Thursday, June 4, 2009

Rising Oil Prices and Rising Mortgage Rates are a Good Thing

It was Harvard and MIT graduation day today in Cambridge. This means tons of eager youngsters are getting wildy expensive degrees and there was plenty of traffic. Never fear, I have extra time on Thursday nights to post!

Sad News
My wife emailed me a Yahoo headline today which broke the news that actor David Carridine died some time yesterday in Thailand. Article from Yahoo can be seen here. Sadly at this point it seems to have been a suicide.

If you are not familiar with the name, David Carridine has been one of the greatest action film stars of the generation. Probably best known for playing the title role of "Bill" in the "Kill Bill" films, my favorite work by Mr. Carridine was the villain role he played to perfection in "Lone Wolf McQuade". Sad news and best wished for those close to David Carridine during this painful time.

Odyssey Marine Exploration Torpedoed
A while back I highlighted a stock I found to be exciting called Odyssey Marine Exploration (OMEX):
The company I took a position in is called Odyssey Marine Expeditions, Inc (OMEX). This firm is the company that found the SS Republic, and has located many other ships that may harbor valued salvage. If you read the book you can appreciate just how good these guys are. The stock itself trades at about $3 today, and shows a market cap of $158 million. The stock trades pretty thin with average volume of 242k shares daily. (All data from Yahoo Finance Ticker report)
As I see it, OMEX is a lottery ticket. The stock is one lawsuit gone wrong on a claim from going to zero. Ships that are located may have nothing recoverable. They could run out of money in short order. This stock is a speculative play at best. If you are still interested, read on.

Still, I am a romantic at heart for treasure hunting and took a micro (very small) position in the stock at $3.

Today brings news that OMEX has lost another salvo in a battle with the Spanish Government over a find:
Odyssey sinks as judge rules loot belongs to Spain
I will not get into the legal details as they are far from clear, but this ruling is very bad for OMEX. They are appealing, but it seems that there is just not any real maritime law out there that applies to such an enterprise. All this I was well aware of when I bought the stock. The stock was hammered for almost 50% today and closed at $2.

At this point I would rate OMEX as a strong sell. $2 is better than $0 which may be the next stop. As for myself, my position is so small that I will hold what I have and see what happens. Never play with what you cannot lose. Going further I would advise OMEX to do the following:
-Pack up the contents of the find
-Travel to the exact point at which they found it
-Jettison the cargo
-Provide Spain with the exact coordinates
-Provide Spain with a detailed cost list (over $150 million) which is the minimum required to salvage such a find
I know, I am mean.

Rising Oil Prices and Rising Mortgage Rates are a Good Thing
In what can only be seen as a return to the crazy days of DOW 14,000 and S&P 1500 there are contortions of logic going on that are worth taking a look at. Two items have had the most attention over the past week, Oil and 10 year yields (aka mortgage rates).

Oil Prices
At the top of the market, it was believed that $130 a barrel oil was "able to absorbed" by the "strong balance sheets of households" with their access to "savings represented by their home equity" or some such logic at the time. It even seemed true for a while.

Now we know that gasoline was being paid for with credit cards which were being paid off using roll over home equity loans. How did that work out?

A serious case of "systemic risk".

In practice high oil (hence gas, normal people do not buy oil drums) prices were able to be carried, but not by wages or real savings but by debt generation.

So now oil has double to almost $70 a barrel and the local gas stations are ramping up prices daily. Where high gas prices should have caused an issue before, they now will have no buffer ("the Corleone family used lots of buffers, Senator") between them and consumer bottom lines. And remember those unemployment lines are MUCH bigger than before. Usually rising oil is indicative of:
-higher inflation expectations
-shortages of some sort
-Global tensions

We all know because the FED has told us that inflation is out. Stockpiles are as big as they have been in some time. There are some global tensions, but nothing to get carried away over. So that leaves us with speculation as the last resort. Anything to support that? Well, maybe:
Oil Stored On Tankers Is Up 71% Since April
The volume of refined fuel stored on ships floating at sea has jumped nearly 71 percent since early April, industry sources said on Thursday.
About 41 million barrels of gas oil and jet fuel were being stored in tankers mostly off Europe's coast, up from around 24 million barrels in April, sources said.
Crude has rallied to a seventh-month high on optimism the economy would soon improve, despite the continued build in storage.
The demand for ships to store fuel has boosted freight rates for the Long Range 2 tankers mostly being used, shipbrokers said. The tankers can hold between 600,000 and 1 million barrels.
"Storage continues to be an option for traders and we see bookings running through at least the end of August, with several of them adding options to extend storage into September," a shipbroker said. U.S. investment bank JPMorgan Chase & Co has hired a crude supertanker to store gas oil off Malta's coast, a unusual sign traders were looking to take advantage of the weaker crude oil freight rates to store distillates. The ship would have to be cleaned to hold the refined fuel.
Crude rallied to over $69 a barrel this week, the highest in seven months, as optimism about the global economy outweighed concern about poor fundamentals in oil markets.

I have warned that the rush to save banks without any regard to how they mishandled their own dealings was a mistake. Back to old tricks again it seems. At this point I do not view rising oil prices as a "global recovery sign" at all. Even if a recovery was in the works, rising energy would surely kill off the expected anemic recovery. Then again, I bought OMEX stock, so usual grain of salt disclaimer.

Mortgage Rates
Mortgage rates can be set by so many benchmarks and tracking indices that it gets crazy. Generally the yield on the 10 year treasury is a good gauge of rates. Yields have been spiking because, you guessed it, the expected recovery in the economy. The spread between the 2 year and 10 year is often looked at to gauge economic matters and Calculated Risk supplies the goods (click for larger view):

CR notes:
This graph shows the difference between the ten- and two-year yields.
Usually a steep yield curve precedes a period of decent growth, but several analysts suggest the current ten year sell-off is due to concerns about increased Treasury issuance to finance the deficit. Whatever the reason, mortgage rates higher are moving higher..

Leave aside for a moment that the rise in yields could be because there is concern about deficits as far as the eyes can see. We were told by the FED just yesterday that the US Congress must CUT SPENDING or else. I am sure they will comply. Right after they fix social security and come clean about Roswell New Mexico.

Regardless, the focus point is that mortgage rates are directly influenced by this action. So how exactly is a higher mortgage rate going to be a good thing?

Essay Contest
My homework assignment to any and all interested is to pen a small thesis (small, so it fits in the comments section) that can explain how rising oil prices (hence gas prices) and higher mortgage rates are "good" for the economy going forward. You can even split it up and pick one or the other. Post your conjectures in the comments and I will post tomorrow the most persuasive cases. Remember, it is always the best way to grow your understanding by giving opposing views fair consideration. The winners will be rewarded with their names in print and a fair discussion of their work, and truly achievement is its own reward! If the winners are really persuasive I may (no promise) be inclined to reward with an ounce of silver (if we can work out details of shipping without undue disclosure of personal info). I look forward to the results.

Have a good night.


GawainsGhost said...

Kung Fu was THE show back in the day. But the best movie David Carradine ever played in was Death Race 2000, the greatest B movie ever made.

I will now pen a detailed thesis on how rising oil prices and higher mortgage rates are good for the economy.

They're not.

watchtower said...

The theme music from "Kung Fu" has been running thru my head ever since I heard the news today.

Rising oil prices might not be good for the average American but I'd bet that it will be for the average Russian considering how their Ruble took a hit after oil went into the toilet.
Having said that I haven't actually checked to see if the Ruble is rising so I could be wrong.

getyourselfconnected said...

Excellent Carridine references. What a loss.

One could argue my contest is a non-starter on the grounds that the actual reality precludes a reasonable expalaination. Perhaps this is a lesson in what second derivitives mean, outside a closed system. We shall see. Still, the contest is on.

PS. Get your requests in for Friday night entertainment. Any and all is welcome.

getyourselfconnected said...

Lisa, your last post on your site was hijacked by a SPAm bot, so you may need to kill anon posting. With wedding bells in your head I am sure you much better things to think about. Hope you find time to read me!

watchtower said...

I checked a graph and yes, we are getting less Rubles for a Dollar.
So this means that anyone here in America selling something that a Russian might want would be in a little better position to make a sale, hence an incredible boost to our economy : )

getyourselfconnected said...

Last tidbit for the night (via Automatic Earth):

Germany wants their gold back. Do we even have it??
If the loyal readers can spread their minds, we may have winners of one silver ounce of thier mint choosing ( I have them all)

Vincent said...

Surely, this is a trick question. How can higher oil, gas, and mortgage rates be good for the economy?

This recovery is fragile at best. Continued higher prices in these catagories will only crash the economy again.

The Fed is in a box. Keep rates low and raise inflation expectations, leading to higher prices, leading to thwarting the recovery, leading to keeping rates low. Round and round we go.

getyourselfconnected said...

Vincent is leading (well done), but I await pure baloney logic arguments. See You tomorrow, its bedtime.

watchtower said...

I've read that when the gold standard was abandoned the US dollar was then pegged to oil.
If oil rises then the world would have to buy more dollars to purchase oil, in effect maybe soaking up the excess printing of dollars.

Just a thought.

Stagflationary Mark said...


I do love a challenge!

"My homework assignment to any and all interested is to pen a small thesis (small, so it fits in the comments section) that can explain how rising oil prices (hence gas prices) and higher mortgage rates are "good" for the economy going forward."

1. Higher Mortgage Rates.

Some people will sell their homes as home affordability goes down. Other people will buy new homes before interest rates go higher. That wealth transfer can then be taxed. Once completed, mortgage rates can tank again. That will allow the second set of people to sell at a loss and allow the first set of people to subsidize those losses through government bailouts. It's the American dream! We're living it!

Further, the information age's sarcastic economy will thrive under such conditions. Expect "Economic Disconnect" and "Illusion of Prosperity" type blogs to rocket higher during their initial public offerings, lol.

2. Higher Oil Prices.

Higher oil prices will lead to lower oil prices. We've already seen this once. As a general rule of thumb, expect oil prices to become 5x cheaper if we can first get oil prices 10x more expensive.

However, even if oil does not crash there are still benefits to our consumer driven economy. Picture the following.

The typical consumer probably lives toilet paper roll to toilet paper roll (sort of like paycheck to paycheck). Now picture how is behavior changes when the headlines say, "Toilet paper shortage imminent." Shopping, baby! That's what I'm talking about. Consumers will be literally clearing out the shelves.

In summary, I am very optimistic about rising mortgage rates and rising oil prices. Combine that will higher taxation on basic needs and we should have this economy humming along in no time.

And lastly, loved Kung Fu.

"If a man dwells on the past, then he robs the present. But if a man ignores the past, he may rob the future. The seeds of our destiny are nurtured by the roots of our past." - Master Po

We have robbed the future and we're now working on robbing the present.

"Quickly as you can, snatch the pebble from my hand." - Master Kan

So is inflation or deflation the bigger threat? What should I be snatching?

"I seek not to know the answers, but to understand the questions." - Caine

GawainsGhost said...

For Friday night entertainment, in memory of Chrysler and GM, I suggest the Euthansia Day scene from Death Race 2000. That's the one where the hospital workers wheel old people out onto the road in wheelchairs so they can be run over, and Frankenstein (Carradine) swerves and runs over the doctors and nurses.

As to interest rates, at 5% on a $100,000 loan fully amortized over 30 years the total amount of interest collected is $97,000. So it's not like the banksters aren't making enough money.

Back in the early 80s, the interest rate was 18%. Do the math and figure out how much total interest is collected on a fully amortized loan at that rate. But people were still buying homes then, just not too many of them. Thus, rising interest rates is the perfect cure for the housing market now flooded with inventory, sort of like the film clip above.

The analogy is exact. The old people represent houses, aged and unwanted. The doctors and nurses represent the banksters and government. Frankenstein represents the American homebuyer. It's Euthansia Day!

As to gas prices, well, they always go up in the summer, during peak driving season. But the American people, cash-strapped if not unemployed, are readjusting their vacation plans, staying closer to home when not at home. I mean, when Netflix are cheaper than a gallon of gas, what are you going to do?

So this is a wonderful cure for the shinking consumer-based economy, not to mention the hotel industry now plauged with high vacancy rates. Thus, I'm long Netflix.

Lisa said...

GYSC, thanks for the spam warning. Fixed that. I always find time to read your posts :)
The wedding is several months away, and it will be a simple affair. I'm just a redneck, so we will have a back yard barbeque with a few friends and family. All that really formal stuff would make me crazy.
I'd enter your contest, but trying to make a case for the irrational would make my head explode.

watchtower said...

SEC charges former Countrywide CEO Angelo Mozilo with fraud

By E. Scott Reckard and Jim Puzzanghera | Tribune Newspapers
June 5, 2009

"Federal regulators accused Countrywide Financial Corp. co-founder Angelo Mozilo of fraud and insider trading, saying he and two other executives failed to warn shareholders of the real risk of the mortgages the company was making at the height of the housing boom."