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The Blue Money Report
"Those skilled in war subdue the enemy's army without battle"                                   
~ Sun Tzu

Welcome to the Blue Money Report

Today's Commentary: 03.20.03
"Mixed" Message

Is oil still at the center of this approaching maelstrom? This morning, oil is trading on the open markets at $28 and change. This should be good news for those whose businesses depend on oil. But it appears to be nothing more than an anomaly called backwardation.

Oil wants to cost twenty dollars a barrel and always, even after the recent spike in prices, it looks for a way to get there. We want to believe that this commodity can and should be a reverse indicator for the markets. Oil prices go up, the equity markets decline. And vice versa. But that is not the goal of the players involved in this little game.

High oil prices does little for the oil producing nations of OPEC whose goal it is to keep the customer satiated enough to continue to return. OPEC understands that war makes folks nervous. OPEC understands pricing and the possibility that if countries are forced to find alternative methods, they will. They want to make sure that the price is always at "just right"

Many President's have tried and many have failed in the attempt to slow down our love for that precious fossil fuel. If early efforts had succeeded, we would not be importing oil from anywhere. In fact, had President Nixon's plan worked, the United States would have been free of importing for over 23 years.

Nervous government and business leaders will try to stock pile oil against future problems. So what they end up doing is buying next June's oil needs in February. The retail cost of fuel increases. Equity markets, understanding this relationship in only one way. The cost of production under increased fuel costs means less profits. Profits drive investments. And equities suffer.

But then, OPEC kicks up production, flooding the markets with cheap oil. So companies buy oil further down the road that is far cheaper than the oil due for earlier delivery. The price comes down and the equities markets get excited. Rallies ensue. But there is no rock solid proof that markets will recover as a result of this lowered fuel price. Some economist and analyst believe that the excitement is mostly unwarranted. The overall effect of these price adjustments might move the equity markets, creating single digit improvements in the short term. And while I agree that any move north is better than nothing, it does little to quell the sluggishness of the overall economy.

Back in mid-February, chief US strategist for Merrill Lynch Richard Bernstein commented that he saw the possibility of a 'double dip' recession increasing, but not because of global competition and deflation." The termed he used was "old-fashioned oil shock."

It might be important to note some basic things often overlooked by oil, or more generally, energy production. Our vulnerability to oil is greater than one might think. Energy differs from other commodities.  Nothing can be done without energy.  Nothing can be moved, built, manufactured, planted, fertilized, harvested, or mined, without the liquid transportation fuels that petroleum provides so well, and for which no competitive replacement has ever been found. OPEC likes that thought but at the same time realizes that without a dependency on this product, they are out of business. The supply of oil in the world is not limitless and there is growing speculation that we have reached the halfway point in supply. The United States reached this halfway capacity in the lower 48 states in mid 1972. The Bush administration lost a key battle to open the Alaskan wilderness to additional exploration in a vote yesterday in the Senate, 52-48.

Finding more oil will not solve the problem nor will it head off future problems. Taxing consumption many feel would provide little incentive to lower consumption but would provide the death knell to any political ambitions the President might hold for 2004. He needs only ask his father who ruined his chances with an increase of 5 cents a gallon.

There has been suggestions to let the price at the pump artificially inflate itself through the sale of vouchers. Cars with fuel efficient properties could sell their excess vouchers to those who purchased gas guzzling SUVs. Commerce Secretary Don Evans believes that this would do more damage than good to the economy. Folks like Mr. Evans and Mr. Bush, veterans of the oil patch don't like to hear about alternatives although the suggestion to develop hydrogen based fuel cells smacked more of lip service than commitment.

And the oil producing nations, Iraq included, will do everything in their power to sustain their own economies or their dictators. They have engineered price crashes in the past to thwart any development of alternative sources. We may be militarily mighty, but those machines still move on the oil below it's treads.

It is not a totally comforting thought that the Federal Reserve is also attempting to navigate these waters in much the same way we are. While their caution is understandable, it is commonly believed that their information and therefore their conclusions are based are far better data that what we mere mortals have to cope with. We are watching numbers reported that have been disrupted by weather. Many of those numbers will be further diminished by war as we wear thin the amount of excuses we can conjure. Not too long ago, it was Warren Buffet who riled the markets with his sentiment. For the last three years, it has been weakness. Looking forward, it may very well be Mr. Bush's remake of President Johnson's "guns and butter" speech that preceded the depression of 1971 that finally takes us down. And our Federal Reserve chairman Alan Greenspan, with post meeting speculation that everyone may not have been in agreement, decided to leave things right where they are. "In the light of unusually large uncertainties"...

Today's Commentary: 03.17.03
The Stockholm Syndrome
The country was amazed last week when, hiding in plain sight, the kidnapped Utah girl, Elizabeth Smart surfaced only a short distance from her home. She was, in fact, at least at first glance, relatively unharmed, protected by the same mental hiding place used by other kidnapped victims, the most famous being Patty Hearst. The syndrome allows those who have been taken against their will to effectively shut out their past, adopting the present, and otherwise becoming at one with your captor. You begin, as Dr. Arthur Deikman, a clinical professor of psychiatry at the University of California suggested, "to identify with the one you are afraid of", which "reinforced by the perception of threat" becomes enough of an influence itself. The syndrome was named after four Swedes bonded with their captors in a 1973 violent bank robbery.

Could this syndrome be what is letting the markets, currently languishing in some sort of shallow pool of options, rally on bad news, rumor, and otherwise grim outlooks in the near term and only slightly better days in the distance? Could we be sympathizing with our captors?

Before the war even begins, the speculation continues as to why we are acting as if there are only four possible scenarios. Do we really believe that a regime change in Iraq will allow stocks to rally? The build up of troops along Sadam's borders has little to do with anything that will significantly change the way the equity markets are at this moment in time. Perhaps containment of the deranged dictator will work the jitters out of investor's minds, keeping the world on the edge of it's seat for a prolonged, if less costly length of time. With all eyes on Baghdad, that scenario is ripe with possible problems in an area of the world that has little interest in our President's lofty goals. Colin Powell continues to make his rounds on Sunday morning talk shows suggesting that a cohesive alliance, read: a second U.N. resolution, is not necessary but would be politically better than marching in based on the first one alone.

This would not do much in the way of boosting the overall negativity that the market has let itself become subjected to recently. And last but not least, we act without the full backing of the world.

Most expectations for the first quarter have been dramatically lowered since the first of the year. We all saw the new year and the refreshing visit to positive territory as the only option for the markets. Up is good. Real GDP has been lowered by most economist almost a full percentage point while the Federal Reserve, which meets on Tuesday, is seen as possibly lowering interest rates another quarter of a point. It may not happen this week, but staring blanking at our captors, we agree that the this is the best thing to get the economy back to even.

Our captors, the economy, the administration, the return to deficits, and the our personal debt, have now completely weaned us of the possibility that we can escape. And if we did, the places to hide, waiting for the rescuers to find us have become scarce indeed.

The President's pal, Charles Schwab joined a growing list of companies who are not going to match contributions to their employees 401(k) plans. Schwab has done his part to swell the ranks of the unemployed, now at 308,000, in an attempt to keep his company profitable. His employees will no longer have much in the way of incentive to contribute to their long term horizons, adding to the possibility that the country's dismal savings rate will slip a little further before it improves. 401(k) plans as you might recall, replaced traditional pension plans as a less expensive option for employers. Traditional plans are much more regulated and expensive to administer but at the same time give the employee who earned X amount of dollars a guaranteed benefit. While we are on the subject of pensions, big corporations are still adding pension profit to the bottom line as they look at the same plan as underfunded. Depending too much on the ability of the US Pension Benefit Guaranty Corporation to bail their poor retirees out should they default or go bankrupt, it was reported last week that PBGC has exhausted its entire $8 billion surplus as a result of a series of big corporate bankruptcies last year. The PBGC provides partial protection for private pensions paid to 44 million workers.

Take the inflated profits of these losing pensions out of S&P earnings for 2001 and you would have a significant drop of almost 70% from what was reported.

Based on this, how can markets rally without blaming the reaction on some sort of syndrome.