Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (17658)	12/5/2004 10:19:15 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Discussion on the latest drop in oil From Rien on the FOOL Rien: If anybody thinks that this drop in the last two days was due to "funnymentals" then they are off their rocker. Since I do not think that these people are nuts, I can only conclude that they are pushing some agenda. However I can only speculate what the motive is. My "best" WAG is that the saudies cannot continue exporting at todays levels. Mish: Depends on what you call funnymentals. Unusually warm weather (record low heating degree days I believe) for November in the US had to slow the demand for heating oil by quite a lot. This was a very lucky break. Combine that with slowing of growth in China and then a bunch of long spec liquidation on the news and voilla, oil price drops. Of course those are short term funnymentals, not intermediate term funnymentals. I am going to define short term funnymentals as 1-3 months and intermedate term funnymantals as 4 months to lets say 3 years (or however long it takes to bring additional supply online (a new oilfield or additional rigs) starting from where we are now. If that number is shorter or longer than 3 years adjust my intermediate term accordingly. Long term is anything beyond intermediate term. Note too that the definition of "intermediate term" will be in slow flux(probably gets longer) as the rate of change in bringing additional supply online is likely to change over time as oil depletes and new sources are harder to find. For whatever reason some people on my board seem to think peak oil is a myth so we will ignore long term funnymentals for now. Finally we need to define short term capacity and I will define that as the capacity we have been pumping on average for the last 3 months or so but it is quite likely that short term capacity is slowly but constantly dropping. If demand exceeds short term capacity, prices rise. Because of a lucky break on weather, perhaps short term demand has dropped to a decent % below short term capacity. Voilla a short term funnymental drop that makes sense even though the interemdiate term outlook (assuming no worldwide recession) is bleak. I 100% agree with your assessment that Saudi can not right now, without bringing more fields or rigs online, continue pumping at current levels. Perhaps they have more fields or proven reserves they are hiding but I do not think those can be brought on in the short to intermediate term. Actually, by my definition they can not bring them on in the intermediate term. I also doubt they increased their pumping output at all recently. It was either just talk, or sour that nobody really wanted. OK, Let's see if we can make sense of Kuwait bitching about $44 oil when there is an "official" target of $28-32 oil. Here is my thought. There are several possibilities: 1) Saudi sold forward oil at those prices and lots of it. Perhaps to China perhaps to others that understood long term need. Kuwait was smarter. They did no such thing. Therfore Kuwait would just assume see the price in the $40-50 area since that price did not decrease the real intermediate term (non weather related) demand for it. 2) The long term price target of $28-32 is a blatant lie. It was priced low enough to keep extra long term supply (if it really exists at all) from being developed. Perhaps it is low enough to prevent development of oil shale and other such sources. 3) Some combination of 1 and 2. This is my guess. Now lets briefly look at the long term. Until I see some real evidence that peak oil is not a problem AND progress is being done to bring that "theoretical supply" on the market, the intermediate term price of oil based on funnementals of supply vs demand is likely to go up unless the world economy collapses. Mish

To: russwinter who wrote (17658)	12/5/2004 10:26:46 AM
From: Crimson Ghost	Respond to of 116555

Doug Noland hit the nail on the head in his latest Credit Bubble Bulletin. To wit -- the longer interest rates are held artificially low -- the bigger and more painful the inevitable snapback.

To: russwinter who wrote (17658)	12/5/2004 12:28:58 PM
From: mishedlo	Respond to of 116555

Stock options EVER notice how huge stock option awards are often given to executives just ahead of bullish company news? The Securities and Exchange Commission apparently has. Last Tuesday, Analog Devices, a maker of integrated circuits, disclosed that the S.E.C. had requested information about the timing of option grants given to company executives and directors during the last five years. In its disclosure, the company noted that its grants in some years "occurred shortly before our issuance of favorable annual financial results." The company added that it believed other companies had received similar inquiries from the regulator. ---- "Even if technically it's not illegal, shareholders who own stock in a company that does this should think long and hard about the management they are dealing with," Mr. Broad said. "Every dollar lower on the strike price is at the shareholders' expense." Analog Devices is a heavy user of options. A recent analysis by Adam Parker, an analyst at Sanford Bernstein noted that in each of the last five years, the company has handed out options representing about 3.5 percent of the company's shares outstanding. One option grant that the S.E.C. may be scrutinizing occurred on Nov. 10, 2000, and covered 920,000 shares given to the company's top five executives. The strike price was $44.50 a share, just $2.25 above the stock's low for all of 2000. Three days later, Analog Devices reported that Siemens A.G., the German electronics maker, had decided to use two of the chip maker's products in its new wireless phones and devices; the stock rose 8.3 percent on the news. The next day, the company announced that its fourth-quarter profit had more than doubled. The shares jumped to $55.50. Within a week of the grant, shares of Analog Devices had risen, up 34.3 percent. ---------------------------------------------------------------------- Read on and see how execs cheat the companies' owners. nytimes.com

To: russwinter who wrote (17658)	12/5/2004 1:34:49 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

The problem with the money printing, low interest rate thesis that you always seem to be defending (are you defending, or just predicting it, I'm never quite clear about this with you?), is that it trashes the economy by wrecking what's called the "pool of funding". It diverts funds away from productive and into consumptive activities. You seem to feel that the solution is just to print more money, and that's the Fed's mistake. I feel the pool of funding crisis is beyond repair now Russ I have said many time that interest rates should never have gotten to 1%. Not only did they get to 1% but they did so at a time of extra stimulus from Bush on tax credits to business, extra stimulus from Bush in tax cuts, and extra stimulus from war buildup. It was truly insane. That said, all it did was create a bubble. Multiple bubbles. The biggest are as follows: housing bubble, junk bond bubble, consumer debt bubble, and a stock market bubble. It did not do what the FED expected: create jobs or create sustainable economic growth. So far I am pretty sure we are 100% in agreement. Where we diverge is in the amount of force it will take to prick that bubble. Given the lag affect of rising interest rates and the affect of tax credits etc that are about to expire, and how heavily the consumer is tied to rates at 1% I personally think we are at or near the breaking point. To be honest, I have been wrong beacuse I thought 3 hikes would do it. I now think 5 will do it. Once housing goes it all goes IMO. Interest rates at 2.5% or however high we get 2.25% are going to be restrictive not stimulative (again, one housing goes). We just will not see loans granted on houses if house prices start to fall, and tapping into home equity is the only thing at this point keeping consumer spending up. Consumers will be strapped if no more jobs are created, and I bet the latest jobs report has the FED scared to death. Thus, I 100% totally disagree with Fillmore's praise of Noland that the lower and longer interest rates stay low the higher they get. Japan is proof of the absurdity of that statement. Again, all I can do is look at where we are and what is happening now. IMO the FED is in an extemely tight fitting box of their own making. Keeping money way below inflation has created these problems, I would not suggest for the FED to do that. All it did was spawn bubbles. However setting interest rates well above inflation or perhaps even at inflation is going to create huge immediate problems given the leverage and the marginal players and the lack of jobs. If the FED gets too restrictive we will have a housing crash. Now I think we are going to have one anyway but Greenspan is probably hoping to slowly let the air out of this thing. Once again I am trying to state things in a manner that I believe but that you can accept as well, and I think you can probably accept this paragraph. Thus we come once again to what happens if housing crashes and what it will take to get there. I suggest we are on the tipping point right now. Assuming I am correct then I expect to see enormous loss of jobs, enormous pullbacks in consumer spending, tightening of credit standards and falling prices across the board as inventories build up, shortly after it happens. Might that mean companies selling goods below cost? Yes. Inventory carrying costs and no sales with no demand is the flip. Thus I see deflation setting in. I am not sure if you accept this paragraph or if you accept the general idea but think it will take much higher rates to achieve it. All we can do is watch and see. Christmas sales, housing sales, and jobs are what to watch. Leading indicators are another. Now, as to whether or not I agree or am just predicting I would suggest some of each (within constraints). It all has to do with if and when spending, housing, and jobs fall. My predictions as well as agreement (as to where to from here) are based on an assumption that "x" number of hikes will send this economy reeling and into out and out deflation. My "x" is far far lower than your "x". When "x" is hit, there will be a pause and there will then be cuts if the pause does not help. Japan has proven that mammoth printing and deflation can occur together. The difference of course is balance of trade. If the US slumps and Greenspan pauses but a US$ panic of some sort forces the US to hike more anyway, I think we have the possibility of a worldwide depression. Finally, lets go back to your "pool of funding". Pool of funding for what? Do we need more manufacturing of TVs, phones, appliances, carpet, what what what. Given productivity enhancements, etc just what do we need a pool of funding for? Infrastructure? Is the US going to privatize roads? All I can think of is "retirement". But where is that savings to go? Into the stock market at these prices? Into corporate bonds? Junk bonds? Treasuries? What? Everyone on the planet going to rush into gold? So you tell me, just what we are going to do with a "pool of funding". What we need it seems is a way to wipe out some of those dollars that are floating around. Bankruptcies will do just that. Without any jobs, that is where more and more US households are headed. Once excess credit is destroyed then we can talk about sustained inflation. Mish