Slope Of Hope with Tim Knight

Everybody Wang Chung Tonight!

All right, Slopers. We're done with 2009. And what a fine way to end it!

Go have fun tonight. I'll probably do something weepy and sentimental in the morning. Until then, thanks for being here, through thick and thin, and here's to a fantastic 2010 for all of us!

 

Fat Charlie the Archangel

And here we are, with just minutes to the close. I just wanted to break things up a quick pic of me this morning, saying hello to my hero here.

 

Bullishness at Record Levels

Howdy folks, and a happy last-day-of-the-decade to you. I've been doing foot exercises to give 2009 a firm kick in the butt as it goes out the door tonight.

The folks over at Elliott Wave International posted a compelling pair fascinating sentiment charts in their Short Term Update last night. The percentage of bears has reached levels not seen since Ronald Reagan was still in office and before the crash of 1987. In other words, there are fewer bears now than there were when the Dow was over 14,000! I feel our corner of the universe is becoming one of the last bastions of bearishness.

Just to drive the point home, they also show the bull/bear ratio, which also is at almost unthinkable levels. Simply stated, virtually everyone in the country is in the bullish camp.

 

I'm looking forward to next year. A lot.

The Slope of Hope. Vox Clamantis in Deserto.

USD & Various Treasury Yields (by Gary Tanashian)

Hey, happy new year all Slopers, and TK, a special happy new year to you!  I wish we had more honest and rational voices out there in the wilderness, which is exactly what Slope is in my limited but increasing experience.  Something I wrote this morning while pondering a trigger point in treasury rates:

What is the story here? 5, 10 and 30 year treasury yields are marching in lock step saying these bonds' would-be buyers want greater compensation if they are going to take on the debt of a society that literally lives by inflation, and by debt. The yields are rising as if to say "Look, we will keep the illusion intact as long as you are willing to manufacture more debt to sustain it, but we must be better compensated as the moral risks get higher here in Full Hubris '10".

The key yield to watch is of course the 3 month t-bill, which will tell the Fed what it is going to do (you don't really believe these clowns are in control of such things, as they pretend to make these decisions, do you?) and if the T-bill tells the Fed that rates are going to rise, then we will find out how sustainable the economic recovery is.

As an aside, you may know that I have a position in the real world where my finger is on the pulse of the US manufacturing economy. The better than expected mid-west manufacturing activity is not a lie. There is recovery, and I see it elsewhere as well. I'll talk about my vantage point on the 'real' economy a bit more in NFTRH. 'THE' recovery is not in dispute and mine is surely no perma-bear, perma-Armageddon blog.

But it is sustainability that is the question, and rising yields, if they are not stopped at our 'line in the sand' of secular change, will answer a lot of questions in that regard as we move forward. The dollar has predictably been rescued from the abyss that the MSM were trumpeting. Now there are actually strong dollar wise guys coming out of the woodwork. Now things get interesting.

Any Last-Day Oddities?

I guess I feel a little silly doing all these posts over the holidays, but my commitment to my loyal readers is strong. I particularly appreciate the guests doing posts, since that gives me a chance to actually vacate on my vacation. I notice some formerly-popular blogs have virtually shut down, doing a post only once every few days or so. People are gearing up to say adios to 2009, it seems.

And here we are, down to the final trading day of this year. I imagine it will be a low-volume affair, although there's bound to be some freakiness, particularly in the final hour. I mean, these days, we can't seem to close the day out without something totally bizarre happening in the final thirty minutes. Monday, a ramp-up; Tuesday, a ramp-down; today, another ramp-up.

Will there be any special reasons to buy or sell tomorrow? My hunch is that whatever end-of-year weirdness there is, it will be on the buy side. I mean.......tax-loss selling? What tax losses? Everyone who bought stocks is in the green. So what losses would they try to take?

How about window dressing? Yep, that would make sense. Stuff those portfolios with AAPL, GOOG, and other winners.

I personally think the tax-driven selling won't take place until March. Why? Because one year will have passed since the bottom on March 6th. If you bought a ton of, say, DTG in early March and have a multi-thousand percent gain, wouldn't you like to score a 15% tax rate instead of 39%? I personally know of people that have gigantic profits on these securities that are praying to God that things hold together until March so that they can get the hell out at an advantageous tax rate. I imagine such tax-based selling will continue for a few months, commencing promptly on March 6th.

It will be interesting to see what stocks like PIR (Pier One), shown below, are going to do in the coming months. I mean, how many scented candles and imported bongo drums does our nation need? Stocks like this, which have gone from ten cents to five bucks (for instance) have created a lot of very profitable positions. They're going to want to take their profits sometime!

 

As for me, I think I'm going to sign off for the day. The Santa Claus effect definitely seems to have pooped out last week, and my numerous positions are finally making minute progress in the right direction. I, for one, will be pleased to start with a fresh slate next Monday. I'll see you in the morning, before the opening bell!

Bear in a China Shop (by Fayssoux)

Jim Chanos and Mark Faber have been making high profile observations about a potential implosion in China due to excess credit and overbuilding ("Dubai, 1000 times worse").  The inference from the Chanos interview is that he is looking to short raw materials companies that have been riding the China infrastructure boom, as well as companies listed in Hong Kong.

FXI is already down a bit since November.  Near term, the Baltic Dry Index has started to dip, possibly a seasonal effect, but potentially a signal the decline has begun.   .

 

Are You Bullish? (by Gary Tanashian)

If you are bullish now, but were not bullish last March, you are the guy or girl in the room saying "who's the mark?" and may be in for a rude surprise. If you were bullish at the March bottom, perhaps you have got your stuff together and I am just a cranky contrarian jumping the gun.

Every instinct I had in November '08 and March '09 told me that deflationist and bearish were the wrong way to be. The current situation with the long bond yield rising muddies up the waters today, so until it is resolved, the commodity and inflation trade must be considered ongoing... along with perhaps the stock market dragging its tired ass higher as part of what is now becoming the anti-treasury trade.

But any bull reading anything decent, reputable or sound into any of this is just a slave to convention, and believe me, there are many highly educated people in finance. That could prove to be their undoing. Talk of risk premiums in bonds and the like is just so much bromide now because we are off the charts, Treasury is talking about somehow taking us further off the charts (despite the mini rebellion in the t-bond) and stock market longs are populated by the momentum herd, trend followers and increasingly, a weary public.

It is funny; an early subscriber of NFTRH cancelled last summer as he had come across some information that the markets were going to crash in the Fall. It would be lights out so he no longer needed the newsletter. I should have known right then and there that the rally would extend longer than I thought likely. It is amazing how easily people fall for bear fairy stories in the age of inflation policy a go-go, which works constantly against the deflation/bear market argument.

Well right now, it is bull fairy stories being constructed by the troubadours on Wall Street and the massive and self-interested financial services industry the world over, not to mention the financial media that touts the agenda 24/7. The risk to the bullish stance - at least for interim hard correction - remains untenable. Real contrarians endure and await opportunity, whether it be next week or in the spring (repeat: I only need one or two good trades a year, I only need...)

Meanwhile, the gold-silver ratio remains subdued but in bullish pretense. Dat be bearish for everything else my friends, if it turns up. A rising GSR would signal the draining of the swamp despite the best efforts of policy on crack.

Bodacious Bevy of New Shorts

As we draw into the final ten hours of the trading year, I am increasing my short positions. Here are the symbols I just shorted, with their respective stop prices:

ADSK.......25.91

ATPG.......19.96

BA.......56.57

BLC.......5.99

BNE.......7.28

BWLD.......43.01

CBT.......27.53

DDS.......20.15

DIOD.......21.11

DOV.......42.76

EAT.......15.56

EMN.......61.96

FCS.......10.35

FCX.......84.29

FISV.......50.01

FORM.......22.66

GEF.......58.90

HBI.......25.95

HTCH.......10.30

KEG.......9.51

KLAC.......37.55

KWK.......16.27

LAMR.......32.24

MTB.......69.16

NE.......42.61

OSK.......39.25

PWR.......22.13

R.......44.26

RCL.......27.40

ROK.......48.31

SNX.......30.65

STP.......17.69

STR.......43.27

SWKS.......14.40

TCK.......38.46

TEG.......43.00

TROW.......54.47

WBS.......13.00

WDR.......31.23

WSM.......22.50

The above should give you plenty to chew on - - - we're expecting a ton of snow here, so I'll be skiing part of the day.

Fading the Fads

Some people are famous because they're famous (think Ashton Kutcher). Some assets rise in value because they rise in value. Sometimes they're called momentum stocks; at others they're called fad stocks. Their nature is to rise - sometimes exponentially - until the public in general changes its mind.

I tripped across one of these last night while I was idly thumbing through the stocks in my Wrecks list - - none other than Jones Soda, which I had sort of forgotten about. Jones is a maker of specialty beverages (including some really tasty cream soda) that had a spectacular run of about 17,000% from late 2002 to April 2007. For some reason, people thought that cane sugar-based drinks (which are admittedly way better than the corn syrup junk most people drink) would be in every pantry in America.

What took me by surprise when I saw the chart last night was just how far this thing had fallen. It is down about 98%, has a market cap of only $12 million, and apparently is looking to simply be bought out at this point.

So the question to ponder at this point is.........what are the "fad" stocks right now? What assets have zoomed up in price simply because they'd been bid up for months on end? Apple? Amazon? Or - dare I say it - gold? Not everything that goes way up in price is fated to plunge. But sometimes what creates an asset's value can largely be based on such animal spirits. It's worth considering.  

Iraq Oil to Rival Saudi Arabia

BAGHDAD - What was once considered a pipe-dream could become reality: after decades of dictatorship, war and international sanctions, Iraq’s massive oil reserves are set to be tapped proper and the country once known for two overflowing rivers could be crowned oil king.

If the seven oil projects awarded to foreign oil companies this weekend, and the three from an auction earlier this year, develop as planned, within eight years, Iraq will see its oil production capacity leap to more than 12 million barrels per day (bpd). 

“We think it is a big victory for Iraq to be able to be a leader in the world,” Iraqi Oil Minister, Hussain al-Shahristani, said after the auction.

Saudi Arabia, the world’s largest producer at 8.18 million bpd, has a capacity of just over 11 million bpd today, after slower demand growth halted plans to expand to 12.5 million bpd by the end of this year.

Iraq – behind Saudi Arabia and Iran – has the world’s third largest proven oil reserves, with potentially more remaining to be found. Currently, however, its 115 billion barrels below ground pump at just 2.4 million bpd, with production hampered by political, structural and security problems that could moot the enthusiasm from this weekend’s auction.

Out of the 10 oil projects on offer during the two-day auction, seven were awarded to a dozen companies. Three fields up for grabs in a June 30 auction were awarded, with one deal already finalized. And there are more than 60 fields discovered but not yet developed. These include two that the ministry is negotiating directly with foreign companies outside of an auction process.

Currently, Iraq relies on oil revenue for 95 percent of its revenue. This will increase if the fields develop as planned. Only after, however, Iraq reimburses companies for their investment and pays them a relatively small fee per barrel of increased output.

But this is Iraq, where, aside from this weekend’s bidding round, it seems nothing goes according to schedule.

Since late 2006, a new oil law to replace current oil governance – an often vague and conflicting mix of the 2005 Constitution and laws left from previous eras – has been delayed by political squabbles. Laws reestablishing the national oil company, reorganizing the oil ministry and formalizing revenue redistribution, are also languishing.

Iraq’s Kurds, who favor heavy decentralization, and nationalist Arabs, who want strong state control, have both questioned Shahristani’s oil deals. Some have called them illegal.

In press conferences and speeches before the auction, both Prime Minister Nouri al-Maliki and Oil Minister Shahristani, reiterated the government’s pledge that the deals would remain valid – no matter what happens in the March 7 national election.

Legal cover has been as much of a concern to foreign oil companies as physical security. Three days before the first field was put on the block, five bombs killed more than 120 people. Iraq’s northern export pipeline was offline for a week, during both October and November, due to sabotage.

“The contract specifies very clearly the responsibilities of the companies and the security for the fields is the responsibility of the Iraqi government but if the oil companies require specific security for their personnel or their activities, that is their responsibility,” said Shahristani.

“We will make necessary precautions to deal with it,” said Torgeir Kydland, the senior vice president for Iraq at Statoil, the Norwegian firm which partnered with Russia’s Lukoil to increase production at the West Qurna-Phase 2 project from nearly nothing now to 1.8 million bpd.

That additional crude, however, now needs somewhere to go. And throughout the value chain, there are missing links. Iraq needs to upgrade refineries, build more storage units, and create a larger capacity transport infrastructure. Following wars and sanctions, everything needs repair and modern technology.

Iraq cannot export much more than it does already; depending on which segment of the pipeline system, either repairs have not been made or an increase in oil flow risks all-out rupture.

“The amount of work required for the infrastructure to handle such a massive production and to transport it and to export it is huge,” said Shahristani. He said a pipeline and export master plan will be completed soon after assessing the needs of the fields awarded for development.

“There will be another port there and also a network of pipelines extended from the north of Iraq to the south and from the east to the west of Iraq to export oil from different areas,” he said. Such a move will diversify recipients, increase delivery to those already served, and allow it to separate the different qualities of crude instead of selling it as a concoction of one.

And when it makes significant gains in production, it will have to find its place within OPEC’s quota system, which Iraq – a founding member – has been excused from because capacity was cut by wars and sanctions. Shahristani said the 12 million bpd target will merely be Iraq’s capacity, and that actual output will be based on market demands and aligned with OPEC. There is language in the contracts that compensates foreign companies if production is reduced, he said.

Iraq is considered by Transparency International as one of the most corrupt countries in the world. And the influx of potentially hundreds of billion dollars of foreign investment into an as yet unproven government of struggling institutions is a volatile concoction producing in other developing yet resource-rich nations what has come to be known as the “resource curse.”

That is, when oil revenues aren’t used to benefit the citizens of the producing country but, rather, the elite. Investor companies are often enablers if not complicit, and their home nations approving.

The result is a populace lacking basic services and a polluted environment that soon turns into violence, destabilizing both oil operations and government. The resource curse in Iraq, however, is not inevitable. And although history is a bad indicator, in Iraq and in most oil producers, such a trend can be slowed and reversed.

“That’s why we’re glad it’s not coming on line all in one day,” said a senior U.S. official. The ministry’s Inspector General’s office is considered to be both progressive and aggressive.

The companies are expected to reach an initial agreement with the ministry by the end of the year.

“They will give us a work plan about the numbers of the fields to be developed, the expected costs, the invested money, and the number of the workers,” said Shahristani.

This is then followed by Cabinet approval and the final signing. Thirty days later the companies must pay the signature bonus, which is no less than $100 million, depending on the field. And it’s non-recoverable, as opposed to the first round where the much larger signing bonus was given as a loan.

This article was written by By Ben Lando for OilPrice.com who focus on Fossil Fuels, Alternative Energy, Metals, Oil Prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com