There is reportedly $4 trillion parked in U.S money market funds and other cash equivalents getting a return of approximately zero.   That’s a large cash allocation.  Breaking even seemed great a few months ago when most investors were being crushed by falling equity prices.  But now pessimism is waning and the last couple of months’ returns have been record-setting.  So cash is now starting to feel under-appreciated, pun intended.  One principle of investing always holds true:  funds must land somewhere.   So cash funds will either be re-invested where they …

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Are stocks and oil bottoming?

Was last Tuesday’s 350-point rally the beginning of the end of the bear market or just a false “bear trap?”  And a related question: “Did oil bottom at $33 and will it get re-tested?”  Let’s see what we know.

Some things we know

Sometimes the objective observable facts can yield fairly clear conclusions.  Usually that’s not the case.  Usually you can use the available facts to make a decent argument in either direction.  But sometimes the facts seem fairly clear.

For example, there should have been clarity about being …

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Some companies are cutting compensation levels and hours rather than cutting employment.  For example, here is a report on Visteon, the car parts supplier, that is putting 2,050 employees on a 4-day week and cutting their wages by 20%.  If you Google  “wage cuts” you get 529,000 responses.

Cutting wages and/or hours is a more humane way to downsize than firing people outright, in my opinion.  But to the extent that wage and hour cuts has been and will continue to be a trend, it disguises the unemployment numbers.  So …

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Here is a picture of the next five years or so that is worth keeping in mind for several reasons.  One: it is not out of the question.  Two: it is not being discussed by anyone else that I know of.  Three: the person who is predicting it has a pretty good track record.   I don’t say this scenario will happen.   But I do say it could happen.  And since it has some non-zero likelihood, investors should bear in mind the risks of something like it coming to pass as …

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Anomalies have been with us for years like baseballs floating in the sky supported against the force of gravity by some mysterious power.   Now some of these apparently irrational phenomena are taking more familiar forms - the baseballs are falling back to earth.  For example: 1. The sustained rise in housing prices since 1986 and especially over the past 5 years brought the price of houses in many areas to heights that made us wonder how our children would ever afford to buy a house.  How could the price of …

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Some coming attractions that will impact the price of oil are predictable:    1. OPEC will cut production - or at least announce that they will cut production - probably by 1 - 2 mb/d    2. The unfreezing of the credit system should proceed apace over the next month accompanied by a reduction in LIBOR, the unfreezing of shipping, and maybe an uptick for the Baltic Dry Index.    3. The coming recession will be nasty: maybe 9% - 11% U.S. unemployment; weakness in Europe; substantial deceleration of …

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Here’s an email that asks a question other readers may also have: Hi Jim,I’m a regular reader of your site. I enjoy all the interesting articles that you compile and write about. I’ve read Profit from the Peak, View from the Top and all about oil megaprojects.What I don’t understand is why the oil futures, priced out all the way to 2016, could be trading for so little. If peak oil is really coming in a few years wouldn’t the futures market show some hint of it?   (think …

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An insightful report in the Financial Times posted below ascribes the recent rise in oil prices above $100 to the far greater than expected losses of oil production in the Gulf from hurricane damage.  As the report also mentions, oil prices have risen despite softness in the global economy.  There are many factors influencing the global price of oil, but considering only the hurricane-induced supply decline and the economy-induced demand decline would lead one to expect lower oil prices ahead as the impacts of the hurricanes recede while the …

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As Churchill said during another time of great public anxiety, “This is not the end, this is not even the beginning of the end.  But it is the end of the beginning.”   At this time of possibly the greatest American economic crisis since 1929, I think that description applies to today’s news that both the legislative and executive branches of the U.S. government are determined to deal with the guts of the sub-prime problem.  To date they were only supplying bandages and graves for the wounded and dead victims …

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I’ve written a number of posts about megaprojects analysis, the most recent being in early July.   That post did not extrapolate a full supply model, which is one thing I want to do in this post.  But another post in early June did analyze the next seven years of oil supply based on megaproject work.  It is interesting to see how that analysis differs from the one below and yet posits similar conclusions as discussed below.  I think megaprojects analysis gives us the best insight on near-future …

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The economy, the stock market, and our understanding of the future direction for energy and transportation may all be on the brink of major changes .  This letter will open a discussion of these ideas. 

A Very Tough Month

Before turning to the future, I must confess that the immediate past month was  most painful for the EIS portfolio.   Oil prices hit a violent downdraft in July, which especially impacted my “options on futures” strategy.  It declined in value by about 33%.  Since the purpose of these options is to provide portfolio …

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A well-respected Dutch consultancy supported by substantial corporate interests including Shell has issued a report that warns of severe oil price shocks starting in 2010.  As my readers know, I have been suggesting a similar time frame for severe oil shortages based on my reading of predictions for supply constraints by many analysts and by the Wikipedia Megaprojects works. I have not analyzed the report in depth but my reading of the summary found aspects that were confusing.    For example, the report blames Mexico and Russia …

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This story may not impact the price of oil in the near term but some day it may bite.  It’s a useful construct for understanding what is happening in the geo-politics of oil, which is vital since above-ground conditions increasingly determine how much oil reaches OECD markets. Here is the short version:    1. A great deal of future potential oil flows lie offshore Africa.    2. Shipments of oil from Nigeria are attracting pirates.  Bandits who are internal to Nigeria are also stealing much …

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Pemex announced another substantial year over year drop in oil production from its huge Cantarell field in June.   June production was 1.017 mb/d, compared with 1.038 mb/d in May  and 1.074 mb/d in April, but it was 35% less than June, 2007.  This is reported to be the fastest decline rate in 12 years. Total Mexican oil production in June dropped 11.4%  from June, 2007 to 2.838 mb/d which compares favorably with May’s 2.79 mb/d.  The monthly increase is due to the fact that, “The company …

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Jeff Rubin, the Wall Street oil analyst who is closest to getting the reality of oil in my opinion, published this piece recently.   He predicts an average oil price of $150 in 2009 and $200 in 2010.  He also says 10 million Americans, mostly poor Americans, will give up owning a car by 2012.  I believe that would be called “demand destruction.”

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