Ander's Market Theories

[AnderL]

Sensationalism creates opportunity

This guy is on the ball. Bird flu anyone? Iraq\Haliburton? Defense Stocks? Natural Gas Stocks? SARS? Cramer for Pete's sake?

http://www.blogginwallstreet.com/

The first thing I heard when I turned on the TV this morning was a bold voice over asking rhetorically if energy shortages will continue forever.

WHAT SHORTAGES? I felt like shouting out in frustration. Here we go again, I thought. Can I take another day of immersion in sensationalism and hype? Maybe it’s just getting to me this week. Maybe I just need a little break. But it seems to me that ever since the hurricanes news began to grow stale the level of sensationalism has been elevated. The mainstream media is like a heroin addict. As soon as the high of one story wears off they’re looking for a new fix. It doesn’t seem to really matter whether a story is newsworthy or not.

In music it doesn’t matter much whether the latest teen pop sensation can sing or not. The producers can make a star out of anyone with the right look and moves. The media can do the same thing with any story. A few out of context interviews, some emotionally directing sound, selective video editing, and the MSM can make a story out of anything.

The secret to making a story out of nothing is that the audience can’t know or understand the facts. The MSM wants people to believe that bird flu is going to run rampant through our country. Never mind that the virus can only be transmitted from a bird to a person, and it can barely do that. The media just says that the bird flu is spreading. They don’t bother to tell you that it’s spreading in birds, not people. They don’t bother to tell you that only about 60 people have ever been killed by it since 1987, while 20,000 people die of the regular flu in the U.S. alone every single year. They just keep saying over and over again that the bird flu is spreading. Take cover.

The media keeps saying that the president is in big trouble over his Supreme Court nomination. They never say what was bad about it. They just keep saying that the president is in trouble for it. The same with the CIA leak investigation. The president is in trouble over that too, according to the media. But they never say what he’s in trouble for. They just use a lot of adverbs and adjectives to describe how much trouble he’s in, and I guess it’s a lot. Why should he even care? It’s not like he’s going to be impeached and it’s not like he can run again.

Between the nonstop media flap about the bird flu, the Supreme Court, the CIA leak investigation, etc… the financial media has barely even given coverage to the earnings season. To listen to the little bit of coverage there has been you’d think earnings were coming in horrid when in fact somewhere around 70% of S&P 500 companies have beaten expectations, while only about 15% have missed and 15% met expectations.

It seems that almost everything I hear from media lately is sensationalized to the extreme.

Have you ever gone to the gas station and not been able to get gasoline? Has natural gas stopped flowing to your furnace? Has the fuel oil truck not shown up to fill your tank? Has there been a run on the little one-quart bottles of motor oil? WHAT SHORTAGE?

The hurricanes hit and took out a sizable chunk of our crude, natural gas, and refined products production. Yet ever since then, supplies and inventories of most products have been climbing. Why? I for one have been lighting a fire in the wood stove every night for more than a month now. My natural gas furnace only kicks on sporadically. It would be running almost constantly otherwise. Up here in the mountains it’s been below freezing most nights for a quite a while now. I’ve also been driving a used car that gets decent gas mileage more often than my beloved old jacked up full-size Jimmy. Am I the only one that’s made an effort to conserve? Obviously, I am not. It’s showing up in the data every week.

The energy bulls still come on TV and talk about how much production is shut in, shortages, disruptions, etc… But the industry experts are mostly now saying that stocks of heating oil are fine, the flow of natural gas is adequate, and refiners will be at 100% of previous capacity utilization by the end of the year. So where’s the price of oil and gasoline going to go when refiners are pumping out as much as they were before and we’re still demanding less?

Really prices should fall all the way back to late nineties levels. In an efficient and competitive market they would. If producers are making more than people want to buy they should have to compete to sell and margins should fall to the point that inefficient producers have difficulty profiting and competing to sell.

But that’s not the case when a market is driven by speculation such as the energy markets have been. Speculators have used the excuse of future problems to justify higher prices today. But there’s nothing logical about this. Why should a futures contract for oil to be delivered next month price in the world demand growth ten years from now? It shouldn’t.

This has been caused by an increase in stock investors playing the futures markets and not understanding the game. That’s why the commodities markets have gotten so out of whack. The stock investors price future demand into contracts that expire in a month or so. If they believe that demand for oil will increase they should be buying futures contracts for delivery well into the future. Apparently, nobody really believes the growth hype because you can lock in a barrel of oil for delivery in 2011 for just $56, while a barrel in December will cost you more than $60.

Now I hear energy bulls using the excuse that we’ve still got production shut in to justify $60 oil. So why then, did oil hit $67 weeks before the Katrina? At least one thing is working in the market. Inventories are climbing and prices are lower, despite the supply disruption.

But it’s darned frustrating to listen to people talk about demand outstripping supply when the producers keep having to put supply in storage tanks because no one wants to buy their product.

At least I can laugh at all the sensationalism and feel good about myself knowing that I’m putting out the truth.

The way I visualize the markets is that the correct price represents a nebulous truth surrounded by prices that represent misinformation, misunderstanding, and manipulation. Truth is the gravity of the markets. Prices might defy the truth for a while, but eventually they are pulled back in. When you think of the markets like that, misinformation equals opportunity, as hard as it might be to stomach at times.

posted by Mark at 12:57 PM 0 comments