Sunday May 9, 2010

If the breakdown last Thursday was a mistake, markets would have snapped back on Friday, instead the markets dropped again, all gains for the entire year have now been erased, in one week no less.

My
initial success in trading markets started in 1983, I realized (after studying
various charts) that oil prices were likely to crumble and that interest rates
had peaked and would come down. I am   recounting this to make some observations. At the time,
only one person I presented the evidence believed me.  For further perspective, I was living in the Permian Basin,
the production center for 20% of all the oil produced in the US, so oil prices
are the topic of conversation.  In
retrospect it is clear that was the case, oil collapsed form $36 to $10. It
happened slowly in that by late 1985, oil was still $24, only down one third
from its 1981-2 peak. This allowed everyone to assure themselves that it was a
‘normal’ correction.   Weary
of being the ‘swing’ producer, ie, the only OPEC member that did not cheat on
over production, the Saudis finally threw in the towel and did not cut
production, by mid year 1986 oil had collapsed to $10. This was below the cost
of production of many areas of the world, typical action at commodity price
bottoms. But the effect was enormous.

The
largest independent bank in Texas, First National of Midland, was wiped out
overnight on exposure to equipment loans. 
In 1979 the same bank had added ten stories to its building. It had
bragged that officers were fired for not making loans.  Virtually every bank in Odessa was
taken over by someone else, ie, failed. All the savings and loans failed o real
estate loans. Entire office complexes, built at the end of ‘the boom’ stood
vacant for years, plural, years. 
Given that the FDIC insured bank and savings deposits, and the great
super cycle stock boom was actually still underway, the are eventually recovered.
But that is hardly the case this time around.

My
point is that this Permian Basin area was a microcosm of the today’s world. As
promises of pensions and salaries evaporate, we see the anger in the streets.
So far this is confined to tiny Greece and peaceful demonstrations in the US.
But Arizona and the protests it has generated are a sign of things to come.   

Social
mood has collapsed resulting in near anarchy in Mexico border towns (thousands murdered
the last two years) and in the streets of Greece where three bank workers were
killed last week. An anecdotal example of the breakdown in the US was on
display last night on SNL. Octogenerian Betty White hosted for Mother’s Day.
One would have expected sweetness and light in tune with her life long image on
television, that is hardly what the viewers got. One digital song of the SNL
players singing to her was followed by ‘her’ version featuring Betty in a black
hood with violent images raging all around. The featured ‘singer’ was rapper Jay
Z.   Don’t take my word for
it, here is a review clip from Ken Tucker

sometimes
White’s willingness to deliver a crass line with gusto was fun. She got fully
into the spirit of a “Scared Straight” sketch, joining Kenan Thompson as a
tough con threatening teen criminals with a visit to “The Wizard of Ass.”

Anyone
tuning in for parodies of White’s TV touchstones — Golden Girls, The Mary
Tyler Moore Show, her Password appearances — would have been
disappointed. These oldies were limited to a Digital Short in which the cast
and guests sang their version of the Golden Girls theme song, “Thank You
For Being A Friend,” immediately followed by White (and a Betty White
stunt-double) doing a metal version of the tune.

We will
have more to say about social mood in future issues, and we leave you with this
final picture of financial mood breakdown.

Exxon has
been excoriated by politicians going back to the Valdez spill. But today,
thirty years after creating a Dept of Energy we import more oil than ever. None
of the alternate energy schemes so loved by politicians has panned out yet. But
our point is that XOM is a reliable indicator of the economy  and the mood. Remember that oil and
stock prices tend to trade together. 
Individual stocks do not always conform to wave patterns as waves are
mass social mood. But XOM is a mass stock which is widely held so here goes.

Exxon
completed a near 4x multiple from 1999 to the oil price top in 2008 at $145.
Since then investors have taken a walk on XOM. At top the SPX had a 60% bounce,
but not dividend paying XOM. Five waves up are done, and this past month as a
huge negative for the stock.  This
is particularly important for one of the largest cap stocks in the world that
is contained in multiple stock indices.

XOM
investors are headed for the exits……