Are We Scared Yet?

June 30, 2008

Well, our commentary on June 22 in Is it really 2001 again? certainly proved timely. Big Ben stepped up to play the role of boogeyman again and the markets took a tumble last week. The Dow Jones Industrial Average (DJIA) found new lows while the S&P 500 (SPX) tested the lows from March. Everything was going exactly to plan, or was something missing?

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Don’t blame the oil ‘speculators’

June 27, 2008

A campaign in Congress to punish traders for record oil prices reveals a fundamental misunderstanding of how futures markets work

By Jon Birger, senior writer
Last Updated: June 27, 2008: 9:11 AM EDT

NEW YORK (Fortune) — “Make no mistake about it,” U.S. Rep. Bart Stupak, D-Mich., said Monday while chairing a meeting of the House Energy and Commerce subcommittee on Oversight and Investigations. “Excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling through our entire economy.”

Here’s a suggestion: The next time a Congressional committee wants to hold a hearing on how “speculators” are driving up oil prices, each committee member should first be required to demonstrate – preferably in their opening remarks – a basic understanding of the mechanics of futures trading.

Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude – and thus never remove a drop of oil from the open market – are causing record high oil prices.

If there were such a requirement, I guarantee we’d never again see a circus like the one Stupak presided over Monday.

“Do I think [Washington politicans] understand the role of futures markets – how they facilitate price discovery and the transference of risk?” asks former U.S. Commodities Futures Trade Commission chief economist Gerald Gay. “No, they’re clueless – at least most of them.”

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No end seen in reliance on oil, fossil fuels

June 25, 2008

Wednesday June 25, 3:05 pm ET
By H. Josef Hebert, Associated Press Writer

Powered by China and developing nations, world energy demand seen growing 50 percent by 2030

WASHINGTON (AP) — World energy demand will grow 50 percent over the next two decades, oil prices could rise to $186 a barrel and coal will remain the biggest source of electricity despite its effect on global warming, government experts predict.

The Energy Information Administration’s long-range forecast to 2030 said the world is not close to abandoning fossil fuels. They will continue to be at the core of energy production in transportation and electricity generation, according to the report released Wednesday.

It said the steepest increases in energy use will come in China and other developing economies, including some in the Middle East and Africa, where energy demand is expected to be 85 percent greater in 2030 than it is today.

“What jumps out is the very strong growth in the emerging economies,” said Guy Caruso, the head of the agency that serves as the government statistical and forecasting arm on energy.

The outlook largely assumes no mandatory international agreements on capping greenhouse gases, especially heat-trapping carbon dioxide, which comes from burning fossil fuels. Fossil fuel use “could be altered substantially” by such deals, the report said.

Without such limits, the annual amount of carbon dioxide flowing into the atmosphere would be 51 percent greater in 2030 than it was three years ago, the study said.

It said fossil fuels are expected to continue supplying much of the energy used worldwide despite the growth of renewable energy sources, including wind and biofuels.

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On the path to a housing rebound

June 25, 2008

The pain that homeowners and homebuilders are feeling now is a sign that things are going to get better

By Shawn Tully, editor at large
Last Updated: June 25, 2008: 9:08 AM EDT

NEW YORK (Fortune) — The news that housing starts have fallen to their lowest level in 17 years sounds like one more reason to be depressed about the shrinking value of your home. In fact, it’s an almost certain sign that the path to a housing recovery is finally in sight.

If prices are going to stabilize, let alone rebound, the United States needs to produce far more first-time home buyers than new houses. That’s the only way to tame the glut of “For Sale” signs dotting front yards from the Inland Empire of California to the Gold Coast of Florida.

Builders constructed far more homes from 2002 until 2006 – the peak bubble years – than could possibly be absorbed by the normal growth in households.

As a result, the market is now swamped with one million new and existing homes for sale that aren’t occupied, and hence need to sell quickly. That’s a multiple of the figure in most downturns, and it testifies to the duration and girth of the bubble.

“For the recovery to begin, builders need to eliminate the standing inventory of finished, unoccupied new homes,” says Mike Castleman, founder of Metrostudy, which assembles sales data on four million subdivisions across the U.S.

The massive overhang of unsold inventory has remained stubbornly high. Sure, builders cut back, but sales dropped just as quickly.

Now that excess supply is finally beginning to shrink. In April, the number of new homes for sale stood at 456,000 according to the U.S. Commerce Department, still a big number, but 93,000 below the mountainous figure a year ago.

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Is it really 2001 again?

June 22, 2008

I thought this would be a good time to revisit our 2001 vs 2008 Comparison of the S&P 500 from late April.

So far, the correlation is quite high both in timing and in respect to the technical indicators. We have seen the SPX fail at the 50% Retracement after only an intraday spike above the 200 day moving average. In 2001, the failure was short of the 200 day and never penetrated the 50% Retracement. Both failures occurred around May stock options expiration in late May.

The weekly 13/34 exponential moving average indicator (a favorite of John Murphy at has recently confirmed its first sell signal since 2003. Additional similarities are present in the monthly indicators like MACD, RSI and ROC which are also all on sell signals for the first time since 2003.

Finally, the SPX has completed a test of the 80 week moving average from below as resistance. This is a critical level as described in The Significance of the 400 day (80 week) moving average. Just this past week the SPX also closed back below the 160 week moving average for the first time since early April. The last major break of the 160 week moving average before this, was of course early 2001.

Those who traded or had investments in the market in 2001 have vivid memories of what came next I am sure. The SPX dropped almost vertically from late May to late September shaving off 28% from top to bottom. The markets were closed for a full week during that time following the tragedy in New York. They opened in panicked fashion with many professionals talking of patriotically buying; yet most were selling with a fear they had never known in their lifetimes. The fear was so great that in just 5 days it was over. The SPX had dropped a staggering 150 points.

But then it bounced hard, rising over 24% by the first week of the new year and completely erasing the 150 point drop with a 232 point advance. That is a severe example of a fear based washout buying opportunity.

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Dearth of Ships Delays Drilling of Offshore Oil

June 19, 2008

New York Times

As President Bush calls for repealing a ban on drilling off most of the coast of the United States, a shortage of ships used for deep-water offshore drilling promises to impede any rapid turnaround in oil exploration and supply.

In recent years, this global shortage of drill-ships has created a critical bottleneck, frustrating energy company executives and constraining their ability to exploit known reserves or find new ones. Slow growth in oil supplies, at a time of soaring demand, has been a major factor in the spike of oil and gasoline prices.

Mr. Bush called on Congress Wednesday to end a longstanding federal ban on offshore drilling and open the Arctic National Wildlife Refuge for oil exploration, arguing that the steps were needed to lower gasoline prices and bolster national security. But even as oil trades at more than $135 a barrel — up from $68 a year ago — the world’s existing drill-ships are booked solid for the next five years. Some oil companies have been forced to postpone exploration while waiting for a drilling rig, executives and analysts said.

Demand is so high that shipbuilders, the biggest of whom are in Asia, have raised prices since last year by as much as $100 million a vessel to about half a billion dollars.

“The crunch on rigs is everywhere,” said Alberto Guimaraes, a senior executive at Petrobras, the Brazilian oil company that has discovered some of the most promising offshore oil but has been unable to get at it.

“Almost 100 percent of the oil companies are constrained in their investment program because there is no rig available,” he said.

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Wall Street’s credit crisis heads into second year

June 18, 2008

Wednesday June 18, 3:59 pm ET
By Joe Bel Bruno, AP Business Writer

More credit losses seen costing global banks $1 trillion as credit crisis hits second year

NEW YORK (AP) — There are new signs that the worst of the global credit crisis is yet to come, and that banks and brokerages caught up in the market turmoil may lose $1 trillion by the time it has passed.

Major U.S. investment banks this week announced yet another painful quarter amid the implosion of mortgage-backed securities and risky credit investments. Regional banks have scrambled to secure fresh capital to stay in business, and by Wednesday there was new talk that embattled investment bank Lehman Brothers might be forced into a sale.

With each passing quarter, Wall Street’s top bankers have indicated that the worst of the market turmoil was over — only to face more pain months later. The uncertainty has caused already battered investors to lose confidence in financial companies, and expectations have increased that more layoffs, asset sales and capital raising will be needed in the weeks ahead.

“We thought this was going to be the kitchen-sink quarter, and we’re finding out that CEOs and CFOs still don’t have a handle on the credit crisis,” said William Rutherford, a former state treasurer of Oregon who now runs Rutherford Investment Management. “We haven’t disinterred all the dead bodies. What else is out there?”

The deepening credit crisis could cost the global financial system some $945 billion by the time it is over, according to a report from the International Monetary Fund. So far, banks and brokerages have written down nearly $300 billion from bad bets on mortgage-backed securities and other risky investments.

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