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Big Oil, Big Enemy

How many times have you heard this about the soaring cost of energy lately? “It’s all Big Oil’s fault.” On Monday, MarketWatch’s Peter Brimelow talked about the investment newsletter Outstanding Investments, which is currently the fourth-best performing letter over the past 12 months according to the Hulbert Financial Digest (up 45.06%) and which also boasts a 40.58% annualized gain over the past five years. Brimelow wrote about what OI editor Byron King had to say on the energy crisis in the current hotline from March 19:

King’s long-term reasoning is simple: supply and demand. Which, he argues, Americans are being misinformed about: “One of the biggest hurdles to the U.S. getting energy right is that the mainstream media infotainment circus has not prepared people… the mainstream media (MSM)— and a lot of U.S. politicians— corporately hate Big Oil so much that they won’t inform viewers and readers how little control the name-brand players have anymore.

King’s right— about how hated Big Oil is. A quick glance at some of the energy headlines over the last few days reveals:

• “We Need a New Bargain With Big Oil”
• “Skip the middle man and send rebate check to Big Oil”
• “Obamanomics: Target Big Oil, Too”

And according to legendary commodities investor Jim Rogers, he’s also right about the supply-demand story. On March 6, the chairman of Rogers Holdings told Reuters:

People have been telling me for five years that oil prices are going down. Every time I ask them where the supply is coming from. So far, nobody has been able to tell me. Please tell me where the new oil is because I want to invest in it.

On March 18, Rogers, while hosting CNBC World, told viewers:

I have no idea if there’s peak oil or not. But I do know that nobody’s discovered a gigantic elephant oil field in over 40 years. Unless somebody discovers a lot of oil very quickly and in very accessible areas, the surprise is going to be how high it stays and how high it goes. All the oil fields in the world are depleting.

King is on the same page as Rogers. Brimelow wrote:

“The MSM could help the situation if they emphasized that we live in an era of less oil, higher prices and a lot more competition for the same old stuff. They could point out to viewers and readers that the developing world is… um… developing. And we in the U.S. are not. We are just living off the past, drinking from wells we did not dig and running down the energy inheritance.”

Sources:

“Calmly contemplating a correction”
Peter Brimelow
MarketWatch, March 24, 2008

“EXCLUSIVE-Rogers says investors bet on commodity shortages”
Pratima Desai
Reuters, March 5, 2008

‘We Only Put Out Good News Here On The Economy’

Regular readers of Boom2Bust.com have probably realized by now that I use quite a number of overseas sources for my posts. Reason being? I’m concerned that we may not be getting a clear picture of our economic health from the American media. Consider the following from Euro Pacific Capital’s Peter Schiff in chapter 2 of his book Crash Proof:

Yet, the American public remains oblivious because we’re not getting the facts. The government, the mass media, and Wall Street have a vested interest in consumer confidence, keeping the American public assured that everything’s basically okay. There may even be an element of altruism; strong economies are built on positive psychology. But too much of the data issued by government agencies is self-serving and ultimately counter-productive. Myths get reinforced and they get in the way of rational decisions. Wall Street buys in because it sells stocks and bonds when investors are optimistic, although it has been known to bet the other way with its own money. The media report the news as they understand it, but they get their understanding from the government and Wall Street.

In chapter 5 of his book Financial Armageddon, Wall Street veteran Michael Panzner adds:

Motivation is also a powerful influence. Individuals who work in the public sector, especially those who have been voted into office, or who work for brokers and other businesses that stand to benefit from positive sentiment, frequently find themselves- willingly or not- becoming cheerleaders for a bullish view, regardless of whether the data support it.

Think this is all mumbo-jumbo? Back on March 17, 2006, responding to a charge by Ron Christie, a former special assistant to President Bush, that he doesn’t report “good things” about the U.S. economy, MSNBC’s Chris Matthews said on Hardball with Chris Matthews that, “We don’t produce bad [economic] news on this show,” later adding, “We only put out good news here on the economy.” According to Media Matters for America from March 22, 2006:

CHRISTIE: No, wait. When do you ever hear people in the media come out and say that the economy is strong in this country?
MATTHEWS: Every single night on this network, we produce, on the half-hour, the latest stock averages. We show Nasdaq’s doing well and Dow’s doing well, and the economy’s doing well. We don’t produce bad news on this show.

Later on in the broadcast:

CHRISTIE: Because - what I’m saying to you is, why doesn’t the media, why don’t we sit and have a conversation on Hardball and say, “Let’s talk about some of the good things”?
MATTHEWS: We only put out good news here on the economy.

How about the following from the SouthtownStar, which is part of Chicago Sun-Times newsgroup. Columnist Marlene Lang sarcastically noted on January 14 that when it comes to getting bad (realistic?) economic news about the United States, we have to get it from across the pond:

We all know those Brits love to hate us. They never got over that tea party thing.

They’re gloating across the pond about the growing power of the pound to the U.S. dollar. And last week, the British Broadcasting Corporation seemed to be the only news source reporting that important financial geeks were saying a U.S. recession is upon us. That’s so impolite.

They never got over that tea party thing. Too funny. Anyway, I’ll keep on using diverse sources for my posts so we can hopefully get a clearer picture of where the U.S. economy is at, and where it’s going…

Sunday Edition: December 2, 2007

The Great Escape
If you haven’t heard yet, U.S. Treasury Secretary Henry Paulson announced on Friday that the mortgage industry was working with the U.S. Treasury Department on a broad plan to save the homes of subprime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes. Earlier this afternoon CNBC reported that mortgage industry executives worked Saturday on the details of a homeowner “rescue plan,” where interest rates on some subprime mortgages could be frozen for up to 7 years. This weekend’s activities took place so that Secretary Paulson could announce a framework for the plan tomorrow, with full details released by Wednesday.

The Wall Street Journal reported Saturday that many of the particulars need to be hammered out, including the duration of the interest rate freeze and which subprime borrowers would be eligible for the bailout. Also unclear are the number of future mortgage resets. The Federal Reserve estimates that 2 million mortgages face resets, with as many as 500,000 homes in danger of being lost. As much as $362 billion in subprime mortgages are due to reset in the coming year, according to Banc of America Securities.

According to CNBC:

Deutsche Bank said in a report Friday that the population Paulson’s plan is aimed at — owner-occupants with at least some equity and facing their first reset — comprises 1.2 million loans valued at $258 billion, or one third of outstanding “first-lien” subprime loans.

Already, the proposed bailout is drawing fire from critics.

Some on Wall Street are saying that the U.S. government has overstepped its boundaries by meddling in the markets. Mark Adelson, a principal of Adelson & Jacob Consulting LLC, which consults on securitization and real estate issues, told the Wall Street Journal that:

There’s a part of this that’s just morally repugnant. The problem is that the policy makers are talking to servicers about giving away other people’s money.

It’s not the servicers’ money, but shareholders’ and investors’ money.

Andy Chow, manager of a $7 billion portfolio of mortgage bonds and other fixed-income assets for SCM Advisors in San Francisco, told the Journal that the success of the plan will depend on how many borrowers qualify. “Given what we know right now, it would benefit a smaller number of borrowers than the market is assuming,” he said.

Alan Fournier, a fund manager at New Jersey-based Pennant Capital Management LLC., is forecasting that the rescue plan may prolong the pain of the housing slump. He told the Journal that the Treasury’s program may merely delay inevitable foreclosures for some people who can’t afford their homes, while allowing holders of mortgage-backed securities to put off marking down their assets. Fournier explained, “This reduces the pressure short-term to bring everything to a clearing price. We really just need to let it wash through.”

Finally, there is the threat of lawsuits from investors in mortgage-backed securities. A temporary freeze on troubled home loans may help prevent defaults, but it would also reduce the amount of interest the loans would pay. “These investors were promised a certain yield, based on the expected hikes in interest rates, and an automatic freeze without reviewing individual loans may give them grounds to sue mortgage servicers,” CNBC reported today.

I’m curious to find out how homeowners who acquired their properties through conventional fixed-rate mortgages feel about the proposed plan.  Does it make you angry knowing that your neighbor in a comparable home may be getting their low-interest teaser rate extended up to 7 years, while you pay off that higher, fixed-rate loan?

Parting Shot
When I was in college, a roommate used to return from home with a bundle of tabloid newspapers to be used for bathroom reading material (thanks Mrs. McGrath!). I read a lot of ridiculous stuff in those papers.  Nowadays, I just turn on the television or read the mainstream press when I’m looking for that same type of entertainment. In the December 10 issue of Time, horror writer Stephen King said the following when asked who he would choose for Time’s 2007 “Person of the Year”:

Britney Spears and Lindsay Lohan symbolize the media’s growing obsession with issues of personality over substance. People care more about the details of Spears’ child-custody case than they do about where the billions the U.S. government has poured into Iraq have gone. It’s time for a discussion of whether the news media have chucked their responsibilities and run off to Tabloid Disneyland.

If it bleeds, it leads…

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

The Two Week Rule

It was the end of July 1996, and I was sitting in my downtown Chicago office where I worked as a U.S. Senator’s aide. Trans World Airlines Flight 800 had just crashed days earlier in the Atlantic Ocean off New York City. As I read a list of not-too-funny jokes that airline passengers were overheard making (and subsequently detained for) in the aftermath of the incident (“Is that a bomb in your pocket or are you just happy to see me?”), I remarked that Americans have an incredibly short attention span. Despite all the theories being discussed in the media as to what had brought down the massive Boeing 747, I told a co-worker that in two weeks you’ll hardly hear a peep about the incident. And I was correct. I started calling it my “two week rule,” where the American media and public focus on a incident for two weeks or so, at which point our attention shifts to something new.

During the evening rush hour of August 1, 2007, the I-35W Mississippi River bridge, the fifth-busiest in Minneapolis, collapsed and fell into the river and onto its banks. 13 people died and approximately 100 more were injured as a result of the accident. The day after incident, USAToday reported:

Across the nation Thursday, there was a fresh urgency on improving infrastructure — the roads, bridges, utilities and other basics of modern life that aren’t always the most popular spending priorities for governments… In Minneapolis, there was grief, outrage and questions over whether government officials could have done more to prevent the disaster. “A bridge in the middle of America shouldn’t fall into a river,” said Sen. Amy Klobuchar, D-Minn., whose home is near the span.

The American Society of Civil Engineers says that $1.6 trillion is needed for infrastructure improvements. The most recent ASCE report card gives America’s infrastructure a grade of “D.” Experts say the main reason the country’s infrastructure is in such horrendous shape is because most of it was built in the 1950s and 1960s with a lifespan of about 50 years. Do the math and you’ll figure out why our bridges are falling down, falling down.

As the dog days of August waned, so did our interest in the Minneapolis bridge collapse and the larger issue of a decaying national infrastructure. As I leafed through the Sunday paper last night, I came across the following story in the Parade magazine:

“More for Pork, Less for Bridges”

After the horrific collapse of a highway bridge in Minneapolis in August, politicians nationwide called on the federal government to repair America’s infrastructure. Now the politicos who control the purse strings have spoken. Though $1 billion for bridge repairs was added to the transportation/housing bill just approved by the Senate, an amendment to stop funding “pork” until all of the at-risk bridges have been fixed was rejected, 82 to 14. Instead, $2.5 billion will go toward pet projects like these:

• Volcano monitoring in Alaska, $3 million
• A hiking and biking trail in West Virginia, $1 million
• A prototype streetcar in Oregon, $750,000
• A minor league ballpark in Montana, $500,000
• Renovation of a peace garden in North Dakota, $450,000

So the two week rule had played out once again. And what was the headline on CNN this afternoon? “Who’s going to win ‘Dancing with the Stars’?”