May 21, 2008

Market Comments for May 21, 2008-Special Energy Issue

1) Crude hit an all time high of $133.85 on the back of an unexpectedly large drop of 5 million barrels in inventories. A build had been expected. This is a big miss. The stock market had discounted a crude spike to $130. It is now discounting $150.

2) The US consumes 21.7 million barrels a day of crude, 25.5% of world production, compared to 7.2 mb/d for China, 5.2 mb/d for Japan, 2.8 mb/d for Russia, and 2.7 mb/d for Germany.

2) The hottest stock for the past month has been Dallas based Trinity Industries (TRN), the leading manufacturer of wind farm towers. The stock has risen from $24 to $38.5, a gain of 60% in the past month.

3) The strategic Petroleum Reserve now has 703 million barrels, the equivalent of 58 days of crude imports. The maximum capacity is 727 million barrels.

4) In 18 months GM will launch the Volt, priced at $30-$45,000. The hybrid will run on electric power only for the first 40 miles, then as a gasoline hybrid for up to 600 miles, getting 100 mpg. The annual cost of the power charge will be only $150-$300. A full charge takes 6 hours. This could be interesting if they actually deliver.

5) The reason that high oil prices are less painful for the economy than in past spikes is that we are using 45% less oil per unit of GDP than in 1980. To reach the old high on GDP adjusted basis, oil needs to go to $190

6) British Airways just announced profits of $1.5 billion. Its jet fuel bill this year will rise from $4 billion to $6 billion. The company hedged 65% of its fuel bill for 2008 at $85/barrel, and 30% of its fuel needs in 2009 at the same price. Many airlines have not hedged their fuel costs at all and these will inevitably have to go out of business.

7) According to Kelly Blue Book the prices of used large SUV's has collapsed, from $23,566 in September to $20,122 today. The price differential equates to 860 gallons or 15,000 miles. Used cars are now selling for 47% the price of new cars. Sales of new vehicles are down 23%. Many dealers are now refusing to take trade ins of these behemoths. Many owners who bought their cars on credit last year, now have negative equity in their cars.

8) Another great wind power play has been Stamford, CT based Hexcel (HXL) which has leapt 35% from $18 to $24 in the past month. The company makes cutting edge carbon fiber blades for wind mills. You could also buy Kaydon Corp (KDN), a leading maker of ball bearings for windmills from Anne Arbor, MI. The stock has doubled since March.

9) Pacific Ethanol (PEIX) has been on fire the past month. The stock has more than doubled from $3 to $6.75. When crude turns, which it has to soon, you don't want to be anywhere near this stock. It also may not survive a democratic administration which is likely to axe subsidies for this industry.

10) Over the last five years the amount of money dedicated to long only oil ETFs and energy index funds has increased from $13 billion to $260 billion. This is about the same amount of oil that China has bought over the same time period. This tells you how hot the money is in this sector, and how big the inevitable fall will be.