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With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

Keith Fitz-Gerald — Thu, 21 May 2009 18:46:31 +0000

The U.S. news media has convinced many investors that oil consumption is falling because of the global recession. While that may be true, it’s a disservice to millions of investors because production is declining at a pace that’s actually three times faster.

And that suggests higher oil and gasoline prices in coming months – perhaps as much as 50% – 70% higher, or more – particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 – nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables – consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now. So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels – at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez – the perennial motor mouth and longtime U.S. critic – is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry – exploration, production, refining and sales – is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years – or even longer – to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.

Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana – as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use – from plastic bags to makeup – still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 – which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue – not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital – I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy – preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this “New Reality”will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “Golden Age of Wealth Creation” The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and on this new market environment.

Source: With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

Potential Refinery Strike to Boost these 2 Oil Stocks

Andrew Snyder — Thu, 05 Feb 2009 19:15:15 +0000

It looks like it will be another volatile week in the energy markets. On one side of the balance, a tremendous economic slowdown and an overabundance of oil are pushing prices down, while the other side of the balance, rather empty until now, has the threat of a major strike propping prices up. Here’s two ways to play it.

This from Today’s Financial News:

Even with the threat of a strike, crude prices managed to dip below the crucial $40 level, the unofficial delineator between cheap and moderately priced oil. What will happen through the rest of the week is up to the United Steelworkers.

If the union, which represents some 30,000 employees and about 70% of the nation’s refinery production, votes against the proposed contract, volatility is bound to rise. If a contracted is ratified over the next day or so, then volatility and prices are likely to drop even further.

The union and the nation’s oil companies are working on a day-by-day basis, but insiders say they are getting close to a compromise. In fact, some say it looks like a strike may even be unlikely. But unions have surprised us before and will certainly do it again.

Destroying what’s left

What makes a worker want to go on strike in this economic downturn, especially after they were promised a raise, remains out of my grasp. But then again, what makes unions tick in the first place has always been a mystery to me. They drove large manufacturers out of my hometown, took Detroit to its knees and now they are threatening to tear at the throat of the nation’s last great blue-collar profit maker.

If these workers get the guts to strike, as an investor, you have a few options. You can pick a major oil refiner, like Valero (NYSE:VLO), the nation’s largest, and short it. After all, even a short-term strike will pull down its quarterly profits.

Another option is to play the broader refining industry through an ETF like United States Gasoline Fund (NYSE:UGA). As production falls, gasoline prices will rise.

Finally, you can play the broader energy market through a fund like the Ultra Oil and Gas ProShares (NYSE:DIG). If shares go up, its price will jump at a two-to-one ratio, at least on a day-to-day basis. Be careful with these ETFs as they are calculated on a single day, not a long-term trend. With the right level of volatility, these shares can actually drop in value even as prices rise over the long-term. They do it quite often.

But do not be certain crude prices will rise because of a refinery-level strike. Chances are, it could be just the opposite. We already have too much oil on the market. If refineries shut down, the supply glut will be even worse. In that case, take the Ultrashort Oil and Gas ProShares (NYSE:DIG).

No matter which slant you take or which way you choose to invest, one thing is certain. The nation’s largest companies are once again out of the predictable hands of a free market. They have been seized by unions and greedy politicians.

It makes the job of an investor even harder, but the profit opportunity is there just the same.

Source: Playing a potential refinery strike

Retail Sales Extend Record Streak of Monthly Declines

Jason Simpkins — Thu, 15 Jan 2009 16:25:51 +0000

U.S. retail sales fell 2.7% last month and will likely continue on a downward trend as job losses mount. Total retail sales dropped to a seasonally adjusted 343.2 billion last month, the Commerce Department reported. That’s a decrease of 2.7% from the previous month and 9.8% decline from December 2007.

Retail sales have now declined for six straight months – the longest streak on record – as falling home values, tight credit conditions and soaring unemployment have sent consumers into a full scale retreat that is showing no signs of letting up.
The U.S. unemployment rate rose to 7.2% in December, as the economy lost 2.6 million jobs last year, the most since World War II ended in 1945. The Conference Board’s consumer confidence index declined to a new all-time low of 38.0 in December, down from 44.7 in November.

“The economy is staring at a very steep, downward trajectory,” Jim Demasi, chief fixed-income strategist at Stifel Nicolaus & Co., told Reuters. “This shows a very sharp falling in household wealth and job creation. This shows a shock in consumer confidence.”

Sales at clothing stores fell 2.5% in December and sales of sporting goods slid 0.4%. The declines in both apparel categories, as well as a 2.2% drop in same-store sales over the final two months of the year, confirmed reports that the 2008 holiday shopping season was the worst in since World War II.

Overall retail sales were also dragged lower by a 15.9% drop in gasoline prices, which have fallen off a cliff since hitting a record high $4.114 a gallon in July of last year. The national average for regular gasoline is now stands $1.792 a gallon according to auto-service AAA. The decline in gas prices in indicative of a similar drop in the price of crude oil, which is down 75% from its record high of $147 a barrel, also reached last July.

The decline in commodity prices across the board that has resulted slumping global demand is also driving down the prices of U.S. imports.

The Labor Department’s import-price index fell 4.2% in December after a revised 7.0% decline in November. The index posted a year-over-year decline of 9.3% – the largest such decline since the index’s 1982 inception.

Retail Sales Extend Record Streak of Monthly Declines

The Commodities Buzzword Of The Moment: Support

Laura Cadden — Wed, 12 Nov 2008 17:31:05 +0000

Never has there been a time where the stock market has influenced the commodities markets so much.

Last time I checked, the price of soybeans, cocoa or orange juice had absolutely no relationship to whether Microsoft (Nasdaq: MSFT), Disney (NYSE: DIS), or Google (Nasdaq: GOOG) declined in price.

But these days, we’ve got a serious blurring of the lines between global marketplaces. In addition, the prevalence and ease of electronic trading, coupled with well-capitalized hedge funds, means we’re seeing all kinds of different markets having an affect on one another.

Not so long ago, it used to be that money typically flowed from one asset class to another – for example, from stocks to commodities. But that isn’t happening now as most players have either bailed out of everything completely, or are selling assets to meet margin calls.

For commodity-watchers like me, I’ve looked on in surprise (as well as a little frustration) as commodities head the same way as stocks and pickings are slim. All the different commodities have suffered a hammering over the past few months, as the stock market’s mess spills over.

The selling wave has taken all the major commodities to new lows for the year, with most markets giving back all their gains for 2008 and more. Let’s see if we can pinpoint the next moves…

Oil’s Slippery Downward Slope… Have We Hit Support?

There’s no question that the oil has dominated the commodity headlines this year, topping out at $147 a barrel back in July.

But somewhat quietly amid the financial crisis, stock market slump, and bailout talk, oil has bounced down to around $60 a barrel. In turn, this has resulted in gasoline prices declining to the $2 a gallon level.

Although there might be more downside to come, it seems we may have hit a temporary support area here.

Natural Gas Could Be Nearing A Bottom… But We Need More Evidence

Oil’s partner in crime – natural gas – has also endured a vicious selloff. Having topped out in July, it’s given up just as much ground as crude oil, with the December 2008 futures contract dropping a solid 8100 points from top-to-bottom. That’s a whopping $81,000 change in equity.

Like crude oil, natural gas seems to have found a temporary support level as prices have consolidated a bit over the past two weeks and remained in the same area. In order to feel confident about a support level, prices have to tread water for a while without giving up more ground. We’re going to watch the price action for a while, but we could be getting near a bottom here.

Even The Safe Havens Are On Shaky Foundations

Ask most folks to name which markets are usually the beneficiaries of an unstable financial market… and you’ll likely get the resounding answer: “Gold and silver.”

Nine times out of ten, they’d be right. But not today. Even amid the economic turmoil, the safe haven hard asset metals can’t muster up any bullish action.

Sure, they got caught up in the bullish frenzy over the summer, just like the other markets. But when the music stopped, investors decided to bail out of the metals, too.

However, take a look at the charts and you can see that they’ve joined oil and natural gas in trying to establish some support. We can see evidence of this in the fact that neither metal has made a new low over the past two weeks. If the stock markets can find their footing here, then the metals may move up just the same.

As you can see, the December silver futures currently sit at $10.40 an ounce, while the December gold futures are trading around $753 an ounce – a far cry from their highs this year of $19.70 an ounce and $1,000 an ounce respectively.

If the market feels confident that the Federal Reserve’s bailout plan will work, investors could start dipping their toes into the long side of the market. If so, that could result in gold and silver moving higher. Until that happens, however, remain cautious, as it doesn’t take much for widespread selling to rear its ugly head again.

It seems that “support” is the word of the moment for the commodities sector. The rest of the markets (corn, wheat, soybeans, coffee, cocoa, sugar, orange juice, and cotton) are all trying to find a foothold and establish some support.

Having been torn apart in the nasty selloff over the past few months, though, it may take some time.

Source:The Commodities Buzzword Of The Moment: Support

Stimulus Checks Push Retail Sales Rally, Economy Still Facing Uphill Battle

Jason Simpkins — Fri, 13 Jun 2008 12:14:39 +0000

Stimulus checks helped send retail sales up 1% in May, the Commerce Department said yesterday (Thursday), bolstering the dollar and lifted the mood on Wall Street.

But the effects may not last, as unemployment continues to rise and crude oil supplies tighten.

Record high gasoline prices padded the report, but purchases still increased in every other sector. Gasoline sales jumped 2.6% last month and have gained 13.8% in the past year. Excluding gasoline, sales still climbed 0.8%.

“Yes, we bought a lot more gasoline as prices skyrocketed,” said Joel Naroff, president and chief economist at Naroff Economics Inc. “But the sales gains may not have kept up with the cost increases. More importantly, you name the good, electronics, appliances, clothing, health care, food or general merchandise and sales rose. We even ate out more. That is impressive, to say the least.”

Many economists were impressed by the figures as retail sales rang up $385.4 billion for the month. However, most attributed the growth to the $50 million in economic stimulus payments the U.S. government sent out in May, and analysts are divided on whether their positive effect will continue.

“The full impacts of the rebate checks are still to come as people are still receiving them,” Naroff said. “That holds out hope that consumption will continue to expand through the summer.”

Then again, unemployment is on the rise having reached 5.5% in May, a 0.5% increase from April – the largest monthly increase in 23 years. Initial claims for unemployment benefits rose to 384,000 last week from 359,000 for the week ended June 6.

“This good [retail] report suggests the tax rebates are having an impact,” Mark Zandi, chief economist at Moody’s Economy.com, told Bloomberg in a radio interview. “As these effects fade, the weaker job market will take over.”

Also, after nine months cutting interest rates and lending freely to financial firms hoping to ease the pain of the credit crunch, U.S. Federal Reserve Chairman Ben S. Bernanke is has been phrasing a reversed course to battle inflation.

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” Bernanke said earlier this week. “The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.”

Coupled with tough talk from the European Central Bank, the message is clear: The U.S. Federal Reserve can no longer afford to stand by and watch the value of the dollar plummet. And if that means the economy and investors limp through the remainder of 2008, so be it.

“The immediate effect from this dramatic shift in policy priorities has been to ‘drain’ visibility, confidence and liquidity from financial markets,” Tullett Prebon economist Lena Komileva wrote this week, according to Fortune. “With monetary policy adopting the role of a risk-driver rather than a source of relief for financial markets, current conditions are actually worse than they were last August when the credit crunch erupted.”

Source: Stimulus Checks Push Retail Sales Rally, Economy Still Facing Uphill Battle

Special Energy Indicator Points Toward Higher Gas Prices and a Potential 467% Profit Play

Keith Fitz-Gerald — Fri, 13 Jun 2008 12:02:46 +0000

Here at Money Morning over the past six months, we’ve talked a great deal about oil and gasoline prices. We’ve offered our predictions about how high those prices were going, and have detailed a number of investment opportunities – chosen as much for their margins of safety as for their profit potential.

This time we’re going to detail three energy stocks with the potential for double-digit – or even triple-digit – profit gains. Admittedly, these are longer-shot, speculative plays. But we used a special energy indicator to help ferret out these energy plays.

This indicator is known as the “crack spread.”

In case you’ve never heard the term before, the crack spread is the difference between the price of crude oil and the value of the petroleum products that refiners can make from it. The crack spread can widen or narrow over time, depending upon various combinations of supply and demand.

If the spread is positive, that means the price of the products that result from the refining process – gasoline, diesel fuel, aviation fuel, heating oil, kerosene and asphalt, to name a few – is greater than the cost of the crude oil needed to make them. But if the spread is negative, it suggests that the cost of crude is higher than the end-game value of its derivatives.

Right now, the crack spread is narrowing. In fact, it has been for some time as governments around the world and gasoline companies actually try to hold down the pain motorists feel at the pump.

Granted, governments and major oil players make for strange bedfellows. But they have a common interest right now: Both are trying to prevent “demand destruction,” the plunge in oil demand that would result if millions of motorists – fed up with high oil and gasoline prices – just stopped driving. Governments want to prevent an economic collapse, while the integrated oil companies simply want to avoid being branded as the “bad boys” of the soaring-oil-price era – making it much easier for the incoming presidential administration to slap the entire sector with an “excess-profits tax” (something that’s already being discussed by Washington insiders).

But we can also see another scenario, one that’s very different. Peering into our crystal ball, we can see a situation in which the crack spread begins to widen, and gasoline prices run away anyway – eventually reaching $7 or even $9 a gallon.

For motorists, the pain would be excruciating. For investors, however, there’s a chance for double or even triple-digit profit gains.

Let me explain…

The Subsidy Gambit

It turns out that a number of Asian governments – most notably Taiwan, Malaysia and China, for instance – are actually reducing or eliminating fuel subsidies designed to shield their consumers from crude oil’s relentless march. Ostensibly, this is designed to control demand, but history suggests this will merely give those with the money access to increasingly large supplies that they’ll gobble up. In other words, we believe that demand may be growing fast enough to override the prices that governments around the world still believe to be inelastic.

Combine that possible new reality with the fact that a developing Asia accounts for as much as 70% of the increase in global oil consumption, this end of subsidies would probably hammer worldwide markets, including our own.

Given that Asia represents a mere 20% of current global usage, Asia’s growth is critical to how the rest of the world uses and prices petroleum-related products – particularly gasoline. Incidentally, this stands in stark contrast to how Japan and much of Europe do things where high taxes on fuel and transportation are used to blunt demand.

The economic forces that will be unleashed when these subsidies are removed have the potential to make the Great Tunguska Blast that took place 100 years ago this month look like a wet firecracker.

Indonesia, for instance, spends nearly 20% of its budget to underwrite fuel costs and has telegraphed a 30% hike in fuel prices when those subsidies are removed. It’s much the same story in China, India and the Philippines, where separate figures for fuel subsidies are hard to come by, but where it’s safe to say that the net effect of these price controls have contributed to artificially low prices and artificially high levels of demand.

In China, where the government caps gasoline prices, for instance, motorists pay about half of what their U.S. counterparts pay. All in all, governments around the world will spend about $100 billion on oil subsidies this year – meaning about half the world’s population is benefiting from “cut-rate” petroleum prices. This year, those folks will account for all of the growth in global oil demand, equal to an additional 1 million barrels of oil per day, says Deutsche Bank AG (DB).

Now, pressure is escalating globally for countries to end the subsidies the world economy can ill-afford. The International Monetary Fund (IMF), for instance, is “calling on governments to let consumers face market prices in order to kick-start conservation and reduce official spending,” says The Christian Science Monitor.

As I hinted earlier, this change has the potential to jam a lot of consumers personally. But it would allow world markets to function as, well, markets. And that, in turn, would afford investors one of the biggest turnaround opportunities available in the energy sector today. The reason: As the subsidy removals, pricing changes and demand shifts work their way through the global economy, the crack spread would widen again… and fast.

And the biggest beneficiaries could well be the oil refiners, which have seen their profits get zapped along with crack spreads in the past year.

The Best Way to Play the Shift From Subsidies

If there is a sector turnaround, the upside could be huge. And the three firms in line to benefit are Western Refining Inc., Valero Energy Corp. and Holly Corp. Let’s take a closer look at each of the three:

Western Refining Inc. (WNR): The El Paso, Tex.-based Western is an independent crude-oil refiner that owns and operates four refineries, and that also owns and runs 155 retail service stations and convenience stores in the Southwest. Although Western’s shares rose 77 cents each, or nearly 7.1%, to close at $11.66 yesterday (Thursday), the stock is down 82% from its 52-week high of $66.13. Independent researcher Soleil Securities Group Inc., this week initiated coverage of Western with a “Sell” rating and a target price of $8, contending that the company is highly leveraged and has seen its shares suffer in concert with its peers as part of a general sector downturn. That underscores the sentiment these companies face. But a return to its 52-week high would represent a 467% gain.

GM Tries to Reverse Course, but Can it Catch Toyota?

Jason Simpkins — Wed, 04 Jun 2008 13:33:52 +0000

It has taken three straight years of declining profit for General Motors Corp. (GM) to realize it is no longer on the cutting edge of the world’s automotive market.

To its credit, GM has shifted its turnaround into high gear, painstakingly reshaping what was once regarded as an American business icon. But even with the changes put in motion, it may be too late to catch rival Toyota Motor Corp. (ADR: TM).

General Motors announced yesterday (Tuesday) that it would cut jobs, costs, and possibly sell off its Hummer brand, all in an effort to reduce its exposure to sluggish truck and SUV sales, and respond to a “structural change” in the automotive industry.

That change is, of course, the rising cost of fuel.

The price of crude oil accounts for more than 55% of the retail price of gasoline, according to the federal Energy Information Administration, and as the price of oil has more than doubled in the past year, gasoline has followed suit by breaking the $4-a-gallon mark and causing motorists to cringe.

“Since the first of this year, however, U.S. economic and market conditions have become significantly more difficult,” Rick Wagoner, GM chairman and CEO said in a statement. “Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix.”

During the first four months of this year, sales of pickups dropped 16.8%, SUVs dropped 9.9% and luxury vehicles fell 12.9%, according to Autodata Corp. Sales of small cars, on the other hand, rose 7.5%. This rebalancing of the “industry sales mix” has swung the pendulum of popularity away from large gas guzzling SUVs back to fuel efficient compacts, and yes, hybrids.

Sales of hybrid cars surged 25% during the first four months of 2008 compared with the same period last year. And the trend only grew stronger in May when sales jumped 58%, outpacing a gain of 18% in April, the Los Angeles Times reported.

While GM’s response to this shift has been thoroughly detailed by Wagoner, change has come slowly.

Wagoner said yesterday that GM would close four truck plants, cutting its North American truck capacity by 700,000 vehicles. The maneuver is expected to save the company $1 billion.

And as far as the company’s Hummer brand is concerned, Wagoner said GM is “considering all options from a complete revamp to a partial or complete sale of the brand.”

However, these changes may have come a tad too late to fend off Toyota, which has pulled nearly even with GM in terms of global vehicle sales and continues to increase its share of the U.S. market.

“Unfortunately, it’s just a sign that once again they’re behind the curve,” Peter Jankovskis, a chief investment officer with OakBrook Investments, told Reuters. “If they were looking to sell the Hummer brand, the more sensible thing would have been to do it three years ago. They’re not going to get anything for it. Just in terms of timing, it’s a very poor example.”

Indeed, GM has already made its bed over the past decade, ignoring smaller hybrids in favor of mainstream success with the popular H2 and Cadillac Escalade. But in that time Toyota was building for the future and assembling a fleet of fuel-efficient hybrids.

The Beast of the East

While GM is struggling to catch a rapidly emerging trend Toyota is at the forefront. Toyota – the world leader in hybrid sales – sold about 429,400 hybrid vehicles in 2007, an increase of 37% from 2006.

In fact, the company announced just last month that sales of its Prius hybrid car topped 1 million units worldwide since its launch just over a decade ago. The Prius, the world’s first mass-produced gasoline-electric hybrid car, first went on sale in Japan in late 1997, and since then, more than 1,028,000 cars have been sold Toyota said.

In addition to the Prius, Toyota’s Camry and Highlander are also regarded as some of the best hybrids on the market today. And the latest addition to Toyota’s hybrid family is the company’s A-BAT, a concept truck that debuted at the 2008 North American International Auto Show in Detroit.

Roughly the size of Toyota’s smallest SUV, the RAV4, the crossover is intended to combine fuel economy with the versatility of an SUV.

“This is classic Toyota,” Erich Merkle, of automotive forecasting firm IRN, told BusinessWeek. “They’re positioning themselves ahead of the curve, preparing products for a generation of consumers that is still coming up.”

And as Toyota continues to find success on the frontier of a changing market, GM is losing ground even in its own backyard.

A decade ago, GM executives wore pins with the number 29, signifying their determination to hold 29% of the U.S. market share, the Wall Street Journal reported. But by 2006, the bar had been lowered to 24%, and the goalpost continues to move.

In April, GM’s share of the U.S. market hit a record low 20.5% according to Autodata Corp., and most analysts suspect it may have dropped below 20% for the first time ever in the month of May.

Meanwhile, Toyota’s U.S. market share hit a record high 17.4% in April, which means May’s sales totals could put Toyota within two or three percentage points of actually passing GM in its home market. Such an achievement would be a watershed moment for Toyota, on par with passing GM as the global automotive sales leader.

With the wind clearly at Toyota’s back, GM seems to be on the verge of accepting the inevitable. “I would rather be a highly profitable, great shareholder value, great reputation, growing No. 2 than a struggling No. 1,” GM Vice Chairman and Product Chief Bob Lutz told reporters after a speech at the Automotive News World Congress. “I would almost say that being No. 2 for awhile – if it happens, and it well may [for] they are in a lot of areas that are growing faster than we are – [well], it may be a powerful motivator for GM employees.” Toyota seems to have the edge in terms of both global trends and the U.S. market, but one final battleground remains. And that’s China.

Precious Metals Slammed Once Again – Strong Dollar, Weaker Oil Cited

Doug Casey — Fri, 30 May 2008 15:18:22 +0000

Gold hung in at $900 until London opened, then declined modestly until about an hour into the New York session, after which it was hammered, falling as low as $873 before making a small comeback during the Globex to finish at $877.00/oz., down $22.90. Overnight, gold has been flat.

Platinum was off sharply in Europe, falling well below the $2000 mark, but clawed its way back in New York to almost retake the level, ending at $1999/oz., down $70. Overnight, platinum has edged lower.

Silver got whacked from London straight through the NYMEX, only leveling off in Globex trading into a close at $16.60/oz., down 81 cents. Overnight, silver has edged higher.
(Click here for charts)

It was a third straight down day for the precious metals, and it was a bad one as gold tumbled to a two-week low.

That it would be a down day was no shocker, considering that falling oil prices and a firming dollar aligned the stars against gold and its sisters. But the extent of the damage may have caught some by surprise.

There was also strength in the equities markets to deal with, as well as an avalanche of selling across the board in commodities.

But analysts were mostly abandoning talk that gold will follow oil, and focusing instead on the role of the dollar, which has been buoyed of late by suggestions that an interest rate hike might come before the end of the year.

“With the dollar stabilizing, gold could fall quite a bit,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “There’s a lot of talk about inflation, which works both ways for gold. If the Fed does start tightening, that will strengthen the dollar and could really pop the commodity bubble.”

It’s an interesting equation, for sure. Inflation is dead certain to pick up as the effects of record-high oil and gasoline prices work their way through the economy. One sign of things to come arrived on Wednesday, with the announcement by Dow Chemical that it was raising prices of its products by 20%. Everyone uses Dow products.

So, will gold emerge in its traditional role as a hedge when inflation really starts to pick up? Or will the Fed’s response, which has to be tightening interest rates, hurt gold by propping up the dollar? Stay tuned.

Source: Precious metals slammed once again – Strong dollar, weaker oil cited

It Is the Season of the Bear

Andrew Gordon — Tue, 27 May 2008 13:38:19 +0000

Did you notice the government’s latest figures on gas and food prices? If you didn’t know what was going on, it could have given you a “what the heck” moment.

The Bureau of Labor Statistics (BLS) gave us some crazy numbers to chew on last week. For example, it said that gasoline prices decreased 4.6 percent.

It also said that the price for vegetables dropped 4.1 percent. Beef, veal, and coffee also cost less in April, according to the BLS.

It’s impossible to believe its numbers – that overall energy dropped 0.2 percent and food prices remained the same.

We all know that this can’t be true. The funny thing is, even the BLS admits it. There it is, in black and white, in its monthly Producer Price Index (PPI) report: the index for finished consumer foods climbed 5.2 percent … the energy goods index advanced 17.5 percent … and gasoline prices rose 3.2 percent.

The total increase for the core PPI (excluding food and energy) came to 3.0 percent.

But 3.0 percent was not the number you saw in the headlines last week. The number you saw was 0.4 percent. And the market was still taken aback. It was only expecting 0.2 percent – as in the previous month.

What’s going on here is seasonality. The government builds it into its employment and inflation numbers not to confuse us (though that is arguably the result), but to smooth out the numbers.

Let’s revisit gasoline prices. Why did the BLS say it decreased 4.6 percent when it really rose 3.2 percent?

Because last April and the April before that (the BLS actually goes back five years to compare prices), it rose even faster. In other words, this is the season (as we approach the heavy driving months of summer) when gasoline prices rise rapidly – every year.

Annualizing the 3.2 percent rise in April would give us an almost 40 percent rise for the year, but that’s overestimating what happens. Into the summer, prices usually fall back. There are other months earlier and later in the year when prices fall back. So the annual price increase ends up being much less than 40 percent.

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Seasonality can lower “adjusted” price increases. But it can also raise them. For example, what happens if the price of gasoline doesn’t fall beginning in June – as it has done in prior years. If the price of gas just stays the same and doesn’t go up at all, the BLS will be reporting a hefty rise on the “adjusted” price of gas in June.

And if the real price of gas goes up? Then the seasonally-adjusted price could very well cause a panic over energy prices which will make last week’s outcry seem like a whimper.

And what goes for the PPI index also goes for the CPI index. The CPI index beat expectations for the month of April, but only because of adjustments made to the numbers based on seasonality. May’s numbers should also be held down by seasonality. But when June’s numbers are reported (that would occur in July), then all hell could break loose.

Seasonality also was a huge factor in making April’s unemployment numbers look good because a lot of new jobs are usually created in the spring. So the Labor Department added tens of thousands of “new” jobs into its final job count.

One of the sectors where it had new jobs expanding? The financial sector. With all the layoffs by the big banks, do you really think this is a sector seeing strong new job growth?

Without the Labor Department adding these presumed new jobs into its bottom line, instead of reporting “only” 20,000 jobs lost for April, the figure would have been well above 100,000, and you wouldn’t be hearing the pundits remark on how well the job market has been holding up.

The truth is, employment isn’t holding up well. And prices aren’t being held down too well. Mark my words. These employment figures will also be revised upwards. It seems the Labor Department conveniently forgot that we’re on the verge of a recession (actually, I believe we’re already in one).

What seasonality giveth, it will taketh away … come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.

Good Trading,

Andrew Gordon

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

Source: It Is the Season of the Bear

Talks About Inflation and Interest Rates Will Be on the Front Burner This Week as Economic Speculation Resumes

William Patalon III — Mon, 19 May 2008 13:08:18 +0000

You can bet there will be a lot of discussion about interest rates this week, thanks to the release of the producer price index (PPI) report tomorrow (Tuesday) and the U.S. Federal Reserve meeting minutes on Wednesday.

The PPI report will undoubtedly rekindle the inflation-versus-recession debate (with more than a few comments about stagflation thrown in for good measure).

While the wholesale inflation gauge (PPI) provides another look into how escalating food and energy prices are impacting the economy, the most recent moves in oil and gas may not be factored in for another month or two.

On an optimistic note, gasoline prices historically peak around Memorial Day and then fall throughout the remainder of the summer. As we’ve said here a number of times before, don’t expect that pattern to repeat itself this year [Indeed, please click here to check out a related story in this issue of Money Morning that details our expectation that oil-and-gasoline prices are headed even higher].

In this column four weeks ago, we told you to ignore a U.S. Energy Department forecast that gasoline prices at the pump would reach $3.73 a gallon before falling. In fact, I said flat out that the Energy Department was wrong. And Money Morning Investment Director Keith Fitz-Gerald shortly thereafter reiterated that belief that the Energy Department’s prediction was way off the beam. And how right we were – that price already has been surpassed and consumers in some parts of California and Hawaii are paying in excess of $4.00 a gallon.

Less than two weeks ago we actually boosted our target price for oil to $225 a barrel (remember that Keith Fitz-Gerald, now Money Morning’s investment director, was probably the first investment guru to predict triple-digit oil prices).

As noted, however, much of this won’t be reflected for a couple of weeks.

Wednesday’s release of the minutes from the last Fed meeting should provide investors with a bit more insight into the mindsets of central bank policymakers and just how likely they will be to stand pat on interest rates: In one of the most aggressive rate-cutting campaigns in the central bank’s history, policymakers have pared the benchmark Federal Funds rate seven times since mid-September. Investors expect the Fed to sit tight (and hold off on further rate activity) at least through the summer months.

More retailers will report this week [Target Corp. (TGT), The Home Depot Inc. (HD) but few surprise are expected at this point in an earnings cycle that – except for the discounters – has been full of disappointing retail-sales reports.

The Money Morning Story SNAFU

When they received their daily e-letter last Monday, sharp-eyed Money Morning readers noticed something peculiar about this column.

It seemed familiar.

There’s a very good reason they felt that way. They were right.

Due to a technical problem, and some human error, the column we’d put together for Monday’s newsletter was inadvertently replaced by the afore-mentioned April 14 story in which we’d told you that the Energy Department’s optimism about summer gasoline prices was wrong.

We replaced that story on the Web site with the correct piece – a warning about the week’s upcoming retail-sales reports, but we heard about the mistake. As we deserved to.

As bad as we felt about the mistake, we still found several positives. First and foremost, we were reminded yet again that we have a loyal following that reads our work closely and carefully – and for the most part enjoys and benefits from what we do.

And if you all had to read one of our “old” stories a second time, I’m happy to say that it was a strongly worded prediction piece that proved us correct.

Market Matters

Over that past year-plus, the subprime debacle and related credit crisis have prompted discussions about “disaster,” “devastation,” “tragedy,” and “catastrophe.” Homeowners were unable to afford their houses, institutions faced significant asset write-downs, hard-working folks lost jobs, and investors watched portfolio values decline. While these financial consequences undoubtedly have been traumatic for many, the events of the past two weeks can serve to lend some perspective. The death toll in Myanmar has reached about 80,000 with another 50,000 people still missing. Likewise, in China, where the earthquake eventually may take over 50,000 lives as well. Somehow, missing quarterly earnings by a few cents simply does not seem quite as significant.

Speaking of…earnings season plugged along and the results to date have given some analysts (the slightest) reason for optimism. As the week began, about 90% of Standard & Poor’s 500 Index companies had reported and 62% actually beat expectations. While average quarterly earnings have plummeted by over 17% on a consolidated basis, the results looked far stronger once the financial firms were removed from the equation.

Without that struggling sector, first-quarter profits actually increased by more than 7%. Retailers took center stage this week as Wal-Mart Stores Inc. (WMT) proved again that discounters are benefiting from the current consumer nervousness. However, while Macy’s Inc. (M) and JC Penney Co. Inc. (JCP) suffered from weak sales, their results (and guidance) bested Street projections. Sony Corp. (ADR: SNE) rebounded as TVs and cameras moved back onto consumer shopping lists. Bond insurers MBIA Inc. (MBI) and Freddie Mac (FRE) reported wider losses, while UK-based HBSC Holdings PLC (ADR: HBC) realized higher profits.

Board directors and corporate execs again played “Let’s Make a Deal” as CBS Corp. (CBS) announced its intent to buy CNET Networks Inc. (CNET); Hewlett-Packard Co. (HPQ) made overtures toward Electronic Data Systems Corp. (EDS); General Electric Co. (GE) is reportedly putting its long-time appliance biz up for auction; and billionaire stakeholder Carl Icahn pushed for Yahoo! Inc. (YHOO) management to reopen talks with Microsoft Corp. (MSFT). Analysts often welcome merger news and consider it a positive sign of a rebounding business climate. Research in Motion Ltd. (RIMM) shares soared this week on news that its newest Blackberry creation will soon hit the market; and Merck & Co. Inc. (MRK) received a major victory when a Texas appeals court overturned a Vioxx verdict that, initially, awarded $32 million in damages.

Goldman Sachs Group Inc. (GS) apparently enjoyed the limelight (and the stir its analysts caused) two weeks ago. Last week, the investment bank was at it again, forecasting that crude prices will rise to $141 a barrel during the second half of 2008. Oil surged to about $128 a barrel late last week as gasoline prices soared to over $3.75 a gallon – just a week before the widely-traveled Memorial Day weekend.