February 27, 2009

Global Market Comments for February 27, 2009
Featured Trades: (SILVER),

1) Welcome to the worst case scenario, with Q4 GDP revised down from -3.8% to -6.2%. Q4 will be just as bad, if not worse, then we will find a bottom. Technical analysts were ringing their hands as the Dow hit a new 12 year low and the S&P 500 broke key support at 740. Thank God I don't believe in that mumbo jumbo. Natural gas hit a new six year low at $3.90, and even gold backed off to $928. Citigroup (C) is now so cheap at $1.40 that you could launch a hostile takeover with your American Express card. It really had the flavor of a 'throw up your hands and sell everything' day.

2) I met with Thomas Ricks, author of the best selling The Gamble: General David Petraeus and the American Military Adventure in Iraq, 2006-2008, who says that we are only half way through the war, and our unfortunate involvement there could run as long as another 16 years. The surge has failed, our casualties are rising, and US credibility with Iraqis is zero. Bush blew a cozy set up that worked for a decade where Saddam was contained at minimal cost. Talking is more valuable than fighting, and it is cheaper to hire someone than to kill them. General Petraeus figured this out, so we now have 100,000 enemy fighters on the payroll costing $30 million a month. It was easy to walk away from Vietnam and leave a few million locals in re-education camps. Iraq won't be so easy, because it sits atop, or adjacent to the world's largest oil supply. Eventually, Iraq will evolve into another Lebanon where you have multiple competing armed groups. The big winner in all of this is Iran, which has seen its prestige grow in the Middle East at our expense. Iraq will continue to be a huge financial drain on the US for decades, no matter what Obama says. All very sobering thoughts, with big implications for the markets.

3) With gold bugs, survivalists, and garden variety hedge funds running victory laps over the yellow metal's recent breach of $1,000, it is easy to miss the move in silver that has been twice as impressive. Silver has run 30% this year to $14.60 an ounce, despite the steady deterioration in industrial demand. Silver ETF buying has exploded by 1,676 tonnes to bring their total to 9,929 tonnes. Sales of silver American eagle coins have doubled to four million ounces so far this year. The metal may have more to run. Hedge fund longs, which peaked last year at 50,000 futures contracts, have so far reached only 23,100 contracts in this round. But risk managers are going to have to keep an extra sharp eye on silver positions. A turnaround by the Dow or the yen against the dollar could suddenly take the air out of this bubble.

Silver-1.png picture by sbronte

4) Anyone who has any illusions about the Canadian tar sands business should take a look at the March issue of National Geographic, not normally a prime source of financial and economic news for me. I'm not normally a big time environmentalist, but just looking at the glossy, eye opening pictures tells you that this is this an ecodisaster of Biblical proportions. A $50 billion investment by several firms over the last decade is now producing 750,000 barrels/day, and another $100 billion was headed north before prices crashed last year. You have to cut down a whole forest, remove two tons of peat, then another two tons of sand, and burn 100 barrels of oil equivalent to heat rivers of water to steam, just to produce a single barrel of oil. This gives you the world's highest production cost, thought to be $80-$100/barrel. There are now 50 square miles of sludge ponds in Northern Alberta leaching a witch's brew of poisons into the water supply, which has caused the local cancer rate to explode tenfold. We're not just talking about a few sick ducks and fish here. Canada is the largest foreign supplier of oil to the US, accounting for 19% of the total, and half of that is coming from tar sands.

One can only assume that the whole industry was built as a hedge against some Third World War, Armageddon type total cut off of all foreign crude supplies that would drive prices to $500/barrel, making all of this hugely profitable. Maybe the owners think they can get away with this because it is in the middle of nowhere. An army of lawyers about to hit these projects with a tidal wave of litigation think otherwise. After looking at these pictures and analyzing the numbers, you have to ask if it is really worth it, just so I can drive my Hummer to Walmart.


"You cannot motivate the best people with money. Money is just a way to keep score. The best people in any field are motivated by passion," said open source advocate Eric S. Raymond.