Saturday, April 22, 2006

A few sobering and contrarian thoughts

  • Oil at a new high ? Sure. Oil at $100 in a year ? Not so sure. I can't see anyone making a case for the price to go down, so I am sticking my neck out risking a whacking. Various oil price forecasts seem to take into account only the supply, or rather the lack of it. How about the other side of the equation ? What if demand, in what is still the most important market, the US, falls ? I feel that a dramatic housing slowdown, well on its way now, will cut demand enought to bring oil back down to - hold your breath - $10 again, from around $70 now. Oil hysteria has now reached a stage where uneconomical alternative energy choices are being hyped daily by the media. Known oil reserve estimates may be overly optimistic, but what about newly opened reserves in regions formerly closed to exploration (Libya and Western Africa come to mind) ? The high oil price has finally led to one desirable effect - more orders for rigs, especially deep-sea ones. When many of these come online, will the market be able to take the supply ? What if oil-sands / oil-shale sources become extremely economical, boosting supply in the short-term ? I am asking questions that no one seems to be asking. As someone who reads practically every financial publication, I can say that there is fear in taking the non-consensus view. But what do I have to lose ?
  • High oil price did have one positive effect. Bringing some much-needed focus on oil executives' compensation packages. Exxon pay packages have been downright indecent - some spillage there! Unfortunately most media outlets either ignore this, and some even defend it. In an industry concentrated on extracting and selling a natural resource, and where the most innovative new thing involves finding new methods to torture indigenous peoples or to payoff local dictatorial thugs, the compensation packages just don't make sense. One executive's pay over five years can, and this is no exaggeration, eliminate drinking water problems and provide medical coverage for the whole of Nigeria!
  • The Iran premium built into oil prices is also something that can disappear in case of an outcome that deviates from most expectations. As a nation made of people who genuinely believe that their country deserves a better place in the world, Iranians must be as fed up with the nut ruling them as the rest of the world. A bloodless coup by pragmatists/moderates will likely find large internal support. Will it happen ? We all can hope for it! Iranians definitely deserve a better ruler and a better place in the community of nations.
  • Is high oil having some impact ? Definitely. I personally have cut back on unnecessary driving. I have reduced my coffee intake further. I have even gone so far as to contact support at Zipcar to ask if they have plans for commuters with last-mile problems when using mass transit. Zipcar support did not respond to my original email, and on a second, somewhat upset followup, replied in a way no customer service department ever should! As for the reduced coffee intake, I am happy not to spend $4 on a latte, where most of that $4 leeches up to some overpaid executive - it wasn't right to buy them in the first place! And alas, going to a Starbucks is not a joy anymore either - in most places the service these days is disgusting and the cafes unclean!
  • While on cafes, the Starbucks alternative, Peet's, is a bit more tolerable, but the recent rapid expansion may have done more harm than good. I closed my positions in both a while ago, though as I said here, I will consider getting into Peet's if I see a better growth story. For now, Tim Hortons (THI), which started trading recently, is a better long term bet. Caribou Coffee (CBOU), which went public a few months ago, looks attractive with lots of insider buying, but be aware that this company, along with many others, are feeling some heat because of their Middle East connections. Truth be told, you will be surprised how many other companies, whose service you use daily, have petro-dollars backing them. Unless you are willing to starve to death, shunning companies based on such criteria isn't practical. If you are ok investing in Domino's Pizza (DPZ), Caribou should definitely be alright.
  • If mainstream media is to be believed, there is an online video revolution out there. If only Youtube showed how to make money, I would be impressed. These new sites are only more friendly ways to download amateur content - content that was always available if you knew how to use IRC! Let them embed ads in them and see what happens to their popularity. Every business plan seems to involve ad dollars - how many ads have you clicked intentionally lately ?
  • The Google juggernaut goes on. But finally its rivals have woken up from their stupor. Recent news about eBay, Yahoo and Microsoft collaborating with each other to fight Google should give you a taste of what is to come. Google better have a way to make money from something other than ads! Original, in-house content will help too.
  • Talking of Google bubble, what will be the surest sign of a top ? How about Google bidding for New York Times ? Remember AOL and Time Warner ?
  • Last week's rally inspired some. I would have felt the same way but for the accompanying rally in gold and silver. I think the metals will have a upper hand, and the market is in for a sharp pullback. Timing the market is not what I recommend, especially if you own individual stocks. But if you are in major indices, now is a good time to consider moving to cash and if you are brave, some of that to bonds even.
  • Danger from an unexpected quarter this week - Sweden decides to move more of its reserves to euros! Of course, the talking heads won't have the same biased tone when Sweden is doing it. But when a Middle Eastern or Asian country does so, prepare yourself for some interesting remarks. Did anybody prevent a Swedish company from buying an American company yet ? Where is Schumer when you need him!
  • Gauging customer service response: As with Zipcar I mentioned earlier in this post, I have in the past tried to gauge investment desirability by mailing to or talking to customer service / support. One such episode, along with the fact that I was ready to redeploy the cash after a 100% gain, was what got me to close my Starbucks position. I still use this method routinely. With a similar intent, I visit malls/retail outlets, and have made some interesting calls. The people-watching opportunities are an added bonus!

2 Comments:

At 10:47 AM, Blogger Shayne said...

medium-term puts on the OSX are reasonably cheap, but liquidity on the longer-tenure contracts is quite poor, which makes a large hedge somewhat tough to pull off - but, all in all, cheap insurance though, and well worth thinking about.

I agree with the Exxon comments - this is not as if this was a wildcat operation that was built by the founder's bootstraps - all Raymond did was act as a caretaker, and ensure that dividend checks were mailed out.

 
At 3:02 PM, Blogger Guru said...

Wildcatters definitely deserve their large, hopefully not excessive, pay packages. After all, they are taking on substantial risks. Raymond's justification of the pay package was laughable at best. People like him give capitalism a bad name!

The other interesting thing to note is that there is insider activity in this sector - unusual after such a runup. From Edge Petroleum (EPEX) to Input/Output (IO) to Maritrans (TUG) - insiders have been buying. Buying volumes are not huge, but nevertheless the higher prices will likely result in a shakeout and benefit research/transportation services.

 

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