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Playing Defense
The EIS portfolio is now substantially out of the stock market and in cash. What sort of an energy investment strategy is cash? It’s the strategy you might want to employ when you judge that
1. All stocks are likely to decline, taking energy stocks down with them, or
2. Oil and/or gas have become short term overpriced and are likely to correct , or
3. Energy stocks have run so far that they’ve become severely overpriced.
I’ve come to judge that #1 above - the risk of a general market crash taking down all stocks - is becoming too great to ignore. I judge #2 - overpriced energy commodities - is a realistic risk for natural gas and a possible risk for oil. And if the commodities do decline significantly over the next 6 - 12 months along with the bulk of stocks, I think that energy equities that look cheap now would likely become even cheaper.
Here’s why I’ve reluctantly come to believe the above is true:
Over the past few years energy stocks have seen some severe pullbacks, but only during the roughly 50% oil price retracement from $78 in August ‘06 to $49 in January ‘07 was there a sustained loss of value for energy stocks. Other sharp corrections reversed quickly. The past couple of weeks have been brutal for energy stocks and have seen only modest “dead-cat” bounces to assuage the pain.
This action of energy stocks over the past two weeks is like the post-August 2006 period, suggesting that the oil price may have a good deal further to fall. A 50% oil price retracement of the gain from $49 to $147, similar in size to the one in 2006 would bring the price to just under $100. If you assume that the SemGroup bankruptcy artificially took oil from about $130 to $147 and that the real top was about $130, then a 50% retracement would bring the oil price to about $90. Natural gas, which actually gained more than oil in 2008 until recently faces increasing North American supplies so has less fundamental support than oil.
The recent decline in oil stocks seems unjustified on fundamentals. While the oil price did fall over $20 from $147, which is not nothing, analysts’ earning estimates for E&P’s for example are based on conservative oil price estimates in the $80 - $100 range, well below today’s price of over $120. The largest drilling company, Transocean (RIG) is estimated to earn over $14 this year and $17 next, with further gains extremely visible based on long term contracts. Does that make its $135 share price too high? A bubble? Clearly not. So the substantial declines in energy stocks seem to be anticipating further significant reductions in oil and gas prices and perhaps further weakening of the global economy, not any speculative pricing based on current fundamentals.
If recent weeks’ energy stock losses were simply a severe correction only in energy stocks, this might well be a buying opportunity for the group. But such is not the case. Rather, this energy correction comes in the context of a general market decline that has been eating away at portfolio values almost continuously since August of 2007 . The combination of dramatic losses in energy stocks, very weak recoveries by them, and the continuing slide in the general market suggests to me a deeper significance than just an ordinary correction in energy stocks. In short, I think the market may be signaling that there is an increasing risk that economic weakness may be spreading geographically and demographically threatening much more serious losses ahead.
Here are some of the factors that concern me about the American economy:
1. Consumers are still spending despite being squeezed by stagnant wages, higher unemployment, higher food and energy prices, tight credit markets, increasing home foreclosures and, most important, lower home prices. It would not be surprising if we see these factors finally result in much lower consumer spending over the next 6 - 12 months.
2. Banks are starting to look shaky. I read just today of the closing of two small banks. We saw the first “run” on a bank recently as IndyMac went under and the TV carried images of people waiting in line to withdraw funds. Also, I understand that IndyMac’s bankruptcy used up 25% of the funding capacity of the FDIC. A need to shore up the FDIC would put further stress on the banking system which funds it. There has been some talk recently about making sure your bank deposits are safe and that you have no more than the $100,000 FDIC guarantee limit in any one account.
This whole concept of the safety of American banks has not been discussed seriously since the Depression. My feeling is that the American banking system may be a bit closer to widespread public fear than one might think. I sense that the Treasury is very aware of this risk and that its recent rapid Fanny/Freddie actions - anathema to standard Republican philosophy - are a symptom that the Treasury is concerned about containing this potential threat to the public trust.
3. Car sales, which normally decline in a weak economy, are getting a triple whammy from two other sources of weakness: higher oil prices that have crippled the market for high profit larger vehicles and the less noticed depressant of an imminent sea-change in technology as the highly publicized plug-in hybrid electrics (PHEV’s) are scheduled to come to market in 2010. I suspect a lot of people will put off replacing their cars until they can buy these new-technology, more efficient models, a factor that will reduce car sales even more than during a normal recession. Note that Chrysler will no longer lease you a car - the company doesn’t want them back in a few years.
Given the lower car sales and the shift to lower profit small cars, it seems to me that all three American car companies must be seen as potential if not likely bankruptcy candidates over the next 24 months. If even one of them goes under, not to say all three, the effect on consumer psychology would be a further market depressant.
4. Both the financial system and sales of consumer durables is dependent on housing. Note that as house prices decline, more and more houses become worth less than the mortgage on them. Self interest by the “owner” suggests a default on the mortgage when that happens. That is why declining house prices is like stepping on the accelerator of the mortgage default problem in America.
Every aspect of housing continues to decline every month and is projected to keep on this track for many more months. Respected commentators suggest we are perhaps only half way through the decline in home prices. I think this bursting housing bubble is the most important driver for all other economic risk factors. When housing bottoms I think we can start to make progress toward a stabilized and then a stronger economy. But that looks like it might be a 2009 phenomenon at the earliest.
5. The $64 question is whether an American recession (dare we say “depression”?)will be a one-off event or whether it will reverberate to the global economy. Clearly it is morphing to a number of OECD countries now. Also clear is the fact that global strength now comes from the growth of the developing economies, particularly China. Can China keep pulling the world economy ahead?
The Chinese government wants to see growth continue. Just today it signaled a move to loosen credit standards and stop trying to increase the value of the Yuan. We tend to think that whatever the Chinese government wants it can ultimately achieve.
But I must note one concern. China seems to be bumping up against both environmental and energy limits to growth. We all know how filthy and polluted the Chinese air and water are reputed to have become. At some point that will tend to limit growth. But a more immediate concern is their lack of coal and the related lack of electrical generating capacity. Electrical shortages are becoming acute, not only in China but also in other developing countries. It is hard to grow an economy without growing electrical output.
Near Term Oil and Gas Supply Dynamics
The second factor - beyond general economic conditions - that an energy investor must consider is the shape of the markets for oil and gas going forward. If the price of oil and gas goes up from here, that would be a substantial support for energy stocks - although it would further harm the general economy.
I have no doubt, as readers of my site know well, that starting in 2010 and especially after 2012, oil supplies will become substantially constrained. But the period from now through 2010 is much less clear. I’ve often said that if Iraq and Nigeria were to start producing up to capacity, there would be a much lower oil price. Well, Iraq has begun to do that.
In addition to Iraq the next 18 months will see significant expansions in capacity from Saudi Arabia, Libya, and Angola. A recent Wikipedia megaprojects analysis shows comfortable supplies in 2008 through 2010. I do not take such projects as gospel, of course. But all the work I’ve done indicates to me that looking forward ten years at the supply of oil, the only years that have a likely chance to be “easy” are 2008 and 2009.
Another positive factor in the near term oil supply is simply the fact that the oil price has gone so high and has now been notably “high” for several years. As commodity experts say, “the cure for high prices is high prices.” It would not surprise me to see some of that impact over the next 18 months as more rigs and better technologies finally succeed in getting more oil out of older fields than previously.
Of course, there are the well known negatives for the oil supply: the global decline rate of about 3.5 mb/d per year, Mexico, the North Sea, and Nigeria. And now with TNK-BP starting to look like Yukos, which could result in some production declines from this 1.5 mb/d producer, near term Russian oil production is also looking more questionable.
In summary, I think it is clear that we are in a long term bull market for the price of oil. But I think it is equally clear that the market has over-shot due to various speculative influences, not the least of which may have been increased hoarding. As the oil price declines, some national oil companies may become more enthusiastic about selling their oil before the price declines further. Venezuela comes to mind, for example. Such a potential reversal of the trend toward hoarding could push the price of oil even below the long term uptrend line, getting it back to perhaps $75.
At some point, if the oil price declines, the forces of OPEC may try to discipline the seller. Whether OPEC still has that capacity or not is unclear. It might be left to the Saudis to do by themselves. But if a global economic slowdown is raging I think the King, who owes his security ultimately to the U.S., might be quite reluctant to make things worse by cutting off oil supplies.
In Sum
All of the above is intended to demonstrate how an apparently low-probability scenario could come about. Specifically, how in the world could Transocean (RIG) be anything but a screaming buy today at $135 a share? This is a company growing at healthy double digit rates as far as they eye can see and selling for under 10 times current year earnings (not to mention even healthier cash flow).
And the answer is: visualize oil at $75 and the global economy going into the pooper. Financial panics. Personal tragedies. Lower global oil demand than the year before. That could get RIG closer to $100.
I well remember that in 1974 - a year of huge stress in the stock market - a cable television company called Viacom got down to $2 a share. Its future prospects had not changed; they were still shining bright in the eyes of every analyst who understood the dynamics of the cable world. And yet you could buy the stock for $2. If you had any money.
In January, 2008 I decided to “step aside” from the stock market because the credit crisis was looking more serious. In March I decided - prematurely, I now believe - that our government was doing what was needed to resolve the credit problems and the “all clear” signal could be activated.
I do not like this market timing stuff at all. In fact I hate it. And I could well be wrong in the call I am making. If so, the EIS portfolio will lose some profit opportunities and will under-perform. But it won’t lose real money because of the decision. And if I am right, it will have more funds to buy more Transocean at $100 next year, the equivalent of Viacom at $2 in 1974.
Tags: peak oil energy investments
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38 responses so far ↓
1 Simon // Jul 28, 2008 at 10:09 pm
Hi Jim, Thanks for the post. I think you have made a fine decision. However from what I have been reading dipping a toe back in in the not too distant future may be a reasonable option.
The economics blogs I read (Brad Setzer - Follow the Money) indicate that the policies adopted by Ben B seem to be allowing the American economy to “hang in there”. If this continues and the stampede of imminent bank failures is steered away from the cliff there may be a set up for a resumption of the bad habits that led us here thus far. I don’t know how, perhaps through renewed confidence due to the nationalization of mortgages and some sort of fiscal package??
This could lead to a brief but significant surge in stocks, particularly mining and energy, followed by a surge in commodities, or vice versa.
It’s a scary thought but it could be a fine ride before the ultimate crash.
2 fred poppe // Jul 28, 2008 at 10:33 pm
Frankly, I am surprised about your reversal from your July 21 posting. Is Warren Buffett, Boone Pickens et all liquidating as well?
It seems now you have switched from beeing an investor to being a trader. Maybe it is the ‘Zeitgeist’ that eventually gets even the Best of them. Amen
3 Mike Mills // Jul 28, 2008 at 10:45 pm
Jim,
Thanks for your post. I was wondering about these issues myself. If no one has money, due to a severe economic downturn, peak oil might be postponed a bit.
However, I recently bought an option on an oil futures contract for June, 2011.
Your reasoning in a prior post convinced me this might be a very good play:
http://www.energyinvestmentstrategies.com/2008/02/23/my-crude-oil-futures-strategy/
I imagine that this strategy still makes sense? I was thinking about putting in some bids on far out oil futures options, say, 2015, 2016 just to see if someone will bite.
Thanks for your informative website.
4 Tim // Jul 29, 2008 at 12:10 am
Thanks Jim, your article is once again thorough and encourages the reader to do some “real time” thinking.
The events you present are indeed plausible, yet you may have failed to take into account the resilient reputation of the American consumer, handicapped as they may be by the woes you describe.
I believe that we will see an end to the “demand destruction” affect on the Wednesday gasoline & crude oil inventory numbers, maybe beginning in September. $110 a barrel for crude oil is likely to become a new support level with the energy sector stocks “settling in” at that level. One would expect the oil producers to go out of their way to maintain that price level and work to keep the crude oil market steady. My hunch is that the oil & gas sector may in fact have a stabilizing effect on the stock market in the near future.
And yes, RIG and $133 is a solid BUY!
5 paultaut // Jul 29, 2008 at 1:00 am
The Saudiis stopped relying on the US some time ago. They were kept in line only because of Iraq. I don’t believe there is even a US base there anymore. I think they relish the idea of being able to live without US interference.
And while I applaud your sentiments, Cash can be utilized to purchase Oil ETFs which would rise in the face of the vision you currently espouse.
If oil were to drop to those levels, which I wholeheartedly do not remotely envision, Economic growth in the BRIC+ countries would reaccelerate and negate whatever decline the US depression would cause.
One very important thing left completely out of your analysis is the US dollar. The Dollar would tank in a Severe Recession. Low Rates for the foreseeable future and Stagflation as far as the eye can see.
The role of the dollar as the reserve currency would disappear, simply because the world will not want to use it to purchase commodities which would go parabolic because of its demise.
Old Europe can reduce the cost of energy for its populace by simply taxing it less. They are in much better shape on their own energy front also. Tariffs on US goods to offset the currency advantage will be imposed. Turnabout is fair play.
That “Peter Lynch” article summed it up rather nicely, “the US will become a third world country”. Islam and the Russians will finally win.
The rest of the world can do quite nicely without us. The only thing we produce is food but we have managed to screw that up also.
6 You be Quick // Jul 29, 2008 at 1:01 am
Playing defense?
Looks more like a lose of nerves. Once you claimed to be buying options on oil to cover just this situation. Seems to me that you are going to dollar and retiring which is just fine as can be. You should be very proud of your career record!
7 Robert Essian // Jul 29, 2008 at 3:40 am
Jim, I am no expert but have a keen sense and trust my gut. I say this because I trust you and I am no (real) expert so I will defer to your way of thinking. A little breather will do the heart some good anyways. I’ll stay engaged and read all that I can and wait for this market to come to order a little…What a ride and thank you for the nice piece of change made from your insights.
8 Nawar Alsaadi // Jul 29, 2008 at 3:45 am
“I’ve often said that if Iraq and Nigeria were to start producing up to capacity, there would be a much lower oil price. Well, Iraq has begun to do that.”
I am from Iraq, lived in Iraq and I know the country and the culture very well, Iraq is not going to increase its capacity beyond the current 2.5m barrels for a long time to come, and the reason is not technical, it is political, the country lack political unity, and thus all major oil production projects are halted and remain halted since the competing sects mistrust each other and all are fighting for a bigger share of the oil cake, a cake that is ever illusive.
After several years of failure in establishing a hydrocarbon law, the oil ministry came with the idea of signing technical contracts to increase the capacity from 2.5m to 3m, initially it was supposed that the contracts will last for 2 years, then it was reduced for 1 year and now the parliament is even looking at blocking those contracts due to the what they label as a fogy selection process.
My read of the situation in Iraq is as follows, eventually some kind of technical contracts will be signed, however it will probably take another 12 months or so, after which it will take another 12 months to get the capacity to 3 million, at which point global oil production will be too constrained for Iraq to make a difference.
As for the hydrocarbon law (which is supposed to bring the real big investments), this one is not likely to be ratified before several years, the key issue is Kirkuk as long as the fate of Kirkuk remain undecided the Kurds will not ratify the law, and the latest delay for the local election in Kirkuk does confirm that the Kirkuk issue remain far from being resolved.
All those who think Iraq will save the day, are betting on the wrong horse, Iraq is politically and socially unstable, and the world will be in big trouble if it counts on Iraq to ease the oil shortage.
Regards,
Nawar
9 fran // Jul 29, 2008 at 5:57 am
seems like one would want to be in coal and foreign currency if your hypotheses prove true.
10 paultaut // Jul 29, 2008 at 5:58 am
One question Nawar.
If the US were to withdraw tommorow, would 2.5 million be feasible the day after?
11 Robert Essian // Jul 29, 2008 at 7:33 am
Jim, I jumped all over your suggestion this morning. As of 1 minute ago my ledger is a very strong plus to the positive because I went to cash and didn’t loose staying in the positions I held.
A nice cold beer awaits you If I ever have the pleasure of meeting you.
As you mentioned in a previous article the investors (wife-son’s) will be well pleased today. If you don’t mind I’ll take the credit.
12 KV // Jul 29, 2008 at 7:36 am
Jim,
Congrats from moving away from oil at $250+ scenarios.
1. SemGroup – a private partnership – was speculating in oil futures for a long, long time, and finally, they played wrong. They were not wrong in shorting the oil, except their timing was way off – by about a year! They are taken out but the cost is paid by all across the industry, not just oil industry but financials as well. To say that SemGroup speculation added $17 to the peak oil price is a disservice, as SemGrroup lost only nine billions and can’t cover! It is only about 70 millions barrels of oil that they could not hide in their pipes and terminals!
If you really apply the worst case multiplier of futures contracts, they were messing around with over 12 BILLIONS barrels of oil in their contracts – some supply and demand! And, they were the NINTH largest private oil and gas company. If this was not speculation, I don’t know what would you call it. By the way, if I recall one web presentation correctly, guys from Merrill Lynch were involved in SemGroup. My age old lesson is where there is Merrill, run away as fast as you can.
2. Banks are in trouble, but if banks are allowed to fail, all the cash you may have will amount to nothing. There will be a massive consolidation in financial system, and it will be highly regulated, and republicans will be bitching about all this for 40+ years in future, conveniently forgetting the mess they created. Example: FNM and FRE, once privatized, the looting began that will add up to a trillion dollars that our children will pay. Same formula like Savings & Loan fiasco. By the way, most bank officers are republicans, and they understand this very well: it is the wealth transfer from poor to rich.
3. Oil stocks and oil price are de-correlated, especially when oil is beyond a range of socially acceptable affordability. Correction in energy stocks will be equivalent to speculation in the oil stocks. By the way, major oil companies have been buying up their stock with the profits from the increased oil price.
4. Ultimately, it is the inflation that corrects for all these fixed debts and losses. The real challenge is how to maintain the same buying power in years to come, and this is the most important reason for investment.
We need ideas how to deploy cash.
13 Thomas Stone // Jul 29, 2008 at 8:23 am
If the concern is that the entire market will drop and take the energy sector with it, then you are a bit early with the warning. Based on both the TRIX of the SP500 and the McClellan Summation Index, an over-sold bounce is starting now that should take the SP500 back up to the 1370 area. After that, your cash position should be a prudent play.
14 Elliot Miller // Jul 29, 2008 at 9:04 am
Since there are rational arguments in both the article and in contrary reader comments, at least for the time being (and subject to constant review) I am maintaining my long position in Crescent Point Energy Trust and buying, as a hedge, Ultra Short Oil & Gas Fund (DUG).
15 Alan Burks // Jul 29, 2008 at 10:08 am
Jim, You’ve been prescient with your calls, not to mention most helpful to my energy investment considerations.
I have felt the pain of stock losses along with many others for some time, and I’m now more inclined to sell some of my energy stocks. Following NV’s final comment, however, what do you suggest we do with our cash?
Many thanks,
Alan Burks
16 Traderchuck // Jul 29, 2008 at 10:46 am
I manage my son’s IRA, so I’m in the market for the long haul. My investment theme is to buy the best energy stocks in the Bakken, Marcellus and Haynesville plays. I sell calls on the stocks in order to hedge the downside and to generate income which I reinvest. If the stock falls, I buy back the call
and roll the option forward and the strike price down to
slightly above break even. If the stock rises to the strike price of the short call, I roll it
up to the next strike price and forward. This strategy should generate a 20% annual return in a flat or declining market and a higher return in a rising market. It will not protect against a meltdown, but market timing is also risky.
I’m retired and my income comes from commercial rental property acquired over the years and exchange traded oil & gas partnerships which pay > 10%. Disaster cash is invested in gold bullion coins and U S Treasury Inflation Inexed Bond Fund. I see oil remaining > $100 and NG in the $15+ range with all bets off when Israel or USA takes out the Iranian nuclear capability. We must convert to nuclear, wind, solar, geothermal and wave energy ASAP because the clock is ticking. Also we have to replace the auto and truck fleet with battery driven vehicles over the next 20 years.
Curtis Publishing used battery powered trucks in the 40’s and 50’s when I was living in Philadelphia, so the technology does not have to be reinvented. My next car will be a plug-in electric for local use and I’ll rent a petrol vehicle for a long trip.
17 KV // Jul 29, 2008 at 1:26 pm
Traderchuck,
I liked your options strategy, and for the record, it is applicable to all sectors, not just oil and gas or MLPs etc.
The risk in your strategy is that many people play to capture MLP distributions (and stock dividends - plain math: buy before ex-div and either dump in three days) and so you could lose a position and distribution, and for MLPs, possibly be exposed to tax liabilities from K-1 on incomes that you did not receive, but were the primary holder for the duration. In the US, a stock option may be assigned at anytime to expiration.
The strategy is great for non-div/dist stocks, or very low div stocks.
I do this on many stocks, and it is best to learn about options and associated strategies beforehand. Make strategy spreadsheets where likely outcomes are already designed; all you have to do is put the premiums in the spreadsheets. If you are savy, automate the spreadsheet so all you have to do is review a summary sheet.
Keep track of records, and maintain tax spreadsheet as well. Finally, if not in tax-deferred accounts, watch for wash sale rules carefully, and it does not go well with IRS where you create the wash-sale positions in taxable and tax-deferred accounts, nor in other family members accounts. It pays to follow the rules.
You might want t consider GLD for gold (optionable) and TIPS have really not panned as advertised.
18 paultaut // Jul 29, 2008 at 2:07 pm
The world’s inflation rate would be significantly lower If they only accepted the Fed’s interpretation of what inflation is: This interpretation was specifcally designed to give retired seniors the least appreciation in their inflation adjustments. Considering that the 3 month time frame for the calc. of those adjustments is July tru Sept, the present route should not come as a big surprise.
Enuf of that rant, My current outlook calls for an oil move down into the $110 area and sideways motion therafter until the Israeli attack. To me it is a Gimme, they have no choice.
19 eddel // Jul 29, 2008 at 3:35 pm
I only recently began reading this site and was impressed with Jim’s research and understanding of the energy world. Now I am shocked to read of such a 180 degree turnaround, much like a short-term options trader.
We may slip into a deeper recession. There are many uncertainties in this outlook. But one thing I feel certain about is that inflation is here and will only get greater because of the very huge money layouts and deficits now underway, which will get larger if Congress tries to live up to all the promises now being made.
The cash you will have in the bank will decrease rapidly in purchasing power. As in most severe inflations, the prices of hard assets such as fuels and other commodities will inflate and help to protect purchasing power. The dollar will be devalued versus other currencies. Thus, currency diversification is critical also. I believe this scenario will accelerate in 2009. Between now and then, protecting a portfolio with puts would seem better than cashing out with the associated tax consequences.
20 Marshall Cole // Jul 29, 2008 at 3:59 pm
Why not maintain your position in oil and short the rest of the market by means of some type of spider even if it includes a portion of oil companies.
21 jkingsdale // Jul 29, 2008 at 4:19 pm
My radical strategy change has caused some readers to say I am inconsistent and/or a trader. This is certainly justified given my recent essay on the need to be a long term investor.
I’m not certain that in the end this move will prove more profitable for me than a simple buy and hold policy. I have little doubt that high quality energy shares like NOV or RIG which have been major holdings in the EIS portfolio will go higher eventually than they are today. The reason I went to cash is that I do not want to take the 1 - 2 year risk of a very serious recession eventuating. I would not adopt this strategy just to avoid a run of the mill retracement of energy stocks from their highs. But the condition of the U.S. economy in particular has become so dangerous that I just want more safety. It’s a personal decision. I respect anyone who wants to ride this out. They may be right.
Some have asked what I am doing with the cash. So far nothing. I’m looking for high yielding safe alternatives and may report on whatever I find. Some of the Canadian trusts may qualify.
The one holding I did not sell was Canadian Oil Sands Trust, which boosted its dividend today by 25% to $5.00 a year, giving the stock a yield of about 10.4%. The yield may growth from here through about 2012, after which I expect the company to restructure as a corporation.
Also, my options on oil futures strategy is still intact, although I have sold my options on natural gas futures. The options are long dated - 2012 and beyond. My belief that oil supplies will be constrained before 2012 has not changed. But as I discussed, the shorter term is much more risky, I believe.
Finally to Nawar: thanks for your views on Iraq. It makes a lot of sense to think they will not get much beyond 2.5 mb/d for quite a while, although that by itself is a nice increase over the past few year’s production.
22 Simon // Jul 29, 2008 at 4:38 pm
I stand by my original comment regarding the resumption of bad habits and the possibility of a “just hanging in there” continuation of current bad habits by the American economy funded by petro dollars and China’s need to sterilize it’s surpluses. My conclusions about a resurgence in commodities and associated stocks needs to be modified.
Confidence in such a senario would only be generated by falling prises as investors rotated out of their speculative positions just as Jim has done. This would be followed by a recovery in some other asset sector that has been oversold. This may be what we are about to see now or soon.
Said false recovery would disguise the further financial sector problems and miss allocation of funds problem.
But imagine this…what happens if house prices do suddenly find a base? How would that effect these problematic bank balance sheets? Much for the better I think.
23 Travis // Jul 29, 2008 at 4:45 pm
Jim, I enjoy your site, thanks for doing it. I have to side with Matthew Simmons: oil is still cheap! I don’t like my odds of successful market timing, so I’m still all in. The dollar is more of a crap shoot than oil. The biggest risk I perceive is whether a bank/FDIC is going to give me my money when I am ready to cash in.
24 Phil Tucker // Jul 29, 2008 at 6:18 pm
Appreciate the forthrightness of your views but suggest you reconsider the all in or all out of the market, an unusual emotional response from a very rational analyst. Our work suggests protracted weakness in North America and Europe, ultimately spreading to the developing world, weak profits leading to broad market weakness. Notwithstanding , there will be many attractive companies during this period in a number of industries. With regard to energy, companies with a profile of increasing production will be attractive to those that do not have this attribute [e.g., most majors] and their valuations are likely to increase. ECA, CNQ, TLM, and NXY, among a number of others appear well situated. Your view?
25 jkingsdale // Jul 29, 2008 at 7:01 pm
Further clarification: I said “substantially in cash” - not all cash. In addition to COSWF I’ve retained a reduced amount of a number of other positions. More details will follow in my month end letter.
26 paultaut // Jul 29, 2008 at 8:30 pm
XOM is still hanging in the second step of the staircase. You have to use a 5 year chart to see it. The rise in this stock has been a grueling affair. It reflects none of the theories currently bouncing around of a Bubble in oil.
Until it breaks down, I view downside risks to oil as temporary.
27 KV // Jul 29, 2008 at 9:03 pm
Jim,
There is nothing wrong in taking profit, also, it will only be taxed at 15%, and who knows what the next year cap gain rate will be.
Besides, when Wall Street Journal says SemGroup was speculating that led to its bankruptcy, you might change your mind, and decide to sell, not that I read your mind.
I understand the euphemism and sexism of “supply and demand”, but marketing any product – whether oil or peanuts – has always been controlling both supply and demand, and not just oil but in all industries. Just look at Google, see how hard it is trying to maintain control of I-net ad business. (Your website places Google ads).
What surprises me that most fail to appreciate that it is fundamental to a free capitalistic society to provide products and alternatives at the lowest possible cost. However, when it comes to oil, these rules do not seem to apply! Why? All I can say that oilmen have done a great job of brainwashing us.
I fail to understand your infatuation with COS. It cost them $65 a barrel to break even. It is playing in mud, and it is a giant welfare program for CA construction/earth moving companies. For 10.4% dividend, you take much more price risk. Besides, there are new processes under developments that will make much of the infrastructure COS has built to be obsolete. Further, you pay 15% foreign tax on COS dividend, that may or may not be recovered from your taxes, depending how tax savvy you are. As you say, COS will be a corporation after 2011, that means CA will tax COS at 30%+ rate over the royalty paid, and then tax dividends paid outside of the CA, another 15%. Finally COS will also correct the same way as other energy investments you feared to correct in coming 1-2 years.
Just like oil sands, Canadians like to play with bitumen, and for that they will sequester natural gas to melt the oil from bitumen. Most Canadians know that it would be better to sell the gas than burn to produce oil, but it is really their political power play. Many good oilmen/women in CA shake their heads when they hear about mega projects in oil sands and bitumen.
Finally, in investment parlor, high yield and safe are opposites. No risk, no rewards.
28 KV // Jul 29, 2008 at 9:18 pm
Eddel,
Most of the time covered calls on stocks held are to generate income (at about 20% a year rate) and provide discipline on taking profit without going through lot of rationalization, and what ifs nonsense.
Unless the company has a breakthrough product (tech and biotech world and sometimes fads like Krispie cream doughnuts and crocs shoes), or a monopoly, its price is not going to blow away. So, writing calls on those positions make sense, especially in tax deferred accounts.
You are correct that main issue is how to maintain the purchasing power of cash in high inflation times that are already in the wind. Both China and India are going through high inflation, and we import a heck of lot from both countries, so we will be paying soon as supply pipeline starts drying up, or we will make do without many things we were buying on cheap.
29 Nawar Alsaadi // Jul 30, 2008 at 12:17 am
Paultaut, if the US was to fully withdraw, I have serious doubts that Iraq can maintain its current level of production, or at least not its level of exports, the only reason why Iraq is exporting more now is because the northern pipeline is being better protected by the American financed Sunni awakening groups, the Iraqi government is highly suspicious of those groups and has refused so far to integrate them with the police and the army, should the Iraqi government relations deteriorate with the Sunnis once again, Iraq northern exports will be effectively shut.
Another example how fragile the situation is in Iraq, few months back, in Macrh, the Iraqi government was going to lose Basrah (Iraq oil centre) in its attempt to control the city, if it was not for British and American support, the Basrah operation against the Iranian backed militia groups would have been a major failure.
I personally have some real estate in Iraq, and I am selling everything now (in this period of relative calm), because I have no confidence whatsoever in the future of the country after the US pulls back.
Regards,
Nawar
30 Robert Essian // Jul 30, 2008 at 11:20 am
Jim, like you I’m going to do a flip flop. I have decided that through thick and thin I’m riding the wave until its eventual conclusion. I’m back in, all in (less 20% cash).
Conviction is what is propelling me.
My reasoning is Obama will be our next President and as such will absolutely replace a President that may go down as the most uninformed, do nothing President of all time. I will not belabor this point further.
What I see coming will be a President who will direct our economy towards the replacement of oil and towards natural gas, wind power, wave power, pond scum and solar as well as everything else.
Why? We have to move on this now and any knucklehead can see that.
The citizens of this country will follow leadership and a plan that is straight forward and spelled out. The citizens will do anything asked of them and in any time table requested at any cost (even higher taxes) if necessary.
The infrastructure necessary will put people back to work for a common goal. The auto company’s will get the necessary boost to move forward towards a stronger profit margin which will help the American consumers piece of mind not to mention less oil and less CO2 emissions. We will need to sell a lot of cars and therefore a tax incentive will be put in place. The list will go on and on.
How will we pay for it? With the oil money saved that we send over sea’s each and every year. Private enterprise will do the rest.
The money will stay here and provide for our Country for a change. It’s time we worry about ourselves and in doing this the rest of the world will benefit. The thought of sending one more dime to the Russians, Chinese, Indians, Iranians and other such riff-raft makes me sick. If I have too I want to fight for every single penny I send them. Literally.
Saudi Arabia gets a lot of negative press but frankly they have been good stewards to the World for many years and deserve their do respect. The industrial world would have seen a depression a couple of times without their help and detriment to their oil fields. They have my many thanks.
The spin off will be tremendous. National pride will over take this Country and
propel it from the brinks of a Depression. We will have hope again, everyone will feel as though what they do is important if our leadership spells it out plain and simply. Just tell the truth in other words. Wouldn’t that be a switch. We all have listened to the side step answer every politician gives to the simplest questions. It’s time we all call them out on it and demand they square up.
Listen, the American people are waiting for their bailouts in the form of a job. If the politicians can find the money to bail out all these corporates and financial types don’t they realize we see this. Have no problem with this so long as we get ours. So far this hasn’t happened and civil unrest will be the penalty. No one likes to get screwed and laughed at while it’s happening. Before this does occur lets get our act together and move. Someone please lead us.
Boone Picken’s proclaims a figure of three hundred eighty billion dollars a year. I think that could be the minimum effect of good leadership and a plan.
We are fed up with the crap being thrown at us (consumers/citizens) and frankly the kettles begining to boil. Walk out your door and the first concern on anyones mind is energy. Their all listening to Mr. Picken’s too and see a way out. His infomercials will have the necessary effect.
So to conclude this I expect to make some cash in energy because I believe all that I have researched. However, I’m betting also that the next President actually surrounds himself with people that actually have the best interest of the people (for a change) first and foremost on his mind. Frankly all politicians can do whatever it is they do so long as they get this right. If they don’t the World is going to pay in the form of the worst Depression ever. Leading perhaps to at worst Nuclear confrontation and at least to the starvation and death of so many of the Worlds citizens.
Nobody gets rich without the American consumer.
This is Robert Essian and I approve this message….Plaaaease!!!
31 Robert Essian // Jul 30, 2008 at 11:36 am
PS: I have no anomosity towards any of the Country’s mention above or its people but I am competitive and that’s all I want to do is compete fairly. I would like the opportunity to compete with my teamates instead of quiting. Seems to me all my teamates and I are lacking is a good COACH (President).
32 KV // Jul 30, 2008 at 3:31 pm
Robert Essain,
The oilmen have no interest in alternative energy sources, products or usage. Why? They want us to pay for rest of our lives and our children’s. By the way, nobody really knows how much oil is there, so anybody can keep crying “peak oil”. What we are running out is the cheap oil and oxygen.
What you really pointed out is that for the last eight years, we have had no leadership in our country. However, to consider Bush/Cheney stupid is a mistake, because they are oilmen, and they have taken care of their kind, not just here but all across the world.
Most of us saw money to be made now, so we all got on the bandwagon.
And, who cares about those Iraqis, hell, we created them as a nation in our service, and we can destroy them when we choose, if they don’t meet our demands! See if any of you know how many Iraqis died since we began shock and awe?
Nawar knows that Iraq is ungovernable, and also that West has no interest in Iraq’s development except oil, and to the extent that Iraqis don’t flood the market.
How many know that Saudis were going broke in 2000? 70,000 princly stiphends are hard to cover.
33 Robert Essian // Jul 30, 2008 at 6:44 pm
KV, all that you have said is true. There is a breaking point however and if the next leader of this country has the courage to lay it all out there for us to see then we will move. If he does not however then I stand by my claim that civil unrest will be extremely violent. Back in the day and about this time of the year the riots began in America in all major cities such as Watts, Detroit, Chicago and many more. This next disturbance will be sick in comparison.
KV, Peak oil is real and I’m surprised you doubt it. Am I mistaken? As I believe it to be is that it’s the size of flow not the size of the tap. Is that your understanding?
34 Robert Essian // Jul 30, 2008 at 7:06 pm
KV, Bush and Cheney are hardly stupid and I don’t believe I said that.
I implied that Bush’s handling of most everything was and is so transparent to everyone that there will be a yen and yang effect if this sort of behavior continues, especially into the next Presidency. He’s an oil man and he’s funded by oil men, I get it. However, one will only truly notice when the oil men take it from your pockets without asking.
You must agree it’s time for some serious changes and civil disobedience may be the course of action. I believe we are pushing in that direction I really do. I’m not advocating it just a gut feeling.
These are serious times and I think we are all on defense.
35 KV // Jul 30, 2008 at 7:37 pm
Robert Essian,
Two points: I agree with CHEAP oil peaked, not with “peak oil” stuff propagandized by oilmen.
Oilmen know when to stop, and I don’t expect any civil disobidience or riots. I just want alternatives to oil so that we do not go through again. I want free market in energy rule.
Unfortunately, Bush played stupid act very well, most fell for it. This also has to end.
Oil crisis is created and perpetuated through wars, and will continue until we wisen up.
36 Robert Essian // Jul 31, 2008 at 2:27 am
KV, we are talking the same language just expressing it differently regarding OIL.
Jim has started something here in this article that I feel is worth talking about.
Mainly CONVICTION.
Jim, I apologize to you if it has drifted off message a bit but like it or not you are part of the solution and not the problem. Your obviously looked to for leadership or you wouldn’t have so many responses to this article. I will not comment further after this.
When I speak of riots I’m trying to express that the only way I know to make real change is to tear the system down and unfortunately or fortunately this has been done with extreme emotional rage in the past.
Examples were given and I would like to ad a couple. As the Vietnam war and our Country’s extreme treatment of our African American neighbors festered it was Civil outrage that transformed the day and moved the Country. I don’t like it but sometimes extreme measures require such extreme responses. Our Constitution requires it.
37 KV // Jul 31, 2008 at 4:56 am
Robert Essain,
Yes, Jim has provided unprecedented forum for pretty smart folks here. I hope he continues.
My point in all the posts I have made is simple: be careful out there.
It is fine to have a thesis, but without perpetual verification, a thesis becomes conviction, which I do not do. I have no convictions about investments. I believe everything on the table is at risk. So, when Jim went to cash, he outlined his reasons, which I disagree with but I do not have his portfolio details – such as gains, tax liabilities, etc. to make any comments. However, if the investments are reasonably diversified, and no single investment is more that 5% of total portfolio (20~30 investments in a portfolio), with a discipline to prune losses early, life would not be that difficult, that you have to run to cash. Taking profits is fine and in some rare case, you may find liquidating a diversified portfolio. Basically, his premise that stocks will go down and so will the energy investments, and hence cash out. I wish markets were that easy to predict.
If you go to the best of best in Wall Street, the only mantra they follow is % gain, and their commissions and bonuses. They could care less about whether it is oil, garbage, or rockets to the Sun. They could care less about a particular account. Actually, they target each account for a certain income. And, honestly, that is also you should be concerned about, as there is no other game. So, if Jim’s investments met his % gain goals, and he was booking profits, it would be wonderful. And, if his reasoning were that may be energy investments have too much speculation and it is time to exist the sector for a while, that is fine too. But to read tea leaves…
38 Bluedog // Aug 1, 2008 at 1:16 pm
Jim,
Do you have any thoughts on the high yielding oil shippers, like SFL, FRO, or NAT? All are fairly elevated now but may be a good buy on a dip. I’m continuing to research these names.
Thanks,
BD
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