Wednesday, May 21, 2008

The Triple Play: Six, Four, Three


The Triple Play:
Oil Addicts, Credit Crunch, and Deflation

In baseball, a triple play is the most coveted event for the defensive
One, two, three, and the inning is over. It can save a pitcher,
show case a
team’s defensive abilities,shut down the offense, and
most importantly win
the game. Unfortunately, it appears the United
States is on the offensive
end of this triple play.

The Line Drive to Short: Oil Addicts

Goldman Sachs
raised its forecast for the second half of the year to
$141.00 a barrel. (1) Now, it appears that this may be on the low end
expectations. The
United States is a nation of oil addicts. We cannot
kick the habit. Currently, we are in a period where we will either one,
check ourselves into rehabilitation by pushing the green energy themes and
conserving the resources we have, or we will let the oil addiction kill us.
With hat in hand,
President Bush implored the Saudis to pump more oil.
Thus far, the Saudis have responded with a mere 300,000 barrel increase.
Mean-while,it is duly noted that large oil producers such as XOM, BP,andCOP
are returning windfall profits to shareholders in the form of dividends.(2)
Other companies like PQ and DNR are bound to hit a profit well beyond
expectations. While big oil receives a moral scolding from Congress, one
cannot fault those who are making the best out of a supply and demand issue.
In the 1970s and 80s, Green Energies never got the attention they deserved.
By the 1990s no one cared as gas (adjusted for inflation) was near decade
lows. Without foresight, and minimal amount of profitability, Green
Energies remained a dream. Only now, when the addiction hurts are we
turning to think of renewable resources. Be warned though, there are a
number of .com type losers amid a winners. TAN may well be the safest play
here, while other investors have been handsomely rewarded with home-runs
like FSLR.

The Play at Second: Credit Crunch

Bill Fleckenstein pointed out that the housing bubble, and devaluation
housing prices are only one of the dominoes that are falling in this
John Paulson made a bundle betting against the sub-prime
mortgages before
they collapsed. With this point in mind, Paulson believes that housing
prices still have another 10-15 %to fall. (3) As pointed out in earlier
articles, financial institutions are still exposed to a ridiculous number
of home equity loans; loans on homes which are currently losing value.
If the borrower goes belly up then the lender is left holding a home that
is worth less than the amount owed. Anyone who touts XLF should have
their heads examined. As far as credit cards go, there are several
problems with current business models. At one time, it was the goal to get
a consumer in debt, and keep them in debt. The idea was to milk out re-
payments as long as possible creating continual cash flow. However, two
problems now exist. Companies are now entering a hyper-competitive
situation where one credit card company is willing to take each another’s
best customers(See Companies are rolling out offers such
as 15 months with 0% APR in desperate attempts to attract good customers!
This situation does not bode well for issuers like COF who in the end,
will be left holding bad debt of financial deadbeats. Throw in inflated
prices for basics such as milk and gasoline this is a recipe for disaster.

The Throw to First: Deflation

On a much grander scale, the real story becomes deflation. What is the
value of a U.S. Dollar? Stopping short of the gold standard (see
of Economics), as a collective lot the global economy is coming to
terms with the question to what a dollar is actually worth. The fact the

government(under the auspices of the Federal Reserve) are printing out
ridiculous amounts of money. The Saudis then might have the answer, and
now we are feeling it at the pump. Note that Ben Bernanke worked feverishly
stop an all out run on the financials by helping engineer the BSC bailout.(4)
There was no mere coincidence that Secretary of Treasury Paulson was in
giving extra assurance that the bonds (
U.S. government debt)is still safe.(5)
Congress is still figuring out another way to keep this Ponzi Scheme rolling
with still more
money for the troubled housing sector. Housing and Financial Services
Chairman Barney Frank floated the idea of a $300 Billion dollar aid package.
The plan would allow the Federal Housing Administration “
So it could back
more affordable,fixed-rate loans for borrowers currently too financially
strapped to qualify.” (6)

Play Ball?

While some prognosticators are calling a bottom to the financial rain out
facing the
United States, it appears as though we are heading into extra
innings. Whether the Fed, Congress, Economists, or analysts
are willing
to call it, we are in a Recession. And as Yogi Berra said “It Ain’t over
til it’s over!” As an investor,it is critical to take advantage of the
situation at hand. Look for a continued rise in oil prices. Beneficiaries
will include APA, BP, XOM, COP, and smaller businesses such as DNR and PQ.
A cheap dollar will increase exports, as it appears that X, AKS, CLF, and
ZEUS may have additional legs. Stocks with high exposure to consumer credit
such as COF will go down swinging! Homebuilders like XHB are still sitting
the bench due to a cash crunch and an over-abundance of vacant housing.

Sources Cited


1 comment:

AX said...

"The fact the U.S. government(under the auspices of the Federal Reserve) are printing outridiculous amounts of money..." appears inflationary to me. Since we stopped printing M3 data as well as stopped measuring small things like housing, energy, and food. See this:

FSLR has taken a nice $40 dump since I suggested it might be too high. I've read reports that silicon competition may reduce current spot prices by 80% over the next few years. TAN may have some run however....