that we will continue to burn in the years to come.

This Week's Stock Pick

BNI- Burlington Northern Santa Fe

"The Skeptic" has been pounding the table on railroads for some time now. This particular rail is Buffett's choice. Never hurts to have Buffett on your side. The bullish case for railroads is strong. For one thing, aside from owning corn, it's the best way to play the ethanol boom. Ethanol cannot be transported using existing pipelines- too corrosive. In addition, higher gas prices improve the competitive position of rails relative to truckers. Currently trading below $90 a share BNI is very attractive.

Disclosure: This stock is owned by the skeptic. The skeptic is not a broker and encourages you to do your own research. It's entirely possible that the skeptic has no idea what he's talking about.