May 19, 2009

1) Obama announced the adoption of California's stringent CAFE standards nationally, which will force car makers to improve gas mileage to 39 mpg for cars and 30 mpg for trucks in six years. The move is expected to save 1.8 million barrels/day of crude by 2016, cutting imports by 10%. But it is expected to raise the cost of a new car by $1,300. Left unsaid among the smiles and platitudes is that fact that the Japanese have been preparing for this day for 20 years, and the Big Three, with nothing even remotely close on the drawing board, have been hung out to dry by the consumer. One man behind Obama stood especially tall. The new regulations put Toyota USA (TM) president Jim Lentz in the sweet spot, with the largest hybrid market share of any manufacturer. This month its third generation, $22,000, 50 mpg Prius is bringing new customers into the showrooms in droves, helping to boost MOM sales by 15%.

2) I ran into a couple of geologists from the Brazilian oil company Petrobras (PBR) who knocked my socks off when they told me about the quality of the crude they were pulling out of their new deep offshore Tupi field. They are drilling at 20,000 feet and getting 15,000 barrels a day of hot, light sweet crude blasting back in their faces under its own pressure; the kind of premium crude you normally only find in the Middle East. Overall, the company plans to boost production from 2.4 million barrels/day today to 3.6 million in five years and 5.7 million in ten years, or half of Saudi Arabia's current production. I was unable to pin them down on the true cost of the offshore production, meekly claiming they didn't break the figures out separately. They did admit, begrudgingly, that it is well below $40/barrel compared to the $80 offered by some industry analysts, and $9.20 for the company's own weighted average cost. This confirms my belief that the next move in crude is up to $200, and then down to $10, as it is replaced by alternatives over time. Be sure to own PBR on the up leg.

3) I try not to fudge articles from the New York Times too often, but kudos on their piece about the glut of ships stranded in Singapore, the casualties of the near shut down of international trade. The greatest assemblage of ships since the D-Day invasion, some 735 bottoms totaling 42 million tons are begging for charters. With China-Europe 40 foot container rates down from $1,400 to $150, and bulk carriers falling from $300,000 to $10,000 a day, it could be a long wait. Singapore became the parking place of choice because of cheap labor, fuel, shipyards, mild weather, and minimal environmental regulations. A 300,000 ton crude carrier can make a pretty messy neighbor. Easy finance sparked a shipbuilding boom and oversupply that is now leading to major losses by European banks. Isn't this a story we've heard before? There is something wrong with this picture. Does a 35% move up in the Dow jive with 4% of the world's commercial fleet rusting in a forlorn Asian port? I don't think so. When I read stories like this, I go home and stroke my short positions until they purr, telling them their day in the sun is coming.

4) Peter Monk's Barrick Gold (ABX) snared approval for its Pascua-Lama adventure after Chile and Argentina signed a tax treaty on how to treat the mine's profits. When completed, the $3 billion, 13,000 foot high project will be one of the world's great engineering achievements, extracting a forecast 800,000 ounces of gold and 35 million ounces of silver in the first five years. This will raise the company's production by 10% at a time when precious metals are getting increasingly hard to find. Just another reason to buy one of the world's best managed companies producing the most sought after product.

QUOTE OF THE DAY

'The market is now getting 'D's' instead of 'F's', said Chris Johnson of the Johnson Research Group.