A GAME OF CHANCE?

Dusting is a good example of the futility of trying to put things right. As soon as you dust, the fact of your next dusting has already been established.

George Carlin 1937-2008

All of us have been there. All of us have thought how sweet it would be.

You’re at the crap tables in Vegas or about to pull the lever on a “one armed bandit,”
and you think to yourself ... "wouldn’t it be great if this game was fixed in my favor." But then you toss the dice or yank down on the handle, and just like that … "snake-eyes" or "box cars."

Even though the odds are always stacked against us in Vegas or Atlantic City, we still play. We do it because we believe it’s a level playing field. We know there’s always somebody watching, whether it’s the state gaming commission or the “eye in the sky.” It may be gambling, but there are rules that make it equally hazardous for everyone.

The same can’t be said for the energy futures market.

By conservative calculations, at least 60% of today’s $138 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures (Intercontinental Exchange) and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny.

US margin rules promulgated by Commodity Futures Trading Commission (CFTC) allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At $138 per barrel, a futures trader only has to put up about $8 for every barrel leveraged. The trader “borrows” the other $130 to complete the speculative transaction. Although speculation adds liquidity to the markets, this liberalized leverage of roughly 17-to-1, has been a key component driving prices to the sky high levels we’re seeing today.

Although rising demand from China and India is well known, the problem may not be a lack of crude oil supply. In fact, there is ample evidence that there is net positive global surplus of oil. Yet the price climbs relentlessly higher. Why? In my opinion, the answer lies in what are clearly deliberate policies that have permitted unbridled oil price manipulation.

The US Government’s Energy Information Administration (EIA) in its most recent monthly Short Term Energy Outlook report, concluded that US oil demand is expected to decline by 190,000 b/d in 2008. This drop in demand is mainly owing to the deepening economic recession. Chinese consumption, the EIA says, far from exploding, is expected to rise this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media.

According to EIA, because of falling domestic demand, US, stockpiles of oil climbed by almost 12 million barrels in April. During the same period, retail gasoline demand fell by nearly 6%. Refiners are now running at about 85% of capacity, down from 89% a year ago. Normally, during this time of year, they would be running at about 95% capacity.

That means the key oil consuming nation, the USA, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a only a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of a percent of the total demand.

The chief problem faced by the major oil companies is not finding replacement oil, but keeping the lid on world oil finds in order to maintain present exorbitant prices. At today’s prices, the pressure to boost both domestic and international production has become dynamic. Here, the oil companies have some help from Wall Street banks and the two major oil trade exchanges—NYMEX and London-Atlanta’s ICE and ICE Futures.


The oil price today, unlike twenty years ago, is determined behind closed doors in the trading rooms of giant financial institutions like Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Deutsche Bank or UBS. The key exchange in the game is the London ICE Futures Exchange (formerly the International Petroleum Exchange). ICE Futures is a wholly-owned subsidiary of the Atlanta Georgia International Commodities Exchange.

ICE was focus of a recent congressional investigation. Through a convenient regulatory loophole known as the “Enron Exception,” the ICE Futures trading of US energy futures is not regulated by the Commodities Futures Trading Commission, even though the ICE Futures US oil contracts are traded by ICE affiliates in the U.S. In 2000, at Enron’s specific request, the CFTC exempted the Over-the-Counter oil futures trades. We all know how that turned out, and now this gapping exception is coming back to haunt us.

In order to prevent unchecked market manipulation by producers and suppliers, CFTC regulations require traders to disclose the identity of their major trading clients. Under the “Enron Exception,” no such disclosure is required. It is this cloak of anonymity that has permitted over-the-counter speculators here and in London to drive prices with impunity.

Look … I believe in the free market. But when the game is rigged, who wants to play.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

FOOD FIGHT

Food fights can be fun.

Nothing says I love you better than a pie in the face. Who hasn't reveled in the idea of touching off a lunch room melee by flipping a flank steak at an innocent bystander or playfully sending plate of spaghetti, with meatballs, airborne?

Who can forget epic slapstick brawls by everyone from the Three Stooges to Marx Brothers. Even today, when in doubt, modern comedy writers fall back on the old reliable. Some things are always funny.

Funk and Wagnalls, the authority on all manner of things wild and wacky, defines a food fight as “a spontaneous form of chaotic collective behavior in which food is thrown around a room, usually a cafeteria, in the manner of projectiles.” In a nod to this comic tradition, Messrs. Funk and Wagnall add, “it is usually started by one person, sometimes by accident.”

Food fights are woven into the fabric of several western cultures. For centuries, the Spanish have had their “Tomatina” and the Italians the “Battallia degli Aranci.” In the Spanish version, citizens young and old, rich and poor, gather in glee to hurl tomatoes at one another. Not to be outdone their Mediterranean cousins, the Italians stage mock battles in which oranges replace grenades as the weapon of choice.

In the wake of the storms and mid-west floods, however, the fight over food has taken on new, and less comic dimensions. With energy prices at all time highs and a growing percentage of corn already committed to ethanol production (nearly 30%), the price of grains has soared. After U.S. Midwest flooding damaged an estimated three million acres, corn, wheat and soybeans are trading at or near new records. As the growing season progresses, and the reality of crop damage sets in, global food inflation will likely accelerate.

From a global perspective, this is the “perfect storm.”

According to USDA, 2007/08 will mark the seventh year out of the past eight in which global grain production has fallen short of demand. This consistent shortfall has cut supplies in half-down from a 115-day supply in 1999/00 to the current level of 53 days.

In a recently released report on global conditions, the Department said “the world is consistently failing to produce as much grain as it uses." Analysts said, however, that the current low supply levels are not just the result of a transient weather event or an isolated production problems. Rather, low supplies are the result of a “persistent draw-down trend."

For America's growers, even those whose acreage currently resembles one of the Great Lakes, this is a boon. For worldwide consumers, however, including those in the U.S., food prices are spinning out of control.

To make matters worse, as the world has become more prosperous, more of the world wants to eat like Americans. This means more meat. It should come as no surprise that the fastest growing restaurants in both China and India are MacDonalds and Kentucky Fried Chicken.

More meat means more livestock feed. Most livestock are fattened on corn-based feed. This year alone, rising feed prices have pushed up the costs of meat and poultry in the U.S. by more than 40%. Pretty soon, the cost of the buns on your Big Mac will rival price points on its shrinking patties.

As Congress begins to tackle the causes and cures of global warming, the action focuses on gas-guzzling vehicles and coal-fired power plants, not on lowly bovines.
Yet livestock are a major emitter of greenhouse gases that cause climate change. And as meat becomes a growing mainstay of human diet around the world, changing what we eat may prove as hard as changing what we drive.

It's not just the well-known and frequently joked-about flatulence and manure of grass-chewing cattle that's the problem. A recent report by the Food and Agriculture Organization of the United Nations (FAO) said that land-use changes, especially deforestation to expand pastures and to create arable land for feed crops, is a big part. So is the use of energy to produce fertilizers, to run the slaughterhouses and meat-processing plants, and to pump water.

Believe or not, the international agency concluded that livestock are responsible for 18 percent of greenhouse-gas emissions as measured in carbon dioxide equivalent. Altogether, if their estimates are correct, that's more than the emissions caused by transportation.

Whew. I'll take my pie in the face now.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

STALKING THE FUTURE

Everybody loves corn. It’s as American as the SUV.

If Squanto hadn’t given corn to the Pilgrims, there’d be no Thankgiving. Corn makes the perfect flake for America’s breakfast table. It produces oil that let’s us pop our favorite matinee snack, and without it, corn bread would have an identity crisis.

Corn is America’s super crop. It seems that corn can do anything. In addition to food, it’s used in everything from adhesives and antibiotics to explosives, insecticides and shoe polish.

Now with gasoline and other fuel prices hitting all time records, we want to put a cape on the cob to fight our energy battles.

If you haven’t already guessed, I’m a card-carrying “tree hugger.” I’m also a fan of the family farmer. But corn as the savior of our energy woes is a really bad idea.

Producing corn is very energy intensive, and uses fossil fuels in virtually every step of the crop cycle: transporting and planting the seeds; operating farm equipment; making and applying fertilizer; and transporting the corn to market. Fertilizer, herbicide, and insecticide production consume the most fossil fuels.

Fossil-fuel based fertilizers also contaminate the soil and groundwater, but they can not be replaced by natural fertilizer: there are not enough animals to provide the fertilizer to grow the corn necessary to produce all the grain-based ethanol needed to run American cars. And the herbicides and pesticides necessary to grow corn at an industrial scale leach into the groundwater, too.

Whether or not ethanol production from corn is efficient is debatable. Proponents of corn-derived ethanol point to studies emphasizing an overall net positive energy creation. The naysayers claim that when the complete production costs of farming, seed, fertilizer, pesticides, fuel, ethanol distillation, etc... are taken into consideration, ethanol utilizes 30% more energy to produce than it creates. Ethanol proponents counter that this corn-based fuel reduces our carbon “footprint” and lowers greenhouse emissions because it recycles the carbon dioxide absorbed the plants during the growth cycle.

The economics of ethanol production is staggering. The estimated cost of building a single 100 million gallon ethanol plant is $140 million. Annually, the cost of natural gas to operate the plant ranges from $15-$25 million. A plant of this size will use nearly 2 million gallons of water per day. This is about 1700 gallons of water for every gallon of ethanol produced. Corn is already one of our most water intensive crops. With full scale ethanol production, the water numbers are mind numbing.

Ethanol, even in gasoline blends, cannot be shipped through the country's existing gasoline pipeline system because it is easily contaminated by water and corrodes the pipes. Presently, there are no working ethanol pipelines anywhere in the world. Corn-based ethanol is currently shipped by truck or rail car to fuel distributors, who then mix it with gasoline before delivering it to filling stations in more trucks. This adds to the cost of ethanol and to its overall CO2 emissions. In order to use
ethanol on any large scale, transport vehicles will either have to be retrofitted for ethanol, or the government will be forced to build or subsidize pipelines.

Although auto makers like GM’s Chevy boast about their “flex-fuel” capability, less than 4% of America’s 135 million cars are equipped to run on E-85 (15% ethanol mixed with gasoline). Even if your Chevy pick-up is E-85 compatible, finding a filling station that carries this blend is like trying to find ethics in Congress.

To be viable, corn-based ethanol will require massive federal subsidies. During 2007, ethanol production was subsidized to the tune of $3 billion. This is on top of the already $11 billion in annual subsidy raked in by corn growers. With corn prices at all time highs, the Hawkeye state is producing more millionaires per square acre than Silicon Valley.

When you factor in the effect of corn-ethanol on food prices and overall global food shortages, the debate takes on ethical dimensions that even I am not willing to tackle.

There are other, and potentially better alternatives to producing ethanol from edible food stocks such as corn. Many of these substitute fuel crops such as switchgrass can be grown on marginal land, require less water and external energy inputs. But that’s discussion for another day.

In the meantime, let’s keep corn where it really belongs, on-the-cob and in our breakfast cereals, and not in our gas tanks.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

TAKE A NUMBER ...

I’ve got a complaint. You know, a gripe, a grievance, a beef, a real bone to pick.

We were promised a recession --- now, where the hell is it?

If it walks like a duck, it quacks like a duck, well you know the rest. But as far as recessions are concerned, this duck just won’t hunt!

The credit markets are in a shambles. Oil and gas prices are slicing through uncharted territory, food prices make the “Dollar Menu” at MacDonalds look attractive and unemployment is climbing.

So, where’s the recession?

According to Merriam Webster, my daughter’s high school econ teacher, and the guy who makes my non-fat macchiatos at Starbucks, a recession is defined as “two consecutive quarters of economic contraction.”

Damn … despite record food and energy prices, despite the collapse of Bear Stearns and the precarious position of Lehman Brothers, last quarter, the U.S. economy actually expanded by nearly one percent. What a rip off!

Oh, how times have changed. Twenty years ago, five percent unemployment was seen as full employment. Today, it’s causing a panic.

During the “Great Stagflation” of the late seventies and early eighties, the inflation rate was eleven percent. While most of us are suffering sticker shock, and the price of gasoline has inspired a new generation of couch cushion explorers, the adjusted inflation rate is only four percent.

Apparently, it’s not as bad as we think.

To make matters worse, today, the ISM (Institute for Supply Management) reported that domestic service industries expanded at a faster pace that initially projected for May. An ISM measure below 50, is an indication that the economy is contracting. During May, non-manufacturing industries, which comprise nearly ninety percent of our
economy, landed an ISM score of 51.7.

Yesterday, Fed Chair Bernanke signaled that his campaign of rate cuts may be an end. What’s next … are we going to find out that the President’s rebates really worked!

Look, I’m an American, I want someone to blame. If this were a “real” recession, I’d get the chance to point the finger at the culprits. It wouldn’t matter to me whether it’s the President, the Congress, the Fed Chair or my barber. I’ve got a right to bitch and moan. But, if this is not a recession, what am I complaining about?

GET IN LINE …



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Shhh ... It's Our Little Secret

This article is a departure from my former pieces, and may be a bit too racy for the puritanical. Read on if you dare … but don’t say I didn’t warn you.

As an investment professional, I’ve always got my ear to ground looking for new opportunities. Recently, I got an e-mail that intrigued me. It was from Adultvest.com, which touted itself as America’s only venture capital firm specifically aimed at promoting adult-based businesses.

One of the “dirty” little secrets of the internet, is that the revenue generated by the porn industry blows the doors off of everything else on the web. By the end of 2007, worldwide porn revenues --- are you sitting down --- topped $97 billion. Even though porn is banned in China, it accounted for roughly 28% of worldwide gross revenues, followed closely by South Korea at 27% and Japan at 21%. Apparently, the slumping U.S. economy also hurt domestic porn revenues, because we only accounted for about 14% of the global internet sales.


Let’s put this in perspective. Last year, internet powerhouse Google ginned about $11 billion in gross revenue, eBay, the web’s biggest swapmeet brought in nearly $7 billion, Yahoo, no slouch by any means, settled for a measly $6 billion, while giant internet discounter Amazon generated $14.84 in gross revenues.

These, of course, were their gross revenues. This means that their ultimate net earnings amounted to a fraction of these figures. Although there are currently no figures on the net income realized by the internet porn industry, most analysts agree, that other than salaries commanded by its biggest and most popular assets, their costs are marginal.

Even though the U.S. only consumes less than 15% of porn worldwide, nearly 89% of all internet adult products are conceived and created in the old US of A. Nearly 269 new porn sites go online every day!

The center of the porn universe has been and continues to be the San Fernando Valley, right here in Los Angeles. As a native Angeleno, it kind of makes me proud, in a perverse sort of way. Some folks call it the “Hidden Hollywood.” If I were an exec at Disney or Time-Warner, I’d sure like figure out how I could bring this burgeoning industry out of the closet, so that I could get a piece of the action for my stockholders.

Here’s what’s really troubling me … How can the U.S. be so successful and pioneering in an industry like porn, yet be eons behind the rest of the world in everything from manufacturing advances to higher efficiency transportation. As any computer geek will tell you, the porn industry has been ahead of the curve in nearly every tech innovation on the web. There has yet be a pop-up blocker or spaminator that can keep all the smut at bay.

The growth in the industry hasn’t come from multinational conglomerates backed by a host of global investment banks. Quite to the contrary, porn has grown on the backs --- forgive the allusion --- of societal outlaws and misfits whose entrepreneurial spirit should be the envy of MBA’s far and wide. If we’re looking for solutions to our economic malaise, maybe we should ignore the usual cast of Harvard, Yale and Stanford eggheads,
and look no further than those tempting little e-mails that all of us pretend to ignore, but secretly want to explore.

As any Madison Avenue sales exec will tell you … sex sells!

For your entertainment and educational pleasure, I have included two "must see" video clips. Don't worry, both are rated "G."

The first is the solicitation I received from Adultvest.com, and the second is an innovative display of critical business statistics that would make any marketing professional proud.

COME ON ... CLICK IF YOU DARE.





To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Milking America

We live in a topsy-turvy world.

Can you imagine it … $3.87 a gallon … for milk!

Is there no end to the lengths to which our nation’s farmers will go to make a profit? What’s next, $10 for a brick of cheddar --- a premium on extra-sharp --- a black market for Munster or Gouda? My wife and I have set up a bootleg churn in our garage, because even the price of “I Can’t Believe It’s Not Butter,” has spun out-of-control!

Yesterday, the Wall Street Journal reported that the Commodities Futures Trading Commission (CFTC), the federal agency that regulates the commodities industry, was launching a probe into milk price manipulation, and in particular, cheese futures on the Chicago Mercantile Exchange.

The CFTC alleges that the farmers’ cooperative that controls nearly one third of the milk in America engaged in illegal market manipulation. According to the Journal, the Justice Department is getting ready to charge the Kansas City based Dairy Farmers of America (DFA) with variety of anti-trust violations --- including conspiring to suppress the price it paid for raw milk in the Southeast, while raising the prices it charged retailers. There are even allegations of secret payments to regulators.

Is nothing sacred? Who do these guys think they are … Exxon-Mobil?

The irony is so thick you could whip into a dessert topping. If the dairy farmers and their evil henchmen are facing prosecution, shouldn't the oil industry face similar investigative scrutiny?

Look, I’m a capitalist. I don’t begrudge anyone a fair profit. The operative term, however, is “fair.”

In 2003 when oil was $30 a barrel --- a time dinosaurs still roamed the earth --- the
average price of gasoline was $1.52 per gallon. Despite this modest price, Exxon-Mobile still turned a profit of nearly $21 billion on $246 billion in sales. Not to shabby.

I’m not going to pretend that I understand all of Exxon’s costs. But obviously, when gasoline was selling for $1.52 a gallon they were able to turn a nice profit.

Here’s the math. Don’t panic. You don’t need your calculator or abacus.

Ok, I’m going to go slow so that even our regulators and the math challenged (like me) can follow. In 2003, the average price for a barrel of oil was $28. There are 42 gallons in a barrel which means that price of a single gallon of oil was about 66 cents.

If the main ingredient in gasoline is oil, and Exxon was able to turn a significant profit at an average price of $1.52 per gallon, that means that the aggregate cost of refining, distributing, marketing and tax was less than 86 cents.

Now, with crude oil trading above $125 a barrel and the average price of gasoline peaking above $3.80, Exxon still posted record profits of nearly $11 billion last quarter. At that rate, Exxon’s net profit for 2009 is projected at $44 billion --- more than twice what it made in 2003, when the average price of oil was only $28 per barrel.

I’m no genius. But if the price of oil went up and the cost of refining, distribution, marketing and tax remains constant, shouldn’t Exxon’s profits likewise remain in the same ballpark? Did Exxon or the other oil companies suddenly find a way to dramatically cut their costs, or is there something more nefarious at work?

So as you’re filling the bottomless tank on your SUV this holiday weekend, ask yourself, who do I have to thank for this blessing. The list is long. Do I thank Senate Energy Committee Chairman Ted Stevens of Alaska or heap praise on the excellent work done by the “Secret Energy Task Force” convened by our own beloved Vice-President Dick Cheney, the former CEO of Haliburton.

The “Task Force” first met in 2001 when crude oil was trading at about $20 a barrel. Cheney and his group of "concerned" citizens didn’t meet again until oil hit $55 in 2004, $70 in 2005 and finally $79 in 2006. As far as we know, after their 2006 meeting, it was "Mission Accomplished."

Are the dairy farmers being investigated because they're less American than the boys at Exxon or Shell? From my limited vantage point, their only real mistake was that they didn’t have their own secret task force protected by “vice-presidential executive privilege.” Otherwise who knows … milk might have hit $5 a gallon without a single regulator batting an eye.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Alphabet Soup

Has financial innovation gone too far? When PhD economists can't explain how your investments work, the clear answer is ... yes.

During a recent conversation with an old friend, I made the mistake of asking him how he was doing in the market. Without missing a beat, here is what he said:

“I recently met with my CFP, who also is a CIC and CLU, and associated with an FCM. He recommended that I stay the course on my LEAPS, look for the exit on my CDO’s, and attempt to marginalize my MBS losses. Overall, to minimize my CGT and to boost my EPS ratios, he's urging me to put more into ETF’s and to consider making a significant shift into EU-backed CFD’s”.

Translation:

“I’m not really sure what broker wants me to do. But I don’t want to look an idiot. So I’m going to swallow hard, pretend that I really understand, prepare for the worst and hope for the best.”

In the dog-eat-dog world of Wall Street banks, the quest to capture more your investment dollars is akin to the arms race. Everyone is trying to invent a better mousetrap. This has resulted in the development of extremely complex hybrid securities one piled on top the other, whose risk and return properties aren’t well understood.

These incomprehensible instruments were not set up to address fundamental economic problems. Rather, they are schemes to attract more and more of your investment dollars. More disturbing, is that it appears that many of these “innovations” were not created to build client wealth, but for the sake of the new brokerage fees they generate.

The profits of the investment banks promoting these "innovative" investment offerings have been astronomical. As long as everyone was making money, there were few complaints. Lawmakers and regulators have kept their hands off for decades to encourage financial innovation. But with the collapse of Bear Strearns, and the likelihood that other institutions may follow, the government is starting to take a closer look. Unfortunately, for the small investor, and the economy as a whole, it may be too little too late.

Everyone wants transparency. But regulators can’t regulate what they don't understand. And if the regulators are at bamboozled, how can investors be expected to crack the code? I'm in the business of investing, and frequently, I'm at a loss to explain how some of the newer financial instruments really work.

Transparency and disclosures are worthless as long as investment banks and their executives are intent on using a sleight of hand. Despite popular belief, there was plenty of disclosure about what Enron was doing. The problem was that it was so complicated that no one understood it, least of all the investors and regulators.

Wall Street bankers can’t be trusted to make things clear. It’s not in their best interest. Because if you understood what they were really doing with your money and real risks involved, you'd probably balk at the investment.

Simple is always better. As any mechanic will tell you, more moving parts means a greater chance for a breakdown. The same commonsense applies to investing.

No one would argue the investment acumen and wizardry of Warren Buffet. As the "Whiz" once observed; “If I can’t understand, they don’t want me to understand it.”

Translation:

If you don’t get it, and you can't spell it, don’t do it!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

The World as We Don’t Know It

As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know.

Donald Rumsfeld

So here’s what we know … the price of oil has hit a new record above $121 a barrel (gulp). According to the Lundberg Survey of 7,000 gas stations nationwide, the average price at the pump for unleaded regular is $3.62 per gallon, up $.15 in the past two weeks alone. In California (always a leader), more and more stations are starting to post their prices at $4.00. Yikes!

Everyday seems to bring more reasons why the price of oil is skyrocketing. Last week, prices were affected by uncertain domestic inventories. Today, oil reportedly surged because of damage to a flow-station in violence plagued Nigeria, Africa’s largest producer. Next week the prices could spike because the “moon is in the seventh house and Jupiter is aligned with mars.”

Call me “Captain Obvious,” but nobody seems to know how high we will go.

Now there are predictions of a “super spike” ranging from $150 up to $200 a barrel!

Oil prices have reached this point without additional global turmoil. Granted, we still are fighting two wars in the Middle East and the threat of Jihadist terrorism persists. Additionally, there is no debate that Asian demand has ballooned and the dollar has cratered. But, in reality, there have been no new major events justifying this tectonic shift in prices. Yet here we are.

Two years ago when oil was trading below $50 a barrel, famed trader/raider T.Boone Pickens projected oil prices above $100. Analysts at noted investment bank Goldman-Sachs echoed Picken’s call. Rational thinkers (yours truly among them) scoffed at these predictions. Color me wrong.

In a recent press statement that would make master obfuscator Alan Greenspan proud, the folks at Goldman said: "The core of our 'super-spike' view is that oil prices will keep rising until demand declines globally on a multiyear basis, resulting in the return of excess capacity and a lower cost structure. Given this view, once excess capacity returns, we think prices can move sharply lower."

Huh?

The causes of the relentless climb in oil prices have been repeatedly chronicled -- demand from China and India, the falling dollar making oil an inflation hedge, speculation, OPEC supply restraints, supply threats in Iran, Iraq and Nigeria, and refinery bottlenecks in the U.S. … and the list goes on.

But what do we really know … let’s be honest … we don’t know, because we really don’t know.

If you’re in business or in the business of investing, how do you plan five-years in advance, let alone five-months? The watchwords are diversity and flexibility. As we have seen over the past three years, only the nimble will survive.

If you’re going to take your cues from anyone, you have to look no farther than Harvard and Yale. Their endowment portfolios have grown exponentially over the past several years because of their willingness to embrace diversity, flexibility and risk. Last year alone, David Swensen, Yale’s investment manager posted a 23 percent gain, and 16% annually over the past 10-years. Harvard’s endowment has seen similar results.

The key to success by these two Ivy League giants has been a mix of assets which are inversely correlated or non-correlated to one another. In their model, risk is ameliorated through this form of diversity. They trade everything from stock indices and commodity futures to real estate and currencies. If they're losing money in one sector, they quickly re-evaluate and shift to another. At one point, Harvard even hired several professional foresters to assess potential in the domestic timber market.

So here’s a simple survival rule for the current marketplace … When you don’t know what you don’t know, don’t get stuck on what you think you know, because you really don’t know what could happen. In other words, keep an open mind and be willing to change your strategies to fit the conditions of the shifting global economy.

If that makes sense to you, then you’re ready to face the unknown or to fill the job as our next Secretary of Defense.



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

The Big Game

Like fans at a big game, the constant chant on Wall Street has been rising like a storm …

One and done! One and done!

The power pin-stripers are rooting for the real “monsters of the midway,” the hippest of hip hoopsters … the Fed. As the Fed's Open Market Committee meets today and tomorrow, investors and traders are hoping that as Ben Bernanke brings his team down court in the final drive to revive the ailing economy, they cut interest rates one last time.

Since summer, the central bank has incrementally reduced the key federal funds rate by 3 percentage points to 2.25 percent from 5.25 percent. On top of rate cuts, the Fed has been lending more money to banks, while the government is preparing to send out tax rebates.

What difference six weeks makes. Prior to the last Fed meeting, the markets were anxious about the implosion of global banks. Now, the “Wizards” are betting that the credit markets are on the mend, and that they can get back to business as usual. Are they daft or just deluded?

A quarter or even a half point cut by the Fed is not going to significantly alter conditions that have precipitated the current market malaise. The S&P’s Case-Shiller Index is reporting that home values have dropped 12.7 percent from a year earlier and foreclosure rates have doubled over the same period. To make matters worse, consumer confidence is at a five year low, fueled by mounting job losses, and soaring gasoline and food prices. Federal Reserve policy-makers may cut interest rates again in an attempt to shore up the financial markets and boost consumer spending. But cutting interest rates at this point may be like trying to cap a well fire with a thimble.

In a recent interview at the Milken Institute in Beverly Hills, Eli Broad, co-founder of KB Homes, the nation’s fifth largest homebuilder, said that he believed that home prices would likely decline another 20%. “I don’t think we’re anywhere near the bottom,” warned Broad. He went on to say that he believed that it may take 3 to 4 years before the market can clear out the huge and growing volume of unsold and unoccupied homes.

The economy lost 80,000 jobs in March, the most in five years. Consumer spending which accounts for two thirds of the economy rose only .07 percent, the slowest pace since 1991. Although government rebates are now being sent out, it’s not likely that this cash infusion combined with another rate cut will be enough to overcome the current consumer caution. The greater concern should be the impact that this action will have on rising inflation.

Historically, it’s not uncommon for consumer prices to flare early in a recession, only to settle back on slack demand as the economy weakens. But considering the prices of basics such as wheat, corn, rice and gasoline, discretionary consumer spending could be dampened until there is a significant shift in commodity prices. During this past week, crude oil surged near $120 per barrel and prices at the pump reacted accordingly.

Unlike past recessionary cycles, however, commodity prices are not simply governed by U.S. demand, but by the global appetite for oil and other raw materials. While Asian countries such as China and India are dependent on U.S. consumer behavior, their thirst for raw materials has not abated. Apparently, they’ve got a wad of cash burning a hole in their collective pockets, and they’ve got a hankering to spend it.

Even the high flyers are feeling the pinch. In a sign of the times, expense accounts for employees at some of the world’s largest investment banks have been drastically curtailed. Last month in a memo to its employees, Goldman-Sachs issued an edict that tabs for business lunches were not to exceed $100 per person without prior approval and that first class air travel only would be permitted for flights over 90 minutes. In further evidence of this clamp down, Deutche Bank told its employees that it would not longer approve the use of company credit cards for adult entertainment or brothels. Ouch!

In point of fact, there appears to be a real disconnect between Wall Street and world. Although the Fed has been a valiant foil for President Bush and his cadre of crack advisors, another rate cut will do little to soften the body blows to U.S economy. The recession must run its course. Cutting interest rates may boost Wall Street’s confidence, but it will do little to bolster the most important component of the economy … the American consumer.

None and done … None and done!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Earth – Love or Leave it to Beaver

"If it weren't for electricity, we'd all be watching television by candlelight."

— George Gobel

The problem with Earth Day, is it’s just not funny.

Do you chuckle when you think about the likes of Ralph Nader or Al Gore? Does the Sierra Club make you guffaw? Do folks sit around the campfire telling funny stories about John Muir?

In a rare comic reference to his 1965 tome about auto safety, and specifically the dangers of the Chevy Corvair, Nader’s staffers would often lament that, Ralph was "unfunny at any speed."

When the recent Academy Award winning ex-Vice-President was in office, the running joke among Washington insiders was: "If Al Gore was in a room with ten secret service agents, how do you which one is the VP?" Answer: "He’s the one who looks stiff!"

Maybe if the environment told jokes or was video game, we might pay more attention. As Groucho Marx was once heard to say: "why should I care about future generations … what have they ever done for me?" My guess is if you query most Americans, they probably feel the same way about he environment.

We could save the planet, but the problem is that most of us are unwilling to make the necessary sacrifices. We don’t want to pay the freight. Without our SUV’s, how will we arrive in style at our next camping trip, let alone to the dry cleaners? But in the end, Mother Nature doesn’t really care about which tax bracket you’re in or what you drive. You can even move to "Green Acres," but like your real mom, when she’s pissed, she’s going to find you.

As the saying goes, "the way to a man’s heart … is through his wallet." With oil topping $118 a barrel, and gasoline prices headed over $4 a gallon, all of sudden, everyone’s an environmentalist. Toyota can’t push enough of its Prius' off the assembly line, while mid-western farmers lining up at the “piggy trough” to get their ethanol subsidies. Even the Hummer’s gone hybrid.

Wall Street gets it. No one is saying that the captains of industry are "tree huggers." Nothing could be farther from the truth. Being the ultimate opportunists, however, they understand the bottom line ... going green is simply good business.

In the 38 years since the first Earth Day, what’s really been accomplished? Other than President Bush, who believes that we can solve the global warming problem by switching from Fahrenheit to Celsius, everyone agrees that climate change is a real threat to the survival of our planet. But as Mark Twain was often quoted as saying, "everyone talks about the weather, but nobody does a thing about it." Sadly, much the same can be said about the genuine progress we have made in protecting our environment.

Whether we’re really willing to admit it or not, all of us make decisions in our own best interests. Maybe economist Milton Friedman got it right, "corporate responsibility" [read personal] is an outgrowth of economic self-interest and preservation.

It’s no coincidence that Japanese and European cars have historically been more fuel efficient than our own. Since the early seventies, gasoline prices in Europe and Japan have been nearly double what we pay. With limited open space, suburban sprawl, a fixture in our universe, is virtually unknown to these nations. As a result, conservation and resource efficiency are an economic imperative.

Although all of us are feeling the pinch at the pumps and the grocery store, compared to prices in the rest of the industrialized world, Americans still are on easy street. Future Earth Days will come and go, but unless we as Americans decide that the real costs and consequences of our conduct are too high, nothing will ever change. In the words of English philosopher-economist Kenneth Boulding, "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist."

Happy Earth Day!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

If You Ask Me ...

Here it is Tax Day again. If you haven't filed, you aren't reading this. If you have filed, you're most likely getting drunk to ease the pain.

Like me, you’ve probably become numb to the news --- oil at record levels pushing up prices at the pump; sticker shock over the price of bread and eggs; a deepening housing slump driven by the ever-widening subprime meltdown. Recession … stagflation … deflation … the weakening dollar. The worst inflation in 17 years. Whew!

Around every corner, there’s a new Nostradamus, adding to the confusion. The airwaves and e-waves are filled with expert predictions and advice. But, opinions are like … well you know … everyone’s got one.

As an investor and consumer, my head is spinning. Do I buy --- do I sell --- do I hold --- or do I simply duck and cover until the storm passes?

The simple answer is ... yes.

To survive or even thrive, in current market climate, you’ve got to be flexible. One size does not fit all!

In the end, sometimes the best course is fall back on the lessons you've already learned.

Lesson 1 - Don’t put all your eggs in one basket - If, for example, your portfolio is comprised primarily of equities or real estate --- diversify. David Swensen, Yale University’s money guru, has averaged better than 16% returns over the past 21 years. Through asset diversification, he has built an 18 billion dollar endowment that is the envy of the investment community. Swensen’s Yale portfolio holds a full suite of assets ranging from stock market indices to emerging market equities and even real estate. The key, according to Swensen is to hold assets which are either inversely or non-correlated with one another.

Lesson 2 - Follow the money – As we have seen time and again, big money goes where big money grows. Commodities are trading at all time highs. Rising global demand for raw materials and a weakening dollar have led to record prices for commodities including corn, rice and gold. Despite sharply rising costs, diesel fuel imports to China surged 49% in March. Jim Rogers, co-founder with George Soros of the Quantum Fund and best selling author of the books “Investment Biker” and “Adventure Capitalist,” believes that the bull market in commodities will last through 2017. From 1999 through March 2007, his Rogers International Commodities Index has posted returns of 281%, and 21% through the first quarter of the year. As Rogers puts it, “if this market were a baseball game, we’re only in the fourth inning.”

Lesson 3 – If its broke, fix it – The math is simple … if you’re not winning, you’re losing. If you called your broker back in 2000, as the bottom started fall out your portfolio, he probably tried to calm your jitters by saying “look, we may be down, but remember you don’t loose unless you sell.” A truism yes … but in a tumbling market, not very comforting. Good markets always are followed by bad markets. If you've got a profit take it. If you’re bleeding equity, stop the bleeding. Being right isn’t worth the risk. As one savvy trader put it, "marry to your wife not your trades!"

Lesson 4 - Buy when there is blood in the streets – Legendary European banker Meyer Rothchild built his family dynasty on the notion that you “buy on the sound of cannons and sell on the sound of trumpets.” When prices fall, whether in the stock or real estate markets, there will be bargains-a-plenty at the bottom. As famed corporate raider Carl Icahn has shown time and again, buy into weakness --- sell into strength.

Lesson 5 – Go to the mattresses – In times of war or siege, Italian families would abandon their homes for safer surroundings. Soldiers would sleep on the floor in shifts. In the “Godfather,” this term became synonymous preparing for battle. The key is to apply this same mentality to your investments. The market is not a garden party. Your brokers are not your friends. Don’t be afraid to make hard choices even if means that you must part company with a long-term advisor. In truth, you are the only one who truly has your best interests in mind.

Lesson 6 – Cooler heads will prevail – Knee-jerk reactions are a natural response as the markets appear to unravel. Recent stock market gyrations can shake the confidence of even most seasoned investors. The natural response is to convert to cash. While this may seem to protect your hard-earned equity, it’s not always the best course. With interest rates low and the dollar losing value against other major global currencies, not even cash is a sure bet. It's sensible to retain cash to pay bills or to have the flexibility to rebalance your portfolio with other assets. Instead of viewing the current shake-up as crisis, however, try to see it as an opportunity …

Lesson 7 - Don't accept candy from strangers - Need I say more?

HAPPY TAX DAY!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Truth or Dare

Truth or dare. You remember this game. We all played it when we were young. When your turn comes round, someone in the group gives you a devilish choice … tell the truth about your deepest darkest secret or face a trial by fire. If you refused to fess up by divulging your confidence, then you were forced to do something unspeakable … you know … like running around the room in your boxers, while belting out the lyrics to “I Feel Pretty” from “Westside Story.”

Whether you knew it then, this adolescent challenge was preparation for the morality play that we would face countless times as adults.

Okay … Truth or Dare.

When you heard that the Fed rescued Bear Stearns by underwriting the failed firm to the tune of $30 billion dollars, did you do a jig? Did you secretly stand up and cheer because those poor bastards --- Bear Stearns execs --- could keep their billion dollar bonuses? If you didn't applaud the Fed's action, were you willing to let the Wall Street giant collapse under the weight of its own ill-conceived risk? Did we dare?

Now Congress and the President are proposing to bail-out hundreds and thousands of borrowers across the nation facing foreclosure. This is where the rubber meets the proverbial road.

Truth or Dare.

Is there a greater risk to the economy if we let these borrowers fail or does the real peril come from taking the seemingly most compassionate course?

Risk transfer is the gist of modern economies. The vitality of the any economy is predicated on the notion that some players will prosper while others will fail. A “moral hazard” arises when an individual or institution does not bear the full consequences of its actions, and as a result, has a tendency to act less carefully than it otherwise would, leaving a another unanticipated party to bear to some or all of the loss. In other words, if investors are led to believe that there is a “safety net” ready to catch their fall, then it more likely that their perception of risk will be distorted. As a consequence, they more freely undertake levels of risk that they otherwise would eschew.

Consider this … if I build my house in a heavily forested area, knowing the risk of wild fires, should I expect the government to rebuild my ravaged home if I didn’t carry adequate insurance to cover my full loss? The same may be asked of borrowers and speculators who took advantage of historically low interest rates to purchase property at record high prices. Just like the homeowners on the mountaintop, they had to know that eventually they would face a wall of flames.

While a government rescue may be politically expedient in this an election year --- or the compassionate course --- the fundamental threat to our economy could be magnified if our public institutions step in to save the day.

The reallocation and transfer of risk have become booming industries. Governments, capital markets, banks, and insurance companies have all entered the fray with ever-evolving financial instruments. Pundits praise the creativity of these often exotic risk spreading devices. In the greater marketplace, these risk dispersion mechanisms allow entrepreneurs to assume more of it, banks to get rid of it, and traders to hedge against it.

But this is precisely the peril of these new developments. They mass manufacture moral hazard. They remove the only immutable incentive to succeed --- market discipline and business failure. They undermine the very rudiments of capitalism: prices as signals, risk and reward, opportunity costs. Risk reallocation or transfer of the type being proposed for this class of investors produces an artificial universe in which synthetic contracts replace real ones and where moral hazards replace genuine business risks.

It’s no surprise new investors and home buyers were lured into the real estate market. The sirens’ song of cheap money is a temptation difficult to resist. New borrowers were blinded by teaser rates, the prospect of purchases without down payments and the seeming ability to set their own initial monthly obligations. Market propagandists spun a world in which property values would rise without end. In short, the makings of a “perfect storm.”

The first concept that most economics and business students learn is that for every benefit, there also is a cost --- for every reward, there must be risk. Much as we’d like to believe otherwise, there is no free lunch! Unfortunately, as tragic as this may be, if our economy is to thrive in the natural course, these borrowers may have to be casualties of “Economics – 101.”



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.