Tuesday, May 20, 2008

Oil is the Bad Kind of Bubble

Well it only dropped to 42 degrees last night and the plants in the garden seem to be ok. Lets go with the springtime temps already! Going to order some dry aged ribeyes tonight for dinner this weekend after I blog. I love the grill.

Massachusetts Senator Kennedy with Brain Tumor
My home state Senator, Ted Kennedy, has been diagnosed with a brain tumor. While I am not of the same politics as the esteemed Senator, I would like to pass along my best wishes for his health and a hopeful defeat of the tumor.

Fannie and Freddie Profits to Fund Housing Bill; What profits?
Some details came trickling out about the dumb housing bailout plan. Allegedly the plan will not cost the taxpayers any money because, get this, profits from the GSE's Fannie and Freddie will be used to fund the logistics of transferring the mortgage to the FHA or something. The plan is as convoluted and complex as any plan you would expect from the Senate.

FNM and FRE have had some issues first reporting correct earnings reports when they had profits, and now they have no profits anyway. Hard to see how mortgages guaranteed by the FHA are not going to cost the taxpayers any money, is the FHA part of the government or what? The crafters of this plan obviously think that home values are at THE BOTTOM and foreclosures are a thing of the past. What else can you expect from our leadership.

Oil is the Bad Kind of Bubble
The market had a rough go of it today. Most commentary attributed the drop to oil prices near $130 a barrel and a hot inflation number. Why oil at $100, $110, $120, or even $125 did not cause any issues is beyond me if oil at $130 is some mystic evil number. In fact, there was a quick jump in thinking that the major issue facing the economy going forward was now Oil prices!? Weird indeed. From Yahoo Finance:
AP
Stocks stumble on record oil, inflation worries
Tuesday May 20, 5:47 pm ET By Joe Bel Bruno, AP Business Writer
Investors retreat as oil passes $129 a barrel, more worries about rising inflation
Analyst Stephen Leeb believes escalating oil prices and their fallout have now replaced the health of the financial sector as the market's biggest worry. He said rising energy creates a "very vicious circle" through the economy, and thinks the government must take some kind of action to bring down prices.
Oh Man! Already we are going to start hearing calls for more government intervention, this time in oil prices? An oil bailout? Can Fannie buy oil futures? Don't laugh, anything can now happen in the new era of socialist America.

"Stock investors are watching oil, period," said Leeb, whose New York-based Leeb Capital Management focuses on crude and its impact on equities. "The events that moved the market before revolved around write-offs and foreclosures, but all that's changed."
When did the housing crisis and credit issues stop being the main problem? I guess at 2:30pm today when oil prices won out.

But some analysts believe the market's slide gave investors an opportunity to collect profits. Peter Cardillo, chief market economist at New York-based brokerage Avalon Partners, said Tuesday's decline doesn't change the market's long-term prospects.
"The oil price rise is being done by speculators and does not reflect market fundamentals," he said. "But, it still has an effect on the consumer -- and investor confidence is equal to consumer confidence, which has been having swings as of late."

And we see a familiar pattern once again.

You see Oil prices are in a bubble that is disconnected from any fundamental valuation of the commodity. This is bad. This must stop.

When home prices were in a bubble that is disconnected from any fundamental valuation of the commodity, that was good. Awesome in fact. So great that while home prices are now falling to better reflect their value based on fundamentals, there is a furious effort to try and stop that process from occurring.

Is oil more important than housing? Both are life needs. Why the differential treatment? Where are the ads and talking heads saying "Buy Oil Now or You Will Be Priced Out Forever!" How about "Stunning Oil Barrel for Sale, Recently Updated and now with a Granite Barrel".

Nobody cared much for the people getting priced out of housing when prices were doing the parabolic thing. In fact smug home "owners" often taunted and jeered at people that opted to wait or could not afford to buy in the bubble mania. These same aloof fools are now whining for help. Unreal.

In summation, I had posted on May 5th that Oil was approaching and important psychological point. I had ended that post:

" I am struck by how strong the desire is out there to be optimistic about various things. Oil is becoming a major threat to that mindset. With all the FED bailout plans and emergency lending tricks have created a new bubble, a bubble in sentiment? If oil at $120 means nothing bad in a macro sense, then you know folks are pretending hard. It is shaping up to be a LONG summer."

And today we see an AP article that says what I said, well kind of. One can dream that reality has come back to the market, but I imagine today's action will have no follow through. When the Oil price bailout plans start to circulate, you know it is time to kiss your money goodbye as the government is going to need all of it very soon. Vote in the new poll!

Have a good night.

6 comments:

watchtower said...

Got Civic?

Anonymous said...

Bad things happen when a country purposely decides to devalue it currency.

Kevin

watchtower said...

Hey GYSC,
I've been thinking of turning a little fiat into a more "tangible" item. I was wondering if you have gotten a chance to try out that new St Croix fishing rod yet and whether it is worth the extra cost over a lower cost pole.
Did you consider a G Loomis before buying the St Croix?

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