Well hello friends, it’s been far too long since I wrote for Energy and Capital. Did you miss me?
For the last many months, I have been hard at work on two books with my colleagues.
The first–Profit from the Peak with Brian Hicks–is now off to the printer, and will be available mid-April. In it, I do a detailed study of peak oil theory, then move on to examining the peaking profiles of every major form of traditional energy, and conclude with a close look at the renewables market, including investing angles on all of the above.
The second, Investing in Renewable Energy: Making Money on Green Chip Stocks with Jeff Siegel, will be out in the fall of this year (details forthcoming). As the title suggests, it is a detailed study of renewable energy and related investing opportunities.
After those intensive research labors, it’s a pleasure to return to writing regular updates for you all, and to take a more active role in Energy and Capital.
As readers of my previous columns know, I like to try to draw out macro trends pertaining to the zeitgeist of the day, and try to bring a little context to the issues that concern all of us.
And boy howdy, it’s a long list. So please bear with me, settle in with a cuppa and let’s look at the big picture together. I’m pent up with months’ worth of observations on our current economy that I want to share with you.
1979, Slight Return
As I surveyed the recent damage in the markets, I was reminded of nothing so much as Tom Paxton’s song about the federal bailout of Chrysler, back in 1979. Change "Chrysler" to "JPMorgan" and it’s once again as current as it can be:
Oh the price of gold is rising out of sight
And the dollar is in sorry shape tonight
What the dollar used to get us
Now won’t buy a head of lettuce
No the economic forecast isn’t right
But amidst the clouds I spot a shining ray
I can even glimpse a new and better way
And I’ve devised a plan of action
Worked it down to the last fraction
And I’m going into action here today
I am changing my name to Chrysler
I am going down to Washington D.C.
I will tell some power broker
What they did for Iacocca
Will be perfectly acceptable to me
I am changing my name to Chrysler
I am headed for that great receiving line
So when they hand a million grand out
I’ll be standing with my hand out
Yessir, I’ll get mine
–Tom Paxton, "I’m Changing My Name to Chrysler"
At first it’s hard to understand how one of the world’s most venerable investment banks, Bear Stearns, could be handed over to JPMorgan Chase for a mere $2 a share, a lousy $240 million for the whole shootin’ match (it is said that Bear’s building alone is worth $1.5 billion), when it had last traded at $30 . . . after falling from $171 a little over a year ago. Oh, how the mighty have fallen.
Or why JPMorgan should get the benefit of a whopping $30 billion in federal money to make the deal. The whole subprime mess and the players and their stakes is a big topic, far too much to get into here. But my ultimate surmise is that this was a big "F- you" to Bear, not only for being one of the most egregious participants in the subprime lending game, but also because they were the one big bank that refused to participate in the bailout of Long Term Capital Management back in 1998, whose derivatives bets had similarly threatened to bring down the whole market. Among the big boys, the players are few and their memories are long. Bear was on the outs with the gang, and they decided to let ’em swing in order to save their own hides.
Despite last week’s Fed cut and the subsequent huge rally, I am far from certain that the carnage is over. As I see it, the true valuations of the underlying assets under all this mess are yet to be revealed, and many banks, particularly regional banks with a large book of mortgage-related business, may yet fall. I am not convinced that the Fed has enough ammunition to prevent it, and I wouldn’t call a bottom in the financials just yet. In fact, I’ve generally been short on the sector since January via the UltraShort Financials ProShares ETF (AMEX: SKF), up 11% YTD as compared with the Dow, which is down about 6%.
Unfortunately, the crisis of confidence in the credit markets has caused a major shakeout in the stock market, and perfectly good energy stocks (including many that I have owned and promoted in these pages) have been whacked hard.
The bottom line is that we’re no longer in a trading environment that makes sense based on fundamentals. We’re now in a world that lives and dies on capital flows, a fairly esoteric world that most investors don’t follow, and one that is heavily influenced by hedge funds and other big money players.
Lessons Learned from the Current Economy, and How To Prosper During the Subprime Crisis
I have taken my lumps along with everybody else in this market. But I have learned a few things along the way. After all, as William Blake said, "If the fool would persist in his folly he would become wise."
The first lesson is that commodities have been in favor, and remain one of the few safe plays right now. Along with cold hard cash and safe havens like bonds, that’s where the big capital is. This has a lot to do with the price of oil, as we’ll discuss momentarily. The incredible recent run in everything from oil to grains to metals to fertilizer is bound to invite some profit taking, as it did Wednesday, but I remain bullish on the sector, at least until the overheated economies of the developing world cool off.
The second lesson is that some of the emerging markets that have attracted so much speculative capital over the last year, particularly Asia, may be headed for a fall along with the financial and housing sectors. If it looks like a bubble-and housewives turning into overnight millionaires in China looks like a bubble to me-it’s probably going to tumble. I have been playing the short side on emerging markets via the UltraShort FTSE/Xinhua China 25 ProShares ETF (AMEX: FXP), up 25% YTD.
The same case could be made for oil, but that calculus is a bit more complex.
Unfortunately, Helicopter Ben’s attempts to stave off recession by opening the money spigots have severely devalued the currency. This "No Banker Left Behind" strategy may be good for Wall Street, but it’s hurting Main Street in a big way. There will be no bailout money for the 14,000 Bear Stearns employees, many of whom had their life savings in company stock (apparently they didn’t follow the stories of WorldCom and Enron very carefully). Bill and Mary Six-Pack have watched their buying power erode so rapidly that last month’s household budget is already out of date.
We’d all have to change our names to JPMorgan if we wanted any federal support for our skyrocketing cost of living, our escalating credit card debt and our underwater mortgages.
Instead, we have blandishments from the White House that our $600 rebate checks arriving months from now will provide the necessary stimulus to get the economy back on track . . . when the average increase in subprime mortgage payments in early 2007 was $320 per month. Woo-hoo, two months’ worth of house payment increases covered!
Let’s not candy-coat this. What we are seeing here are desperate measures. An emergency bank buyout deal and a Fed discount rate cut on a Sunday. A handful of alms to try to pay a mortgage that is now under water and likely to stay there for some time. This is no time to be complacent. If the latest round of shots in the arm doesn’t cure our economic ills (and I doubt that it will), we’re in for more trouble, because there aren’t too many stops left to pull.
So that’s my view of the financial world. But like I said before, this is only the tip of the iceberg. Next week, we’ll start taking a look at the big picture on energy.