Posts filed under “Think Tank”

Oil! The price forecasts vary. Why?

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs.


Oil! The price forecasts vary. Why?
August 23, 2009

Oil flirts with $75 dollars a barrel. Forecasts range from a low in the $40s to $85-90 before the end of the year. Inventories on or off the water, futures and ETF-driven trading forces derived from dollar strength or weakness, China’s and other emerging market countries’ demand, mature countries’ economic recoveries, fuel substitutions when natural gas prices are so low relative to oil – these are some of the crosscurrents that make the oil price so difficult to determine.

One oil price driving force that has been more obscure lately is the geopolitical risk in the Persian Gulf at the Straits of Hormuz. This body of water, situated between Iran and Saudi Arabia, is what Stratfor’s George Freidman has described as Iran’s “true nuclear option.” The details of that analysis are found in the last several discussions at Cumberland is a subscriber; readers may wish to try the free subscription available on their website and see if they like the service. It will give you an opportunity to read the Iran and Persian Gulf analysis.

Stratfor disclosed some intricate and little-known intelligence items this week while market agents were busy with Bernanke at Jackson Hole. At the end of August, it takes shocks to pry folks out of vacation mode and away from the Kansas City Fed meeting. For us, some long plane rides and two days’ work in Salt Lake City gave us a reading opportunity. We immediately asked for and obtained permission to republish the last Iran situation analysis for our readers. It follows below.

Friday, August 21, 2009

Mixed Signals From Tehran, by Stratfor, .

“THE IRANIAN GOVERNMENT’S BEHAVIOR has grown a bit more bizarre over the past several days — as to be expected, with a September deadline looming for negotiations with the West over its nuclear program.

U.N. officials revealed Thursday that Iran had allowed International Atomic Energy Agency (IAEA) inspectors access last week to its nearly completed Arak heavy water reactor for the first time in a year. Iran also agreed to allow expanded IAEA monitoring of the Natanz uranium enrichment site, which produces material for nuclear fuel that potentially could be enriched further for use in nuclear warheads.

In addition to these confidence-building measures, the Iranians also appear to be using private channels to dilute the U.S. perception of an Iranian threat. After Israeli President Shimon Peres left a meeting with Russian President Dmitri Medvedev in Sochi on Tuesday, STRATFOR received word from an Iranian diplomatic source that Russia has flatly refused to sell Iran the S-300 strategic air defense system. Iranian Defense Minister Mostafa Mohammad Najjar (nominated by President Mahmoud Ahmadinejad to be the new interior minister) was rebuffed by his Russian counterpart when he visited Moscow in February and, despite his attempts, has not since been invited back. The Russians allegedly told the Iranians that as long as concerns remain over Iran’s nuclear ambitions, they can pretty much forget about the S-300.

The timing of this message is interesting, especially as Russia, in recent weeks, has been the one to draw attention to possible weapons sales to Iran. Even after the Israeli president traveled to Sochi to warn the Russians against arming Iran, state arms exporter Rosoboronexport announced that it would consider Iranian requests to buy front-line fighters and bombers. Peres claimed that Medvedev promised to reconsider the matter of S-300 sales to Iran, but the Kremlin has not confirmed making such a pledge. With Russia’s negotiations with the United States currently in a flux, the Russians want to remind Washington of the upset they could cause in the already shaky state of affairs in the Middle East should their demands be ignored.

“The Iranians evidently are nervous enough about this September deadline that they feel the need to give the West at least some assurances that they are willing to cooperate.”

But the Iranians evidently are nervous enough about this September deadline that they feel the need to give the West at least some assurances that they are willing to cooperate. While trying to soften up its image, Iran also might be seeking to want to give Washington the impression that, in light of the domestic political turmoil that followed presidential elections in June, the regime simply isn’t prepared or capable of committing to serious negotiations in the near term.

This was the kind of mixed message that came across Tuesday, when Iran’s envoy to the IAEA, Ali Asghar Soltanieh, said on state television said that Iran was ready to resume negotiations with the West over its nuclear program — as long as the talks were held without preconditions and based on mutual respect. Several hours later, Soltanieh publicly claimed he’d never said anything about Iran’s readiness for negotiations; he attributed his earlier comments to a letter he had sent to the United Nations, calling for a ban on armed attacks against nuclear facilities around the world. The lag between the first statement on state TV and Soltaniehs odd retraction gave the impression that there were competing opinions among the regime elites over how to negotiate with the West, and that Soltanieh had spoken prematurely. There was enough confusion that day that Washington didn’t bother responding to the statement either way.

Between threats of crippling sanctions on Iranian gasoline imports and hinting at military action, the U.S. administration has insisted that this September deadline would not come and go without consequences if Iran defies demands to curb its uranium enrichment programs. There are methods to getting around sanctions, but the Iranians don’t seem to be in the mood to take many chances on the military threat. As we have recently noted, the real nuclear option that Iran holds against the United States is the threat of mining the Strait of Hormuz. This is an option of last resort, however — and while Iran’s leadership is playing out all the options, it has a need to make itself appear as confused and benign as possible.”


We again thank Stratfor for permission to share these views.

Stratfor’s analysis reminds us of previous periods when oil prices firmed. We reach back into history to the time when the Egypt closed the Red Sea to Israeli shipping and triggered a war in 1967. We recall the 1973 invasion of Israel on the Jewish holy day of Yom Kippur. We remember the Iraqi belligerency of Saddam Hussein. In many instances there was a firming of oil prices that preceded some hostile action in the Middle East.

Those price hikes had no apparent explanation at the time. The clarity came after the events. There are oil-trading companies linked quietly to Middle Eastern governments; many are owned or controlled by the rulers of those countries or their neighbors. They know that oil prices will spike on geopolitical risks. They take long positions prior to actions that will cause those prices to spike. At the time preceding the outbreak of violence, the markets don’t have a clear explanation for the rising price. That is the pattern of the last 50 years.

Having followed Stratfor’s details on the developments in Iran, we speculate as to whether this is another one of those developing instances. Our primary rule about the Middle East is simple: when it is too quiet and there is no apparent violence, the situation is temporary and will soon change for the worse.

Is there going to be a September surprise? As Stratfor notes, September is a key month for Iran and for the US. The same is true for oil

David R. Kotok, Chairman and Chief Investment Officer, email:

Category: Think Tank

Words from the (investment) wise August 23, 2009

Words from the (investment) wise for the week that was (August 17 – 23, 2009)

After starting the week with a broad-based sell-off, stock markets resumed their five-month uptrend as investors’ confidence in the recovery prospects of the global economy gained traction. With risky assets back in favor, a number of bourses and crude oil closed at fresh highs for the year, showing resilience in the face of a sharp correction in China on Monday (-5.8%) and Wednesday (-4.3%). Safe-haven assets such as government bonds and the US dollar received a cold shoulder.


Source: Walt Handelsman, August 20, 2009.

Referring to the nascent economic recovery, Paul Kasriel and Asha Bangalore (Northern Trust) said: “There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession. Anything is possible, but that does not necessarily make it highly probable. In the post-WII era, once the US economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.

“We believe that the earliest the Fed will begin to take action to brake the pace of nominal economic activity will be late-June of 2010. And if it begins to take action then, it will do so only tentatively. If, in fact, economic activity is flagging from a lack of additional fiscal stimulus, then the Fed is unlikely to commence tightening or would reverse course. We believe that the next recession, whenever it occurs, will be precipitated by the lagged effects of Fed tightening, not by the economy ‘running out of gas’ on its own.”

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates renewed investor appetite for risky assets.



A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.6%) and MSCI Emerging Markets Index (-0.8%) followed separate paths last week as China and a number of emerging markets came under pressure during the first few trading days. Emerging markets have now underperformed developed markets for three weeks running.

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Category: Think Tank

How Not to Reduce Excess Reserves

Here is something I never expected to be linking to on a Saturday afternoon, via the St. Louis Fed’s David C. Wheelock: How Not to Reduce Excess Reserves: The Federal Reserve’s actions to support financial markets and the broader economy have resulted in a large increase in bank reserves—both total reserves and reserves held in…Read More

Category: Credit, Federal Reserve, Think Tank

The Statistical Recovery, Part Three

The Statistical Recovery, Part Three
Capacity Utilization Set to Rise
A Real Estate Green Shoot?
The Deleveraging Society
Some Thoughts on Secular Bear Markets
Weddings and Ten Years of Thoughts From the Frontline

This week we further explore why this recovery will be a Statistical Recovery, or one that, as someone said, is a recovery only a statistician could love. We look at capacity utilization, more on housing, some thoughts on debt and deflation, and some intriguing charts on volatility in the last secular bear-market cycle. This letter will print a little longer, but there are lots of charts. I have written this during the week, and I finish it here in Tulsa, where Amanda gets married tomorrow. (There is no deflation in weddings costs!)

Thanks to so many of you for your enthusiastic feedback about my latest Accredited Investor Newsletter, in which I undertook to examine the impact of last year’s dramatic increase in volatility on the performance of hedge funds and to ascertain those elements that led to success in the industry, such as select Global Macro and Managed Futures strategies, as well as the challenges. If you are an accredited investor (basically anywhere in the world, as I have partners in Europe, Canada, Africa, and Latin America) and haven’t yet read my analysis, I invite you to sign up here:

For those of you who seek to take advantage of these themes and the developments I write about each week, let me again mention my good friend Jon Sundt at Altegris Investments, who is my US partner. Jon and his team have recently added some of the more successful names in the industry to their dedicated platform of alternative investments, including commodity pools, hedge funds, and managed futures accounts. Certain products that Altegris makes available on its platform access award-winning managers, and are designed to facilitate access for qualified and suitable readers at sometimes lower investment minimums than is normally required (though the net-worth requirements are still the same).

If you haven’t spoken with them in a while, it’s worth checking out their new lineup of world-class managers. Jon also tells me they just added yet more brilliant minds to their research team, making it, in my opinion, one of the foremost teams in the industry, focused solely on alternative investments. I invite you to have a conversation with one of their professional and seasoned advisors. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) Now, let’s jump into the Statistical Recovery.

Capacity Utilization Set to Rise

Capacity utilization is a concept in economics that refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that is produced with the installed equipment and the potential output that could be produced with it, if capacity was fully used.

The chart below shows that capacity utilization in the US is at an all-time low, around 68%. That means that with the equipment we already have in place we could produce almost 50% more goods than we are now producing. However, most analysts think that 80% capacity utilization is a very good number.

If you look very closely at the bottom right-hand detail, you can see that there is a small uptick in last month’s data. Whether or not this is the “bottom” remains to be seen. But if it is not the bottom, it is close. You can only shut down so much production before inventories fall to levels that require restocking. And we are getting close to that level in many industries.


Before we wander too far away from the graph, I want you to notice that past dips (circa the recessions of 1968, ’74, and ’80-’82) had V-shaped recoveries in capacity utilization. But in the 1990-91 recession it took longer than it did in past recessions, and in the most recent recession (2000-02) the recovery took longer and we did not actually “recover” for four years.

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Category: Think Tank

Existing Home Sales

July Existing Home Sales, 85% of the housing market and a measure of actual closings, totaled 5.24mm annualized, 240k more than expected and the highest since Aug ’07. The inventory to sales ratio though remained unchanged at 9.4 months because the improvement in single family homes to 8.6 from 8.9 was offset by a spike…Read More

Category: MacroNotes

Chart of the Day: S&P500 P/E Ratio

Today’s chart illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From…Read More

Category: Earnings, Technical Analysis, Think Tank, Valuation

King Report: Phony Philly Forecast

> Is Bernanke purposely aiding & abetting the usual market manipulation that occurs during expiration week? In July, Ben poured $80.2B into the system, mostly by monetizing MBS, during expiration week, igniting a huge rally. The Fed balance sheet contracted for most of June and July before Ben’s gambit. For the week ended Wednesday, Ben…Read More

Category: Markets, Think Tank

Memories, Light the Corners of My Mind

“Memories, like the corners of my mind. Misty water colored memories, of the Way We Were,” sang Barbra Streisand and I’ll be humming the song as Bernanke gives a speech today titled “Reflections on a Year of Crisis” at 10am from Jackson Hole. Unfortunately the trip down memory lane won’t begin in mid ’03 when…Read More

Category: MacroNotes

JD Power quantifies the impact of the Clunker program

J.D. Power and Associates today is quantifying in their estimation the impact on auto sales this year due to the clunker program and the extent that it steals sales from 2010. They said that based on data seen thus far, August will see the first 1mm+ unit sales (includes fleet sales) month since last year….Read More

Category: MacroNotes

Bob Novak (1931-2009), The Last Reporter

My father Richard Whalen was a long time friend and contemporary of Robert Novak, whose funeral is tomorrow in Washington.  I knew Bob and his family growing up in Washington and even went on some memorable fishing trips off of Ocean City, MD.   Dad wrote the following remembrance of Bob earlier this week.  — Chris

By Richard Whalen

I knew Bob Novak for almost fifty years.  I first met him in Washington, D.C. when he was a member of the Wall Street Journal Washington’s bureau and I was a New York based Wall Street Journal editorial writer assigned to write an editorial page article on Republican politics.  Bob, defending his Washington turf, asked me what I was doing in DC.  After shouting at each other, we had a drink and then another and a third and by that time, Bob helped me outline my piece.  We became great friends – best friends.

As the media elite emerged as part of Washington’s permanent government in the 1970s, Bob was at the center of it, but he resisted the social phoniness like a true son of the working class from Joliet, IL.  He was determined to keep the realistic perspective of his father, an intelligent small businessman who was quietly proud of his celebrated son. .Bob was in the special category occupied earlier by Arthur Krock, David Lawrence and Walter Lippmann. He was not a pundit but a hard-nosed, hard-working, shoe leather reporter whose sources ranged wider and deeper than anybody else’s. He distilled truth from depths of fresh reporting.
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Category: Think Tank