Oil and gold contest update #1

Despite what you might hear on CNBC right about now regarding plunging U.S. stocks, it was a good week for hard assets - oil was up almost 9 percent and gold rose more than 3 percent. Here's the anxiously awaited first update to the fourth semi-annual "Guess the price of oil and gold" contest.
With the June WTI crude oil futures contract closing at $126.19 per barrel (WOW!) and the spot gold bid price ending up at $884 per ounce, this puts CG snuggled up closest to the little yellow marker above, followed by the R. Smith, timothy, and AS#2.

For a list of all 111 guesses and other titillating information about this contest, see the post from two weeks ago: Oil and gold guesses - the fun begins.

This chart will be updated about every two weeks until mid-June and then weekly updates will commence. The winner receives a free one-year subscription to the investment website Iacono Research where, after a difficult few weeks, the model portfolio did a lot better than the U.S. stock market and is back into positive territory for the year.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Drivers are feeling the pain

USA Today reports on how high gas prices are causing motorists to drive less, a trend that looks set to accelerate in the months ahead.
A related story about how resale prices for gas guzzling SUVs are tumbling makes the Clinton/McCain "gas tax holiday" proposals look sillier than ever before.

If policymakers would be half as proactive during the gestation phase of the current problems - energy and housing - we probably wouldn't be in such dire straits today. Instead, while that tiny, informed sector of the population began screaming about peak oil and the housing bubble a few years ago, policymakers were oblivious.

Unfortunately, that's just the way the system appears to work. With plunging home prices people are certainly changing the way they think about housing. Now, four dollar a gallon gas is making people change the way they think about energy.

Record high gas prices are prompting Americans to drive less for the first time in nearly three decades, squeezing family budgets and causing major shifts in driving habits, federal data and a USA TODAY/Gallup Poll show.

As prices near — or in some places top — $4 a gallon, most Americans say they are cutting back on other household spending, seriously considering buying more fuel-efficient cars and consolidating their daily errands to save fuel.

Americans worry that steep gas costs are here to stay: eight in 10 say they doubt today's high prices are temporary, the poll finds. It's the first time such a large majority sees pricey gas as a long-term problem.

The $4 mark, compounded by a sagging economy, could be a tipping point that spurs people to make permanent lifestyle changes to reduce dependence on foreign oil and help the environment, says Steve Reich, a program director at the Center for Urban Transportation Research at the University of South Florida.

Every time we pull up next to a middle-aged lady with some sort of a fast food-style uniform on who is loading up the Ford Expedition with $4 gas, it's hard not to feel some sympathy.

But, at the same time, unless some big new source of cheap oil is located, many changes by both consumers and businesses are needed that will not come about if policymakers step in and try to make things all-better.

It was nice to see the flogging by economists heaped upon the dopey "gas tax holiday", though, the unfortunate reality here is that most voting Americans probably don't give a damn about what economists think and just want someone to stop the pain.

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Oil and Housing

It's been a busy, busy last few days getting ready to travel to the East Coast, but things are shaping up nicely (we learned today that it's well worth driving an extra half hour to get to a Kinkos rather than use Staples for printing).

A number of you have asked - the oil and gold contest chart will be updated tomorrow.

There were a couple of articles in the free section of today's WSJ that are definitely worth a look. I'm not sure if it's my imagination or not, but it seems that, along with more fluff in the print edition, there are more free articles online since Mr. Murdoch took over.

Anyway, Congress is trying root out the "speculators" that are driving the price of oil to once unimaginable levels. They never tried to root out the housing speculators, did they?

A Senate proposal to combat speculation in energy markets could have damaging unintended effects, a top federal regulator warned Wednesday.

At issue is a Senate proposal to mandate higher cash collateral for energy-futures trading. The proposal is part of a package of measures that Senate Democrats unveiled Wednesday -- and will try to bring to the Senate floor for a vote by Memorial Day -- in an effort to curb speculative trading that some say is contributing to soaring oil prices.

Trading-exchange officials are lobbying against the measure, saying it could cause a migration to foreign exchanges and rob the market of the liquidity that some participants in the market say they need to hedge their risk. Wednesday, the acting chairman of the Commodity Futures Trading Commission also criticized the measure.

"It has the potential to drive participants [traders] into more opaque markets, which is exactly the opposite of what we want to be doing," Walt Lukken, the commission's acting chairman, said in an interview. Mr. Lukken also testified before a Senate panel that his agency hadn't seen evidence indicating that speculators are "a major factor" in driving up the price of oil.

In the same story in the print edition, it was noted that the proposal seeks to increase the cost of oil futures contracts from between 5 and 7 percent of the futures contract value to 25 percent.

Note that this will have no effect on much of the investment money coming into this sector because most index funds only use a portion of investor money to buy futures contracts and invest the rest in treasuries.

For example, if you invest $1,000 in an oil ETF, $70 goes to buy a futures contract for $1,000 worth of oil and the other $930 goes into Treasuries. Raise the margin to 25 percent and $250 goes toward the futures contract and $750 goes to Treasuries - in both cases, the same amount of crude oil futures were purchased.

And David Wessel wrote a good piece about the ongoing debate between Congress and the White House regarding what to do with all the homeowners who are underwater on their mortgages (is upside-down reserved for auto loans?)

These are some pretty staggering stats:

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won't, and are at risk of losing their homes.

Lenders, we're told repeatedly, prefer to avoid foreclosure if possible. Better to cut a deal than end up with an empty, decaying house. "If a foreclosure is preventable...the economic case for trying to avoid foreclosure is strong," Mr. Bernanke said this week. And not just for borrower and lender: "Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes and lower municipal tax revenues," he said. And that could depress housing prices, which could hurt the economy and the stability of the financial system, he added. On that much, Mr. Frank and Treasury Secretary Henry Paulson agree.

In ordinary times, a lender shouldn't need prodding from the government to do what's in its self-interest. But these aren't ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the "speculators" who bought homes they don't live in or those who lent to them. And there's broad agreement that those who bought more house than they'll ever be able to afford are going to lose out. The debate revolves around the "preventable foreclosures."

Geez, I don't know.

While it's easy to feel sorry for those people who were really duped into doing something stupid, what kind of a lesson is that teaching them?

Shouldn't someone be learning some kind of a lesson here?

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Is this what a bursting bubble looks like?

It seems odd to me that, after having already burst at least two times this year, the commodities bubble would look like this on a chart.
But, then again, I haven't worked on Wall Street for the last twenty years like most of the "commodities bubble" experts, so I must be missing something.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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A gold proposal

This came in the mail earlier today. It seems that Kona needs assistance in handling some gold sales and investing the proceeds. I might be able to help...

Dearest,

Am writing you with a great honour and I hope my letter will be a surprise to you since we have not meet personally. I saw your contact from the my father's address book. This gives me the courage and assurance that you are one of my father's foreign partners.

My name is Kona Outara a student of 22years old. I inherited 250 kilos of 22carat gold dust from my late father who was a reputable gold dealer in bouake northern part of ivory coast. the gold was deposited in a security company in belgium,and i have every necessary document that confirmed this said deposit,and also i have contacted the security company several times and they assure me of the safety of the gold.

Since i don't have any means to travel down to belgium,and i don't have any document to travel down to belgium, more over am too young to handle this gold for my security, i need your urgent assistance to enable me to continue my education in your country.

I am soliciting for your partnership in order to sale and invest the money in several fields especially real estate management.

I am also using this opportunity to inform you that I have no concepts of investment I would need your suggestions and assistance to sale and manage the money.

Waiting for a favourable reply.

Best greetings.
Kona Outara

Normally, you can scan these and look for a dollar amount and then quickly dispatch them, but this one made you do the math:

• 250 kilos * 35.2 ounces/kilo * $900/ounce * 22/24 karat = $7 million+

That seems to be the standard amount - just under $10 million.

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A rebound in inventory at the streetTRACKS Gold Shares ETF

The "tonnes in the trust" for the streetTRACKS Gold Shares ETF (NYSE:GLD) is once again increasing after the largest decline in the the fund's three and a half year history late last month.
After share redemptions corresponding to over 61 tonnes of gold bullion over a five day period, share creation in the last two days has totaled 10.1 tonnes (see the streetTRACKS website for details)

With strong price gains so far today, the $850 level may prove to have been the bottom for the recent correction. Then again, the International Monetary Fund is again talking about selling over 400 tonnes of the stuff into the market. Note that this sale has to be approved by the U.S. Congress.
We are quickly coming up on the one-year anniversary of the start of the 2007 credit crisis when the price of gold began to rise from the mid-$600 level.

Wasn't that credit crisis supposed to be all fixed up within just two or three months?

Full Disclosure: Long GLD at time of writing

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Steel pennies and belief systems

Maybe it's time that the U.S. Government skipped right to the chase and banned all coinage. They are fighting what seems like a never-ending battle to produce the stuff at a cost lower than the face value, more evidence of this provided today in this AP report:

Further evidence that times are tough: It now costs more than a penny to make a penny. And the cost of a nickel is more than 7 cents.

Surging prices for copper, zinc and nickel have some in Congress trying to bring back the steel-made pennies of World War II, and maybe using steel for nickels, as well.

Copper and nickel prices have tripled since 2003 and the price of zinc has quadrupled, said Rep. Luis Gutierrez, D-Ill., whose subcommittee oversees the U.S. Mint.

Keeping the coin content means "contributing to our national debt by almost as much as the coin is worth," Gutierrez said.
...
The proposals are alternatives to what many consider a more pragmatic, but politically impossible solution to the penny problem: getting rid of the penny altogether.

"People still want pennies, which is why we're still making them," Moy said.

What is it with the penny? Why do people think that we need it?

Is it some sort of a linchpin in the American psyche where, if we get rid of the penny, all sorts of other uncomfortable questions arise?

Like, while on jury duty once, a conversation was struck with another prospective juror who was about half-way through reading the DaVinci code and he remarked, "This book shakes your entire belief system".

See Coinflation.com for more on the nation's money, no assistance can be provided for questions pertaining to religion.

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Kevin Phillips on the U.S. shark tank and other ills

Kevin Phillips, author of "Bad Money - Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism" was interviewed by Amy Goodman at Democracy Now (hat tip DK). A few of the highlights appear below.
First, on the types of sharks that the United States is currently swimming with inside a "shark tank" as it heads into a recession (this would be in contrast to the much preferred "shark cage", where metal bars separate the swimmers from the sharks):

• Finance dominates the US economy
• Massive debt, both public and private
• The collapse of home prices
• Global commodity inflation
• Lousy economic statistics
• The price of oil

He also noted that every time the government says things are getting better or that the worst is behind us, then things get worse. As if on cue, Hank Paulson just happened to be in the news again today: Worst of financial crisis is past: Paulson - AFP

On the government's economic statistics:

I think the government has cooked the books, and as a result, we get this unrealistic view of where the economy is. For example, they pretend that inflation is in the two- to three-percent range. Barron’s magazine did a survey of money managers, and their average estimate of what the CPI would be later this year was 2.7, and for 2009, at the end of the year, 2.8. Now, that’s ridiculous.
...
Now, the real meaning here is that when you look at the growth statistics for the economy, the GDP figures, you have to take—to get the real figures, you have to take nominal gross domestic product growth, and then you subtract for inflation. So if you’ve got nominal growth of four percent and you subtract for inflation, you still would get a positive number if you use the number of, you know, 2.6 or three percent inflation. But if you’ve got nominal growth at four percent and inflation is really six to nine percent, then you’ve got big-time negative growth, and the economy is contracting.

The government talks, you know, like they used to say in the Western movies, with a forked tongue, but so does the financial sector. All the questions about whether the ratings were really AAA or they were really something lower than BB on the securities that were imploding, no honesty in economic data or ratings or descriptions of what really goes into a financial instrument, and this has the American people at some degree of peril, because foreigners don’t really believe what we say anymore.

By the way, the popular Mortgage Lender Implode-O-Meter is mentioned in the new book.

On speculation in commodities markets:

Well, there’s a degree of commodity speculation going on, because a lot of the hedge funds in the United States have a major allocation to commodities, and they see commodities as a particularly attractive play with some of the major currencies losing their respect. And that’s particularly true of the dollar. American hedge funds think it may make more sense to be in commodities than to be in dollars or in American stocks.

But I would not say that the principal driver of global food prices is speculation.

On Peak Oil:

The peak oil question has to do with whether or not global production isn’t either about to peak within the next five, ten, fifteen years—some people believe that it’s peaked already. And if that’s the case, you can expect that, given the demand for oil that can’t be replaced by other things too quickly, certainly not in five to ten years, you’re going to see oil prices just keep climbing. And if people can assume they keep climbing, then they become a speculative vehicle, if you want to get your money out of dollars, which then makes oil prices rising a huge negative for the dollar, which means that we have this currency which is weakening in ways that raise all kinds of other questions.

So peak oil is one of those things you just won’t see on the front pages of the newspapers, but I wish they would deal with it, because there are lots of things going wrong with the economy that the media, as well as the politicians, really don’t want to put on page one, and page one is where they ought to be. This is serious stuff.

The new book is awaiting idle time later this week en route to the East Coast - highlights will be provided later this month. If it's anything like "American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury" (now in paperback), it should be good.

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The Money Magazine commodities indicator

When Money Magazine starts running stories like this one in today's Wall Street Journal, then you'll know we're a lot closer to the end of the commodities boom than the beginning.

Are Commodities Funds a Long-Term Bet? ($)
Global Demand Could Drive Sector; The Inflation Hedge
By DAISY MAXEY
May 6, 2008; Page C13

Commodity-focused mutual funds' incredible multiyear run is leading some investors to wonder how much upside could possibly remain, but strong demand for raw materials likely means these funds can deliver additional gains, at least longer term.

While the sector may be due for a correction in the next six months or so, global demand is expected to buoy the funds over the next several years.

"In the near term, it does look like it's run too far, too fast," said Mihir Worah, manager of the $13.9 billion Pimco CommodityRealReturn Strategy Fund. "But the longer-term picture is unchanged; commodities are going to do well over the next three, five, 10 years; in my mind, there's no doubt about it."
...
With inventories for many raw materials unusually low and strong growth in emerging countries, commodity prices should continue their upward trajectory, said Mr. Worah.

"There's too much demand from emerging economies for energy and metals, and not enough supply," he said, noting that creating new supplies involves long cycles.
...
Investors generally use these kinds of mutual funds to diversify their portfolios as the sector's performance is relatively uncorrelated with that of the broader market. But commodity funds can also offer a good hedge against inflation.

This is very matter-of-fact reporting in a manner that is very different from what you might read on the same subject in recent issues of Money Magazine.

And this is probably about as close as you'll every hear anyone in the mainstream financial media say, "Invest in commodtities - it's a good long term bet".

The question posed in the title was clearly answered in the affirmative within the story.

Recall that, like the delightfully memorable Time Magazine cover in mid-2005, Money Magazine also got on the housing boom bandwagon not long before it peaked a few years ago (see June 2, 2005- Money Magazine Does Real Estate).

Then they did a hasty dismount (see Sept 5, 2005 - Money Magazine Does a One-Eighty).

My guess is that, at some point, the nation's most popular personal finance magazine will grudgingly add "commodities" as one of their approved investment asset classes (with maybe a 15 percent weighting) and that will be the time to start thinking about selling everything you've got.

But, don't worry.

As explained in today's WSJ story, that won't happen until sometime in the next decade.

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What's up with the Baltic Dry Index?

A few months ago, wasn't nearly everyone so-o-o-o-o sure that the commodities bubble had burst (again!) when the Baltic Dry Index took a dive. Well, looky here!
This report from Bloomberg the other day notes the remarkable turnaround:

The Baltic Dry Index added 1.5 percent on May 2 to the highest since Dec. 19. The index, which tracks the price of transporting bulk commodities, has gained 7.8 percent this year.

And at Minyanville the increase was attributed to yachts (no, not really):

Interestingly, an article in today's Financial Times notes that demand for stuff may not be the sole explanation for the surge in the Baltic Dry Index.

According to the FT, slow growth in the supply of bulk carriers to the market and underinvestment in port facilities is also fueling the rise in the shipping index.

Also see:

• Investment Tools - Baltic Exchange Dry Index
• Dry Ships Inc. - Baltic Dry Index Daily Market Report
• The Big Picture - Baltic Dry Shipping Index
• Mish - Commodity Boom Over for Now

If only the housing bubble could bring itself back to life with the regularity and the ferocity of the commodities bubble, the world would surely be a better place.

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Countrywide: Not so easy anymore

After hearing the complaints coming out of Las Vegas after Countrywide shut down thousands more home equity lines of credit, you'd think that "tapping home equity" (whether the equity is there or not) was some sort of an inalienable right.Bloomberg reports on the distress that the nation's former number one mortgage lender is causing in Sin City:

Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business.

``I hope this doesn't break me,'' the 35-year-old retailer said. His credit score was 790 out of a possible 850, putting him in the top 40 percent of borrowers. ``It's going to hurt more than I thought.''
...
Jerry Tao, a part-time lawyer and spokesman for Evofi One's parent company, lost access to his $50,000 Countrywide line despite earning more than $500,000 last year and having a credit score he says was between 750 and 770.

Though he never accessed the line, Tao, 40, said he'd hoped to redo his backyard and replace his 1995 Nissan Pathfinder.
...
``If you had anything on the ball, you could make it happen in Vegas,'' said real estate agent Donna Marie Gold, 62, who built a $4.5 million fortune buying and selling properties over six years.

After failing to complete a single sale last year, Gold said she fell $22,000 short each month on payments needed to maintain 14 properties. Now two to four months behind on some mortgage payments, she's lost access to a $250,000 Wells Fargo & Co. equity credit line.
...
John Simon, 42, borrowed $35,000 on low-interest credit cards in 2007 to pay down his $63,000 credit line and save on the 11.75 percent interest he says Countrywide charged. He expected to be able to access the credit line later. When Countrywide froze the line, he wasn't able to get money needed to pay his bills.

``They took away the last amount of cash I had to make all the payments on my father's retirement home,'' Simon said. ``From a business standpoint, this was the stupidest thing I ever did. But it was so easy.''

Geez. Does anyone feel sorry for any of these people?

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Tea and subprime sympathy with the Greenspans

Eddie Elfenbein over at Crossing Wall Street sent this link earlier today, wanting to know if I was the current high-bidder. My guess is that he wanted to make a deal if I was.

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The math behind the latest Big Oil PR campaign

After spotting this Big Oil ad for about the tenth time in recent weeks, looking at the math behind the ad copy seemed like a reasonable exercise to undertake.

[For the entire ad, see this item(.pdf) at Energy API.]

Based on a study of U.S. oil company ownership conducted last year, among other things, the ad states:

Tens of millions of Americans have a stake in the U.S. oil and natural gas industry. When the industry’s earnings are strong, the real winners are middle-class Americans, people investing in their retirement security or saving for their children’s college education.

And of course they go on to rail against the ill-effects of higher taxes on energy company profits - how higher taxes would hurt not only them, but middle-class Americans as well through their investments.

What is left unspoken here is that high energy prices aren't such a bad thing because the middle class benefits as shareholders.

But is that true at all for the "middle-class Americans" cited in the advertisement?

Let's find out...

For example, assume that the average "middle-class American" has a 401k retirement account or other investment accounts with a balance of $90,000, which seems reasonable after looking at the $40K to $80K income range across all age groups in this report.

Then figure that they hold an average of 70 percent in stocks and that all this money is in an S&P500 index fund with a weighting of about 13% for energy stocks (per the S&P500 sector weightings) resulting in a total energy stock value of $8,190

Investment in energy stocks: $90K x 0.7 x 0.13 = $8,190

Using data from the DOE, it appears that retail gasoline prices have risen from about $2.80 last summer to about $3.60 today for a hefty increase of about 28 percent. So, since a typical middle class American consumes 500 gallons of gas per year and, assuming a roughly linear increase in the gas price since that time, an additional $133 has been spent on gas over the last eight months.

Increased gas cost: 333 gallons * $0.40 = $133

That seems like a lot of money for a middle class family trying to make ends meet. Now, how much of this has been offset by rising prices for energy stocks?

Well, things were pretty volatile last summer, but it's fair to say that the giant energy ETF (AMEX:XLE) was at about $70 when gasoline prices started rising. At around $82 now, that's a hefty gain of 17 percent which, when applied to the typical middle-class American's investment portfolio,would yield a whopping gain of well over $1,000.

Increased stock value: $8,190 x 0.17 = $1392

Hey, maybe Big Oil companies aren't that bad after all!

Of course this doesn't consider those middle class individuals who have no 401k account at all or who are now too scared to death to invest in anything but FDIC insured CDs now yielding about two or three percent per year.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Julie on high gasoline prices

Julie hits the streets to find out how badly the sky high oil prices are squeezing New Yorkers at the pump. Also see the recently updated California SUV Fill Up Index.

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What difference will +$1,200 make up against -$100,000

With home price in parts of the country dropping by $100,000 per year or more, is $1,200 in rebates from the government going to make any difference?

The now-quickly-vanishing home equity was nearly as easy to spend as the checks that are now hitting bank accounts and mailboxes. Remember when purveyors of home equity loans would offer credit cards that would tap your equity directly?

Do they still do that?

If government stimulus plans are to be effective, that's what the government should do - just issue credit cards that would tap the U.S. treasury directly and then everyone can worry about paying the money back later.

They ought to keep that in mind since it doesn't look like the first batch of checks is going to have the desired effect as explained in this report in the New York Times.

The Rebates Might Not Go to the Mall
By PHYLLIS KORKKI

Go ahead and spend — it’s your patriotic duty. That’s one way to look at the government rebates that are just starting to arrive in taxpayers’ bank accounts and mailboxes.
...
The rebates are meant to help revive our parched and stunted economy with millions of liquid infusions. But many consumers do not plan to rush to the store with the money.

According to a recent survey by the NPD Group, a research firm, 42 percent of taxpayers said they planned to pay bills with the check, and 21 percent said they would add it to savings. Only 12 percent said they would spend it on discretionary items.

It is still possible, though, that once the bills are paid, and the savings are padded, the urge to splurge will assert itself at last.

They really should consider the credit card idea for the next round - either that or just decree that home prices are going to be reset to their peak levels in 2005 or 2006 (whichever is higher) from which they will not be allowed to fall.

ooo

This week's cartoon from The Economist:

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