"Beginning [in 2006], and over the course of the next 5 to 10 years, increasingly volatile energy prices are going to affect how you live and what you drive, not to mention the economy, the environment, and the complexity of the geopolitical chess match being played out for the world's precious energy resources... we are in the midst of volatility, right on the cusp of a break point that will change the way governments, corporations, and individuals exploit and consume primary energy resources, especially crude oil."This an excerpt from Peter Tertzakian's book A Thousand Barrels A Second. I strongly recommend this book as you only need to get through the first page to see that the former oil industry "foot soldier" and energy analyst knows what he's talking about.
Anecdote: The New York Times followed up on my news tip with Jad Mouawad's lead business story, As Oil Giants Lose Influence, Supply Drops. I sent in the tip following my post "Big Oil: 2nd Quarter In Brief".
The Olympic Spirit
Usain Bolt raised eyebrows with his come-from-nowhere gander into the title of "world's fastest man". Three months ago, he raced in his first adult international competitive 100m event. The morning of the Olympics he woke up at 11, ate some chicken nuggets, watched TV, ate lunch, more chicken nuggets, then jogged his way into a new world record and gold medal in the 100m. He could have run faster were it not for his pre-finish celebration and an untied shoelace. This may seem suspicious, but even if he had used performance enhancers a good pharmacist knows how to circumvent drug testing; we may never know whether or not he really did wake up one day realizing he's the worlds fastest person. If he ran clean, it would be nothing short of impressive. Or maybe he wanted to run clean but someone slipped something in his Chicken McNuggets. Either way, the Olympic spirit and excellence more than offsets the less desirable sides of the games. 'Communist' China has thus far hosted the games without anywhere near the level of controversy many of the alarmists and human rights extremists had predicted. Canada topped its Athens podium count with 13 medals.Anecdote: Simon Whitfield made an impressive come-from-behind sprint in triathlon, nearly clinching gold but finishing with silver. I could feel his pain in the closing kilometers of the run. "It hurt, it really hurt..." said Whitfield. But with 300m to go and 40m behind the leading pack of three, he threw away his cap, summoned some energy from deep within, and commenced his sprint to the podium. He even took the lead before Germany's Jan Frodeno stormed back to rain on the party, leaving Whitfield with the silver.
Freddie and Fannie Fall Off The Tricycle
Mortgage guarantor Freddie Mac had mixed success with a high-yield debt sale today. Freddie Mac was able to raise over $3 billion in capital. Shares fell another 6% in addition to yesterday's 25% plunge. The likelihood that the mortgage GSE's will require explicit taxpayer backing is a bit of a psychological self-fulfilling prophecy--as investors are told by analysts not to invest in these companies, it makes it very difficult for them to raise capital. As a result, they must do so by offering a very high yield incentive (as was the case in today's sale). The premium will keep them afloat for longer, but it also hurts longer term profitability, which is why equity shareholders continued their sell off. Inflation data from the past week did not help, as it raises speculation that the Fed may need to raise rates sooner rather than later--a move that would likely force Freddie and Fannie to seek public funding if a rate increase were factored in this year.Anecdote: Last week, I tried to warn a handful of naive investors on the Google Finance discussion board who thought they were getting a bargain on the shares of Fannie Mae (NYSE:FNM). I pleaded with them to cut their losses and move on. Unfortunately they thought I was a hedge fund manager trying to use psychology to maliciously drive down prices. In retrospect, I should have tried to explain that I did not hold any short positions (my investment knowledge is not advanced enough to take short positions). I have no financial stake in Fannie or Freddie whatsoever--I was simply trying to advise them to donate their money elsewhere. Instead the poor souls lost 30% already since then.
photo credits:
Oil Barrel byblizzy73
Birds Nest by Theo W L Jones
Tricycle by iMorpheus
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2 comments:
To you observation about Fannie and Freddie's crisis of confidence, our entire financial system depends on confidence. Investors running for the hills will not establish confidence. In fact investors who run are traders not investors.
I agree that confidence and human psychology plays a very big role in financial systems. This effect is even obvious with oils recent $30 correction, and the problem is even worse when you are dealing with non-physical assets. However, the low confidence may have merit because I think the entities are fundamentally flawed. It is certainly possible that they are currently undervalued due to baseless negative reporting--but if indeed they are structurally flawed then they will fall in the long term. Not everyone who runs is just looking to make quick money. Some are simply investors who think their investment are not as good as they previously thought (i.e. 'I made a bad investment decision and it's time to cut my losses and move on'). While psychology surely plays a very big role in financial systems, I think fundamentals always trump psychology in the long run.
In the case of Freddie and Fannie, their troubles go beyond investor confidence--I think are structurally flawed entities that will either be phased out completely or exist in an entirely different form once the crisis is over.
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