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Random Notes

Thursday, September 30, 2004 | 12:09 PM

Today's random items relate back to the prior post:

When George Meets John
Goodbye, Geneva
Oil hangs over foreign policy debate
Al Qaeda Seen as Wider Threat
Growing Pessimism on Iraq
Pentagon Spends Without Bids, a Study Finds

Quote of the Day:
“In business, words are words; explanations are explanations, promises are promises, but only performance is reality.”
-Harold S. Geneen

Thursday, September 30, 2004 | 12:09 PM | Permalink | Comments (0) | TrackBack (0)
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Confessions of Repentant Hawk

Thursday, September 30, 2004 | 12:01 PM

One hardly hears much about Iraq’s impact on the US Economy and Equity markets. Since tonight’s Presidential debate will focus on Foreign Affairs and National Security, a review of our past analyses on Iraq and its likely impact on the markets is past due. Iraq is the Wild Card: It impacts the cost of oil, America’s standing in the world. It has been undercutting the sense of stability that is necessary for global trade.

Three months ago I wrote: “The Neo-Conservatives hawks who pressed for the invasion of Iraq failed to create an adequate strategy for a post-war period. This created an opportunity for insurgents to cause havoc and mayhem; With the handover to the Iraqi Ruling Council a few days early, the planners have gotten one right for a change. The insurgents will be denied an opening to thwart sovereignty for Iraq.”

That marginally positive view turned out to be far too optimistic. As I wrote that in June, the CIA was reaching the exact opposite conclusion: conditions in Iraq were bad and deteriorating rapidly. Subsequent events have shown the CIA’s assessment was far more prescient than my own.

My original analysis of the invasion was based on the potentially positive domino effects. As we wrote in March 2003, it was never about WMD or Hussein as a ‘threat’ to the region; Rather, it was all about eliminating potential negatives: Saudi oil fields falling into the hands of Fundamentalists; Our securing Pakistani Nukes, and lastly, brokering a deal between the Israelis and Palestinians. I am chastened by how inaccurate those expectations were.

None of these goals have been accomplished. While the potential benefits of intervention in the Middle East were significant, the incompetent execution of the post-war period raised new problems. It has become a debacle. Further, I find it unconscionable that the basic military lessons of Viet Nam - give the Pentagon what its military planners ask for, and do not micro manage the war - were mostly ignored.

The first of three presidential Debates are tonight, and it will be about Foreign Affairs. Everyone expects Iraq and terrorism to be topic A. From the incumbent, I’d like to hear a frank assessment of what went wrong, why the best minds from the Pentagon and State Department were not listened to, and what will change if he wins a second term. From the challenger, I’d like to hear specifics as to how he can extricate us from this quagmire.

I do not expect much on either count . . .

Thursday, September 30, 2004 | 12:01 PM | Permalink | Comments (5) | TrackBack (1)
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The Bush vs. Kerry Ratio

Thursday, September 30, 2004 | 06:55 AM

Martin Pring is a reknowned market technician. His site includes an interesting chart, derived from data via Rasmussen, a reliable pollster.

Click for larger graphic
Graphic via Pring Research

There is a caveat to the charting of polling data patterns: It hardly correllates to technical trading patterns; Polling is a cost free public opinion survey, subject to headlines and PR issues rather than fundamental concerns of the business cycle. Individual equity performance is driven by 'Supply and Demand' issues.

Still, its an interesting concept, and Pring does a nice job of presenting the data as an objective assessment. It will be curious to see if the debate tonight impacts this . . .

via Mike Barret, NYU

Pring Research

Thursday, September 30, 2004 | 06:55 AM | Permalink | Comments (6) | TrackBack (1)
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WSJ & Barrons pick up Oil comments

Wednesday, September 29, 2004 | 05:12 PM
in Media

barrons_online wsj_format_logo

Some of our earlier comments on Oil got picked up by 2 separate Dow Jones properties:
Barron's and the Wall Street Journal.

T. Boone Pickens (BP Capital) has been talking about a permamently high plateau for oil, stating we will never see $32 oil again.

This is an issue that is likely not to go away anytime soon.

UPDATE: September 29, 2004 10:54pm
Whoops! Better add Slate to the mix . . .

Oil, the Next Stop and Its Impact
Tim Annett
WSJ, September 29, 2004 2:40 p.m

Oil Hits $50 on Heavy Demand
Market Watch Today
Barron's, WEDNESDAY, SEPTEMBER 29, 2004 2:03 p.m. EDT

Oil Terror
Don't blame Osama for high gas prices.
Daniel Gross
Slate, Wednesday, Sept. 29, 2004, at 3:40 PM PT

Wednesday, September 29, 2004 | 05:12 PM | Permalink | Comments (0) | TrackBack (0)
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Global Crude Oil Demand & Gasoline

Wednesday, September 29, 2004 | 09:55 AM

I've been talking about the extent of global demand for Crude outside of the US; This chart demonstrates that perfectly:

Global Oil Consumption
click for larger chart

chart courtesy of Chart of the Day

The trend in China and India is clearly higher; I expect this pace to be maintained at the very least, and potentially accelerate later this decade.

There also seems to be a theory circulating that Oil and Gasoline are uncorrelated; This chart (from this morn's NYT shows that not to be hardly true over the long term:

Oil and Gasoline Divergement?
click for larger chart
chart courtesy of NYT

While there are occasional divergments, they are hardly the typical pattern. Instead, we see they are temporary and mostly modest -- except recently. While there are several unconvincing explanations for this, I expect that eventually, the two will reconverge. The unusually rapid rise in Oil and the longer lag in gasoline is a condition that cannot continue undefinitely. One will have to move towards the other.

Here's a quick excerpt from the times piece:

As the price of crude oil flirts with $50 a barrel, gasoline prices are heading up again, ending an unusual period in which gasoline prices were falling even as oil prices rose.

Crude oil and gasoline prices began moving in opposite directions in June, a conundrum that was a pleasant surprise for motorists in the peak summer holiday season.

Last week, however, gasoline prices jumped 5.1 cents a gallon, to a national average of $1.917 a gallon, still below the record average of $2.06 a gallon in May but 33 cents higher than a year ago, the Energy Department said. If crude oil prices keep going up, as many oil industry officials predict, gasoline prices are expected to keep climbing as well, as is the price of home heating fuel.

Finally, we look at this chart of the recent run-up in Oil. The WSJ notes that it pulled gasoline higher, and we are likely to heating oil and natural gas prices rise next.

Bubbling Up: Along for the Ride
click for larger chart


Chart of the Day

With Oil Near $50 a Barrel, Gas Prices Start to Inch Up
New York Times, September 29, 2004

Bubbling Up: Along for the Ride
WSJ Graphic

Oil at $50 Could Bring Sharp Pinch
THE WALL STREET JOURNAL, September 29, 2004; Page A2

Wednesday, September 29, 2004 | 09:55 AM | Permalink | Comments (3) | TrackBack (0)
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New Column up at Real Money (9/28/04)

Tuesday, September 28, 2004 | 03:17 PM
in Media


The latest Street.com column is up:

"Bounce Beckons but Long-Term Challenges Remain"
In a postbubble, poststimulus economy, look for trading vs. investing opportunities.

For those of you without a subscription, its loosely based on Monday's comments, Bull or Bear Market?

Here's an excerpt:

"Two weeks ago, the S&P 500 and Dow Jones Industrial Average had reached the top of their trading ranges and I surmised that, at the very least, a retracement of the Aug. 13 to Sept. 15 rally was likely. Furthermore, I suggested any break of S&P 1123 would project a pullback toward 1100-1105.

These levels have been reached -- the S&P traded as low as 1101.29 Tuesday morning -- and the markets have become slightly oversold, at least on a short-term basis. That suggests to me that a small, relatively insignificant, bounce is due. After that, we should resume moving downward toward an intermediate-term low sometime in October.

As that progression unfolds, investors may wish to ponder this philosophical query: What is the meaning of the lower highs and lower lows of 2004? Are we in a bear market? Or, as some have argued, are we merely digesting outsized gains from 2003?

With the third quarter ending Thursday, and the indices flat to down for the year, one can hardly claim this is a powerful bull market. Yet the range-bound environment hardly proves the bear's case."

Tuesday, September 28, 2004 | 03:17 PM | Permalink | Comments (0) | TrackBack (0)
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Oil = $50 a Barrel

Tuesday, September 28, 2004 | 06:19 AM

Oil broke a psychological barrier last night: $50.

As I have been lamenting for quite some time, this is not due to a "terror premium." Oil is rising in a response to demand from Asia, especially China.

Click for larger graphic
Graphic courtesy StockCHarts.com, RealMoney.com

As the chart above makes clear, after 9/11 there was brief plunge in oil prices. This reflected the expectation that the global economy would slow. It snapped back from that fairly quickly. Oil prices were then stable from April 2002 to January 2004 -- hardly a terror premium.

Here's a more recent history of oil prices relative to events:

Click for larger graphic
Graphic courtesy WSJ

The WSJ observed:

As oil topped $50 a barrel Monday, "one of the world's most important fuel gauges -- U.S. commercial inventories of crude oil -- signaled that the surge in prices may well continue. Inventories in the U.S. have plunged substantially below last year's level, confounding predictions by many analysts that stocks were building.

That may portend bigger jumps in the price as the Northern Hemisphere approaches winter, the season of peak oil use due to consumption of heating oil. To rebuild stocks and keep refineries humming, the actual users of oil -- rather than speculators -- are likely to snap up petroleum, keeping up the pressure on prices.

The decline in American inventories is roiling markets because the U.S., as the world's largest oil user by far, is the main setter of world prices. The fall in stockpiles was exacerbated by Hurricane Ivan's hammering of key producing and transport facilities in the oil-rich Gulf of Mexico. Oil output in the U.S. gulf is still running about 25% below normal, robbing U.S. refiners of needed supplies and prompting the Bush administration to make some emergency loans to buyers from the U.S. government's Strategic Petroleum Reserve. The government is considering making more such loans."

I suspect that $40-50 is a likely range for the next year or so. Look for events to conspire to create oil hitting $57 sometime in Q1 2005 . . .

Market Challenged by Macro Concerns
Barry Ritholtz
RealMoney.com, 9/22/2004 3:37

Low Oil Inventories in U.S. Signal High Prices May Stay a While
THE WALL STREET JOURNAL, September 28, 2004; Page A1

Tuesday, September 28, 2004 | 06:19 AM | Permalink | Comments (9) | TrackBack (1)
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Bull or Bear Market? (hint: Neither)

Monday, September 27, 2004 | 11:43 AM

Two weeks ago, we noted that the SPX and Dow had reached the top of their trading ranges. We suggested at the very least a retracement of the August 13 to September 15 rally was due. Further, the break we were looking for below 1123 has produced our expected pullback towards 1105. As those levels get hit, the markets will become oversold, at least on a short term.

As we wait for that to play out, investors are left pondering the meaning of the lower highs and lower lows of 2004: Is this a Bear market, or are we merely digesting 2003’s outsized gains? With the quarter ending Thursday, and the indices flat to down for the year, one certainly cannot make the claim that this is a powerful Bull market. Yet the range-bound trading hardly proves the Bear case.

Our conclusion? We are working our way through a post-bubble, post-stimulus economy. The Nasdaq remains more than 60% off from its highs. We continue to suffer the hangover from the bubble’s aftermath: Capacity utilization is lingering in the ~75% area, thanks to all the overbuilding and over-investment from the ‘90s. End-user demand remains anemic, and manufacturers find themselves unable to pass along price increases, despite the rising prices of many commodities.

All this suggests to us that economic growth will remain in the modest 2.75–3.5% range. Inflation will primarily be found in commodities, as opposed to wage pressure. Job growth will continue to be mostly mediocre.

With or without further stimulus, the U.S. economy requires additional time to heal and work off the excesses of the bubble. How much time? Following the popping of the Japanese bubble in 1989, and the 80% drop of the Nikkei Dow, Japan was mired in an economic hangover for 14 years. But the Japanese central bankers made the mistake of cutting rates somewhat gradually. They allowed a deflationary mentality – postponing purchases as prices slid – to take hold amongst their consumers.

That doesn’t appear to be happening in the U.S. Our central bankers produced more monetary stimulus, and in a faster timeframe, than did their peers across the Pacific. So far, we appear to have dodged the deflation bullet. But that doesn’t suggest that we are out from under the post-bubble environment.

As such, we continue to look at the markets as presenting trading – but not investing – opportunities. Modest support exists at SPX 1100-1105 — and if we get extreme sentiment readings at that level, we would be buyers, albeit with tight stops loss points.

Monday, September 27, 2004 | 11:43 AM | Permalink | Comments (0) | TrackBack (0)
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Chart of the Week: Yield Curve

Monday, September 27, 2004 | 11:18 AM

Looking at the past two decades, whenever the Fed has started tightening AND the yield curve has flattened, it has presaged a downturn in economic activity, as reflected in the ISM.

That is exactly the situation we find ourselves in at present:

Federal Reserve, Yield Curve and the Economy
click for larger chart
chart courtesy of Michael Panzner, Rabo Securities

Panzner used this measure because it has had a pretty good correlation with swings in year-over-year Gross Domestic Product data during the period.

Random Items:
Signs of listless economy persist
The Two-Income Trap
Inside Kerry and Bush's Technology Agendas
The Longevity Gene
British firm finds the nuclear industry's 'holy grail'
Iran asks the world to nuclear party

Quote of the Day:
“The work of the individual still remains the spark that moves mankind forward.”
-Igor Sikorsky

Monday, September 27, 2004 | 11:18 AM | Permalink | Comments (0) | TrackBack (0)
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Classical and Opera DVDs: Cheaper than CDs

Sunday, September 26, 2004 | 06:09 AM


We haven't addressed anything new in the music area recently (I have a long queu of comments getting ready) but this discussion of classical/opera DVDs caught my eye. While the article is mostly an exposition on the virtues of DVD for these genres of music, one cannot help but notice a key economic issue: Opera & Classical DVDs cost less than music only CDs:

"Though VHS offered only a postscript experience to classical music (and didn't sell well), DVD has become a medium unto itself, a genre with its own rules, never usurping the primary strengths of the compact disc or the live concert, but having virtues of its own.

DVDs offer no great sound and picture advances over the now-defunct laser disc. But unlike those bulky, heavy discs, DVDs are, as Video Artists International chief Ernie Gilbert put it, "cute." That means storage is easy. There's no hunt-and-rewind tedium. "With DVD, you click and, in a quarter of a second, you're there," Gilbert says.

Sales regularly hit 5,000 units, the standard break-even figure for classical CDs, and go as high as 40,000 worldwide, says Klaus Heymann, the Hong Kong-based head of Naxos International. Also, the hard-core classical community doesn't have to wait around for the video companies to finish issuing meaningless Luciano Pavarotti galas before going on to the real stuff.

Major classical labels initially hesitated to jump into DVD, so smaller, specialized concerns took the medium directly into niche marketing. Upfront "authoring costs" (translating video to the small disc) were as low as $2,000 a few years ago, says Gilbert, and are now half that.

Once a nightmare of regional formats, DVDs are increasingly universal (look for the "0" in the code box), though savvy consumers still need a specially doctored player to read all codes on discs available on European Web sites. Disc prices, which range from $10 to $35, are still unstandardized. The Deutsche Oper's Die Meistersinger is $39, but the Australian Opera's better cast sells for as little as $25.

Whatever the reason, even the most expensive DVD operas cost less than sound-only, full-price CD sets. "And that's contentious," admits Chris Roberts, head of Universal Music's worldwide classical arm. "Fewer and fewer sound-only opera recordings are being made, and some people think DVDs are an excuse to get out of making them. But DVD is a better way of doing it."

The ongoing slow death of the CD format continues apace . . .

DVD's classy way with classical music
David Patrick Stearns
Inquirer Music Critic, Posted on Sun, Sep. 26, 2004

Sunday, September 26, 2004 | 06:09 AM | Permalink | Comments (2) | TrackBack (0)
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