In Today's Daily Reckoning:
*** "Oil at $40" warns the head of OPEC...it's at its
highest price in 10 years, and still rising
*** Airlines down...utilities up...Big Techs hit
*** Euro falls...is it time to buy euros? Maybe...
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*** Oil was expected to retreat yesterday - following an
OPEC promising greater production. But it didn't.
Instead, oil advanced $1.50 on Monday... and then another
14 cents in after-hours trading.
*** "Fuel stockpiles are running at more than 20-year
lows," Reuters informs us, "despite refineries operating
at maximum capacity."
*** At $35.28/bl, oil is at its highest level since Iraq
invaded Kuwait in 1990. Europe has already been rocked by
truckers' and taxi strikes - in reaction to high gas
prices.
*** Britain is now preparing for similar trouble. The
British government took on 'extra powers,' says the
Reuters report, to deal with the expected problems. More
below...
*** How is it that in this great new digital era - where
information is freely available - that no one seemed to
notice we were running out of gas? How is it that the
people who check the nation's gas gauge failed to say
'fill 'er up' at the appropriate moment?
*** Gary North quotes Paul Erdman on the wonders of the
New Economy: "In this information age," writes the former
novelist and end-of-the-world herald, "we live in a new
world in which decision makers are immeasurably better
informed than ever before and where response times are
but a fraction of what they were just a generation ago."
*** Ahem...if that is so...how come the decision makers
missed what might be the biggest single threat to global
growth of the year... and now are powerless to do
anything about it? "We are approaching a crisis of great
proportions," commented OPEC chief, Rodriguez. "Depending
on the winter," the oil price could hit $40 as
"production capacity is reaching its limit."
*** Mr. Bear, no doubt with an amused eye on the oil
price, stopped by Wall Street and left his calling card.
The Nasdaq fell 82 points. The Dow dropped 25. The Big
Techs were, once again, the targets of selling. Cisco
fell $2.70. Sun Micro lost $5.50. Juniper Networks got
whacked for $14.25. Ciena lost $15.60. Qualcomm was off
$3.40.
*** "A report by the bureaucracy that controls
California's ailing electricity grid, says what we've
been saying all along..." writes Dan Ferris of Real Asset
Investor. "And that is... price caps don't work. The
price caps cut wholesale prices by two-thirds as of
August 7, from $750 per megawatt to $250. But less than 2
months later, the report affirmed that the laws of nature
are still valid... the total cost of electricity consumed
was higher during the period of lowest prices. In other
words, lower prices led to higher demand." (see: The
Limited Effectiveness of Doing the Wrong Thing
http://www.dailyreckoning.com/body_headline.cfm?id=457)
*** Meanwhile, the airlines - which are energy consumers
- lost ground. And utilities, also gas-guzzlers, rose.
But utilities pay dividends. And the smart money has lost
confidence in Wall Street's ability to produce capital
gains. Both the Dow and the Nasdaq are down for the year.
So, the investment pros are looking for a return on their
money in the old familiar places.
*** But the public continues to be as confident as ever.
Advancing stocks outpaced declining ones yesterday - 1522
to 1295. 208 issues on the NYSE hit new highs - only 42
hit new lows.
*** The National Ass'n of Business Economics - a group of
3,000 economists and corporate executives has raised its
GDP forecast for this year from 4.9% to 5.2% - the
highest in 16 years.
*** The group also collectively opined that inflation
would moderate next year...and that the productivity
surge, the collective delusion and statistical mirage
which has so delighted the hearts of American investors,
will continue. (see: The Cult of Productivity
http://www.dailyreckoning.com/body_headline.cfm?id=453)
*** And the U.S. trade deficit? The gaping hole in the
hull of the U.S. economic ship, currently taking on water
at the rate of $1 billion per day, is only of "mild
concern" to the NABE.
*** Cash, measured by MZM, rose at 8% over the last 2
months. M3, a different cash measure, has been going up
at a 10% rate year to year. This is a lot of extra buying
power. Prices are bound to rise. But what prices?
*** Debt levels keep rising too. In the popular
imagination, Federal debt is falling. Yet, it rose $25
billion last year... about $500 million per week.
*** And the euro fell again. The Esperanto Currency is
showing the structural weakness I warned about a year
ago. Some currencies are backed by guns...some by
gold...but the euro has neither. But neither is Euroland
running a $1 billion/day current account deficit, which
economist Joan Robinson described as "the road to ruin."
Stay tuned...
*** Leaving nothing to chance, Wall Street is showering
Republicans and Democrats with campaign cash. "Just more
than half of $45.6 million donated by the securities
industry through Aug. 3 went to Republicans," says a
recent Reuters report. "The Street's most powerful
companies," the article continues, "give almost equally
to both sides of the aisle, according to analysis by the
nonpartisan Center for Responsive Politics." Political
scientist, John Green, notes that for such large donors,
giving money is "an investment."
*** Another Reuters report: "Each athlete at the Sydney
Olympics has been supplied with 51 condoms." To use all
the condoms, Olympic athletes would need to have sex
three times a day for 17 days to use up their condom
quota. "These people are very optimistic," says the Thom
Bomb.
*** And William Fleckenstein, SiliconInvestor.com,
provides more evidence of a tight job market - a
complicated sentence from the Austin American-Statesman:
"Last month, a job fair was held at the Travis County
Community Justice Center, a state jail, that attracted
headhunters who pitched jobs paying as much as $25 an
hour, plus benefits that included retirement plans,
company cars and the promise of career advancement, to
many of the inmates scheduled to be released in the next
two months..."
*** Today in 1880, H.L. Mencken was born in Baltimore.
When the Lights Go Out Across America... Some People Are
Going To Get Very Rich!
Demand so high, chipmakers are building their own mini
power plants on barges in San Francisco bay. The
California electricity shortage is already earning some
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Because it's going to get worse before it gets better...
For your chance to grab a piece of the action please
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Not since the Carter Administration has oil been so much
in the news. The chattering classes, then as now, have
begun using the word 'crisis' in the same sentence as the
world 'oil.' Lester Brown - now so worried about what an
over-abundance of oil consumption might do to the planet,
fretted, back then, about the lack of it.
The newspapers and TV newscasters just report the facts:
there is a problem with the world's oil supplies. Too
many people. Too many cars. Not enough oil.
The leader of the Free World a quarter century ago
declared an emergency. As incredible as it sounds to our
sophisticated, jaded and digital ears today - outside
Christmas lights were banned...and a national 55 mph
speed limit was imposed...all in the name of a 'crisis'
that did not exist.
"What are you laughing about," asked Addison as I write
these lines. But Addison, born in 1968, is too young and
too reasonable to imagine the depths of imbecility to
which popular sensations can reach.
There was, of course, some objective reality behind the
oil story of 1974. Oil follows the same cyclical patterns
of other industries - boom to bust...optimism to
pessimism...expansion to contraction... Since oil
infrastructure - drilling, shipping, refining - can take
years to put in place, occasional bottlenecks can cause
severe price distortions.
There are also political issues. A lot of the world's oil
comes from a relatively few places. It is always possible
for a few of the producers to get together and jimmie up
prices - for a while, at least.
If you were cut off from the media, you would take little
more notice of these price swings than of, say, your
local town councilor being caught taking a bribe or your
painting contractor mixing his metaphors. It would be
outrageous - but not unexpected. You would drive less
when prices skyrocketed...and perhaps use more gas when
they fell. But the sensation mongers in the media and
politics managed to get oil in their grip in the 70s.
Prices were not allowed to rise sharply enough to clear
the market. As I recall, we ended up wasting time sitting
in long gas lines... grumbling about the oil companies,
the Saudis, or someone.
That was a quarter of a century ago. Now oil is back in
the news...and once again, on the verge of becoming a
popular sensation.
Again, there is an objective reality behind the movement
in oil prices. As I explained a year ago, oil has been
out of the popular imagination for a long time. While no
one seemed to notice, it became very cheap. Inventories
and infrastructure have been allowed to deteriorate. It
was an opportunity for a contrarian.
At the turn of the century - 100 years ago - you could
buy a barrel of oil for about $1. The Dow was about 60.
As recently as 15 years ago, that ratio was still about
right. The Dow was about 60 times the price of oil.
But then, the Dow took off...and oil collapsed. Early
last year, the ratio of the price of oil to the Dow was
close to 1 to 1,000. And now that the price of oil has
more than doubled, you can buy the Dow for roughly 275
barrels of oil.
"Oil is still cheap in real terms," Dan Ferris reports.
"$35 oil is equal to $14.10 in 1979 dollars, $8 in 1970
dollars. We are still well below the (real) price peak of
$70 reached shortly after the Iranian revolution, near
the peak of the Great Inflation, in 1979."
No surer proof that oil is becoming a popular sensation
is the fact that James K. Glassman is writing about it in
the New York Times. In yesterday's article, the man who
assured us that the Dow would go to 36,000, explains why:
"The new economy," he says, "is creating wealth at an
unprecedented rate..."
But then, we discover what this means for oil: "...and
the newly rich want cars, air conditioning and other
comforts that consume lots of energy...and high-
technology itself is surprisingly energy-intensive."
Glassman has discovered the "Internet's dirty little
secret." And now...after the Internet, the New Economy,
and the Big Techs...is it energy's turn to be a popular
sensation?
Glassman cites the work of Peter Huber and Mark Mills who
wrote the Digital Power Report: "The digital economy,"
they wrote, "is completely dependent on the big central
power plant." They also explain that companies such as
Sun Microsystems consume as much power as a small steel
mill.
"My guess," writes Glassman, whose business is minting
popular sensations, "is that investors are
underestimating the importance of energy."
Perhaps not for long. "It is difficult," he warns, "to
pick the energy winners," reminding us of how much money
we might have made on the Big Techs if we had bought them
before anyone ever suggested doing so. "Picking winners
in this sector is nearly impossible for amateurs..." he
points out, but then suggests a couple of possibilities.
Among them is Dan Ferris' favorite - Enron. "The stock
has risen 346% in the past 3 years, but many who follow
energy companies say it is still undervalued."
Maybe it is. And maybe, if the popular sensation keeps
building, Enron will rise in price even more.
But popular sensations are dangerous - whether political
or financial. People surrender their own individual
judgment and personal knowledge to a kind of mass, herd-
thinking. The key to making money is no longer being able
to anticipate the cyclical trends of the oil market, or
to buy good companies are low prices - but being able to
anticipate the episodic waves of crowd psychology. Those
who make money are not analysts with sharp eyes and sharp
pencils...but those who can spot a fashion trend.
The energy fad could follow the same sort of pattern of
the Internets - working its way from one sector through
another as the story develops. The key will be to stay
ahead of the stories.
"The real news," writes Dan Ferris, who has so far been
ahead of the fashion scene, "isn't oil. It's natural gas.
We are headed for a major supply shock this winter. We
have 15% less gas in storage than we did last year at
this time, and there's not enough time to make up the
difference. Last year's winter, the mildest winter in 105
years of record keeping, kept natural gas prices-and
therefore supply-low."
All we need is a normal winter," he continues, "and my
natural gas stocks are going to fly even higher than they
already have."
We will see.
Your correspondent,
Bill Bonner
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