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.