November 12, 2008

Global Market Comments for November 12, 2008
Special Crude Oil Issue

1) A number of big hedge funds are starting to circle around $50 as a place to get involved on the long side with crude. Hundreds of companies faced a near death experience with crude at $148, where no business model was profitable. This time around they are going to be hedging their fuel needs for the next several years like crazy, especially the airline industry. Marginal oil supplies like tar sands, deep offshore, and most alternatives are going back to the wilderness. The credit crisis has frozen financing of many new traditional oil fields. Below $50 OPEC producers start shutting in production, especially the emergency supplies they brought on stream only six months ago. Buy crude at $50 an you might get a double out of it over the next two years, and a quadruple in the next economic recovery.

2) Now that crude is threatening $50/barrel, it is clear that someone in Mexico City was thinking. The world's sixth largest oil producer has hedged all of next year's oil production at $70-$100/barrel through long dated put options at a premium cost of $1.5 billion. I wish I had been the one to write that ticket! Oil accounts for 40% of Mexico's government revenues, and this strategy locks in the country's earnings at much higher levels.

3) Since we are talking about crude, has anyone noticed that the foreign oil import bill for the US has dropped from $900 billion to $400 billion since June, and that the $500 billion in savings is hugely stimulative for the economy? This is especially true for big oil consuming industries like airlines, trucking, downstream refiners and petrochemicals. Great for United (UAUA), YRC Tricking (YRC), Tesoro (TES), and DuPont (DD), as well as the oil consuming BRIC's of China (FXI) and India ($BSN).

4) David Hale, a global economist at Chicago based Hale Advisors, believes that the US is not headed for a lost decade like Japan's. The speed of action by the Fed and the many measures taken by the Treasury should resolve most of the banking problems in a year. The IMF calculates that American real estate loan losses total $1.7 trillion, and that only half of this has been written off. The TARP program funded by congress will finance a write off of the remaining half. A recession of this magnitude historically ignites an economic rebound at a 5% annualized growth rate. However, this time more stringent lending standards will probably only allow a 2.5% recovery growth rate.

5) If you want to see truly Great Depression era charts look at these two. The Market Vectors Russia ETF (RSX) has cratered from $60 to $12. The Baltic Dry Shipping Index ($BDI) has vaporized from 12,000 to 820! Both are huge buys at some point.


The only person who should be picking bottoms here is your proctologist. :