Thursday, June 19, 2008

Drill Here, Drill Now, Pay Less

It is strange how quickly things change in presidential politics. Early on it looked like Hillary was a shoe in and the war was going to be the main issue. The Hillary got in trouble and she changed the message to food and fuel. Her answer to the high cost of energy was to suspend the Federal Gas tax for the summer and tax “Big Oil” profits to pay for the tax reduction. Hillary finally concedes to Obama and oil prices hit $140 a barrel and gas at the pump went through $4.00.

The presidential campaign will now focus on $4.00 gas prices and rising food prices. I do not believe that the war in Iraq or any other issue is more important to the American consumer than the cost to fill their cars and feed their families. The next big shock to the household budget will be the cost to heat the home this winter. Higher fuel oil and natural gas prices could almost double the cost of heating a home this year over next year.

The former Speaker of the House Newt Gingrich has a non-profit organization called American Solutions. The have developed a theme that seems to be catching on like wild fire. The phrase is “Drill Here, Drill Now, Pay Less”, the web address is www.americansolutions.com. In a very short period, they have collected over 1,000,000 signatures to their petition for the congress with a goal of over 7,000,000 by January 20, 2009.

I am reminded of the old movie “Broadcast News” when the actor says, “I’m feed up and I not going to take it anymore.” I think when gas went over $4.00 a gallon things changed dramatically. One of the concepts about want is happening with higher food and fuel prices are the question what is the demand destruction point? I think for most Americans $4.00 was that point.

I think the Democrats have backed themselves into a corner and may well fin--that come the fall campaign there may only be one issue that unites most Americans, food and fuel. By all accounts we have the oil and natural gas within our own borders to help us through the transition to alternative fuels the environmentalist have prevented the development. Remember the people who were voting for Hillary in the big states? The when given a choice to the blue collar, non-college educated white voters between for $5 or $6 dollars a gallon for gas and protecting the environment or Drill Here, Drill Now, Pay Less, how do you think they will vote?

How do you think they would vote if they could choose to stop using corn to generate fuel and make more food at lower prices? The big challenge for the Democrats is how they will deal with their voting records on energy exploration. Every Republican who is running against a Democrat incumbent should stay with one theme Drill Here, Drill Now, Pay Less. What does the incumbents voting record say about his or hers position on energy independence? I find it hard to believe that if the Republican party were to adopt this concept that the outcome of the fall election different than the slam dunk everybody thought it was just a few month ago.

Dan Perkins

Saturday, June 7, 2008

Was the 400 point decline of Friday the long awaited capitulation?











After the close on Friday I could not help my self in asking the question that is in the headline of this post. I think the answer to my own question is no. We want our problems to be over and if you listen to both the presidential candidates they promise that they can solve our countries problems. I don’t really believe that any president has the power to solve the problems we are facing as a nation during their terms(s).

Let’s look at two issues oil and housing. The president could sell some of the oil in the strategic reserve and hope that it may bring down the price of oil. Not. There is about 750 million barrels of oil in the Strategic Petroleum Reserve. We use about 25 million barrel of oil a day in the United States, do the math. Divide the 740 million by 26 million and you roughly get about 30 days worth of supply. So, if a serious hurricane interrupts supply of our US produced crude supply what is the president going to do next month? If we have no reserve we have to go to the open market and compete with the rest of the world for supply. You really think that eliminating our SPR will being down prices for only a few days.

We have to do something about the oil problem, but again people don’t seem to be willing to admit that we can’t solve the problem over night regardless of what the president says. My wife showed me an article in the Newark Star Ledger on the decline in imperial America. The world has changed and more and more countries are competing with the United States for oil in the world market. Sharing the oil will mean that we have less for ourselves and we have to find our own and develop alternatives. If we really want to solve the oil problem I believe we can if we as a country are committed, much like the commitment to put a man on the moon. The achievement of getting to the moon took 10 years to complete energy Independence may take longer..

The one thing that both of these very serious problems have in common is that they can’t be solved over night regardless of who is elected president. We want to believe that the new president can fix all of our problem, but no matter how much we want to believe it "aint going to happen".This week it was reported that foreclosures were the highest in history on a year to date basis and the bankruptcy fillings were higher than just before the change in the bankruptcy laws. If the amount of inventory of older home for sale in the market is in excess of 12 months supply and the inventory of new homes for sale is just over 11 months, how are we going to solve the problem of excess housing over night?

All of the major stock market indexes closed on Friday down about thee percent for the day, and down between 7% and 8% on a year to date basis. As you can see from the chart above it has been a volatile six months. Many of the credit problems we thought were fixed in the first quarter are showing up again with vengeance. The problems of oil price, credit problems and housing are showing up in the markets in a negative way. The markets are stuck in a trading range. The Dow Jones seems to be stuck in the range form 11,800 to 13,000. My concern is that we may break the range on the low side and find ourselves in a new trading rang but a lower one.

Dan Perkins

Wednesday, June 4, 2008

Raising Interest Rates the Wrong Call.


I have seen and heard a great deal of discussion concerning the need for the Federal Reserve to start aggressively raising interest rates because of inflation. I tried hard to justify in my own mind that thinking and I have concluded that the idea is just wrong. Let me tell you why I think it is wrong.

The two factors that are driving the current inflation problems are food and energy. The culprit is worldwide demand for both of these commodities. There is no question that, as countries accept democracy, and begin to build a market based economies, the demand for food and energy increases.

Keep in mind that the United States Economy is service and consumer based economy. The needs of the American consumers account for about 70% of Gross Domestic Product (GDP). In the past, the driving force behind inflation, in the United States has been dramatic increases in the cost of wages or unit labor costs. For many companies in America, labor is the most expensive item in its cost to produce goods or services. We have not, as of yet, seen any significant increases in unit labor cost.

With that as background, lets again look at the premise that the Fed needs to start increasing interest rates. How would increasing interest rates bring food and fuel inflation under control? Will increasing interest rates in the United State cause the economies of the far east to cut back on their demand for food and energy? The bottom line is they will not. Higher cost to borrow money will not stimulate the expansion of capital to find and fund new energy sources. Higher interest rates will not allow the farmers to put more seed in the ground to grow more grain to feed the world.

No blog post of mine would be complete without some mention of the housing problem. Higher interest rates by the Fed will not stimulate the housing sector into recovery--just the opposite. I saw a report on what has been happening in the worst real estate market in the country, Cape Coral Florida. The reporter stood in a house that sold new in 2005 for $619,000. It is currently under contract for $293,000, a decline of $326,000.

While the street is calling for the Fed to start seriously thinking about raising interest rates in the fall, I think the Fed is sitting back and waiting to see if the price of food and fuel starts to fall back. I suggested in a recent blog that I thought food and fuel were in a bubble state. I was not sure if the bubble would burst or turn into a slow leak. Based on the market action over the last week or so it appears that the slow leak may be gaining some momentum. I stand by my prediction that I think gold will be under $850 by mid summer and WT crude oil will be around $100. If I am right then I think the inflation problem will start to come down and take pressure off the Fed and the markets just in time for the fall election.

Dan Perkins