Response to American Labor Arbitragers Everywhere

This is a response to an economist who suggested that we weren't really losing many manufacturing jobs and it wasn't a big economic deal to begin with. the guys went on about how we would focus on solid productivity as trumping both massive manufacturing job losses and ewer well paying jobs domestically. Both naive views in my mind so I had to do my best to enlighten the easily convinced:

Less people making less to produce more (productivity) is great for the business owner, but it is not in the best interest of us as a nation. When you forsake the ability to produce labor intensive goods you also give up the ability to innovate in the future and create value accordingly. You give up the ability to add value (however small) at each step in the value chain. You can bet your half baked theory that someone will create significant innovations in autos, machinery and the like at some point and it wont be us

There are universities in China that have majors in things like bra engineering - and they now produce differentiated, value added bras that our wives spend $50 and $60 in Vicki's hush hush. For now that value creation is being split nicely in the retailer's favor but its a matter of time till there are bootlegs available for half that price and it then becomes the beginning of the end of another American company. Once upon a time the brits were good manufacturers and had a strong economy, as were the Germans, as were the Japanese and others. As their manufacturing base lost its luster, so too did the economic growth, and real incomes. These countries became second rate economies where too many battle for too few jobs and wages and standards of living collapse. It isn't long till too few are left who can afford the few things still produced domestically. Don't lose sight of the fact that one's spending is another's revenue. The view that we will retain high value added, high paying jobs is naive. The Chinese, Indian's and Brazilians amogst other now have not only cheap labor, but also knowledge, technology and capital to knock off almost everything. As they do, they will put more U.S. businesses and consumers out of commission.

Of course we are using technology and a better educated, more industrious workforce to produce more efficiently and that much is a good thing. But make no mistake about it, the driving force of much of this is little more than labor arbitrage with unintended consequences that will haunt us for years to come because those jobs arent coming back and we aren't manufacturing jobs to replace them.

Employing more Americans which earn a better living than walmart cashiers and greeters, to produce more goods to sell to everyone else globally is a better economic situation for most Americans and us as a nation in the long run than the opposite scenario. If you agree with that, then you ought to agree that we should be promoting policies designed to encourage investment in manufacturing that creates jobs here instead of doing exactly the opposite

Follow-up on a show me story that’s showing up doubters – MYL

Mylan’s comeback is on track! Mylan reported 4Q earnings late last week and the results were excellent. At a time when most long investment theses are deteriorating, this one (http://seekingalpha.com/article/108343-mylan-on-the-comeback-trail) is intact if not strengthened. EPS of $0.26 came on better than expected revenues, margins and cash flow. Although the tax rate was lower than expected, this was a quality beat.

The integration of Merck KG assets is proceeding as planned and there’s now talk of better than initially projected synergies (previously guided at $120M, but now likely materially higher, perhaps as much as $150-160M). Base (generic) revenues are strong and expected to continue growing high single digits (ex-currency) and Mylan expects to generate at least $450M (and as much as $500M) in operating cash flow this year, which appears very doable given $135M generated in the quarter. Both Matrix and Dey also appear to be doing well.

Its hard to poke holes in a clear over deliver like that, but I suspect bears will persist. Sentiment, although not as bad as it was a few months ago, is still pretty bad. Short interest was almost 64m shares as of 1/7 and that was up in the prior few weeks. Although many surely covered on the earnings beat, a good amount are apt to remain in hopes of a stumble in the current quarter. That said, there should be no doubt that Mylan is executing as management has guided, so I have to believe that the burden of proof is shifting to the bears.

Management reiterated EPS guidance of $0.90-$1.10 in 2009 and $1.50-$1.70 in 2010. Despite solid execution on FDA filings and approvals, better sales, solid operating cash flow, and accelerated debt pay down, consensus remains well below guidance for 2010, and the shares trade on a substantial discount to peers as well as its historical range on cash flow and earnings; even though they’ve now doubled off their lows. A few months ago, I argued that the shares should at a conservative 12 times 09’ earnings in the coming months and thought if the company could execute as promised over the next few quarters, investors would start thinking about 12 times the low end of the 2010 guidance ($18).

Although I think it’s still a bit premature to have great confidence in 2010 (especially in light of heightened macro and forex headwinds), I think it is reasonable to expect the shares garner a 13-14 multiple on current year estimates if they can meet expectations and reiterate guidance when they report in May. Furthermore, I do think it reasonable to expect that continued execution, free cash flow (exp. ~$350mm this year and $500mm+ in 2010 by the way) and pay down of debt taken on to do the Merck KG deal should lead to confidence that the low end of management’s 2010 guidance is doable and thus a move to $14 or $15 by year end appears reasonable.

As confidence in management increases and visibility on 2010 improves, then estimates and the multiple can increase, and we might see that $15 sooner than you think. Although I don't recommend chasing anything in this market, I think buying pullbacks in this name makes sense. If it keeps on keeping on near term, put the next earnings date on your calendar and look to take advantage of an opportunity should it arise then.

Comment on Barrons predicting golden age of Activist Investing

I submitted this to another site last week and neglected to post here so here goes.

The article's premise is a joke. There were a ton of new activist investors that thought they could buy a big stake and convince operators of businesses to take a shortcut to value creation via some form of financial engineering or another. Most of these guys have gotten smoked many times over because the game is not played on paper. Blocking and tackling is a little harder than it looks. These twenty something hedge fund geniuses assume that managements of companies who generate buckets of cash the old fashioned way (through earning it) can't do the math of share repurchase or are too stupid to realize that they can put their firms on the precipice of bankruptcy by leveraging it to the hilt in order to increase EPS and return on equity without increasing net income or return on capital.

Of course there are companies out there with potentially greater intrinsic values were it not for dumb managements that pay themselves excessively not to create value or allocate capital well. But those are not where most activist attention is focused. Then you have the activists who play a glorified game of pump and dump - acquire a large stake in an apparent value, pump out a few press releases, and hit he CNBC circuit and then sell as copycats fall over themselves to piggyback these.

The problem with thinking we are on the cusp of a golden age in activist investing is that's its all much easier said than done AND current macro conditions are apt to buy many managements time, while otherwise valuable franchise managements will be reluctant to sell on cyclically depressed multiples. Furthermore, if low valuation is your first reason, then why not be a passive investor in better managed companies which are inherently significantly less risky.

In the real world there are many more bad businesses than most want to believe and industry and macroeconomic forces are bigger than either management or hedge funds that want to fancy themselves activist investors. Its amazing how many grand opportunities hedge funds can burn other peoples money on. Activist investing will remain a niche. There's a lot of playboy centerfolds out there who like the average joe the plumber, are more desperate than ever, good luck finding one with a big bank account that will cook, clean, pay your bills and faithfully love you long time. Again, the game is not played on paper; you have to block and tackle and overcome all kinds of seen and unseen obstacles to score.

Deflation semantics are useless - purchasing power pays the bills

I see a lot of people talking about inflation and deflation being "exclusively a monetary phenomenon" The old Milton Friedman line of reasoning has become an extreme exercise in semantics. These dogmatic economic philosophers preach that persistent general price level increases are not inflation unless accompanied by a substantial increase in money supply. This lacks grounding in truth and reality and is a disservice to converts who don't know any better.

I'll say upfront that I actually agree with their conclusion that inflation ( the kind we all know but don't love is apt to surge in a way that can put us in a banana republic sort of conundrum; I just am not convinced the bogeyman is around the corner, because I think the current economic circumstances are likely to suppress demand more and longer than most think, credit has changed dramatically, and there is likely to be a transmission problem with regard to getting that credit into enough hands that can overwhelm the enormous amount of excess capacity in product, service and labor markets that have been created almost overnight.

So there's no telling how long deflation (not the asset kind, but the kind that increases purchasing power meaningfully) is apt to persist because this is anything but a free market economy anymore - ie. the Fed is likely (IMO) to be successful in keeping rates low and the dollar from collapsing in the near term. But some day in the not too distant future inflation will get going and it will inflict pain of the non-theoretical kind - on your and my pocketbook and bank accounts and by extension our quality of life. Its just near impossible to predict when and to what extent but also how far and long deflation goes before it turns.

My guess is that wont happen until the economy here and globally improves - which I doubt happen anytime soon. People looking for a 2nd half recovery are way off; we'll be lucky if happens by year end 2010 IMO. Although I also expect the USD to be under longer term pressure, I'm not sure that triggers immediate rampant inflation because I think it also is likely to hurt global purchasing power. I think we clearly need a lower dollar and reflation if we are to have any hope of avoiding a lost decade economically, I'm not sure that its going to mean oil or gold must go up because gold and oil typically go down in protracted recessions regardless of what M-whatever is doing. People, the IMF, all central banks, the GLD and any other big holder will hope to hit any bid that comes and most will simply not have enough cash (on lower cash flow from un&underemployment, broken balance sheets and reduced purchasing power) to buy much gold. Sorry, but I really doubt that the gold that the guy "is holding in his hands and touching on the table" is likely to go to $166,000.

Folks that reiterate the line about inflation is always and everywhere a monetary phenomenon and then declare that a general, persistent rise in price levels do not constitute inflation if not accompanied by a simultaneous increase in M2, M3 or modified M whatever miss the point that the real world does not care about that type of deflation is their purchasing power (ability to buy food, shelter, fuel, healthcare and other service is not compromised. These "what is is" deflation rants are cute but not very useful.

I have actually been looking at buying a little Gold Corp again on the next pullback because I want to have a little skin in the game when gold surges. Problem is I'm very reluctant to go all in yet because I honestly have little conviction regarding the timing of a move. I've been an on and off mini gold bug (trading the long side since 2002 in and out of Barrick, Gold Corp, Desert Sun, Yamana, NEM and the GLD) and also dabbled in a few silver names. I might even pair a Barrick or Mewmont short against GG long. I'll follow up when the whole situation is a little clearer to me.

Is that all you got? There’s got to be a better way than TARP 1!

The whole idea of using taxpayer money at the Treasury to stabilize the economy and arrest the collateral economic damage which wall street has wrought on main street is either naïve or sinister. Naïve if Paulson and congress really thought this was the most efficient and effective way to restore liquidity and viability to the banking system and thus circumvent unnecessary business failures. But sinister if Wall Street intentionally conned congress into buying an economic Armageddon (by the time the Asian markets opened if we didn’t do this) scenario so they could effectively rob the Treasury.

Although they would never admit it publicly, you have to believe that these bank CEOs were smart enough to understand that they had screwed up the risk management and leverage to a point where they were in no position to use the lion’s share of the cash they received from Treasury to make loans. Surely they knew that this capital would be used to plug holes in severely over levered balance sheets and make good on some counterparty claims rather than make new loans in a stimulative fashion or renew revolving credit to creditworthy and current borrowers reliant on bank lines to run their businesses effectively.

Most of the $80B that AIG took went to counterparties like Goldman Sachs, UBS and Merrill Lynch and statutory capital requirements that should have been met all along. And most of the rest of the TARP money has effectively gone to bail out bond investors which made bad investments in over levered financials. Recall that in most of these instances, even though equity holders can slammed (and rightfully so), bondholders got taxpayer financed guarantees. Where are the anti-socialist free marketeers when you need them?

The reason banks haven’t loaned the TARP monies as expected is simple as I understand it: when you are way over levered and under provisioned and credit losses are surging, as your revenues are collapsing, you have to shrink your balance sheet asap or risk having the little tangible equity capital disappear as a result of additional charge offs. The problem with that is that shrinking your balance sheet is inconsistent with extending incremental credit. The math is in some ways simple and in other ways complicated. Simple because a bank levered 30 to 1 has little room for error before their capital is wiped out to an extent where solvency becomes an issue. But complicated due to a lack of transparency where assets had to be marked incorrectly, which distorted book values dramatically. Either way, the balance sheet got way too big, the assets way too risky and the transparency way too murky.

So the net of it is that most of our largest banks are in no position to lend more or take more risk; and the economic ramifications of what’s happened now make virtually all lending more risky. This should be clear as despite huge capital injections, banks struggle to meet regulatory capital requirements. And if meeting regulatory capital requirements are a priority, then how do you expect that capital to get translated into credit or investment that might mitigate the economic meltdown underway. So what to do now? More of the same? I don’t think so. We must do much better.

I understand that if the banks could shed some of the garbage assets they have on their books at above market prices then they would be in better shape to lend and I understand that given the lack of transparency and a most uncertain and dire economic outlook, that serious bids from the private sector are largely absent. So I understand the temptation to rationalize taxpayer financed welfare for the banking dregs amongst us; especially when you consider the audacity of these bank managements in the first place. This is not the best way to underwrite the costs of fixing our credit market problems, and its not the best way to get liquidity to the many solvent companies that need it to maintain employment and consumption (by both consumers and businesses. We truly need more novel approaches, so I thought I’d mention a few that I’ve thought of.

Now I’m not as smart as Paulson, Bernanke and Geithner so forgive me if this sounds a bit crazy or technically unfeasible. Although I’m not an expert here, I do have a cursory understanding of how the business and the economy works so here goes. You can always do conservatorship coupled with direct lending (which as far as the goal of increased lending is concerned seems to be a better option than TARP as its been administered to date). But I think present circumstances call for a more creative approach and probably more than one.

Why not have government employed securitization experts repackage some of the less than most toxic assets and couple them with a European style put option (written by the Treasury) which exercises a couple of years out. Or I guess it could be American style by application if necessary. Encouraging a longer term holder here would seem preferable so I think it makes sense to structure and incentivize accordingly. A sort of structured product priced to offer a chance to make a better than average return for a nominal but quantifiable risk and only make this available to banks that were responsible enough not to over leverage themselves in the first place. You could also incentivize and subsidize banks that put assets into such vehicles such that making new loans with their refunding was an attractive economic option.

Why not have the Treasury and/or Fed also subsidize restructuring and refinancing of mortgages such that the Treasury and the creditor share a principal reduction while the terms are extended a number of years AND a newly formed government agency funded by TARP money also subsidizes the mortgage rate for homeowners with cash flow sufficient to finance their primary residence if only the terms were better. Make it a needs based program with stiff penalties for fraud to prevent abuse. This would not only help lenders with more cash flow and less credit losses but also stabilize home values and residential mortgage backed securities valuations – which would buy extension lift the value of assets on bank balance sheet and their book values and thus not only lift capital ratios (which ultimately improve a bank’s lending capacity) but also make it easier and cheaper to raise additional capital from the private sector.

I thought this might be necessary a year ago and I’m shocked that it hasn’t been seriously considered. The reason it hasn’t is due to political ideology related to contract law. What’s crazy is you could have made this voluntary – some smart banks would do it and others would follow if/when it proved successful. The charges wouldn’t be as great because the treasury or fed would take half the hit so the bank’s book value, capital ratios etc. would be impacted substantially less, and the banks liquidity position would be better than otherwise the case. Loan to value ratios would also improve so credit worth would improve. And the incentive to not walk away would thus also be strengthened. The irony is that by not doing something like this the damage to creditors has been magnitudes worse as cash flow has disappeared and collateral values pummeled. It’s also ironic that the only way a bank would be otherwise worse off is if borrowers became healthier quickly and/or home values surged – both high class problems in comparison.

Another option I thought of was allowing substantial holders of U.S. Treasuries to swap Treasuries at bubble like valuations for bank asset pools with puts attached that would again limit losses in return for a chance of a reasonable return commensurate with the risk that would be realized if the buyer would have to exercise their put option. This too should not be structured in a risk free way but some risk would be necessary AND this risk could also be collared in a way that the Treasury would realize upside beyond some predetermined level in the event that the structured product performed exceptionally well. This would free up capital banks could lend and transfer some re-priced risks to foreign central banks with stronger balance sheets.

All of these things can be done with more direct government lending. The direct government lending should be underwritten sensibly (such that the taxpayer cost is minimizes yet borrower capacity to remain current maximized. And any such direct government lending could be done in a way that minimizes potential competitive damage to private sector lending by allowing banks to either participate in syndication or by subsidizing the loans to some degree so that the private sector can take down such loans at say a percentage point above where the government would do it and that extra percent would be paid by the government. This would incentivize the private sector to lend more because they would get better than market terms. In instances no private sector offers came to the market, the government would do the lending. Thus more lending would occur and it would get done on better terms with or without private sector participation.

Subsidies should not be permanent -they should remain in effect only for such time as necessary to restore the banking system. Congress could set up an agency to administer this for say a 2 year period and it could be renewed if necessary. And discretion should be paramount – although increased lending is necessary the last thing we need is more “unintended consequences”. Underwriters should be compensated and incentivzed accordingly – with back end bonuses to the extent that they increase lending and the loans perform such that cost to taxpayers is minimized. One way or another we need to try to stabilize home values, support solvent businesses with credit and create jobs. Drastic times call for drastic measures; but the more creative the measures then less drastic they might be. We must do better than we’ve done thus far or we’ll face a depressed lost decade.

The Ultimate Game Changer: Why 2009 Will Be Worse Than 2008 (Part 2)

I don’t want to belabor the point but wanted to stress the fact that credit, saving spending and investment will be changed for a generation. People will be forced to save more to buy stuff they could previously buy with little or no money down and low interest. Frugality will be a way of life, not just in consumer sector, but also in the business and government sector. And the government (federal that is) can not create enough jobs to mitigate the economic pain in any meaningful way b/c the private sector is likely to cut another 6 million jobs this year and state and local governments will cut more than the federal level is apt to create. I can’t see how and when consumers and businesses will be willing AND ABLE to spend more. Generation X & Y have pulled forward a lifetime of sales. Many hundreds of billions of dollars worth of stuff bought on credit in the last few years would have been bought in the period ahead if folks had to save for it. Instead, consumers and businesses alike have to retrench in order to pay overwhelming debt service burdens. And one man’s spending is another man’s revenue; and so it goes, the multiplier effect in reverse. These dynamics don’t change overnight.
And to the extent that you buy into the bull crap (pun intended) spoon fed to you by CNBC pundits employed by fees on your assets your net worth and quality of life will suffer for it. Understand that the Abby Joseph Cohen’s of the world will never implore you to take your money out of the Goldman Sach’s of the world because it means they get paid less or fired altogether. It’s not good business as they say; but if you ask me its bad business. Strategists putting a 1100 and 1200 targets on the S&P500 as 2009 started was flat out irresponsible at minimum and probably disingenuous as well. I say that because not only are they clueless about what the earnings on the S&P500 might have been if the constituents remained the same; but many names are being changed to protect the guilty as they say, so what does it mean to the market that the new constituents earn whatever. If I recall correctly, they mentioned $53-$55 in EPS this year (which interestingly was at the low end of the street) and $60 next but many of the top market caps have will have been replaced with companies with better balance sheets and earnings. Who in their right mind would take a skewed sample and put a high teen multiple on it and say that’s what they honestly expect. I’ll tell you who – its people with a vested interest in you not allocating capital away from equities.But that’s exactly what you ought to do.

Another reason why I doubt equities can snap back a lot anytime soon is because I can’t recall a time when equities have gotten pummeled to the extent they have and other assets are as attractive as they are. Investors that lost 50-60% in what was supposed to nimble “HEDGE” Funds (which didn’t hedge well) are going to be done with them in many cases and shift money back into the mutual funds (which have much less leverage) which never lost that kind of money for them. They will also buy debt securities, corporate bonds, munis, converts and real estate among other things. Sure there’s a lot of money that will come out of treasuries but it aint going into equities to the extent that it has historically. And that money on the sidelines is not all going back into the market either. Much of it will go to redemptions and other asset classes – I doubt many will underweight cash as much as they had in the past, regardless of what yields are.
As the market rallied a couple of weeks ago, I was shocked to see how many were sucked into the idea that the worst was over. Well educated money managers bought into the company line.

Many remain in a state of disbelief and think it can’t get much worse now. They think “I can’t sell now, it’s too late”. Wrong again, uncertainty has never been greater, our financial system is melting down and the meltdown is creating massive collateral damage. Otherwise good companies are seeing credit issues impair their operations; which are already under duress on the demand side. As corporate profits slide and the outlook for growth deteriorates so too will equity valuations. Earnings and Multiples will remain under pressure and equities will decline – if you don’t reallocate out of a long only overweight equities portfolio, the market will do it for you.
So the decline is apt to be more protracted than most think and the downside will be such that the comps can’t be easy enough. Retailers are a good example of this – things got bad retailers almost 2 years ago, they’ve been up against what should have been easy comps but still comping the high teens NEGATIVE for many. Sure we may be approaching a point where its hard to get MUCH worse (much being the key) but I think the disconnect here is that everyone is assuming that things bounce back as they did in past cycles when consumer balance sheets weren’t decimated and banks were healthy and lending. Generation X & Y have pulled forward a lifetime of sales (which would have gone to sales in the period ahead and would have been more money with interest instead of deficits and unmanageable debt service burdens. One consumer’s/business’ spending is another consumer’s/business’ revenue and the multiplier effect you heard about in econ 101 (when the butcher buys baked goods and the baker then buy candles etc.) works in reverse. That’s how a mild recession turns into a really bad one – the butcher and the baker cut back the spending and employment and the candlestick maker goes out of business.
My point in all of this is not to be doom and gloom for doom and gloom sake – I’m not trying to be Marc Faber or Jim Rogers talking my book on Bloomberg or CNBC. I’m saying all this to impress upon you how important it is to worry more about containing he risk in your portfolio than missing out on a rally that has a very low chance of happening in the first place. That Goldman Sach’s S&P500 target is now almost 45% away and the hurt is palpable. It’s not too late to reduce exposure to equities and increase exposure to cash, and high quality/much less risky debt. That doesn’t mean you shouldn’t hold equities at all, it means to hold less. Avoid the temptation to bottom-fish banks, brokers, cyclicals, industrials, transports, materials, techs and other relatively high beta, economically sensitive sectors and instead focus on well managed, well financed less cyclical names likely to survive this hell of a cycle. I think a names like DE and NUE are still good shorts. And am likely to put FSLR on short as well. I’ll be back to you soon with more names both short and long. But first I’ll tell you why I think TARP is a joke and I’ll suggest what I think is a much better way to stabilize the financial system in a much more cost effective way.

The "60 Minutes" story on oil speculation was spot on - facts, not shabby conjecture

Everyone seems to be bashing the 60 minutes story about speculation causing oil to surge to $147. After reading the articles published at SeekingAlpha.com I felt compelled to see how bad this segment was, so I went to the 60 minutes website to take a look see. I expected to see a chop job; but what I saw was an excellent laymen's explanation of how speculators and investors with fiduciary duties turned speculator contributed to a bubble which helped send billions of Americans hard earned money to Saudis, Iranians, Venezuelans and others who laughed all the way to the bank. These CBS bashers either have no idea how energy markets work or are spinning the truth because they have an axe to grind with CBS. It's a shame because for people that have a cursory interest, these clowns just effectively made a very enlightening report questionable to those honestly uninformed who would like to understand the issue better. And all they say to support their position is that the EIA has a graph that sort of makes it look like price tracks demand very closely. The truth is EIA estimates change with the wind - if your memory is that short you too should check the record. The EIA makes intermediate and long term energy supply and demand estimates that are awful - they failed to anticipate the CYCLICAL market tightness and failed to anticipate the cyclical downswing.

One of the first lines in the report asserted that the oil price spike was not caused by oil company CEOs or sheiks but speculators and other so called institutional investors like Hedge Funds (like Citadel, Amaranth and Ospraie), Commodity Traders in Chicago and Europe, Morgan Stanley, Goldman Sachs, J.P. Morgan, Barclays, Sovereign Wealth Funds, Yale, Harvard, as well as, Pension Funds like CALPERS and others. That this is debatable is crazy. It is a FACT that these entities entered the oil market in a big way during the bull market in oil. The story asserted that over a 5 year period the amount of energy futures traded went from $13B to $300B - this too is a fact. It is a fact that Enron lobbied aggressively for changing the rules so they could control the market more and got what they wanted. It is a fact that Morgan Stanley owns more pipeline, storage, production and refined product than most oil & gas companies; this wasn't the case in past cycles.

You don't have to be a forensic scientist to understand they did it because the asset class was going up for a long time. You can delude yourself with rationalizations if you please but this is no different than what pension funds did when they doubled and tripled their allocations to unseasoned and excessively leveraged "alternative investment" strategies. Yale did it first and looked like genius, everyone else felt either inadequate or couldn't deal with missing out. It really is that simple. Allocations to commodities increased because they did well for a long time. MBAs, CFAs and Quants everywhere fabricated a few correlations graphs and an articulate pitch and presto the blind followed the blind.

The story mentioned that there is very little physical demand in the futures market relative to the total and by far more than there has ever been. This too is a fact, bearish oil analysts which had seen a cycle before pointed this out many times. Sell side wall street analysts talked about this in research reports, Barrons did stories about it, analysts from Sanford Bernstein, Oppenheimer and ISI pointed this out at congressional hearings on the subject. A J.P. Morgan official denied speculation played any part at the same hearing, claiming it was pure supply and demand while another JPM strategist spoke about speculation taking over the energy markets in an email the same day. 60 minutes had the email and showed it. It was obvious to anyone who bothered to check. The 60 minutes story asserted that there were 27 barrels worth of futures contracts traded for every barrel of physical demand and a fraction of those ever took delivery. This too is a FACT - "60-70% of the futures contracts which were (as the story indicated) initially created to help users hedge were held by either small or large specs - I.e. CTAs, hedge funds commodity day traders. You can look at commercials as a percentage of open interest and see how bullishly involved speculators were. Not unlike the real estate market, easy money (institutions that could borrow easily and lever themselves up 20 to 1) and a market that never seemed to go down sucked the suckers in and they got what they deserved.

People told me I was crazy when I told them that demand destruction was already taking hold and the economy was already slowing so it was a matter of time till oil collapsed. I looked like an idiot as I told my friends that I thought we'd fizzle a little past par; figuring that oil would look like it lost momentum near $100, suck some premature shorts in and then proceed to spank us on a move to $110. So I got cute and shorted some black gold at $109 and covered at $117. I got lucky there as I should have also known that we'd go parabolic before the collapse. I could have easily got smoked. But that's another story. $25/bbl increase in a day on NO significant news? $10 moves in each direction? That's not the sort of volatility you see in the middle of moves but rather at tops and bottoms of speculative exhaustion. It seems to always happen that way. Markets that go parabolic are almost always driven by speculation. Permanent supply and demand shocks are rare.

My message is that if it looks like a duck, quacks like a duck and acts like a duck, don't let some clown who cant or wont deal with the facts tell you different. If you didn't watch the story, go see it for yourself. If we were running out of oil or couldn't produce enough to meet demand, you would see the kind of lines and rationing we saw in the 70s. Anyone who was around back then recalls what shortages look like - people waiting for an hour or more in line at gas stations and couldn't even fill up. To even suggest it was all supply and demand is laughable. The crash is proof in and of itself - markets driven by fundamentals do better to sustain price advances.

Nothing in the 60 minutes story was news to anyone with a clue. I'm really shocked at how it came across and appalled at how some "professional money managers" writing here spun it - super weak arguments that by and large missed the point. So I felt compelled to try to set the record straight so others less versed wouldn't get bamboozled. The fact is that no one really knows when the world will run out of oil. Many factors influence energy prices over the long run, including production costs, the dollar, supply, demand and competition from alternatives, etc. But bubbles are usually borne of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated by analysts and pundits who con otherwise unsuspecting investors and traders with new paradigm type stories. There's a saying in the commodity markets that goes "price cures price", in other words, high prices are the cure for high prices. This has been and always will be true because of the economic sensitivity of commodities and the ability of commodity producers to always race to make hay while the sun shines. OPEC didn't cut production while prices surged. The laws of supply and demand are called laws for good reason.