An Oily Mess

$100 per barrel for oil. In recent years this was the harbinger of absolute doom. Politicians used to talk about how the current occupant of the White House (whomever it happened to be at the time) would preside over this apocalyptic ascension, and thus must be defeated to preserve the country. This was critical because as we know from all this pontificating, oil at $100 per barrel would shut the country down completely. So let me pose a question or two -- Is this the end?, and Why is oil so expensive anyway?

The first question is already being answered globally. In Asian, Europe, South America, and here, economies are slowing, but still not moving in reverse. There is no measurable difference between $120+ oil, and when the commodity first hit $100. Mankind perseveres!

The second question is far more interesting. There is rampant speculation in oil now. Prices are being driven by a rush to get into a party that is likely winding down. But, that's the way of most bubbles and make no mistake, that is exactly what we are witnessing in oil. A bubble. All bubbles come to an end. They either deflate, as with real estate, or burst as we saw with technology. My bet is the oil bubble deflates. (Can you imagine how messy bursted oil bubble would be?)

Here is the dilemma which must be dealt with first. Right now we have a weakened dollar. Oil is denominated in USD. This makes oil expensive. If the dollar strengthens, the ensuing economic upswing will create a greater demand for oil. This makes oil expensive.

The wild card in all of this is the twin demons of risk premium and speculation. Once a risk premium is built into the price of a commodity it remains in large part even after the risk dissipates. A storm that threatens refining in the Gulf, for instance. The storm never hits, but the $3+ uptick in oil remains.

Speculators jump in on severe weather predictions and try to guess what reserves might be. These are the tools of ascension that tend to fade away allowing a deflation of a bubble. Headlines and panics cause bubbles to burst. Oil companies continue to mint money, and the oil supply is not going to dry up anytime soon.

Oil prices will ease after OPEC has milked the American vacation season. This is merely another storm for us to weather.

Preen vs Perspective

Ben Bernanke dutifully trudged back to Capital Hill yesterday in a valiant effort to make yet another attempt at educating Congress on the investment markets. This time, his energy was largely spent explaining the unwinding of the Bear Sterns-J P Morgan deal. Rumors that he used crayon drawings to make his point are unsubstantiated.

Congress members were primed with their Reader's Digest versions of markets and the economy. They assailed financial institutions in general, and Bear and JP Morgan in particular, in an effort to "out care" their counterparts on the dais, many of whom are seeking reelection in November. We learned that Congress is for the man on the street and against large institutions. Well, at least until it's time to collect those campaign contributions.

Greed, of course, was the central theme. The greed of financial institutions for their myriad sins. The crime of the FI's is their fast and loose approach to mortgage loans. To be sure, there is culpability to be passed around. Much of it however should have been distributed to the left and right of these Congressfolk, and not out in front of them.

Also front and center was speculation on recession. Not unlike children on Christmas Eve, the dais was positively giddy at the mere mention of the word. At last! No matter that we have not seen a single quarter of negative growth let alone two, Bernanke said THE word. Now it can possibly be used to scapegoat away legislative irresponsibility.

But what of the evil mortgage lenders? Let's not forget the pressure Congress put lending institutions under to develop creative financing to ensure lower income consumers and subprime borrowers could get loans to buy houses (and thereby feel compelled to vote for them). From there of course, it got out of hand. The door to creativity was left wide open, and many of these loans were packaged as investments without the requisite underwriting critical to stability. Well, you know the story there.

The point is that while symbolism held sway yet again over substance on the hill Thursday, we should not lose sight of the fact that those hurling the often accusatory and occasionally inane questions at Mr. Bernanke, are accomplices, not arbiters.

When Shoe Size Matters

Back on Nov. 6, 2007, I wrote in this blog about the financial sector (Are Financials Fair Game?). They had been badly beaten down and speculators were arguing that the time might be right to jump back in. I argued against that for two reasons.

First, very little of the "known" writedowns from creative financing had been delivered. At that time it was about $30 billion. I quoted Mr. Gross as projecting as much as $250 billion would be closer to the final figure.

Second, I warned against what I referred to as "the other shoe" that would surely be dropped by a major financial institution. That shoe dropped Friday when Bear Stearns told the world "disregard our rosy comments of Wednesday. We seem to have run out of money." Goliath couldn't have squeezed into that loafer.

Enter JPMorgan Chase with the blessings of the U.S. government. They picked up Bear Stearns, and in the process, at least for the time being, the markets themselves. A $2 per share takeover offer was accepted and put in the works. The market reacted with an eventual yawn in the face of all this. Pretty impressive considering it occurred against the backdrop of greater volatility in a number of the overseas indices.

But what of it? How should we react? In a late Sunday night meeting here, we decided to buy JPM at the open this morning. While we would not be surprised to see some kind of rollback for the stock, we knew we'd be kicking ourselves three or four years from now if we failed to pick it up at the current valuations.

There are entry points in the market. While I cannot suggest a course of action to anyone without knowing their full circumstances, there are opportunities afoot for those not engaged in panic selling.

When a Stimulus Package Isn't

It seems everyone with a media outlet has an opinion on the current state of our economy and how it can be fixed -- including me. The most troubling to me is the stimulus package being touted in various forms by both political parties. This is the original free lunch your mother warned you about.

Simply put, those pandering for your vote are promising to dump money into the economy in the form of a tax rebate to some American taxpayers. I've heard figures as high as $1,200 per couple. That would be kind of nice, wouldn't it? Imagine creating millions of dollars worth of $1,200 checks to be distributed in a toys-for-tots scenario. Once in possession of these rebates, Americans could get back to the serious business of buying flat screen televisions and going on cruises.

But there is one glaring problem with this particular stimuli. Unless my parents were mistaken, there's no money tree in the back yard or well to lower a bucket into and draw out money. It has to come from somewhere!

In this case, it comes from other tax payers -- those who are not eligible for the rebate. Those who get the rebate spend it; those who don't get it of course do not. The problem is, there is no new money being pumped into the system. It's money that is already there. What's a stimulus to one is a sedative to another. It has absolutely no affect whatever. It's a ruse.

Stimulation would occur only if the money was not removed from the pocket of the taxpayer to begin with. Reaching into Peter's pocket to pay Paul is proverbial in its inanity. The economy cannot be "gamed" out of this funk. It is going to take spending dollars. Real dollars.

Other thoughts …

Those Who Forget The Post

On Dec. 15 of last year I posted a blog here warning of the possible slip into what I called "that most American of term, stagflation." Yesterday we saw this brought up in The Washington Post and other leading publications and news programs.

Why are these folks arriving so late to our party? A quick re-read of that December blog will tell you. Others in the investing business have been ignoring the past, while we have placed it front and center. It's for this reason that our portfolio has held up so well in the face of all this volatility. A good investment advisor looks over the horizon and anticipates where markets and economies are going. He or she doesn't get caught up in what everyone else is predicting or touting.

We didn't make grandiose predictions of how different things are now because of lower interest rates and more corporate accountability. We instead illustrated the similarities that should serve as a clarion call in the present to pay close attention to what has gone before, and how to prepare for it.

Our clients are well aware of how that posture benefits portfolio analysis. The difference between an outstanding and average investment advisor is the former acts and the latter reacts.

We continue to carefully measure the ingredients necessary to whip up a good batch of stagflation.

Other thoughts …

Will we ever learn?

Recession. It's the buzz word of early '08. Some in the media are positively hungering for it. They have hung themselves out on the "recession" limb so long, they can't bear to let it go. As proof, I offer the latest catch phrase fast becoming a favorite of the talking heads -- "Recessionary environment." That's the new response to the question, "Are we in a recession?" Because we are not, the word still must be inserted in some way so politicians running for office, and broadcasters vying for ad revenue, can keep us on the edge of our seats. Otherwise, we will simply live our lives and pay little attention to the hyperbole.

We are told that McCain, Obama, and Clinton all want to "fix" Wall Street. To fix our economy. Exactly how does one step in and fix a free market? Cut taxes? Raise taxes? Cut interest rates? Raise interest rates? Tighten the money supply? Loosen the money supply?

All of these methods are tried year after year and time after time by both parties and all Fed chairman. For every argument made for these moves, there is an equally compelling argument against. If the free market could be fixed by government, China would be a financial paradise. If it were done here, one party would be accusing the other of fascism.

There are many who seemingly want to muddle through the quagmire without ever having to truly deal with the problems we've created. Their goal is to make sure we believe it will be a quick and easy fix, and that someone else will pay the freight.

They haven't learned a thing about free markets. The real question is, have we?

The Baited Trap

Every year millions of viewers wait with great anticipation for the television event of the year. The Super Bowl. As we all know, the Super Bowl is the event in which the best of the best compete......in advertising.

Did you have a favorite ad? If so, why? Because it made you laugh? Because it made you think? I picked my favorite because it made me ill.

For me, Etrade was the big winner. Their ad had an adult voice lip syncing over the computer-generated mouth of an infant in a highchair. This was to illustrate how easy it is to trade online. You know, even a baby can do it. Are you still wondering why investors lost their shirts in the dotcom bust, and are being put out of their homes now?

In the dotcom era there was an ad where a tow truck driver owned his own country because he traded online with such resounding success. The other day I saw an ad where an investor (probably in his mom's basement) was positively giddy over having placed a trade on the Shanghai exchange. Why? I guess because he could.

It's very easy to trade online. There is no disputing that fact. It is also very easy to pull your own teeth. That said, such a practice might solve one issue but could very likely lead to others of more serious consequence.

Just because you can do something doesn't mean you should. Simply put, if you're going to put the same research and effort into investing that a baby does, it's my bet you're going to need to be changed in short order.