7/8/08 (Picken's Plan, Bernanke more powers?)

Traders,

Yesterday was more mix action as we flirt with the lows – the global market, oil, and credit problems still are on the forefront of everyone’s mind. The INDU has huge action as well as the NDX. The sad state was the RUT which continued to slip down another 1%+, but still above the 650 area. I think we are TRYING to find (or build) a support level. The indices that have blown down are waiting until the broader market finds less volatility.

The G8 and strong dollar talk initially got the dollar to rally, but I think everyone (like myself in yesterday’s post) realize that talk is fastly becoming cheap and ACTION is needed. There doesn’t seem to be any plan – but rather quick decisions hastily made to TRY to band aid one problem to the next.

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Oil and Pickens



If you caught CNBC this morning Pickens is the guest. They had an open discussion and mailed in questions. For those that don’t know, Pickens is the premier oil man in our country. If anyone understands oil and energy in this country you would put Pickens at the top or very close to it. The man has made billions, has been to the oil producing nations, has been involved with many different energy companies, understands Coal, Natural Gas, Solar, Wind, Oil, etc collectively from a production, business, and policy model probably better than anyone else. I would say he is more the premier energy man – and not just oil. While you may not like what he has to say or blankly argue with him – we should take his opinions probably more seriously than most politicians, analyst, or others. No doubt he has made BILLIONS in energy and will make billions more – so he knows to some extent what he is doing.

Here are some of his opinions, thoughts, and comments.

Speculation affecting price: While he admits that there are speculators in the market – the fundamental price of oil is not driven by speculators – but rather supply and demand. that the global consumption rate has (at some times recently) inverted and that we are consistently running between 85-86 million barrels per day extraction vs. consumption. Several other things to note, oil future contracts expire to ACTUAL oil delivery. If the market was driven by speculators ALONE then every expiration cycle we would see oil come crashing down as those speculators would start selling their future contracts as to NOT take physical delivery of oil. No doubt there are speculators and part of the oil price has a speculative premium – but it is a very small portion of the price.

Alternate sources of energy: You may know he is building the largest WIND farm in the U.S. (Texas) and is looking to expand wind production. He says that Wind trumps Solar currently as a cost to energy model. He loves Solar – but the technology and cost benefits are not up to Wind capability – YET! He also said that the government is not making Solar a big priority and there have been some issues with the BLS and solar (energy farms) recently – which is putting pressure on Solar to deliver. He has meet with and worked with the President of the Serra club to help push through more ideas and political pressure to make alternative energy sources a priority. It’s nice to see big business men and environmentalist on the same side of the fence!

Natural Gas and Coal: He was asked what he drives, people would be surprised that this billionaire drives a Honda that is converted to Natural Gas. He says he fills it up in his garage and it costs him about $1.30 a gallon. He said the conversion was about $2000 for his Honda. The two largest natural resources in this country are NOT being tapped to help ease the load of Oil reliance. He mentioned that Natural Gas is the easiest and fastest way to get the U.S. off the OIL nipple (mainly energy) – he was in Thailand and the cars there are being quickly and rather easily converted to Natural Gas as they roll out of the plant. It costs money but the major US auto makers could and should make that change. It will not bring oil prices down – but rather a good start to get us off the foreign oil nipple. He also mentioned that new technology to burn coal cleaner is online – we should start looking towards Coal as a big move for energy to again get us off of Oil.

Corn and Ethanol: Don’t bother – the whole corn and farm subsidies is a mess to begin with. Farmers can pick and choose what to grow – Corn for ethanol is too expensive and we could not grow enough corn to replace gas anyway. It also has a negative by-product and that is pushing up food prices. It’s not that it doesn’t work – it does – it is just the business model doesn’t work. The amount of corn needed, the energy and cost to convert it, and the resulting amount doesn’t even come close to the realm of reality. We are spending too much (tax payer) money on farm subsidies and political screwing around on the subject – because it is an election year. The math doesn’t make sense and the impact to food and grain prices will only create more problems.


Oil: We should have a CALL OPTION on Iraq Oil – he cannot believe we don’t. The billions the war has cost us, not including the lives (which we cannot place a value on) – the government should have a Call Option to buy oil at (the very least) market prices – before any other company or lease option. At the very least have it help pay the war cost. (My personal note: If I where president, I would of told Iraq that we would purchase their oil at PRE-WAR prices to cover the cost of the war. We could then have the SPR sell it back at those low costs back into the US. Our war would be paid for and that – temporarily – would keep prices down – as we look to alternative and other energy sources). Pickens idea was similar. He noted that China (unlike the US) buys oil where and when they need it – they don’t care about politics – which allows them to do business with all countries. He pointed out that China has a $40 billion call option on Venezuela oil – they also buy oil from Iran, Sudan, Saudi Arabia – all OPEC and NONE OPEC members.

A Plan: He stated the government needs to help – however the problem is we NEED a PLAN – we don’t have an energy plan – that is the key problem. To many politicians are focusing on the election and the administration has not taken their eye off of oil. We need an complete energy plan for this nation that includes alternative energy, natural gas, coal, and oil. We need a clear plan and a leader to push that plan through. Until we get that we will be chasing our tails and continue to watch oil go higher. High oil prices are here to stay – get use to it – we need to plan for the future today, not in the future!

Read more about the Pickens Plan here: http://www.pickensplan.com

Of course I am paraphrasing his comments – however he makes some valid points and I will take his opinion with a little more weight than say Maxine Waters.

Oil is down this morning $138 in the pre-market. Regardless if you agree with observations or opinions – I think there is one thing we can ALL agree on that he has stated. We NEED a ENERGY PLAN NOW! And we need to take ACTION on it NOW! The political race is just putting that off as politicians focus on vote getting and pointing fingers – rather than working together. It couldn’t be a worse time for an election year, a lame duck unpopular president, fighting in the Democrat Party – everyone trying to get VOTES rather than focusing on governing or policy. How many times do you think McCain or Obama have spent time on policy or even in House this last year? Not to mention all the other politicians marketing themselves hoping to be moved up the chain into some office of the new president. What a waste – we will not see anything done until after Jan 2009 and that means everything now is just a band-aid and more volatility.

Make sure to catch him the next time he is on Bloomberg or CNBC – he is worth listening too!

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Futures Pre-Market

Futures are getting some big volatility swings this morning - Down, Up , Down. Expect the ARB traders to be side line and not take a big stance. Expect a mix opening.

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Support / Resistance

The RUT slid some more getting to the March lows – SPX and INDU slid as well.

INDU 11200 (We would like to see the INDU stay between 11200 - 11300 to start building a support level – even with the RUT coming down to its lows. If the INDU can spend some time at these levels – with volume – we could get a short-term support and maybe a little rally – at least to unload some long deltas.)

NDX 1800 (We had some serious whip-saw action – expect more to come. Stocks like AAPL are driving the boat!)

SPX 1250 (We are there – do we hold?)

RUT 650 (Almost there – do we hold?)

We are getting to key levels in ALL the indices – watch that RUT for money flow and volume confirmations

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Conclusion

Bernanke spoke and it looks like his powers and responsibilities are broadening (not a good thing). The FED needs to focus and not load up his plate with more power and therefore responsibilities. Bloated government agencies never work – expect the expansion to be the down-fall of the FED’s ability to stay on track. Sweeping powers are just going to derail the train further. After Fannie Mae and Freddy Mac got the open check-book from the government and started shoring up their own books – they are still looking like crap. Bernanke spoke about them as well – is he now responsible for Fred, Fan, Sally? Look – he has one tool – it is NOT a Ronco Pocket Fisherman that can do EVERYTHING – it is one thing – a valve! It goes ON or OFF that is it! If he takes on Fred and Fan to help them – believe me he will be keeping the valve WIDE open.
Banks are looking at a new looming problem – the increase of credit card defaults. Something Bernanke also talked about. Bernanke might wear a cape when he is in the basement cranking on the press – but he is NO super hero. He needs a plan and stop meddling with every other agency that has a problem.

It’s simple: Figure out how to keep the Discount Window opened to Investment Banks (if that takes working with Congress) and start focusing on strengthening the dollar – NOW!!! Fight inflation at all costs!


Ahh – I feel we are on a boat in the middle of the ocean and in “irons” the main sail is flopping around and Bernanke is fiddling with the bumpers!