As a follow up to yesterday's post on Contango Oil and Gas (MCF), here's a presentation that contains a summary of the company's core beliefs. Kenneth Peak,
the founder, CEO, and chairman of Contango, says that these core beliefs have been in place since the company's inception in the late 1990s.
Contango's Core Beliefs
- The only competitive advantage in the natural gas and oil business is to be among the LOWEST COST producers
- Virtually all the exploration and production industry's VALUE CREATION occurs through the drilling of successful exploration wells
- The whole point of a business is only and always to increase SHAREHOLDER WEALTH – PER SHARE…with conditions
Beliefs are optional, Results are mandatory and the only result that matters is long term – 3-5-10 year returns to shareholders
It's also worth noting Contango employs no hedges, has no debt, keeps plenty of cash on hand, and that 23 investors own 75 percent of the stock (Mr. Peak owns more than 15 percent).
"Investing is only and always about return on capital invested." - Kenneth Peak
In this Bloomberg interview, in addition to noting the importance of being low cost, Mr. Peak explains why you cannot lever up an exploration and production company saying that Houston is littered with the graveyards of enterprises that thought they could.
Contango generally drills in less than 200 ft of water in the Gulf of Mexico. Mr. Peak says that, in shale exploration, you may "never drill a dry hole", but that doesn't mean what you'll find will be economically sound (I guess he's saying that what's discovered too often produces a low return on capital). In contrast, he says that the types of wells you do find in the Gulf of Mexico tend to be economically sound.* In other words, when you find a productive well it's very profitable even though, in between, there may be some dry ones. Overall, he essentially argues that, if you know what you are doing, the cost of the dry wells are more than compensated for by the ones that end up not being productive.
In the Bloomberg interview, Peak says the payback on the investment is often 1 to 1.5 years for the kinds of wells he typically goes after.
Contango has few employees (ten or less) and just twelve wells offshore. So operationally it is a relatively uncomplicated and smaller company. According to this presentation back in 2010 (page 7), Contango's full cycle costs sit at roughly half the industry average which, if the case, sure seems rather impressive.
While Contango is a long distance from being my favorite kind of business, I think it's worthwhile noting when the person running the show seems such a competent capital allocator and, more generally, a capable operator. It wouldn't hurt to have more CEOs that think along these lines.
In any case, listening to what Mr. Peak has to say probably isn't a bad way to learn more about what's critical to business success in the energy industry.
Adam
No position in MCF
* At least in the shallower depths that he seems to favor. Kenneth Peak wrote a letter (excerpt can be found here) after the Deepwater Horizon oil spill in 2010. In the letter, he differentiates the kind of shallow water drilling Contango engages in from the deep water variety. He explains that shallow water drilling does not pose the same kind of operating challenges as deep water. For example, divers can be sent to the mud line of the well bore. Not so for deep water drilling.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Showing posts with label Commodities. Show all posts
Showing posts with label Commodities. Show all posts
Friday, July 6, 2012
Thursday, July 5, 2012
Kenneth Peak on Bloomberg: Contango's CEO Discusses the Importance of Low Costs and Value Creation Per Share
Contango Oil and Gas (MCF) is a houston-based exploration and production business with a ~ $ 920 million market value. Kenneth Peak, the founder, CEO, and chairman of Contango, was recently interviewed on Bloomberg. In the interview, he talks about the importance of being among the lowest cost producers in the natural gas and oil exploration business.
Contango, in many ways, operates in what is an inherently tough environment.
Bloomberg Interviews Contango CEO
In a commodity business where (by definition) you have no control over price, being at or near the lowest cost becomes all-important. Being at least among the lowest cost producers is a crucial factor for survival during the bad times (low prices) and excess returns during the good times (high prices) for any commodity business.
(For banks it's similarly about having the lowest cost money.)
A durable low cost position, balance sheet strength, and management that allocates capital wisely is at or near the top of the list of those things an investor should attempt to gauge before putting capital at risk.
Well, at least that's what I'd look for before investing a penny in any commodity-based business.
Mr. Peak also explains why he chose to eliminate stock options at every level. He first eliminated his own stock options four years ago then later moved to do the same at the board level and for employees. He emphasizes the importance of value creation per share saying "there's no point in getting big, the object is to get rich". Stock options have a tendency to quietly dilute shareholders (and in some cases not so quietly...actually rather blatantly).
He makes the point that a buyback done just to offset dilution from options isn't really a buyback. In other words, the buying back of shares in order to offset that dilution is hardly a brilliant reason for a buyback (though some companies seem to behave as if it is).
Speaking generally, buybacks can make sense in my view if a business is financially strong, is comfortable in its competitive position, there's no clearly superior alternative use for the available funds, and the shares are selling at a plain discount to value.
So buybacks work well under the right set of very specific circumstances; inevitably the right course of action will be different for each business and industry.
It's worth noting that Contango doesn't bother to hedge, has plenty of cash, and no debt.
Contango may not be my favorite type of business but I do think some useful lessons can be learned from this interview.
Adam
No position in MCF
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Contango, in many ways, operates in what is an inherently tough environment.
Bloomberg Interviews Contango CEO
In a commodity business where (by definition) you have no control over price, being at or near the lowest cost becomes all-important. Being at least among the lowest cost producers is a crucial factor for survival during the bad times (low prices) and excess returns during the good times (high prices) for any commodity business.
(For banks it's similarly about having the lowest cost money.)
A durable low cost position, balance sheet strength, and management that allocates capital wisely is at or near the top of the list of those things an investor should attempt to gauge before putting capital at risk.
Well, at least that's what I'd look for before investing a penny in any commodity-based business.
Mr. Peak also explains why he chose to eliminate stock options at every level. He first eliminated his own stock options four years ago then later moved to do the same at the board level and for employees. He emphasizes the importance of value creation per share saying "there's no point in getting big, the object is to get rich". Stock options have a tendency to quietly dilute shareholders (and in some cases not so quietly...actually rather blatantly).
He makes the point that a buyback done just to offset dilution from options isn't really a buyback. In other words, the buying back of shares in order to offset that dilution is hardly a brilliant reason for a buyback (though some companies seem to behave as if it is).
Speaking generally, buybacks can make sense in my view if a business is financially strong, is comfortable in its competitive position, there's no clearly superior alternative use for the available funds, and the shares are selling at a plain discount to value.
So buybacks work well under the right set of very specific circumstances; inevitably the right course of action will be different for each business and industry.
It's worth noting that Contango doesn't bother to hedge, has plenty of cash, and no debt.
Contango may not be my favorite type of business but I do think some useful lessons can be learned from this interview.
Adam
No position in MCF
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, April 16, 2012
Buffett on Commodity Businesses - Part II
A follow-up to this post.
Warren Buffett, in the 1985 Berkshire Hathaway (BRKa) shareholder letter, explained his thinking about commodity businesses:
"For an understanding of how the to-invest-or-not-to-invest dilemma plays out in a commodity business, it is instructive to look at Burlington Industries, by far the largest U.S. textile company both 21 years ago and now. In 1964 Burlington had sales of $1.2 billion against our $50 million. It had strengths in both distribution and production that we could never hope to match and also, of course, had an earnings record far superior to ours. Its stock sold at 60 at the end of 1964; ours was 13.
Burlington made a decision to stick to the textile business, and in 1985 had sales of about $2.8 billion. During the 1964-85 period, the company made capital expenditures of about $3 billion, far more than any other U.S. textile company and more than $200-per-share on that $60 stock. A very large part of the expenditures, I am sure, was devoted to cost improvement and expansion. Given Burlington's basic commitment to stay in textiles, I would also surmise that the company’s capital decisions were quite rational.
Nevertheless, Burlington has lost sales volume in real dollars and has far lower returns on sales and equity now than 20 years ago. Split 2-for-1 in 1965, the stock now sells at 34 -- on an adjusted basis, just a little over its $60 price in 1964. Meanwhile, the CPI has more than tripled. Therefore, each share commands about one-third the purchasing power it did at the end of 1964. Regular dividends have been paid but they, too, have shrunk significantly in purchasing power.
This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson's horse: 'A horse that can count to ten is a remarkable horse - not a remarkable mathematician.' Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business.
My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row..."
Then later in the letter Buffett added...
"Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."
Since businesses with commodity-like economic characteristics by definition have little or no pricing power, a sustainable cost advantage ends up being the crucial factor for investors.
Now, it's one thing to understand the importance of owning shares of low cost producers (or, at the very least, among the lowest cost producers), but sometimes figuring out who that actually is and why the advantage they have is sustainable isn't all that easy.
Adam
Long position in BRKb established at lower prices
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Warren Buffett, in the 1985 Berkshire Hathaway (BRKa) shareholder letter, explained his thinking about commodity businesses:
"For an understanding of how the to-invest-or-not-to-invest dilemma plays out in a commodity business, it is instructive to look at Burlington Industries, by far the largest U.S. textile company both 21 years ago and now. In 1964 Burlington had sales of $1.2 billion against our $50 million. It had strengths in both distribution and production that we could never hope to match and also, of course, had an earnings record far superior to ours. Its stock sold at 60 at the end of 1964; ours was 13.
Burlington made a decision to stick to the textile business, and in 1985 had sales of about $2.8 billion. During the 1964-85 period, the company made capital expenditures of about $3 billion, far more than any other U.S. textile company and more than $200-per-share on that $60 stock. A very large part of the expenditures, I am sure, was devoted to cost improvement and expansion. Given Burlington's basic commitment to stay in textiles, I would also surmise that the company’s capital decisions were quite rational.
Nevertheless, Burlington has lost sales volume in real dollars and has far lower returns on sales and equity now than 20 years ago. Split 2-for-1 in 1965, the stock now sells at 34 -- on an adjusted basis, just a little over its $60 price in 1964. Meanwhile, the CPI has more than tripled. Therefore, each share commands about one-third the purchasing power it did at the end of 1964. Regular dividends have been paid but they, too, have shrunk significantly in purchasing power.
This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson's horse: 'A horse that can count to ten is a remarkable horse - not a remarkable mathematician.' Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business.
My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row..."
Then later in the letter Buffett added...
"Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."
Since businesses with commodity-like economic characteristics by definition have little or no pricing power, a sustainable cost advantage ends up being the crucial factor for investors.
Now, it's one thing to understand the importance of owning shares of low cost producers (or, at the very least, among the lowest cost producers), but sometimes figuring out who that actually is and why the advantage they have is sustainable isn't all that easy.
Adam
Long position in BRKb established at lower prices
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, April 10, 2012
Buffett on Commodity Businesses
"...when a company is selling a product with commodity-like economic characteristics, being the low-cost producer is all-important." - Warren Buffett in the 2000 Berkshire Hathaway (BRKa) shareholder letter
In his 1985 letter, Warren Buffett focuses on a mistake he made with Berkshire's textile operations.
From the letter:
"Our Vice Chairman, Charlie Munger, has always emphasized the study of mistakes rather than successes, both in business and other aspects of life. He does so in the spirit of the man who said: 'All I want to know is where I'm going to die so I'll never go there.' You'll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses."
Early on, the cash generated by the textile business had funded Berkshire's entry into insurance. It was a crucial move since the textile business never earned much even in a good year.
Smart capital allocation led to further diversification and, over time, the textile operation became a relatively small portion of Berkshire. Excess capital was consistently put to more attractive alternative uses. If that capital had been instead invested back into the textile operation Berkshire would be a shadow of itself.
In the 1978 letter, Buffett listed the four reasons why they were staying in the textile business despite its relatively unattractive economics. The last of the 4 reasons listed by Buffett was that:
"...the business should average modest cash returns relative to investment."
He also said:
"As long as these conditions prevail - and we expect that they will - we intend to continue to support our textile business despite more attractive alternative uses for capital."
By the mid-80s there was overwhelming evidence Buffett's thinking in 1978 was incorrect. For the most part, the textile business continued to be a consumer of cash. He admits as much in the 1985 letter saying:
"It turned out that I was very wrong...Though 1979 was moderately profitable, the business thereafter consumed major amounts of cash. By mid-1985 it became clear, even to me, that this condition was almost sure to continue. Could we have found a buyer who would continue operations, I would have certainly preferred to sell the business rather than liquidate it, even if that meant somewhat lower proceeds for us. But the economics that were finally obvious to me were also obvious to others, and interest was nil.
I won't close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return. However, I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable."
So the textile business was largely shut down during 1985. Buffett later added...
"Over the years, we had the option of making large capital expenditures in the textile operation that would have allowed us to somewhat reduce variable costs. Each proposal to do so looked like an immediate winner. Measured by standard return-on-investment tests, in fact, these proposals usually promised greater economic benefits than would have resulted from comparable expenditures in our highly-profitable candy and newspaper businesses.
But the promised benefits from these textile investments were illusory. Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide. Viewed individually, each company's capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game and returns remained anemic.
Thus, we faced a miserable choice: huge capital investment would have helped to keep our textile business alive, but would have left us with terrible returns on ever-growing amounts of capital."
Unless a commodity business has a clear and sustainable built in cost advantage over competitors, capital expenditures will likely not produce a great return for long-term owners.*
Returns of these businesses, at least as a general rule, will be subpar.
The Appendix to the 1983 Berkshire Hathaway shareholder letter is relevant here. In it, Buffett explains economic Goodwill.**
"It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.
Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price. Consumer franchises are a prime source of economic Goodwill."
Yet economic Goodwill can also exist in non-consumer businesses...
"Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry."
Otherwise, lacking a sustainable advantage, large amounts of capital investment aren't likely to work out well in the long-run for owners.
There are exceptions but most commodity businesses (excl. things like governmental franchises or a monopoly-like position) need to have a sustainable cost advantage to produce above average returns.
The lessons from Berkshire's textile business experience may be useful background for those considering an investment in a commodity-like business.
Adam
Long position in BRKb established at lower prices
Related post:
Buffett on Commodity Businesses - Part II (follow-up)
* Government interference can subsidize or support what otherwise is a commodity business. Well, at least enough help that there is less competition and no overbearing profit regulation. Eliminate the natural competing forces or provide subsidies and the underlying economics may no longer seem like that of a commodity business. Yet, if proper competition existed it would. In contrast, it is the reputation and brand of successful consumer franchises create their pricing power. No government support or monopoly required.
** Economic Goodwill is very different animal from accounting Goodwill. Buffett does a good job of describing the differences in the Appendix to the 1983 letter.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
In his 1985 letter, Warren Buffett focuses on a mistake he made with Berkshire's textile operations.
From the letter:
"Our Vice Chairman, Charlie Munger, has always emphasized the study of mistakes rather than successes, both in business and other aspects of life. He does so in the spirit of the man who said: 'All I want to know is where I'm going to die so I'll never go there.' You'll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses."
Early on, the cash generated by the textile business had funded Berkshire's entry into insurance. It was a crucial move since the textile business never earned much even in a good year.
Smart capital allocation led to further diversification and, over time, the textile operation became a relatively small portion of Berkshire. Excess capital was consistently put to more attractive alternative uses. If that capital had been instead invested back into the textile operation Berkshire would be a shadow of itself.
In the 1978 letter, Buffett listed the four reasons why they were staying in the textile business despite its relatively unattractive economics. The last of the 4 reasons listed by Buffett was that:
"...the business should average modest cash returns relative to investment."
He also said:
"As long as these conditions prevail - and we expect that they will - we intend to continue to support our textile business despite more attractive alternative uses for capital."
By the mid-80s there was overwhelming evidence Buffett's thinking in 1978 was incorrect. For the most part, the textile business continued to be a consumer of cash. He admits as much in the 1985 letter saying:
"It turned out that I was very wrong...Though 1979 was moderately profitable, the business thereafter consumed major amounts of cash. By mid-1985 it became clear, even to me, that this condition was almost sure to continue. Could we have found a buyer who would continue operations, I would have certainly preferred to sell the business rather than liquidate it, even if that meant somewhat lower proceeds for us. But the economics that were finally obvious to me were also obvious to others, and interest was nil.
I won't close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return. However, I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable."
So the textile business was largely shut down during 1985. Buffett later added...
"Over the years, we had the option of making large capital expenditures in the textile operation that would have allowed us to somewhat reduce variable costs. Each proposal to do so looked like an immediate winner. Measured by standard return-on-investment tests, in fact, these proposals usually promised greater economic benefits than would have resulted from comparable expenditures in our highly-profitable candy and newspaper businesses.
But the promised benefits from these textile investments were illusory. Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide. Viewed individually, each company's capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game and returns remained anemic.
Thus, we faced a miserable choice: huge capital investment would have helped to keep our textile business alive, but would have left us with terrible returns on ever-growing amounts of capital."
Unless a commodity business has a clear and sustainable built in cost advantage over competitors, capital expenditures will likely not produce a great return for long-term owners.*
Returns of these businesses, at least as a general rule, will be subpar.
The Appendix to the 1983 Berkshire Hathaway shareholder letter is relevant here. In it, Buffett explains economic Goodwill.**
"It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.
Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price. Consumer franchises are a prime source of economic Goodwill."
Yet economic Goodwill can also exist in non-consumer businesses...
"Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry."
Otherwise, lacking a sustainable advantage, large amounts of capital investment aren't likely to work out well in the long-run for owners.
There are exceptions but most commodity businesses (excl. things like governmental franchises or a monopoly-like position) need to have a sustainable cost advantage to produce above average returns.
The lessons from Berkshire's textile business experience may be useful background for those considering an investment in a commodity-like business.
Adam
Long position in BRKb established at lower prices
Related post:
Buffett on Commodity Businesses - Part II (follow-up)
* Government interference can subsidize or support what otherwise is a commodity business. Well, at least enough help that there is less competition and no overbearing profit regulation. Eliminate the natural competing forces or provide subsidies and the underlying economics may no longer seem like that of a commodity business. Yet, if proper competition existed it would. In contrast, it is the reputation and brand of successful consumer franchises create their pricing power. No government support or monopoly required.
** Economic Goodwill is very different animal from accounting Goodwill. Buffett does a good job of describing the differences in the Appendix to the 1983 letter.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, March 23, 2012
North American Oil and Gas Revolution
From this CNBC article:
Increased production of energy from a number of sources including deepwater drilling, natural gas exploration and Canada's oil sands could make North America the next Middle East, according to a new report from Citigroup.
According to the report, supply will go up substantially a result of the substantial strides in natural resource extraction. In addition, demand for oil in the U.S. is down 2 million barrels per day (since the peak in 2005) and is expected to continue declining over the next decade. Some of this is the result of the 2008 recession but it is also partly a structural decline.
The article quotes Ed Morse, head of global commodities research at Citigroup. Mr. Morse says this supply and demand revolution has "potentially extraordinary" economic consequences.
The report also predicts that the U.S. could overtake both Russia and Saudi Arabia in oil production by 2020. Check out the chart in this article.
According to the article, Citigroup's analysts assert that some of the consequences for the U.S. in a "good case" scenario include:
- An increase in GDP of 2.0 to 3.3 percent
- Roughly 3.6 million new jobs by 2020
- Decreased geopolitical risks
- A decline in oil prices
In 2011, the U.S. became an exporter of refined oil for the first time since 1949 but will likely continue to be a net importer of crude oil for a very long time. The U.S. currently imports roughly 9 million barrels of crude oil per day so there's a long way to go.
There's still a ways to go but the Citigroup report suggests the U.S. could put a material dent in those 9 million barrels of daily imported crude oil in less than ten years.
From this article in The New York Times:
Across the country, the oil and gas industry is vastly increasing production, reversing two decades of decline. Using new technology and spurred by rising oil prices since the mid-2000s, the industry is extracting millions of barrels more a week, from the deepest waters of the Gulf of Mexico to the prairies of North Dakota.
We are also using significantly less gasoline. In part due to the recession and high prices but also from driving less with more fuel-efficient machines. While our reliance on imports continues to be substantial, I doubt many would have predicted that anything like this would happen in the U.S. as recently as five or so years ago.
The question is whether there's a smart way to invest in this.
That I haven't figured out yet.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Increased production of energy from a number of sources including deepwater drilling, natural gas exploration and Canada's oil sands could make North America the next Middle East, according to a new report from Citigroup.
According to the report, supply will go up substantially a result of the substantial strides in natural resource extraction. In addition, demand for oil in the U.S. is down 2 million barrels per day (since the peak in 2005) and is expected to continue declining over the next decade. Some of this is the result of the 2008 recession but it is also partly a structural decline.
The article quotes Ed Morse, head of global commodities research at Citigroup. Mr. Morse says this supply and demand revolution has "potentially extraordinary" economic consequences.
The report also predicts that the U.S. could overtake both Russia and Saudi Arabia in oil production by 2020. Check out the chart in this article.
- An increase in GDP of 2.0 to 3.3 percent
- Roughly 3.6 million new jobs by 2020
- Decreased geopolitical risks
- A decline in oil prices
In 2011, the U.S. became an exporter of refined oil for the first time since 1949 but will likely continue to be a net importer of crude oil for a very long time. The U.S. currently imports roughly 9 million barrels of crude oil per day so there's a long way to go.
There's still a ways to go but the Citigroup report suggests the U.S. could put a material dent in those 9 million barrels of daily imported crude oil in less than ten years.
From this article in The New York Times:
Across the country, the oil and gas industry is vastly increasing production, reversing two decades of decline. Using new technology and spurred by rising oil prices since the mid-2000s, the industry is extracting millions of barrels more a week, from the deepest waters of the Gulf of Mexico to the prairies of North Dakota.
We are also using significantly less gasoline. In part due to the recession and high prices but also from driving less with more fuel-efficient machines. While our reliance on imports continues to be substantial, I doubt many would have predicted that anything like this would happen in the U.S. as recently as five or so years ago.
The question is whether there's a smart way to invest in this.
That I haven't figured out yet.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Wednesday, February 1, 2012
The Fracking Revolution: End of the Peak-Oil Hypothesis?
Fracking* is a method of extracting natural gas (and increasingly oil) that seems to be transforming the energy industry.
This Bloomberg article says that the U.S. oil market may be about to have a fracking revolution not unlike what has happened with natural gas.
Fracking Boom Could Finally Cap Myth of Peak Oil
In the U.S., the primary controversy when it comes to fracking has been and continues to be concerns over the adverse environmental effects.
Still, what seems amazing, no matter how the environmental issues play out, is how quickly these advances have changed the oil and gas landscape.
In the article, CEO Jim Mulva of ConocoPhillips said the following:
"The revolution has spread to domestic oil production. And it may track the path it followed with natural gas."
Experts refer to oil that comes from shale formations as "tight oil".
The federal Energy Information Administration estimates that production of crude oil in the U.S. will rise to 6.7 million barrels per day by 2020 (much coming from tight oil and development of offshore resources), a level not achieved since 1994.
As a comparison, domestic crude oil in the U.S. was produced at a rate of 5.5 million barrels per day in 2010.
Some think the future estimates are still conservative since projections of "tight oil" continue to be revised higher. Energy analyst Seth Kleinman added this in the Bloomberg article:
The year ahead, he [Kleinman] says, "could really see the death of the peak-oil hypothesis..."
This Reuters article from late last year also explains some of the implications of horizontal drilling and fracking. Some excerpts from the article:
Transformed in Less Than Half a Decade
The combination of horizontal drilling and hydraulic fracturing has already transformed North America's natural gas market in less than half a decade. It is now starting to do the same for U.S. oil production...
Worldwide Transformation & Major Constraints
Fracking and horizontal drilling have the potential to transform the industry worldwide.
Inside North America and Western Europe, the major constraint on the roll-out of the technology is political and environmental opposition. Outside the United States, the main constraints are lack of specialised equipment, know-how and skilled personnel.
The lack of specialised equipment and skills outside the U.S. would seem to sort itself out over time. Knowing how some of the environmental controversies end up impacting the potential of all this seems harder to gauge.
Adam
* The term fracking (or hydrofracking) is short for hydraulic fracturing.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
This Bloomberg article says that the U.S. oil market may be about to have a fracking revolution not unlike what has happened with natural gas.
Fracking Boom Could Finally Cap Myth of Peak Oil
In the U.S., the primary controversy when it comes to fracking has been and continues to be concerns over the adverse environmental effects.
Still, what seems amazing, no matter how the environmental issues play out, is how quickly these advances have changed the oil and gas landscape.
In the article, CEO Jim Mulva of ConocoPhillips said the following:
"The revolution has spread to domestic oil production. And it may track the path it followed with natural gas."
Experts refer to oil that comes from shale formations as "tight oil".
The federal Energy Information Administration estimates that production of crude oil in the U.S. will rise to 6.7 million barrels per day by 2020 (much coming from tight oil and development of offshore resources), a level not achieved since 1994.
As a comparison, domestic crude oil in the U.S. was produced at a rate of 5.5 million barrels per day in 2010.
Some think the future estimates are still conservative since projections of "tight oil" continue to be revised higher. Energy analyst Seth Kleinman added this in the Bloomberg article:
The year ahead, he [Kleinman] says, "could really see the death of the peak-oil hypothesis..."
This Reuters article from late last year also explains some of the implications of horizontal drilling and fracking. Some excerpts from the article:
Transformed in Less Than Half a Decade
The combination of horizontal drilling and hydraulic fracturing has already transformed North America's natural gas market in less than half a decade. It is now starting to do the same for U.S. oil production...
Worldwide Transformation & Major Constraints
Fracking and horizontal drilling have the potential to transform the industry worldwide.
Inside North America and Western Europe, the major constraint on the roll-out of the technology is political and environmental opposition. Outside the United States, the main constraints are lack of specialised equipment, know-how and skilled personnel.
The lack of specialised equipment and skills outside the U.S. would seem to sort itself out over time. Knowing how some of the environmental controversies end up impacting the potential of all this seems harder to gauge.
Adam
* The term fracking (or hydrofracking) is short for hydraulic fracturing.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Tuesday, December 20, 2011
Warren Buffett on Profitability: For Commodity Businesses, "Nothing Fails Like Success"
From Buffett's 1982 Berkshire Hathaway (BRKa) shareholder letter:
"Businesses in industries with both substantial over-capacity and a 'commodity' product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. These may be escaped, true, if prices or costs are administered in some manner and thereby insulated at least partially from normal market forces. This administration can be carried out (a) legally through government intervention (until recently, this category included pricing for truckers and deposit costs for financial institutions), (b) illegally through collusion, or (c) "extra- legally" through OPEC-style foreign cartelization (with tag-along benefits for domestic non-cartel operators).
If, however, costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous.
Hence the constant struggle of every vendor to establish and emphasize special qualities of product or service. This works with candy bars (customers buy by brand name, not by asking for a 'two-ounce candy bar') but doesn't work with sugar (how often do you hear, 'I'll have a cup of coffee with cream and C & H sugar, please').
In many industries, differentiation simply can't be made meaningful. A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable. By definition such exceptions are few, and, in many industries, are non-existent. For the great majority of companies selling 'commodity' products, a depressing equation of business economics prevails: persistent over-capacity without administered prices (or costs) equals poor profitability.
Of course, over-capacity may eventually self-correct, either as capacity shrinks or demand expands. Unfortunately for the participants, such corrections often are long delayed. When they finally occur, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates over-capacity and a new profitless environment. In other words, nothing fails like success.
What finally determines levels of long-term profitability in such industries is the ratio of supply-tight to supply-ample years. Frequently that ratio is dismal. (It seems as if the most recent supply-tight period in our textile business - it occurred some years back - lasted the better part of a morning.)
In some industries, however, capacity-tight conditions can last a long time. Sometimes actual growth in demand will outrun forecasted growth for an extended period. In other cases, adding capacity requires very long lead times because complicated manufacturing facilities must be planned and built."
Capacity-tight conditions can persist for a very long time.
After several years of experiencing what seems like a favorable profitability environment, an investor can be lulled into thinking the recent experience represents what is normal.
(When something goes on for many years, it's not hard to make the mistake of projecting things indefinitely forward.)
So watch a commodity business put up five or seven years (maybe more) of outsized profitability and it's easy to incorrectly interpret the performance as ongoing. Yet, in all likelihood, over a long enough cycle, that profitability will eventually shrink or even become persistent losses (possibly for a very long time) as the capacity/demand imbalances are corrected.
When an executive at a commodity business decides to invest in new capacity, assumptions need to be made in order to judge the likely pricing environment many years down the road. Get it wrong (either due to weaker demand than expected or too much unexpected new capacity) and the returns end up sub-par or much worse.
No business is easy but getting that judgment consistently right seems difficult at best.
When the added capacity (often with a substantial time lag...enough for the macro world to have changed a whole lot) does come on line, what seemed like persistent profitability can shift and dramatically so.
The problem is that for most commodity businesses the fixed investments are enormous. Also, commodity prices fluctuate in ways that a differentiated product or service generally does not.
(Compare Coca-Cola's beverage or Pepsi's snack prices over a few business cycles to suppliers of copper, oil, sugar, etc.)
All commodity business equity investments need to be looked at carefully in this light.
Is the recent period (even if a very long cycle) of profitability a precursor to something much different once new capacity comes online or demand takes a hit?
Does the business have a sustainable cost advantage and a conservative balance sheet that lets it outlast competitors during the supply-ample years?
None of this is really an issue for businesses that can differentiate their offerings and wrap a trusted brand around it.
Products and services that can be differentiated, in contrast to commodity-like businesses, are more likely to experience a temporary but manageable hit to profitability -- all else equal -- during times of meaningful economic stress.
Adam
Long position in BRKb
* The commodity price spikes that occurred in recent years were certainly a headache for consumer goods businesses, but the hit to profitability for most of them was actually rather modest. Naturally, this requires that reasonable degree of leverage is employed.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
"Businesses in industries with both substantial over-capacity and a 'commodity' product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. These may be escaped, true, if prices or costs are administered in some manner and thereby insulated at least partially from normal market forces. This administration can be carried out (a) legally through government intervention (until recently, this category included pricing for truckers and deposit costs for financial institutions), (b) illegally through collusion, or (c) "extra- legally" through OPEC-style foreign cartelization (with tag-along benefits for domestic non-cartel operators).
If, however, costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous.
Hence the constant struggle of every vendor to establish and emphasize special qualities of product or service. This works with candy bars (customers buy by brand name, not by asking for a 'two-ounce candy bar') but doesn't work with sugar (how often do you hear, 'I'll have a cup of coffee with cream and C & H sugar, please').
In many industries, differentiation simply can't be made meaningful. A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable. By definition such exceptions are few, and, in many industries, are non-existent. For the great majority of companies selling 'commodity' products, a depressing equation of business economics prevails: persistent over-capacity without administered prices (or costs) equals poor profitability.
Of course, over-capacity may eventually self-correct, either as capacity shrinks or demand expands. Unfortunately for the participants, such corrections often are long delayed. When they finally occur, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates over-capacity and a new profitless environment. In other words, nothing fails like success.
What finally determines levels of long-term profitability in such industries is the ratio of supply-tight to supply-ample years. Frequently that ratio is dismal. (It seems as if the most recent supply-tight period in our textile business - it occurred some years back - lasted the better part of a morning.)
In some industries, however, capacity-tight conditions can last a long time. Sometimes actual growth in demand will outrun forecasted growth for an extended period. In other cases, adding capacity requires very long lead times because complicated manufacturing facilities must be planned and built."
Capacity-tight conditions can persist for a very long time.
After several years of experiencing what seems like a favorable profitability environment, an investor can be lulled into thinking the recent experience represents what is normal.
(When something goes on for many years, it's not hard to make the mistake of projecting things indefinitely forward.)
So watch a commodity business put up five or seven years (maybe more) of outsized profitability and it's easy to incorrectly interpret the performance as ongoing. Yet, in all likelihood, over a long enough cycle, that profitability will eventually shrink or even become persistent losses (possibly for a very long time) as the capacity/demand imbalances are corrected.
When an executive at a commodity business decides to invest in new capacity, assumptions need to be made in order to judge the likely pricing environment many years down the road. Get it wrong (either due to weaker demand than expected or too much unexpected new capacity) and the returns end up sub-par or much worse.
No business is easy but getting that judgment consistently right seems difficult at best.
When the added capacity (often with a substantial time lag...enough for the macro world to have changed a whole lot) does come on line, what seemed like persistent profitability can shift and dramatically so.
The problem is that for most commodity businesses the fixed investments are enormous. Also, commodity prices fluctuate in ways that a differentiated product or service generally does not.
(Compare Coca-Cola's beverage or Pepsi's snack prices over a few business cycles to suppliers of copper, oil, sugar, etc.)
All commodity business equity investments need to be looked at carefully in this light.
Is the recent period (even if a very long cycle) of profitability a precursor to something much different once new capacity comes online or demand takes a hit?
Does the business have a sustainable cost advantage and a conservative balance sheet that lets it outlast competitors during the supply-ample years?
None of this is really an issue for businesses that can differentiate their offerings and wrap a trusted brand around it.
Products and services that can be differentiated, in contrast to commodity-like businesses, are more likely to experience a temporary but manageable hit to profitability -- all else equal -- during times of meaningful economic stress.
Adam
Long position in BRKb
* The commodity price spikes that occurred in recent years were certainly a headache for consumer goods businesses, but the hit to profitability for most of them was actually rather modest. Naturally, this requires that reasonable degree of leverage is employed.
---
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, April 25, 2011
One Fund = 1/3 of all Silver Bullion on Earth
From this recent Jason Zweig article in the Wall Street Journal on the iShares Silver Trust (SLV).
The article points out that the fund is now the 12th largest ETF in the U.S. and holds (get this) one third of all silver on earth.
One fund that owns one-third of ALL the silver bullion on earth?
Geez.
The market in silver operated okay, for quite a long time, before a trading vehicle existed that owned 1 out of every 3 troy ounces of the metal.
So it seems reasonable to ask the following: Does this amount of incremental demand created by these convenient new methods of trading and owning silver cause a slight or even meaningful upward push in the metal's price?
I'd like to hear an unbiased explanation of how that kind and size of structural change doesn't impact prices.
I know that concerns over extremely loose monetary policy by central banks and the resulting lack of trust in paper currencies in general is a fundamental (and maybe even one of the dominant) driver of these price increases.
Makes sense.
That doesn't mean the invention of these (and other) relatively convenient new methods of trading commodities aren't exaggerating the moves.
Both can be true.
In addition, it has been suggested for some commodities that other factors (leverage in the system, inadequate position limits etc.) are distorting prices.
At some point down the road, with the benefit of hindsight, the actual drivers of the huge moves in commodity prices (monetary policy, supply/demand imbalances, leverage, position limits, proliferation of ETFs, etc.) will be easier to understand. There will be no shortage of strong opinions until we do. I don't know the answer. All I know is, historically, an extended period of price increases in any market starts with something fundamentally sound then gets exacerbated by excess.
So yes there are fundamental causes behind these price moves. There are, in many cases, legit supply/demand imbalances and concerns about monetary policy. Still, I won't be surprised when the dust settles if it turns out more than a little bit of these massive increases in price across the commodities complex turns out to be, in part, driven by how convenient it has become (from pension funds to personal brokerage accounts) to trade everything from gold to grains. The amount of leverage being employed will also likely be a factor (explicit or via derivatives). In short, the sheer amount of money that has flooded commodities markets used to end up elsewhere.
The above 4 ETFs are far from an exhaustive list of silver funds but all are relatively new (roughly 5 years old or less...the entire commodity ETF phenomenon began a half decade ago or so but proliferation is a more recent thing).
The newest of the silver ETFs is the Sprott Physical Silver Trust which has been around for ~6 months. Zweig's article points out the silver in the fund is worth $ 18.15/share but the market price is $ 22.11.
A 22 percent premium.
The oldest of these funds is the iShares Silver Trust at roughly five years old. I think five years or so qualifies as too little history to be making a definitive judgment about whether and how much prices are being distorted. Yet, such a small base of experience with relatively new trading vehicles that potentially wield significant influence on behavior (and ultimately prices), at the very least, warrants skepticism and open-minded caution.
What's changed is usually a good place to start in order to understand a problem.
Adam
Related posts:
Michael Masters: Commodities Complex in the Throes of a Bubble
Oil's Endless Bid
Ray Dalio on Stocks & Commodities
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The article points out that the fund is now the 12th largest ETF in the U.S. and holds (get this) one third of all silver on earth.
One fund that owns one-third of ALL the silver bullion on earth?
Geez.
The market in silver operated okay, for quite a long time, before a trading vehicle existed that owned 1 out of every 3 troy ounces of the metal.
So it seems reasonable to ask the following: Does this amount of incremental demand created by these convenient new methods of trading and owning silver cause a slight or even meaningful upward push in the metal's price?
I'd like to hear an unbiased explanation of how that kind and size of structural change doesn't impact prices.
I know that concerns over extremely loose monetary policy by central banks and the resulting lack of trust in paper currencies in general is a fundamental (and maybe even one of the dominant) driver of these price increases.
Makes sense.
That doesn't mean the invention of these (and other) relatively convenient new methods of trading commodities aren't exaggerating the moves.
Both can be true.
In addition, it has been suggested for some commodities that other factors (leverage in the system, inadequate position limits etc.) are distorting prices.
At some point down the road, with the benefit of hindsight, the actual drivers of the huge moves in commodity prices (monetary policy, supply/demand imbalances, leverage, position limits, proliferation of ETFs, etc.) will be easier to understand. There will be no shortage of strong opinions until we do. I don't know the answer. All I know is, historically, an extended period of price increases in any market starts with something fundamentally sound then gets exacerbated by excess.
So yes there are fundamental causes behind these price moves. There are, in many cases, legit supply/demand imbalances and concerns about monetary policy. Still, I won't be surprised when the dust settles if it turns out more than a little bit of these massive increases in price across the commodities complex turns out to be, in part, driven by how convenient it has become (from pension funds to personal brokerage accounts) to trade everything from gold to grains. The amount of leverage being employed will also likely be a factor (explicit or via derivatives). In short, the sheer amount of money that has flooded commodities markets used to end up elsewhere.
The above 4 ETFs are far from an exhaustive list of silver funds but all are relatively new (roughly 5 years old or less...the entire commodity ETF phenomenon began a half decade ago or so but proliferation is a more recent thing).
The newest of the silver ETFs is the Sprott Physical Silver Trust which has been around for ~6 months. Zweig's article points out the silver in the fund is worth $ 18.15/share but the market price is $ 22.11.
A 22 percent premium.
The oldest of these funds is the iShares Silver Trust at roughly five years old. I think five years or so qualifies as too little history to be making a definitive judgment about whether and how much prices are being distorted. Yet, such a small base of experience with relatively new trading vehicles that potentially wield significant influence on behavior (and ultimately prices), at the very least, warrants skepticism and open-minded caution.
What's changed is usually a good place to start in order to understand a problem.
Adam
Related posts:
Michael Masters: Commodities Complex in the Throes of a Bubble
Oil's Endless Bid
Ray Dalio on Stocks & Commodities
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, April 13, 2011
Michael Masters: Commodities Complex in the Throes of a Bubble
Michael Masters was interviewed by Maria Bartiromo on CNBC yesterday. Below are some excerpts of his thoughts on oil prices and commodities in general.
Maria started by pointing out that a number of executives and others in the oil sector have been on recently saying that there is plenty of supply. She asked Masters if he agreed:
"...while people can talk about supply and demand the overriding role is the force of money from financial participants."
What should be done? What new rules? Masters said provide limits to speculation at a specific aggregate level (something like 1/3 speculators, 2/3 bonafide hedgers) and limit commodity index funds. He went on to say...
"...we need speculators to provide liquidity in commodities markets, we don't want them to overwhelm these markets and effect price discovery."
How do you prevent them from overwhelming the markets? According to him it's position limits:
"...the nice thing about position limits is, they worked for 50 years. From the 1930s until the mid-90s. They worked great to limit speculation and to allow enough liquidity in the markets to benefit the hedgers, the primary constituency."
His thoughts on other commodities...
"...the whole commodities complex is really in the throes of a bubble or an echo bubble if you will."
Enormous speculative capital is involved. Masters recently founded Better Markets Inc., a nonprofit focused on the public interest when it comes to commodities prices.
Last week another veteran oil trader, David Greenberg, had the following to say about the oil market on CNBC. Some excerpts:
"The speculators have just taken control of this market, and it's just out of control."
"With the amount of money that is in this market, the market is too small to handle it, so it's very easy for any fund that needs a position to go one way or another to slam it with the algorithms and that's what's moving the market right now."
"The bottom line is there is no disruption of oil right now."
"As far as what can be done to help the oil prices...and that's position limits that nobody seems to ever talk about."
"...in the old days, intraday, there was really barely any intraday margin. Now, on a $ 50,000, you know, crude position, could you probably trade hundreds of thousands of dollars worth. Maybe $1 million worth depending on the day and the position."
Greenberg does point out that the sheer size of the oil market makes it such that position limits alone will probably not fix the problem.
So add the above comments from Masters and Greenberg to these recent comments by another veteran trader, Daniel Dicker, and that's three different sources saying essentially the same thing. If even partially true seems foolish to not address this yesterday.
A sustained distortion in prices will drive investments that later turn out to be a widespread misallocation of resources.
We've seen this movie.
Adam
Related posts:
Oil's Endless Bid
Ray Dalio on Stocks & Commodities
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Maria started by pointing out that a number of executives and others in the oil sector have been on recently saying that there is plenty of supply. She asked Masters if he agreed:
"...while people can talk about supply and demand the overriding role is the force of money from financial participants."
What should be done? What new rules? Masters said provide limits to speculation at a specific aggregate level (something like 1/3 speculators, 2/3 bonafide hedgers) and limit commodity index funds. He went on to say...
"...we need speculators to provide liquidity in commodities markets, we don't want them to overwhelm these markets and effect price discovery."
How do you prevent them from overwhelming the markets? According to him it's position limits:
"...the nice thing about position limits is, they worked for 50 years. From the 1930s until the mid-90s. They worked great to limit speculation and to allow enough liquidity in the markets to benefit the hedgers, the primary constituency."
His thoughts on other commodities...
"...the whole commodities complex is really in the throes of a bubble or an echo bubble if you will."
Enormous speculative capital is involved. Masters recently founded Better Markets Inc., a nonprofit focused on the public interest when it comes to commodities prices.
Last week another veteran oil trader, David Greenberg, had the following to say about the oil market on CNBC. Some excerpts:
"The speculators have just taken control of this market, and it's just out of control."
"With the amount of money that is in this market, the market is too small to handle it, so it's very easy for any fund that needs a position to go one way or another to slam it with the algorithms and that's what's moving the market right now."
"The bottom line is there is no disruption of oil right now."
"As far as what can be done to help the oil prices...and that's position limits that nobody seems to ever talk about."
"...in the old days, intraday, there was really barely any intraday margin. Now, on a $ 50,000, you know, crude position, could you probably trade hundreds of thousands of dollars worth. Maybe $1 million worth depending on the day and the position."
Greenberg does point out that the sheer size of the oil market makes it such that position limits alone will probably not fix the problem.
So add the above comments from Masters and Greenberg to these recent comments by another veteran trader, Daniel Dicker, and that's three different sources saying essentially the same thing. If even partially true seems foolish to not address this yesterday.
A sustained distortion in prices will drive investments that later turn out to be a widespread misallocation of resources.
We've seen this movie.
Adam
Related posts:
Oil's Endless Bid
Ray Dalio on Stocks & Commodities
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, March 31, 2011
Oil's Endless Bid
I often hear the glut of housing inventory as an explanation for why house prices will continue to drop in the coming years. This Business Insider article explains that the excess inventory is keeping the pressure on house prices.
That makes sense. Too much supply puts pressure on house prices.
The question I have is why doesn't the same thinking apply to oil?
Bespoke Investment Group posted a good chart in this article last week. Check it out.
So, as the chart in the Bespoke article shows, oil inventories are sitting well above the average inventory level since 1984 yet we've got oil over $ 100 per barrel.
I've read and listened to explanations and justifications for why oil prices (and other commodities) are going up by so much (explanations not unlike those justifying high house prices that I remember hearing back in 2005). Some of these explanations may even be partially or completely correct. Obviously, monetary policy has been a big driver of the increases in commodity prices.
It's also possible that the reason has to do, in part, with what Dan Dicker (a veteran oil trader and author of the new book, Oil's Endless Bid) says in this article:
...the "financialization" of all commodity markets, but most particularly oil, has not only unnecessarily pumped up the prices that you and I pay for gasoline and corn and wheat, but has made those prices far more viciously volatile.
In a separate article, Dicker had the following to say about the cause of high oil prices:
It turns out, Dicker says, that the price has nothing to do with supply and demand for oil. It's the financial market for oil, filled with both professional speculators and amateur investors betting on poorly understood oil exchange-traded funds, who have ratcheted up the price of gas to such sky high levels.
Here is another Dan Dicker interview on what he sees as the cause of high oil prices.
It's only one individual's take but, if this is even partially true for oil, I can't see why it may not also be a factor for other commodities.
I think it's difficult to get at the root cause of something this complex but the fact is a large amount of "financialization" of commodities has occurred this past decade. When it comes to problem solving asking what has changed is usually a good place to start.
If distortions are occurring as a direct result it seems foolish for us to not address them. I know eventually prices will be sorted out by supply and demand, but eventually can be a long time. We saw what happened with housing when we juiced prices via the securitization of mortgages for years. That might have been fun on the way up but we're still feeling the economic ramifications of those inflated housing prices now. I still vividly remember experts and other serious folks making very thoughtful and sincere rationalizations of why housing prices were justified back then.
Who says what's happening now with commodities isn't a variation on a similar thing?
I'm not saying the outcome is going to be the same. I'm saying it's better to not wait to find out.
Adam
Related posts:
Ray Dalio on Stocks & Commodities
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
That makes sense. Too much supply puts pressure on house prices.
The question I have is why doesn't the same thinking apply to oil?
Bespoke Investment Group posted a good chart in this article last week. Check it out.
So, as the chart in the Bespoke article shows, oil inventories are sitting well above the average inventory level since 1984 yet we've got oil over $ 100 per barrel.
I've read and listened to explanations and justifications for why oil prices (and other commodities) are going up by so much (explanations not unlike those justifying high house prices that I remember hearing back in 2005). Some of these explanations may even be partially or completely correct. Obviously, monetary policy has been a big driver of the increases in commodity prices.
It's also possible that the reason has to do, in part, with what Dan Dicker (a veteran oil trader and author of the new book, Oil's Endless Bid) says in this article:
...the "financialization" of all commodity markets, but most particularly oil, has not only unnecessarily pumped up the prices that you and I pay for gasoline and corn and wheat, but has made those prices far more viciously volatile.
In a separate article, Dicker had the following to say about the cause of high oil prices:
It turns out, Dicker says, that the price has nothing to do with supply and demand for oil. It's the financial market for oil, filled with both professional speculators and amateur investors betting on poorly understood oil exchange-traded funds, who have ratcheted up the price of gas to such sky high levels.
Here is another Dan Dicker interview on what he sees as the cause of high oil prices.
It's only one individual's take but, if this is even partially true for oil, I can't see why it may not also be a factor for other commodities.
I think it's difficult to get at the root cause of something this complex but the fact is a large amount of "financialization" of commodities has occurred this past decade. When it comes to problem solving asking what has changed is usually a good place to start.
If distortions are occurring as a direct result it seems foolish for us to not address them. I know eventually prices will be sorted out by supply and demand, but eventually can be a long time. We saw what happened with housing when we juiced prices via the securitization of mortgages for years. That might have been fun on the way up but we're still feeling the economic ramifications of those inflated housing prices now. I still vividly remember experts and other serious folks making very thoughtful and sincere rationalizations of why housing prices were justified back then.
Who says what's happening now with commodities isn't a variation on a similar thing?
I'm not saying the outcome is going to be the same. I'm saying it's better to not wait to find out.
Adam
Related posts:
Ray Dalio on Stocks & Commodities
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, March 15, 2011
Ray Dalio on Stocks & Commodities
An interview with Ray Dalio of Bridgewater Associates in Barron's.
In the Barron's interview, Dalio says that China will continue the commodity-buying spree and that the commodity bubble probably goes on well into 2012.
He ultimately sees the following:
"...a seismic shift, very similar to the Bretton Woods breakup in 1971, in which linked monetary policies and linked exchange-rate policies come undone."
One of the outcomes of all this, in his view, is that China will also be buying commodity manufacturers and other companies. In other words, buy assets trusted more than bonds denominated in depreciating money.
Dalio is long gold and in the interview he explains his thinking.
Productive assets like a good business happens to be my focus so owning shares in the right stocks makes sense to me. We know that the U.S. currency lost value massively over the past century yet partial or full ownership of shares in a good business performed just fine (along with a 6-7x increase in the standard of living). I don't plan on the dollar doing that much better going forward. Fortunately it doesn't need to.
For me, a non-productive asset like gold is of little interest though I think I understand Dalio's point of view.
Gold will certainly go up from time to time and especially in periods when fear is prevalent and paper money is not trusted.
"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk." - Charlie Munger at the University of Michigan in 2010
"...Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now." - Warren Buffett in a recent CNBC Interview
In the same interview Buffett also added the following...
"...If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today's market prices about $7 trillion. That's probably about a third of the value of all the stocks in the United States...Now, for $7 trillion, there are roughly a billion of farm-acres of farmland in the United States. They're valued at about $2 1/2 trillion. It's about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobils (XOM), and you could have $1 trillion of walking around money." - Warren Buffett
In the interview, Dalio added the following about how printing money and currency devaluations will likely impact assets:
"Currency devaluations are good for stocks, good for commodities and good for gold. They are not good for bonds."
Makes sense.
Adam
Related posts:
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
In the Barron's interview, Dalio says that China will continue the commodity-buying spree and that the commodity bubble probably goes on well into 2012.
He ultimately sees the following:
"...a seismic shift, very similar to the Bretton Woods breakup in 1971, in which linked monetary policies and linked exchange-rate policies come undone."
One of the outcomes of all this, in his view, is that China will also be buying commodity manufacturers and other companies. In other words, buy assets trusted more than bonds denominated in depreciating money.
Dalio is long gold and in the interview he explains his thinking.
Productive assets like a good business happens to be my focus so owning shares in the right stocks makes sense to me. We know that the U.S. currency lost value massively over the past century yet partial or full ownership of shares in a good business performed just fine (along with a 6-7x increase in the standard of living). I don't plan on the dollar doing that much better going forward. Fortunately it doesn't need to.
For me, a non-productive asset like gold is of little interest though I think I understand Dalio's point of view.
Gold will certainly go up from time to time and especially in periods when fear is prevalent and paper money is not trusted.
"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk." - Charlie Munger at the University of Michigan in 2010
"...Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now." - Warren Buffett in a recent CNBC Interview
In the same interview Buffett also added the following...
"...If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today's market prices about $7 trillion. That's probably about a third of the value of all the stocks in the United States...Now, for $7 trillion, there are roughly a billion of farm-acres of farmland in the United States. They're valued at about $2 1/2 trillion. It's about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobils (XOM), and you could have $1 trillion of walking around money." - Warren Buffett
In the interview, Dalio added the following about how printing money and currency devaluations will likely impact assets:
"Currency devaluations are good for stocks, good for commodities and good for gold. They are not good for bonds."
Makes sense.
Adam
Related posts:
Financialization of Copper
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, March 7, 2011
Why You Don't Need More Energy Stocks
Energy stocks from integrated (COP, CVX), to pure exploration and production (APA, DVN), along with the oil-services stocks (SLB, RIG) are getting a lot of attention these days.
From this Wall Street Journal article written by Jason Zweig:
Wall Street Journal: That's Oil Folks, Why You Don't Need More in Your Portfolio
The article points out the price of oil has tended to go down adjusted for inflation over the long haul and argues against oil-related stocks.
Nothing wrong with holding some energy stocks but buying any stock that's already in the headlines usually means there is already some kind of premium in the price. It may be a trade but no way to invest for the long run in my view. You've got to buy good businesses when the are out of favor due of some short-to-intermediate term yet very real problem(s).
Now, this buying-what's-unloved approach generally means the stock in the near term behaves poorly against the market as a whole (umm, in the near term can be years by the way...patience required). With discipline and the right tools, figuring out how market price of a good business compares to approximate intrinsic value isn't all that hard to do. Timing when the gap between the market price and intrinsic value will close is nearly impossible.
That it will close is an easy call. When it will close is not.
That'll drive some investors crazy as they see whatever is hot at the time going up while the supposedly wise contrarian investment underperforms.
The impulse to buy what others are currently making money in (chasing price action vs buying productive assets below intrinsic value) is precisely what got Isaac Newton in trouble during the South Sea Bubble.
I understand the desire to try and jump into what is hot at just the right time. In trying to do that the investor adds a new risk: that the chance to own a good business at a depressed price will pass.
When something like previously unloved ConocoPhillips was selling in the $ 40-50/share range was the time to accumulate shares. Conoco has been on the Stocks To Watch as something I'd buy at or below $ 50/share since July 2009 (the day I put Conoco on that list it was selling at $ 43.50/share). I still hold some of the shares bought back then but at nearly $ 80/share and in the current environment it's no longer an obvious bargain.
So while many energy stocks do not look terribly expensive (and could very well go up from here) there's no longer enough margin of safety for my taste at current prices.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
From this Wall Street Journal article written by Jason Zweig:
Wall Street Journal: That's Oil Folks, Why You Don't Need More in Your Portfolio
The article points out the price of oil has tended to go down adjusted for inflation over the long haul and argues against oil-related stocks.
Nothing wrong with holding some energy stocks but buying any stock that's already in the headlines usually means there is already some kind of premium in the price. It may be a trade but no way to invest for the long run in my view. You've got to buy good businesses when the are out of favor due of some short-to-intermediate term yet very real problem(s).
Now, this buying-what's-unloved approach generally means the stock in the near term behaves poorly against the market as a whole (umm, in the near term can be years by the way...patience required). With discipline and the right tools, figuring out how market price of a good business compares to approximate intrinsic value isn't all that hard to do. Timing when the gap between the market price and intrinsic value will close is nearly impossible.
That it will close is an easy call. When it will close is not.
That'll drive some investors crazy as they see whatever is hot at the time going up while the supposedly wise contrarian investment underperforms.
The impulse to buy what others are currently making money in (chasing price action vs buying productive assets below intrinsic value) is precisely what got Isaac Newton in trouble during the South Sea Bubble.
I understand the desire to try and jump into what is hot at just the right time. In trying to do that the investor adds a new risk: that the chance to own a good business at a depressed price will pass.
When something like previously unloved ConocoPhillips was selling in the $ 40-50/share range was the time to accumulate shares. Conoco has been on the Stocks To Watch as something I'd buy at or below $ 50/share since July 2009 (the day I put Conoco on that list it was selling at $ 43.50/share). I still hold some of the shares bought back then but at nearly $ 80/share and in the current environment it's no longer an obvious bargain.
So while many energy stocks do not look terribly expensive (and could very well go up from here) there's no longer enough margin of safety for my taste at current prices.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, February 4, 2011
Why Stocks are Acting Like Commodities
Jason Zweig wrote this Wall Street Journal article a few months back on algorithmic trading programs or "algos":
An algo doesn't know or care why two assets are moving together; it merely is programmed to recognize that they are doing so. As soon as a computer places bets that such a linkage in prices will persist, other traders—computers and humans alike—tend to take note and follow suit. That can be true, Mr. Simons says, whether or not a correlation is driven by fundamental economic factors.
Market systems are about effective and timely capital formation and allocation. Making sure dollars meet the best ideas and are there to support/develop productive assets and useful capabilities.
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes
Today, a whole lot of brainpower and talent focuses their energy on creating algorithms designed to game the capital development system.
The result is a less than optimal system with increased frictional costs that distracts some of the best and brightest from doing more useful things.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
An algo doesn't know or care why two assets are moving together; it merely is programmed to recognize that they are doing so. As soon as a computer places bets that such a linkage in prices will persist, other traders—computers and humans alike—tend to take note and follow suit. That can be true, Mr. Simons says, whether or not a correlation is driven by fundamental economic factors.
Market systems are about effective and timely capital formation and allocation. Making sure dollars meet the best ideas and are there to support/develop productive assets and useful capabilities.
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - John Maynard Keynes
Today, a whole lot of brainpower and talent focuses their energy on creating algorithms designed to game the capital development system.
The result is a less than optimal system with increased frictional costs that distracts some of the best and brightest from doing more useful things.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Wednesday, December 8, 2010
Financialization of Copper
An excerpt from this CNBC article:
Just a few short years ago, the now-monstrous GLD ETF was but a curiosity in the gold market, an obscure financial instrument in an old-fashioned asset class. It has since become the largest private holder of bullion in the world, buying $30 million worth of gold a day and "wagging the dog" in terms of price action. It has been estimated that GLD alone represents hundreds of dollars per ounce of the spot price of gold.
My question is: What exactly is the benefit of all these commodity ETFs anyway? It's hard to see how this is useful innovation. They appear to be another set of vehicles that helps a sector that has historically made up 2.5-3.0% of GDP become more like 6.5-7.5% of GDP without adding much value.
...in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America’s capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP! - Jeremy Grantham in his 3Q09 Letter
And Volcker said the following in late 2009.
"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence," said Mr Volcker...
He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you’re paid?" - Paul Volcker
It's one thing to create financial vehicles that end up inflating the value of a mostly useless metal like gold.
I think it is an entirely different matter altogether to distort the prices of something as useful as copper.
Some copper facts:
More than 40 billion pounds is used globally each year with building construction, electrical/electronic products, transportation equipment, and Industrial machinery/equipment consuming the bulk of it.
Over 400 lbs of copper is used in an average single-family home.
9,000 pounds of the total weight of a Boeing 747-200 jet plane is copper. Included in that weight is 632,000 feet of copper wire.
A typical, diesel-electric railroad locomotive uses about 11,000 pounds of copper.
Triton-class nuclear submarine uses about 200,000 pounds of copper.
Since the early 1960s, over 5 million miles of copper plumbing tube has been installed in U.S. buildings. That's equivalent to a coil wrapping around the Earth more than 200 times. The current installation rate exceeds a billion feet per year.
Kinda useful stuff.
Traditional banks need to get back to being a utility that focuses on the role of intelligently lending money and being a trusted holder of deposits.
Basically, get back to banking.
Investment banks need to be, first and foremost, a trusted facilitator when it comes to capital formation and allocation for businesses (from very large to very small).
Basically, put a whole lot less energy into their many casino-like activities. Today, providing access to capital seems a sideshow compared to what they primarily do.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Just a few short years ago, the now-monstrous GLD ETF was but a curiosity in the gold market, an obscure financial instrument in an old-fashioned asset class. It has since become the largest private holder of bullion in the world, buying $30 million worth of gold a day and "wagging the dog" in terms of price action. It has been estimated that GLD alone represents hundreds of dollars per ounce of the spot price of gold.
My question is: What exactly is the benefit of all these commodity ETFs anyway? It's hard to see how this is useful innovation. They appear to be another set of vehicles that helps a sector that has historically made up 2.5-3.0% of GDP become more like 6.5-7.5% of GDP without adding much value.
...in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America’s capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP! - Jeremy Grantham in his 3Q09 Letter
And Volcker said the following in late 2009.
"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence," said Mr Volcker...
He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you’re paid?" - Paul Volcker
It's one thing to create financial vehicles that end up inflating the value of a mostly useless metal like gold.
I think it is an entirely different matter altogether to distort the prices of something as useful as copper.
Some copper facts:
More than 40 billion pounds is used globally each year with building construction, electrical/electronic products, transportation equipment, and Industrial machinery/equipment consuming the bulk of it.
Over 400 lbs of copper is used in an average single-family home.
9,000 pounds of the total weight of a Boeing 747-200 jet plane is copper. Included in that weight is 632,000 feet of copper wire.
A typical, diesel-electric railroad locomotive uses about 11,000 pounds of copper.
Triton-class nuclear submarine uses about 200,000 pounds of copper.
Since the early 1960s, over 5 million miles of copper plumbing tube has been installed in U.S. buildings. That's equivalent to a coil wrapping around the Earth more than 200 times. The current installation rate exceeds a billion feet per year.
Kinda useful stuff.
Traditional banks need to get back to being a utility that focuses on the role of intelligently lending money and being a trusted holder of deposits.
Basically, get back to banking.
Investment banks need to be, first and foremost, a trusted facilitator when it comes to capital formation and allocation for businesses (from very large to very small).
Basically, put a whole lot less energy into their many casino-like activities. Today, providing access to capital seems a sideshow compared to what they primarily do.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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