Jim Cramer: "The Simmons Argument is Right..."
Posted by Prof. Goose on September 9, 2005 - 3:26pm
Jim Cramer, on CNBC, at 6:10-6:20edt discussed Matt Simmons, oil prices, and even took a call on "Hubbert's Peak!" He also said oil was way too cheap (compared to a gallon of milk) and was going to $100 way before it sees Steve Forbes' $35/bbl.
It was one of the better lay explanations I have seen in a while. I would recommend you tell your non PO-aware friends about this one if they have CNBC.
The program will be rebroadcast at 9 and midnight edt. The segment begins about 10 past the hour. If you wanted mainstream media coverage folks, this is it.
As for style - I am not a Cramer hater myself. I'm a trader and can relate to him, even if I disagree with some of his opinions. He's far better than the vast majority of people selling investments or mutual funds (when was the last time most of them said "sell"?). His animated approach has gained fans and catches people's attention, and it seems clear to me that he is really trying to educate, as he goes over the same topics over and over again to ensure its sinking in.
Plus apparently he's not too worried about reputation; the show's popularity helps there no doubt. How many interviewers in the financial biz will invite a CEO to their show, listen, and then immediately tell their viewers after the interview/call to "sell sell sell"!
Not many and that's one of his values.
I've not cashed in as yet on my core ECA position but do believe a short term correction is possible and if so, likely next week.
I would be shocked if Cramer, "three months ago" claimed it was getting crazy. Mid may the latest big leg of the rally started. It was only barely going by June.
(towards the bottom of page 1)
Maybe it's catching on...
I've noted a number of daily briefings from two of the big brokerages that comment on something noted on one of Cramer's shows. When you consider that these briefings are issued to an entire brokerage's sales force, occasionally an item gets broad coverage.
In the context of Cramer's show I suspect the actual impact on the broader audience will not be high, but any move forward is a positive one.
Unfortunately Peak Oil is custom designed as a topic for the doom and gloom crowd ... the ones that believe gold is the only useful store of value ... and as has been discussed here in the somewhat distant past, being associated with the always-negative-folks can diminish the Peak Oil community's ability to spread the message in a constructive fashion.
Myself I think the gold guys got it all wrong; oil would be a better store of value in a doom and gloom world.
Think Mad Max.
;-)
http://home.aol.com/keninga/lp_kero.htm
As for Cramer, he was a trader, and often held stocks for less than one day. I do recall him pounding the table to buy Charles Schwab when it had declined from $50 to $30. The stock now trades in the low teens, having been much lower not long ago. I would fade him before taking his advice.
Seriously, though, I worked in a chem lab one summer while I was in college that did service for the oil business. My dad was an oil man his whole career and he helped me find some summer jobs back then. Turns out that when oil comes out of the well, it's actually mixed with quite a bit of water, at least it is in west Texas. So one of the things I had to do was to separate them so they could see how much there was of each and then also do some tests on the water part, pH and such. I'd put some chemical into it, some kind of de-emulsifier, and then the mixture would settle out into layers real nicely. Somewhat surprisingly the water is on the bottom and the oil on top. So we'd drain off the water and then do the other tests. That's about as close as you'll get in the real world to dehydrated oil.
When I asked why we are not seeing a move toward long-term investments anticipating the peak, he remined me that there are no long-term invesments on Wall Street. Professional traders are interested in making money next week, not next year, and the peak is not yet upon us.
That argument doesn't really hold up. Long term investments do exist and if you believe in peak oil, buying a 2010 contract for $60 would be a sure path to riches. Granted it's five years out, but who would pass up a sure thing like that? Which would you rather do, have a million dollars in five years as essentially a sure thing, or else struggle to outwit every other trader in guessing what will happen in oil in the next week, the next day or the next hour? People just don't leave money on the table in the real world. They don't say yeah, I could make millions off that, but I really don't feel like it today.
And the fact is, trades do occur in these multi-year contracts. There aren't as many as in the near-term markets, but they happen. Somebody is buying and selling out there. Prices are being set, trades are being made. If the consensus among those traders was for a Simmons style peak oil scenario, they wouldn't be setting a price of 60 bucks. It would be up over a hundred, maybe two hundred.
Another point is that even just looking at today's prices, if all the pros believed that oil was going to be worth $100 or $200 in a few years, they wouldn't be selling at 65 today. Again, that's leaving money on the table. They would demand a higher price today. And you know what? They'd get it! Why wouldn't someone buy oil at $80 today, if he knew the fundamentals were driving it up to double that?
The only explanation that makes sense is that traders don't see this as anything like a sure thing. They see a real risk that oil could move down over the next few years. After all, there are plenty of experts who say that it will do just that, Yergin and Lynch and the U.S. DOE. You can find experts on both sides. Any sensible trader will hedge his bets and not put it all on a Peak Oil scenario, at least not without realizing that he's taking a big chance in the hope of a big reward.
Maybe your fund manager is a Peak Oil believer, but I'll bet if you pressed him he'd admit that it's not a sure thing, that it would be a big risk to bet heavily on a Peak Oil scenario, because one thing you learn in the markets is that there are no sure things. No matter how good something looks you can always be surprised. If your hedge fund guy has the kind of experience you say, I'm sure he's learned that lesson, and learned it good.
There are many more optimists than pessimists in the investment game. Even among professionals, those that only know how to buy outnumber those that know how to sell.
After all, there aren't many/any big producers saying "sell our stock, it will be worth less soon". When was the last time you read an explicit admission like this: "in 2010 (or 2011 in March) we will no longer, forever, be able to increase our reserves and by 2012 in May our production will start to decrease by % a year".
No, most of the bigger producers are aiming for reserve and production per share growth. Some of the income trusts which exist solely to exploit relatively short-lived reserves are the exception.
So you've got a culture that is geared towards rewarding companies that can keep on delivering and in this case that means finding and producing more. Not until its really obvious that there's an industry-wide lack of such companies, and that no new tech or unconventional sources are coming to the rescue, will you really see long-dated futures rise.
I'm thinking that when peak oil is an obvious reality, governments around the world will ban futures speculation, depending on how fast/bad the situation is. The rise in the price of oil is nothing so far compared to what could happen at a time when it becomes clear there will be much less available to markets every year.
Now, as a rhetorical device, I might almost understand a comparison to bottled water, since for the normal use of bottled water, there is an ultra-cheap direct substitute - tap water. In that sense perhaps something about the level of frivolous spending is conveyed. On the other hand, there's not an ultra-cheap direct substitute for milk. And direct frivolous spending on oil products (and energy) is very comprehensible without diverting into strange comparisons with milk - travel to lecture halls just to watch TV on a screen at the front of the room when one could just as well watch at home; regular ski trips to the Alps; taking the kids to Disney World; most conferences and conventions; houses so huge that folks can hardly maintain them; Hummers; etc., etc.
But even so, a comparison to bottled water, or even an acknowledgement of frivolous consumption, however vast, still doesn't help me understand what oil or anything else "ought" to cost per unit, other than what it actually trades for. One might even coherently argue that oil "ought" to cost more now because it will cost more very shortly in the future - but that's a different story that can be told quite clearly without reference to bottled water or milk.
Isn't there some kind of economic fallacy going on here?
With C Campbels prediction of 940 billion barrels of crude oil left, if we do a net energy comparison (of how difficult it is to obtain these 940 and how much energy quality is in them) we work out to about 700 billion in todays 'crude' terms - that is a little over 100 barrels of oil left for every person on the planet - forever! (The average american uses over 30 barrels per year)
Clearly oil is worth more than milk - our market mechanism doesnt work on a principle of 'sustainability' yet, so its hard to say how 'much' more. If we correctly priced things on their replacement value, instead of their marginal current availability, the price of oil would be close to infinite.
But then, I haven't had a television in 20 years, either.
You'd think this Kramer fellow was god or something...
He also writes; one doesn't need a TV to be exposed.
His real value is perhaps more as a catalyst for others in the biz to dig deeper, although one show is not likely to be enough.
At any rate, I am not a Cramer apologist or promoter; I've faded (gone against) him often enough but everyone has wrong ideas from time to time. I recognize him as a professional that will admit to making wrong calls and more to the point, do something about it. If he's warming up to the idea of Peak Oil that certainly does not mean he is any less right or wrong this time, only that he's headed in the same direction that many of us are.
He's generally more interested in a good trade than a good investment compared to my temperment, but I enjoy hearing his ideas. Some have been useful to me.
However I'm dubious about some of his energy plays. If I recall correctly a week or two pre-Katrina he advocated buying ADM because they were thinking of building a plant to make plastic out of ethanol and ethanol biproducts derived from corn. He quoted a ADM spokesman who said the bioplastics could be made from corn far more cheaply than from oil as long as oil stayed above $30/bbl. Anyone else remember the show? Sure, sounds like a good idea, but I doubt the economics look so promising without federal corn subsidies. If ethanol from corn is a net energy loser, how can plastic from corn be much better?
"The two aren't exactly blemish-free themselves. In the early '90s, Kudlow resigned as chief economist for Bear Stearns, later citing cocaine and alcohol use. And Cramer has acknowledged unsavory trading practices, such as working to manipulate stock analysts, in his recent book, Confessions of a Street Addict. Cramer writes, "We would work to get upgrades or downgrades because we knew, cynically, that Wall Street was simply a promotion machine.""
The significance is that it will get more people thinking that energy will become more expensive, not less.
The vast majority of people invested in the market (passively or otherwise) know very little about what really drives the big risk transfer machine (put risk on the backs of the small guy, and make a profit on it in the meantime). I applaud any one in the mainstream that tries to open up the kimono even if just a little bit.
Kudlow, on the other hand, is just a freak.
I've been thinking a lot about what a global peak will be like compared to a regional peak such as the one experienced in the USA in the 1970's. I think that just as we reach the crest, we will find prices so high that there will be demand destruction. Couple the demand destruction with a couple of dozen small to medium yearly finds in the 5-10 years leading to the "peak", we may see an undulating crest or "multi peak". I think it's entirely possible that we'll see gigantic demand destruction that is severe enough to prolong the peak(s) that are to come. We may not even know that we peaked for 10-20 years after the peak. I doubt it, but I can foresee that being just as likely as some of the other theories I've read about.
If we are truly unprepared then may God have mercy on ALL of our souls. Perhaps we have collectively earned a correction to our human hubris that only an unprecedented calamity will provide. I also find it interesting that so many different religions predict a time like this. Maybe the Mayans, American Indians, and ancient "hindus" knew something that most of our world seems to be unaware of now... sorry to get OT...
However, the current energy prices have a lot more to do with market manipulation than actual problems with depletion... in my estimation. Time will tell...
One difference: I would not call the current price increase manipulation as much as honest speculation. People are moving money into energy as they start to consider this issue and that has the positive effect of pushing prices up. All for the good. There is no allocation scheme in existence and therefore price is the only means to destroy demand.
Enron manipulated energy prices and became hated throughout California. Did you ever read some of the transcripts that came out where the energy traders would be on the phone with a power company out there and suggest that they "go down for routine maintenance"? Big companies do think about how to push profits up and they aren't above taking advantage of situations as they arise. Sometimes pushing profits up is just a matter of knowing what needs to be done and not doing it.
I have been an insider before so I know that these companies are, for the most part, just giant machines made up of lots of small cogs. In the case of the oil industry, I think it's not a matter of trying to defraud. I think it's a matter of trying to push the stock up. I remember how the employees were complaining about how low the stock was. I remember the incredible pressure being put upon upper management (though I wasn't involved at that level).
Geopolitical circumstances have been in their favor lately. The fact that refining capacity was not invested in has been a great boom for those who own or invest in the refineries. I can guarantee that for the most part the employees and shareholders are happy with these companies right now. The distributors and some of the stations are making out pretty well in this as well.
However, you aren't going to see me condemning them. The more I've learned about the industry, the more I realize just how precious the resources of this earth are. We've been given an incredible gift and once it's gone, it's gone. I don't blame a corporation for being amoral. I don't blame them for trying to increase the value of their stock by posting record profits quarter after quarter. We've allowed them to become what they've become -- so we can only blame ourselves. Now maybe that prices are high people will start to take this seriously for once.
I don't recommend any one who is not a trader follow his specific market advice, because his time frame is usually short. But from what I gather, his recognition of peak oil is not a trading idea, but a long term change.
Mark his change in attitude as being the same as other serious and large investors.
Furthermore, it is not possible to be anywhere near 100% right in this business, so you can very easily find ways to snipe at calls that don't work out. The key is how well reasoned the calls are (that tells you if the prognosticator has a good investment mind) and how much money the advisor makes for clients over time (which also boils down to, does he allow mistakes to ruin his clients or does he protect them with diversification or getting out before the losses become really destructive to client accounts).
Cramer claims to have made 24% per year compounded for his hedge fund clients during the 15 or so years he ran the Cramer Berkowitz hedge fund. Since he managed to alienate quite a number of his clients with his abrasive personality, I would have expected one of his clients to refute his claimed track record publicly if it were in fact fraudulent. In fact, I have not heard of anyone doing that.
Having said that, I understood why he said some months ago to take at least some profits on oil stocks. Like the oil companies Cramer knows that up until recently, oil prices always fell back after spiking, and oil stocks did too. Until he began to read about peak oil, he had every responsibility to tell his listeners to take at least some profits off the table, which is the way I heard earlier calls to cut back exposure to the oil sector. As Cramer well knows: bulls make money, bears make money, and pigs get slaughtered.
There are lots of ways to invest in oil by the way. You can buy stocks of the majors, or of the US & Canadian exploration & production companies (my pick, I like long lived reserves in politically secure places), or the refiners. If you are not a market professional, I have three words of advice regarding oil futures: don't do it.
As a former hedge fund manager turned academic, the Peak Oil landscape is a unique one for studying the 'contrarian' indicator. For those that are unaware of the term - most public markets price in most of the information available most of the time. If everyone is bullish on Intel stock and a good earnings release comes out that beats expectations, the stock trades down, people think its a bargain and buy more, the stock keeps trading down,etc -this happens because all the positive news was priced in and everyone who needed to buy already bought -no new buyers and only sellers - this is why savvy traders look for situations when everyone agrees on an investment thesis, because then there is a free fall in the other direction on the horizon, not based on fundamentals but on short term supply and demand.
Methinks Oil is different for two reasons:
a) people can sell Intel and buy a different stock-there are few, and limited alternatives to oil - so a contrarian viewpoint will work in the very short term but in the intermediate term, the demand/supply equation is what it is. (case in point - oil traded down $5 this week even though shut-in production was all over the news)
b)As I said in a previous post, oil is priced at the marginal barrel, not so much as a long term investment (though halfin points out that SOME people are trading the backdated futures). Almost always the backdated futures move the same direction, but smaller magnitude as the front month contract. We are, in effect, extrapolating the current supply/demand constraints into the future. At some point, when Peak Oil is not just a 'theory' but a reality, the backdated futures will trade closer to the true value of oil, and the short dated contracts will be a different market, trading on who needs/has oil this month to buy/sell.
I disagree that wall st understands peak oil, at least the way readers of this forum do- they may be comfortable with the term, but many very smart people I talk to think a)there will be demand destruction ala 1980s that will offset any supply declines - b)the alternatives that are publicly discussed such as coal-to-liquids,shale oil, tar sands etc will make up the gap and c)the CERAs of the world keep saying Saudis are able to dramatically increase production,etc d)almost all historic 'fringe' views have never quite come to pass - they ARE focused more on short term, but will/can adjust amazingly quickly.. Since we're priced at marginal bbl, any of the above will send oil to $20-$30 bbl, at least for a time - hard to make a long term bet, even if you expect to triple your money $65==>$200+ if youre gonna get a 50-66% haircut first.
Bottom line: as the layers of the onion unfold, and if we see the oil situation more as Simmons presents it (as opposed to Yergin), there will be a couple of days, or a week or two when massive amounts of capital is invested in backdated oil futures and they 'collapse' upwards. When Wall Street truly 'gets it', they simultaneously will come to terms with the concept of 'limits to growth'. With SP500 making new highs seemingly everyday, there is no way that wall st 'gets' Peak Oil. Either they are 'underinformed' or we are 'overinformed'. Historically, I would have bet on wall st over the academy, but one of these times.....
ANd its ever more obvious he's know much about peak oil either.. Take whatever he claims about ethanol and peak oil with a grain of salt!!