Gangocracy, Oil and Pericles

Gangocracy
Newspaper reports say Russia is using its rescue fund to rescue some billionaires who margined their stock in big Russian companies. Whether Russia "saves" the billionaires or just uses the opportunity to re-take the valuable holdings looted by those same billionaires in the 1990s, time will tell. Does the Boss of the gang save the Capo when he gets into trouble, or does he liquidate him and take his territory back ? The Russia = Gangocracy model suggests the billionaires will soon be outcasts and economic power in Russia will become even more centralized.

Oil
From FT: "Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows. Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

"The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand. The effort will become even more acute as prices fall and investment decisions are delayed."

This is why I like the oil stocks with major exploration and production opportunities in good deep water sites like the US Gulf of Mexico. CVX and DVN have major finds there. RIG supplies equipment to them and to other majors like Petrobras.

Pericles
The panicking rich are cutting back spending on luxury good, per FT story. Hmmm ... let's see. They are so dumb they invest trillions in hedge funds and also spend idiotic amounts on simple items like purses. Perhaps the quote from Pericles should be required reading:

"We cultivate refinement without extravagance and knowledge without effeminacy; wealth we employ more for use than for show ..."

Perhaps a change in behavior is in order: from endless striving to become richer than Croesus and showy spending to doing something to improve humanity, such as providing a young scientist or mathematician or artist with a stipend to create something enduring for the human race would be a better use of such wealth.

Other News

GM and Cerberus seem to be working on deals together to merge GM and Chrysler and separately to restructure GMAC into a bank. Government help to come. I support this, as said yesterday, as the auto industry with its myriad parts suppliers and dealers really is an important part of the real economy. Management change is a necessary condition, however.

Porsche smartly offers to sell some VW shares to help reduce the short squeeze it created ... at a huge profit. Smart move, as it helps stave off government intervention. Still, the short beefers are doomed.

Actions

Nothing. Holding Alpha Fund stocks with modest margin: CVX, DVN, RIG, FCX, BHP are largest; DRYS, EXM, GNK, JOYG and MBI are smaller. The shippers particularly stink now. Obviously my chronic "buyearlyitis" hurt me. I really have to learn more patience. Mrs. B has a lot, I should follow her style more.

Word of the Day

"Agnate" - adjective & noun [$10]

Agnate means (adjective) 1. descended esp. by male line to another male ancestor; 2. descended from the same forefather, of a clan or nation; 3. of the same nature, akin; (noun) a person who is descended esp. by male line from the same male ancestor.

Sentence: As the line of the Bush-Cheney Republican ruling class seems soon to be extinguished, the practice of the Republican party to select leaders from its agnate line must be changed. Big John McCain could be a fine regent for his sidekick from the distaff side*, Sarah Palin, to breathe some fresh ideas into that moribund party.

["distaff side" means the maternal branch or female side of a family]

Did you notice the subliminal message in the title to this post ?

Results

One cannot run experiments or collect enough data to prove or disprove many ideas about the world economy, but occasionally the time evolution of some actual observables permits one to accept or reject theories. The past few months' trajectory of oil prices does let us educe the truth of one theory, viz., that pension funds and speculators were driving up oil prices to levels unsupported by real supply and demand. On July 7, I wrote a blog post on the causes of high oil prices near $140, laying out that theory, while also detailing the causes of the long base of support for oil prices near $100 from real supply and demand causes.

From my commodity data services [see http://www.barchart.com/ and http://www.futures-research.com/ ] one can readily see that beginning about February, gasoline demand versus last year was down significantly. At that time the price of oil was struggling to break $100 per barrel. During that period, much pension money was flowing into indexed commodity "investments". So this flood of money then overwhelmed natural hedgers' capability to sell forward. And the break through of $100 per barrel created a favorable chart pattern. This led to massive speculative longs flooding market, too. All the funds saw the same pattern and barged in.

So oil prices rose parabolicly until early July. Over that same time period, the US gasoline demand continued to be markedly lower than last year and that drop increased. No summer driving season bump in demand occured. So prices rose while demand fell - odd behavior in a "rational" and "efficient" market.

Finally in early July, after the flood of pension fund money had petered out and some talk began about restricting both their "investments" and position size of speculators, too, oil prices began to fall rapidly. Did demand data change ? No, the same pattern persisted that had been in effect for months. What happened ? The pension fund and speculative buyers just ran out of new long money. The whole run up from $100 to $147 was a pure bubble, a mass delusion. And millions of people have been hurt by this flood of money chasing their Holy Grail, viz., more money.

This example explains why a populist libertarian like me wants to restrict the power of the big money pools to damage the US and world economy. I just don't like the rich and powerful - the ruling classes - fouling the lives of billions in playing their games to get more .. and more ... and more. Empires have fallen due to the greed of the aristocracy in grinding down the common man. This must not be allowed to happen again.

The big money pools need to be strictly regulated.

Word of the Day

"Sward" - noun [$10] eps. literary [used in Goethe's Faust, part II of the Great Books edition]
Sward means 1. an expanse of short grass; 2. turf.
Sentence: Golfers somehow enjoy hitting a little ball on long swards towards a little hole with a club, while bearing stress and using unusual grips like the "claw" to lower their score. Oh, man is a strange beast !

Causes of High OIl Prices in 21st Century

The recent run-up of the price of oil to first $100 / bbl and now to over $140 / bbl has been caused by a correlation of forces. Most of these forces are nothing new and have been around for over 30 years. The oil markets were studied quite intensively in the mid and late 1970s after the first oil price shock. Books were written; Ph. D. dissertations were produced; numerous academic and industry studies were done. Your author read some of those and even took a class at a ... gasp ... Harvard graduate school mostly devoted to the world's energy future. Not much has changed.

Here are the facts and forces.

1. The short term elasticity of demand for oil is very, very small, a FACT known for decades.
2. Major oil fields are in decline. All oil fields eventually produce less per year and eventually run out. This applies to all major fields developed in the 1960s, 1970s, and realy 1980s, viz. the North Sea, Mexico, Russia, and some in the MidEast. US oil fields are nearly depleted, except off-shore. [By the way, the US was the #1 oil producer for many decades up to the 1960s].
3. All new production such as from Angola merely goes to replace lost annual production from item #2.
4. Oil supply is a flow problem - the key number is the number of barrels produced PER YEAR, not the total still in the ground or accessble at high cost.
5. Demand is also a flow problem - The world economies have demand for a growing number of barrels of oil PER YEAR. Once the Soviet Union broke up and eastern Europe was permitted to develop normally, demand from there increased substantially. Demand from India and China has grown enormously.
6. Oil supply is approximately at its practical limit - about 85 million barrels per day.
7. Oil demand recently approached and hit that number. Barring price rises, demand would be over that number.
8. So under free market economics, price must rise to ration that last available barrel per day.
9. How much ? See item #1. A lot. Oil prices rose from the low double digits to $80 and then $100 / barrel. At those levels, modest declines in demand from the US were measured. This is a fact. Until prices rose to $80-100 / barrel, the American consumer did not cut back. At $100, they did.
10. Most oil traded on commodity markets is a fairly high grade of oil, not the heavy, sour grades that are the marginal barrels produced by Saudi Arabia.
11. There is really little truly "free" high quality oil on the markets - that is, not under contract or owned by governments. Financial Times recently put that number at about 5 million barrels per day out of total production of 85 million barrels per day.
12. For a few years, massive amounts of money - hundreds of billions - from pension funds has flowed into long only positions in the commodity markets. About 50% of that goes to oil and related products. The pension fund money is long-only. Massive flows into energy hedge funds occured, too. Whether made directly in the futures markets or via swaps, all these eventually cause massive long positions in enegry derivatives. These are DERIVATIVES - not actual barrels in the ground. This is differrent than investment in timber or gold where physical trees or bars of gold are owned. Fro a derivative, for every buyer there must be a seller.
13. There are really few natural sellers of oil futures. Who can do this ? Oil companies. That's it. governements don't sell oil in the futures markets. OPEC doesn't. And oil companies limit the amount they will sell forward.
14. So the pension funds have overwhelmed the natural sellers of oil futures and driven the prices up from a natural range around $100 / barrel to over $140 / barrel.
15. US consumer and industrial demand is dropping quite a lot now. The summer driving season that usually would cause a peak in gasoline demand seems to have vaporized. Demand is down about 3-5% year over year. Since the US is the largest consumer in the world, that's a lot of oil demand destruction.
16. Many nations in Asia subsidize the price of oil. That prevents market forces from rationing demand there. China recently raised gasoline prices, so in some places that distortion is lessening.

What next ?

Price will remain elevated. That is simple. No new supply and a continual flow of people and industries in growing economies thinking they'd like a bit more. Some marginal demand must be rationed by the high price. How high ? Very high until Congress kicks the pension funds out of the oil derivative markets (where they were in fact prohibited from being until a few years ago). If pension funds want to invest in oil, let them buy it in the ground or drill for it. Position size for hedge funds must be limited, too. And all-encompassing regulation on derivates is needed to prevent these beefers from getting around the limits with the help of Wall Street firms.

My guess from demand response that I've noticed over the years is that about $100 is a natural price balance. Demand was indeed being rationed at that level. The rest is the pension funds and beefers.

Other issues:
A. Most refineries have problems using heavy, sour grades of crude oil to make gasoline or diesel fuels - using it requires technical changes and costs more.
B. The spread between the prices of grades of oil has grown to record amounts - viz, the high quality price less the low quality price.
C. Congress, in its perpetual stupidity, mandated use on only very low sulfur diesel fuel in US trucks. This is hard and costly to make from cheaper, sour grades of crude oil.
D. Over time, new refineries can be built to use lower grades of oil. This is being done now - not in the US, of course - as US Congress and environmentalists want to grind the common man down and limit his freedom.

PS: Unless drilling is permitted and large amounts of money is invested in hard-to-recovery fields, such as in deep water or the Arctic, oil prices will rise as far as the eye can see. Why ? Because more oil must come into production to replace the production to be lost in near future years from declining fields.

PPS: I made a large add to my CCJ position this morning. This is the largest uranium mine in the world. Being a mine, there are always production risks. But long term, uranium must be the growth energy source of the 21st century. From Barron's quoting Nicholas Sarkozy, President of France, "The era of cheap oil is over. [The world] will end the 21st century without oil." said as he unveiled plans to expand France's nuclear plants. The monthly chart shows a solid two year base. The PE is a reasonable 22-23x with a five year compound earnings growth rate of 32%. I intend to make this one of my top ten stocks by position size.

Word of the Day

"Conspectus" - noun [$10]
Conspectus means 1. a general or comprehensive survey; 2. a summary or synopsis.
Sentence: Today Bunkerman wrote a conspectus in his blog on the causes of the increasing oil price in the last few years.

Monday Morning Ramblings

I guess Congress reads this blog, as they are responding to the recent post that financial investors such as index funds are overwhelming natural hedgers in the oil markets for the higher grades of crude oil, and are unaturally driving up those prices. Financial Times also had a recent story how the spread between the prices of various grades crude is at record levels. I have no problem with pension funds investing in oil, but let them buy it in the ground or invest in finding it. The futures markets are no place for them. Congress should simply reimpose the unrelated business income tax on pension funds speculation in futures.

In addition, the position size of financial firms, hedge funds etc., need to be greatly limited and swaps and other over the counter derivatives need to be regulated. Letting these big pools of capital mess up physical markets is just wrong. Again, if they want to invest in oil, let them buy or find it in the ground.

There is no silver bullet to solve the energy problems, but doing a little bit of everything that can help will, in their cumulation, make a big difference. The long term solution is nuclear power as I wrote recently. Short and intermediate term, many smaller changes can help over the multi-decade transition.

Word of the Day

"Meliorism" - noun [$ ? - no dictionary available] - this word comes from reading the fine biography titled "Walter Lippman and the American Century"
Meliorism is a belief that things can be improved but never perfected.
Sentence: (A) Politicians need to embrace meliorism in their efforts to solve the energy problems by making many small improvements and giving it continuous attention. (B) A stock trader must accept meliorism as his credo as trying to attain perfection in trades is psychologically damaging thru quotidian failures.

Tuesday Tidbits

As mentioned recently, I have started reading the Financial Times daily. This newspaper continues to show superior news reporting and writing compared to The Wall Street Journal. Yesterday I found two really interesting stories with some real facts.

First, an article about the oil markets included the fact that "just 5m [million] barrels per day of light, sweet crude is actually available in the open market", viz., not otherwise under contract. The light sweet grade of oil is most suitable for low sulfur fuels, which Congress in its wisdom [not!] has forced the diesel-based trucking industry to adopt. Some math: 5 million barrels per day times 30 days per month times $135 per barrel equals $20.25 billion. So only $20.25 billion can control an entire month's free, open supply of light, sweet crude. Who is so stupid as to not realize that pension fund flows and beefers in the futures market can drive its price any place they wish ? Thanks Congress, for those sulfer rules - you were told that they would increase prices and ignored that testimony. And thanks, pension funds and beefers and Congress for making this vital commodity a ping pong ball.

Second, an article on the funding differences between US and European banks was illuminating. Data show that "European banks had secretly increased their dependence on dollar funding by about $500b [billion] in the last four years. ... Much of this funding was apparently borrowed from US banks. However, American banks, by contrast, have been raising most of their funding from money market funds, which they have lent on to other banks, such as those in Europe." This data is from the Bank for International Settlements. So some of the tension in the interbank markets has occurred as US banks cut back interbank lending, putting pressure on European banks. Only US banks have direct access to the Fed's liquidity programs.

This made me think ... where are the petrodollars ? That is a really large amount of dollars overseas. This data make it appear those dollars are not being deposited in European banks. Where are they ? Still thinking ...

Markets

My bank stocks got crushed yesterday, on the LEH news, I suppose. Ugh !!! This selling seems at insane levels but ... the beefers can push them anywhere they wish in these markets. Tax issues make it difficult for me to make any moves now. If I sell some winners I would have ST gains which are taxed at 40%. I think I'll wait for new money to arrive and then double up on some to hold for 30 days and then take a tax loss on the older shares. This can save me a lot of money on the large gold & silver profits I took earlier this year.

Word of the Day

"Timocracy" - noun [$10]
Timocracy means 1. a form of government in which possession of property is required in order to hold office; 2. a form of government in which rulers are motivated by love or honor. Sometimes a timocracy is called, "rule by the best".
Sentence: While the early government of the United States could be called a timocracy on both counts, it's obvious that the current United States Congress is not a timocracy, as they are motivated by power and payoffs.

Poorer

I still remember the lecture on the oil price increases of 1973 and 1979-1980 in the business economics class at MIT's Sloan School of Management. This was 1979 and its effects were still being felt. The professor simply said that such an increase in the price of an important, irreplaceable (in the short term) raw material was going to make everyone poorer. There was no way around it - poorer. Those oil price increases were quite sudden. The current wave of oil price increases are occurring over a few years - from a monthly chart, oil prices broke out in 2004 at $40/barrel and the trend has been up ever since.

The professor said there were two outcomes from a sudden oil price spike: recession or inflation. The inflation occurs if the central bank monetizes the oil price increase. A third outcome exists in a steady price rise: a slowdown. I note that hourly earnings are nearly flat in real terms. But productivity was up about 2.5%. So what's going on ?

The gains in productivity are being used to pay for the higher cost of oil, not to increase the standard of living of the common man. Coupled with the continued avarice of the ruling classes, the common man is experiencing a decline in his standard of living as he must work harder and learn new skills to stay even.

Ruling Classes

These hogs are continuing to create trouble for the common man. I heard this morning from an analyst in Europe that for five years there has been an aversion to investing in equity. The beefers*, who were getting all the funds flows, instead heavily played in spread products, creating the debt bubble and the current credit crises. And they are playing in commodities. Together with their friends/clients in the pension funds, they are buying oil futures. Not investing to find more oil. Just buying futures and swaps. For every buyer there is a seller - that is a truism in any derivative product.

Who are the sellers in oil futures/swaps ? There is a limited universe of strong sellers: oil companies with oil in the ground. But they limit how much oil they will sell forward. OPEC and other governments don't sell oil in the forward markets. So this stampede of money into commodities has overwhelmed those derivative markets. That's the cause of this oil price increase since $100. Anyone saying that's not possible simply hasn't done the math. I did a quick calculation last Friday and it's rather easy to prove this flood of pension and beefer money into the oil derivative markets can overwhelm them.

I have no problem with pension funds investing in real assets, but futures are NOT real assets. If a pension fund wants to own oil, it should buy physical oil in the ground, as they do for timber - they buy forests. Or invest in drilling and other real, physical oil investments - that creates more supply. So the old rules against pension funds speculating in futres should be reinstated. Bring back the "unrelated business income tax" for these activities. And beefers must be regulated stringently.

*big, evil funds.

Markets

Ugh. Obviously the markets can't sustain a bullish trend until the upper limit to oil prices is known for the intermediate term.

Hmmm ... I see Goldman, Sachs is building a new, palatial corporate headquarters with six huge trading floors. See my blog post of june 4 for "Truisms", #1. Perhaps this will signal a top in this unholy focus on "trading" as a source of income. How unproductive is that ? Nothing is created by that huge human activity of talented people. They just try to skim money off their institutional clients. What a despicable business for a corporation !

Word of the Day

"Congener" - noun [$10]
Congener means 1. a thing or person of the same kind or category as another, esp. animals or plants of a specified genus; 2. (esp. US) a by-product giving a distinctive character to a wine or spirit.
Sentence: Huge Wall Street firms that focus huge capital and effort in trading, such as Goldman Sach, are simply gargantuan congeners of the beefers. They must be heavily regulated to prevent them harming the common man with their shenanigans.

Gold and Oil

GOLD

Gold hits $876 this morning on the February futures contract. I remember a year or so ago discussing gold ... when it was in the low $600s. The question from a friend was regarding the psychologically difficult decision whether to hop onto the move since the lows under $600 had been missed. My reply was that those $25 missed look really small compared to the gains when gold hits $1000. Missing a low or buying too early are psychologically difficult barriers to overcome when trying to buy for the big, long term move. The barriers are magnified as they seem to be big percentages of the original amount. This is why I think about what the prices will be in one or two years. I buy a long term position on that basis - not the much smaller bounces and dips that occur as the beefers move around the stock or commodity.

So what now on gold ? I "plan" to hold it all until "about" $1000, then will sell a 'bit" - maybe 20% of my large position - on principle. That's been a long term target and not taking some sugar there would anger the trading gods, implying hubris and cupidity, which are punishable sins. After that, I will continue to hold unless something changes and review the matter.

OIL

At $100 per barrel, I believe that slow conservation is taking hold and reducing future total demand in the US and in many other markets, particularly the emerging markets where industrial and process decisions can be made to permanently reduce future demand. This will help keep oil from rising to levels well over $100 barring a supply disruption. And this conservation will give room for new needs and demand from emerging markets due to growth. So supply and demand seem balanced to me around this level. New production will go to replace declining old fields. A wide trading range from $90 to $110 seems likely to me.

So what to do about the oil stocks ? Those were big gainers in 2007. I've graded my oil positions 3, 2, or 1, which are rough $ value proportions of the holdings that I want to keep: DVN, CVX, COP, XOM, HES, MRO, SU. As my LT gains dates are hit, I'll cut back the stocks that I now grade as 2 or 1 to the appropriate level. I already took some sugar on some per my post of last Friday in the early AM - fortunate timing :-)

3's: DVN and CVX. these two companies have big deep water fields in the Gulf of Mexico and stand to gets big new reserves as those fields are developed. No selling here.

2's: XOM, SU, COP. XOM is well managed but has a higher PE; COP is poorly managed but has a lower PE and a lot of natural gas; SU is a very long term play on the oil sands in Alberta.

1's: MRO, HES. These are smaller integrateds that I've held as possible takeovers. HES seems fully valued now, but my LT date is in March.

Most of these, except HES, are still undervalued. As the confidence in keeping $100 oil increases, I think they will continue to increase in value. Also, at some point, - maybe this spring, refining margins will increase again which will help them all.

I grade VLO a 2 as it is very cheap and is integrating forward slowly into retail sales under its own brand. BTU is a 2, also. I will keep all of my RIG and DO as multi-year deep water drilling plays. At some point I'll probably sell NOV and NE, but can't now. In all cases, I sell on the periodic rips caused by beefer rotation.

Energy and Miners

The beefers are rotating out of the energy and miner groups, creating the potential for good entries for long term buys. I've followed these groups for years and have seen this game played out several time. As long at Asia demand is strong these groups will outperform long term [in my humble opinion].

If you don't own any of these and are a long term investor, I suggest watching them over the next few weeks or couple of months. There is a some seasonal basis for the pullback, too. No rush to buy - the stocks usually bounce around a bottom awhile building a base for the next leg up. I already own a lot of them, so likely won't buy them this time around. I might trade some through options.

Here are my positions in energies and miners.

Oils: CVX, DVN, XOM, COP, MRO, HES
Oil Sands: SU
Pure Gas; CHK
Deep Water Drillers: RIG, GSF [these two are merging soon], DO, NE
Refiners: VLO [HES and MRO have refining, too, as do the big integrated oils]
Oil Service: NOV
Miners: BHP, RIO, RTP, FCX, PCU, AA
Uranium: CCJ

CVX and DVN have really good properties in the deep water Gulf of Mexico, so have great prospects for substantial adds to reserves. The deep water drillers have great long term prospects as that is the only place that really large oil finds are likely to be made.

Gasoline prices will likely rise in the spring, so stocks with refining could move then, viz., VLO, MRO, HES and the integrated oils.

I think PCU will eventually be bought by China. I think someone will buy AA - either another miner or a Russian aluminum firm. There have been rumors that BHP will buy FCX ... and AA ...and they are trying to buy RTP. I think MRO and HES could be bought by a major integrated.

These are all long term positions for me and I expect to hold them into 2009 or longer.

Here's a bit more rationale: these companies produce raw materials that are costs for the rest of the world economy. And the demand is going up as are the prices. So overweighting these stocks is the only way to capture the value in that sector and to offset the increased costs that negatively affects other stocks. So I overweight them through my Alpha Fund holdings.

PS: yesterday was another in a long line of "Day 1" for potential rallies. This one had higher volume. As before, these mean nothing until a follow-thru day occurs.

BAC

I read some research on BAC [Bank of America] that was published on Barron's Online. Punk Ziegel & Co. wrote that BAC has a large investment in China Construction Bank with the option to increase it to 19.9%. Under the new accounting rules, they will be able to write it UP in Q4. This gain will flow directly to the bank's equity and increase its capital ratios quite a bit. The total increase is ... $35 billion [sic]. BAC's market cap is less than $200 billion now. So this is huge and that capital can be used to increase loans and earnings power in the future.

Combined with the pain inflicted on the non-bank loan markets, such as CDOs, SIVs, and mortgage companies and other structures that let non-banks s compete with banks, I think BAC's earnings power in the future is really a lot more than today's excessively bearish mindset puts it.

So I am thinking of buying more BAC. I have a lot but have about 17% left to add to the big banks from the "Plan" amount (100%). Either JPM or BAC will get it. JPM is the smallest position of the "four horsemen" in my big fins holdings [BAC, WB, C, JPM]. So I have some real thinking to do.

WSJ story says Russian oil production growth is slowing very much. No surprise. Oil demand is growing and has to ration the relatively fixed supply. Oil demand elasticity is well known to be quite small - it's "inelastic". This means to reduce desired demand just 1% it takes a multiple % move in oil prices. Since oil/energy demand is highly correlated to economic growth, oil prices are going up over time. For example, if economic growth would naturally increase oil demand by 1%, oil prices must increase a lot to cut that demand to 0% as no more supply is available.

This is why oil prices are high. It's not fear or speculators. If those were causing high prices, lots of oil would be moving into storage or OPEC could not sell all it desires. But OPEC is selling every barrel. Boone is correct.

Stocks:
Nothing has changed. Beefer actions can make Ms. Market dance anything they wish short term. Buy good stocks & groups on dips. There have been some good dips in oils and miners and deep water drillers. Take a look if you don't own them.

PS: Per yesterday's late day comment, I bought more C around 34.50

PPS: per the comment posted, on this AM's dip I bought more BAC, WB and JPM. Around 15 I'll add to YRCW.

Turmoil in Europe

European stocks are down quite a bit this morning and some asset allocation programs seem to be pushing US stock futures down a lot, too. S&P futures are down about 18 pts as of 5AM ET.

Gold is up $20 to around $840. Oil is up to about $98.6. The Euro is up to 1.468; the pound to $2.10

There doesn't seem to be any significant news yet. ECB tough talk is driving the Euro up.

Longer term, I think Persian Gulf and Russia money is moving into euros and gold to diversify. They spend most of their money in Europe, so it makes sense. There is talk of Chinese diversification, too. For that to happen, China must de-link from the dollar.

For decades the US with its free markets and low regulation has been a great place to invest. That is good, but it also led to an overvalued currency that hurt exports. That has been and is still correcting itself before our eyes. Exports are surging, export industries and jobs are growing. So far US consumer prices are not strongly affected as many imports are from countries with dollar links like China. Basic materials and oil are priced in dollars.

Let's see how the ECB reacts. They need to step up and provide Euros to meet demand. This will maintain the global money supply growth as the flow of dollars overseas contracts.

NOTE: I will be traveling to NYC later this morning until Friday around noon. So posts might be sparse. I should be able to post a blog tomorrow, but not Friday until later in the day. Good luck. Be wary - beefers are stomping the mud in search of a new waterhole.

PS: This looks like a euro-panic. Euro-beefers or big euro-investors are probably doing big asset alloctions out of dollar, US stocks.

Total Portfolio Structure

A few weeks ago I described how I run the "Krypto Fund", which is the name for my long-term investment portfolio where I keep the bulk of my investments. The Krypto Fund is completely indexed across several asset classes and is aggressively rebalanced. The amount I keep in it as a percentage of net investable assets varies with my inclination to work & opportunities. In my current state of semi-retirement, I keep 70-80% of net investable assets there. [Fwiw, when I was aggressively trading short-term, I kept less in the Krypto Fund as I was able to get 50-100% returns by working very, very hard at trading very aggressively with mucho margin and options.]

What about the other 20-30%? That includes all my "alpha" plays - the "Alpha Fund" - where I invest in stocks & sectors that I think will outperform. My time frame varies and can change, especially with significant news. I try to get long-term capital gains, but will sell if I think the news merits. For example, as I posted in mid-February, I sold many positions to cut back when the CPI news was unfavorable, even though that realized short-term gains. [Better a ST gain than lost profits]

The Alpha Fund is now 24%. I have about 6% in India stocks, about 12% in oil and oil service stocks, about 3.5% in mineral stocks, and assorted others such as AAPL, EDU, ORCL, CRXL etc. The Alpha Fund can use margin, btw. I had it 200% long until mid-February. Now it's about 120% long - my oil plays are using some margin as I keep finding good stocks there and don't want to sell until I can realize long-term gains in midsummer (I loaded up the big dips last summer).

I think by compartmentalizing investments this way one can control risk, yet "stay in the game" through the "Alpha Fund". I can keep position and sector size under control while having a stable core base of investments to let me stay "semi-retired". [btw, my commodity speculation funds are completely separate.]

Longer View

OK, it's time to step back and wait for a trend to develop. I am mostly a month+ trader - the recent excitement got me involved in quickies again with the usual result, namely a waste of effort & small losses.

Yesterday both killed the prior IBD rally count due to the new low and then the rally to green made it a new "Day 1". We have inflation data today (PPI) & tomorrow (CPI). Those are very important numbers. We need a drop in core levels year over year for a sustained move up, imho.

Oil & product demand numbers yesterday were strong as usual: four week moving averages for demand was up about 5% year over year in most products and the total. No drop off at all.

Oil Inventories

This weekly focus on oil inventories is dumb. Except in unusual market conditions, the oil companies can make those inventories anything they want by importing crude, gasoline and / or distillates. The demand numbers are what's important. Watch the weekly demand numbers by product & the comparison of them to last year. DOE gives a four week average demand comparison to last year. You'll see steady increases. Over time, that's bullish for oil & oil stocks as long as it continues.

Oil & Gas

If you took any crude futures around the time of my January 17 post where I said I was starting to average in, I wanted to let you know I flipped my crude position this AM early in e-trading. I think the cold story is well known now and am not sure crude can move a lot higher now. Ditto natural gas - am out of those contracts now, too (didn't post as it's too volatile - just a weather trade now). Lots of resistance is above. The frigid winter will drain excess inventories in heating oil & natural gas, so I think we can consolidate a base around these levels. Then the next wave of bullish news can take them way up.

I am keeping all my energy stocks for the next move up. I hold them a lot longer as I want long term capital gains treatment. Sometimes I buy calls on dips & flip them on rips, but have none now. I think a hot summer will rip natural gas & the summer driving season will move oil up. We needed this winter weather to eliminate the short term commodity surplus of both to set up the next big bull move for the energy stocks. We got it.

Oil

In early August 2006 the oil market hit a short term peak as a confluence of shocks hit the market: Israeli-Hamas trouble, Israeli-Hezbollah fighting, Iranian nuclear fears, hurricane season approach, plus the ongoing Nigeria and Venezuela problems. With all these fears, prices hit $80 and ran out of buyers. I believe that fear-based buyers had just all bought all the protection and inventory they needed. Oil inventory levels were high worldwide. How much disruption inventory protection is needed? It seems like there was enough in August 2006.

The oil markets have been sliding every since on fear dissipation/rationalization of inventory levels.

In my opinion, the rapid fall in the first two weeks of this year has been caused by (1) asset allocations away from oil and commodites; (2) commodity index rebalancing; and trend following commodity fund selling. There were no big buyers to offset these large sellers as no short-term bullish news occured. Also, OPEC resolve is being tested by traders. Since yesterday's comments by Saudi Arabia indicates they will not be a patsy for other OPEC cheaters and bear all the cuts; traders saw less risk of quick near-term OPEC action.

Winter seems to be returning with vigor and one good forecaster has the overall winter being near normal, with early warmth to be offset by oncoming below normal cold.

Demand numbers in the US show continued year over year increases. India & China continue to increase demand.

The recent drop will scare exploration teams causing them to be more conservative in selecting drilling projects.

I am re-mounting crude trading positions, averaging in slowly. Weekly XLE chart shows a higher high and a higher low, IFFF the current level holds. So long term oil stock plays are still on - keeping all for long-term capital gains. If trading these, follow the "buy dips, sell rips" method. This is a dip. The asset allocation moves should be finished now after two weeks.