Sucked Under by the Black Tide

WD 031511

Subject line: $200 Oil -- and a billion dollar tide

Sucked Under by the Black Tide

By Adam Lass

What's a gallon of oil worth to you these days? $2?  $3?  $5?

Is it worth a year in jail, or maybe a bullet between the eyes?

I could talk to you today about Libyan output shortfalls, or failing Japanese uptake because of the earthquake, tsunami, and ongoing nuclear disasters. Stuff like that certainly does matter, at least in the short run.

But in the long run, Japan and Libya are just blips, minor cyclic twitches in trends that have been in place -- or perhaps I should say put in place -- years ago. They are results, not drivers. I'd much rather point you toward the real driver behind today's headlines, and the very real threat and opportunity it represents.

Four Sloshing Buckets Full of Trouble

If you want to see a genuine economic driver, check out the guy in New Haven, Connecticut who risked his life to score some 20 odd gallons of heating oil. According to the Middletown Press, last week, the local cops caught Trenton Williams trying to spirit four of those orange handyman buckets full of kerosene out of someone else's basement.

To be fair, I suppose I should call Williams an alleged thief, as for all we know, he may have had some kind of arrangement with the home owner. But in my admittedly rural neck of the woods, where trespassing is handled in a rather abrupt and permanent fashion,  an attempted larceny charge would be the least of Williams' troubles.

Williams' willingness to risk life and limb for a week's worth of warmth tells us something that horrifying reports of Libyan atrocities and pictures of destroyed Japanese cities do not.

Williams has found himself up to his neck in the Black Tide. Fortunately, understanding the true cause of William's miserable life could easily translate into double digit gains for your portfolio. Too cynical? No, just realistic.

Damned Lies

One of the givens in economics is the intimate connection between supply, demand and cost. A moribund economy does less biz, and therefore ought to use less energy. One might imagine that the price for oil might fall off a bit. A recovery implies increased activity and demand, therefore, one might expect energy prices to rise. Econ 101, right?

Wrong! This text book myth depends entirely on a static standard by which we can measure the value of an asset. But the dollars that oil is bought and sold in globally are hardly static. Rather, they are blatantly manipulated by a central bank bound and determined to print its way into the history books. TARP. QE1. QE2. QE3. These dry acronyms are part and parcel of a program that deliberately courts the destruction of the US dollar a trillion newly-imagined dollars at a time.

For months, Ben Bernanke and his cronies have sworn up down and sideways (literally sworn under oath) that there is no inflation to speak of, that the pain you and I (and Trenton Williams for that matter) feel every time we go grocery shopping, by t-shirts and jeans for the kids, or, lord help us, sidle up to a gas pump for a tank full of economy grade is purely imaginary because these rampant price increases are not systemic, not "core" expenses. 

Black Tide Rising

[WD 031511 img1 oil v dollar ] 

Here are  the charts for the US dollar index and Crude oil futures over the past year or so clearly demonstrating their conjoined angles of attack and decline. Note that I have factored out such short term news-driven events like Europe's PIIGS crisis and the recent unrest in the Middle East. Not that these incidents don't impinge on price. But they clearly NOT the prime movers here.

Simply put: Oil and the dollar are Siamese twins, folks. Every time the Fed imagines another billion into existence so as to buy up increasingly worthless US Treasury bills (Just ask PIMCO's Bill Gross about THAT), you can just watch the Black Tide crawl higher.

And every time oil puts on another systemic high, most everything that rides petroleum from creation to end user climbs another notch as well, be it cotton for clothing, food for hungry mouths, or gasoline for your daily commute.

Racing to the Choke Point

Now it's a foot race between the economic boom purchased by trillions of imagined dollars and the Black Tide that will eventually choke it off. We are told by the bean counters at the Fed that our personal net worth is growing like a weed, with gains of 2.6% and 3.8% over the past two quarters. But somehow folks are not feeling particularly cheered by this news.

The latest report out of Thompson Reuters and the University of Michigan has their index of consumer sentiment falling off to a five-month low at 68.2. Strangely enough, most of the  economists polled by Bloomberg somehow missed this drop entirely. Their guesstimates ranged from a moderate drop to 74 to a hardy boom slated to reach a whopping 80. Speaking of Bloomberg polls, their investigation into national "attitudes" noted that only one in seven Americans had any faith whatsoever that some kind of lasting recovery is underway.  

Here's what you and I know that that Washington's pet economists are somehow missing: According to the US Energy Information Agency, each American pay some $700 more dollars for gasoline in 2011 than we did in 2010.

This estimate depends entirely on gas rising no higher than $3.71 this summer. I should point out that I paid nearly that much when I gassed up this morning at a discount station in rural Maryland. I am told that they are already paying more than $4 a gallon in California, and I've heard estimates of $5 a gallon tossed about by some fairly reasonable prognosticators.

Follow the Tide of Cash 

Now broaden your viewpoint for a moment: As a general rule, every $10 increase in the price of oil at the well head reduces the growth of gross domestic product by half a percentage point within two years. If you want to look at it from the other end of things, each penny increase at the gas pump robs American consumers of roughly $1 billion a year. 

The question at hand is not whether or not the Black Tide will eventually snuff out the boom in the exact same fashion as it did in 2000 and 2007.  Rather it is what you plan on doing about it.

The trick is to ride that massive flow of cash as it moves from sector to sector. There are, of course the obvious opportunities in oil and energy production -- opportunities that are only improved by the crises in the Middle East and Japan. [insert energy promo hot link?]

However, if you are willing to hold your nose and take advantage of other folks' pain, you can make cash on almost all sides of this action. Over the next few weeks, I will explore at length the businesses that will suffer the most from the Black Tide, beginning with one company that enjoyed a 16% price spike when it announced a dramatic 4.1% increase in unit sales over the past 12 months. What management failed to mention was just how much its bottom line will suffer when it's primary cost doubles over that same period. A well placed put option against this industry stands to double over the next few months as the Black Tide washes ashore.

Sincerely yours,

Is it worth a year in jail, or maybe a bullet between the eyes?

I could talk to you today about Libyan output shortfalls, or failing Japanese uptake because of the earthquake, tsunami, and ongoing nuclear disasters. Stuff like that certainly does matter, at least in the short run.

But in the long run, Japan and Libya are just blips, minor cyclic twitches in trends that have been in place -- or perhaps I should say put in place -- years ago. They are results, not drivers. I'd much rather point you toward the real driver behind today's headlines, and the very real threat and opportunity it represents.

Four Sloshing Buckets Full of Trouble

If you want to see a genuine economic driver, check out the guy in New Haven, Connecticut who risked his life to score some 20 odd gallons of heating oil. According to the Middletown Press, last week, the local cops caught Trenton Williams trying to spirit four of those orange handyman buckets full of kerosene out of someone else's basement.

To be fair, I suppose I should call Williams an alleged thief, as for all we know, he may have had some kind of arrangement with the home owner. But in my admittedly rural neck of the woods, where trespassing is handled in a rather abrupt and permanent fashion,  an attempted larceny charge would be the least of Williams' troubles.

Williams' willingness to risk life and limb for a week's worth of warmth tells us something that horrifying reports of Libyan atrocities and pictures of destroyed Japanese cities do not.

Williams has found himself up to his neck in the Black Tide. Fortunately, understanding the true cause of William's miserable life could easily translate into double digit gains for your portfolio. Too cynical? No, just realistic.

Damned Lies

One of the givens in economics is the intimate connection between supply, demand and cost. A moribund economy does less biz, and therefore ought to use less energy. One might imagine that the price for oil might fall off a bit. A recovery implies increased activity and demand, therefore, one might expect energy prices to rise. Econ 101, right?

Wrong! This text book myth depends entirely on a static standard by which we can measure the value of an asset. But the dollars that oil is bought and sold in globally are hardly static. Rather, they are blatantly manipulated by a central bank bound and determined to print its way into the history books. TARP. QE1. QE2. QE3. These dry acronyms are part and parcel of a program that deliberately courts the destruction of the US dollar a trillion newly-imagined dollars at a time.

For months, Ben Bernanke and his cronies have sworn up down and sideways (literally sworn under oath) that there is no inflation to speak of, that the pain you and I (and Trenton Williams for that matter) feel every time we go grocery shopping, by t-shirts and jeans for the kids, or, lord help us, sidle up to a gas pump for a tank full of economy grade is purely imaginary because these rampant price increases are not systemic, not "core" expenses. 

Black Tide Rising

[WD 031511 img1 oil v dollar ]

Here are  the charts for the US dollar index and Crude oil futures over the past year or so clearly demonstrating their conjoined angles of attack and decline. Note that I have factored out such short term news-driven events like Europe's PIIGS crisis and the recent unrest in the Middle East. Not that these incidents don't impinge on price. But they clearly NOT the prime movers here.

Simply put: Oil and the dollar are Siamese twins, folks. Every time the Fed imagines another billion into existence so as to buy up increasingly worthless US Treasury bills (Just ask PIMCO's Bill Gross about THAT), you can just watch the Black Tide crawl higher.

And every time oil puts on another systemic high, most everything that rides petroleum from creation to end user climbs another notch as well, be it cotton for clothing, food for hungry mouths, or gasoline for your daily commute.

Racing to the Choke Point

Now it's a foot race between the economic boom purchased by trillions of imagined dollars and the Black Tide that will eventually choke it off. We are told by the bean counters at the Fed that our personal net worth is growing like a weed, with gains of 2.6% and 3.8% over the past two quarters. But somehow folks are not feeling particularly cheered by this news.

The latest report out of Thompson Reuters and the University of Michigan has their index of consumer sentiment falling off to a five-month low at 68.2. Strangely enough, most of the  economists polled by Bloomberg somehow missed this drop entirely. Their guesstimates ranged from a moderate drop to 74 to a hardy boom slated to reach a whopping 80. Speaking of Bloomberg polls, their investigation into national "attitudes" noted that only one in seven Americans had any faith whatsoever that some kind of lasting recovery is underway.  

Here's what you and I know that that Washington's pet economists are somehow missing: According to the US Energy Information Agency, each American pay some $700 more dollars for gasoline in 2011 than we did in 2010.

This estimate depends entirely on gas rising no higher than $3.71 this summer. I should point out that I paid nearly that much when I gassed up this morning at a discount station in rural Maryland. I am told that they are already paying more than $4 a gallon in California, and I've heard estimates of $5 a gallon tossed about by some fairly reasonable prognosticators.

Follow the Tide of Cash

Now broaden your viewpoint for a moment: As a general rule, every $10 increase in the price of oil at the well head reduces the growth of gross domestic product by half a percentage point within two years. If you want to look at it from the other end of things, each penny increase at the gas pump robs American consumers of roughly $1 billion a year.

The question at hand is not whether or not the Black Tide will eventually snuff out the boom in the exact same fashion as it did in 2000 and 2007.  Rather it is what you plan on doing about it.

The trick is to ride that massive flow of cash as it moves from sector to sector. There are, of course the obvious opportunities in oil and energy production -- opportunities that are only improved by the crises in the Middle East and Japan. [insert energy promo hot link?]

However, if you are willing to hold your nose and take advantage of other folks' pain, you can make cash on almost all sides of this action. Over the next few weeks, I will explore at length the businesses that will suffer the most from the Black Tide, beginning with one company that enjoyed a 16% price spike when it announced a dramatic 4.1% increase in unit sales over the past 12 months. What management failed to mention was just how much its bottom line will suffer when it's primary cost doubles over that same period. A well placed put option against this industry stands to double over the next few months as the Black Tide washes ashore.

Sincerely yours,

Adam Lass