Tuesday Tear-Down

I blame Goldman Sachs for everything.

Aside from being the manipulator-general of the oil market, GS decided today (their earnings day) would be a good time to put regional banks on their conviction sell list and that sector fell 5.7% as GS forecasts that US banks may need to raise an additional $65Bn in capital.  FBR knocked AXP and other credit providers down 2% on their report that credit quality will continue to deteriorate.

Even though they set themselves up as the only "safe" place to park your money, GS got caught up in the value collapse they created and finished right down at the 2.5% rule themselves, despite pretty good earnings.  Investors were in no mood for facts as even BBY dropped 5.6% after what seemed to me and Barrons to be a very good quarter with firm guidance.  Nonetheless, BBY fell 5.7% on the day and was the worst performer in the retail sector, which fell 1.6% overall.

On the whole, the weak action has pretty much kept us from buying anything this week, even though I really wanted to.  One problem is oil is simply refusing to get back below $132.50 and we may have to wait until this weekend’s special OPEC meeting for some real relief.  John McCain pulled a reverse and now wants to drill every square mile of US coastline and Florida Gov Crist, who is angling for the VP slot, has held out Florida’s fragile coastline as a sacrificial lamb to the alter of continual consumption.

I wouldn’t be against drilling off the Florida or California coast if we had truly exhausted other efforts but make no mistake – this is simply a land grab by the oil companies, who are looking to lock up leases off of Florida, the way they have locked out the Gulf Coast from all competition.  The map on the left indcates over 40Bn barrels of proven reserves that have been leased to XOM, et al, of which less than 10% is under any stage of development.

This issue is not about actually producing oil, if it were, there are already 40.92Bn barrels leased in the area on the map and 210.37Tcf of natural gas.  The problem is that the current leaseholders are only producing 2Mbd out of their current leasholds after 10 years on the current leasing program.  Meanwhile companies like PBR, PRT, CEO and many Russian oil companies who ACTUALLY drill for oil have been increasing their production output 30-50% per year. 

This is about the big 5 oil companies, who already hold 90% of the above leases, locking up the final 18Bn barrels of oil and 77Tcf of gas BEFORE someone who actually might want to drill gets a hold of it.  Oh sure, they’ll drill the easy wells, the ones closest to shore that do the most immediate damage to the coast.  But the major deposits in the deeper waters will remain the private reserves of XOM, BP, CVX, COP et al until they run up the price high enough to open their private gold mines and John McCain wants to just give them the keys – no strings attached.

Obama has been talking energy independence since February 2006, when he made a major speech on the subject to the Governor’s Ethanol Coalition.  Oil was "only" $60 a barrel way back then but Obama said at the time "It would be nice if we could produce our way out of this problem, but it’s just not possible. We only have 3% of the world’s oil reserves. We could start drilling in ANWR today, and at its peak, which would be more than a decade from now, it would give us enough oil to take care of our transportation needs for about a month."

"As a result, every single hour we spend $18 million on foreign oil. It doesn’t matter if these countries are budding democracies, despotic regimes, or havens for the madrassas that plant the seeds of terror in young minds – they get our money because we need their oil.  Our enemies are fully aware that they can use oil as a weapon against America. And if we don’t take this threat as seriously as the bombs they build or the guns they buy, we will be fighting the War on Terror with one hand tied behind our back."

"The bad news is that the President’s energy policy treats our dependence on oil as more of a nuisance than a serious threat."  Obama went on to call for a comprehensive program that stresses conservation and development of alternate energy and that is reflected in his platform today, the one McCain is making fun of.

At least Congress is taking a stab at the speculators, saying they will place stricter limits on foreign exchanges that trade US oil, as well as cracking down on NYMEX and ICE abuses.  We got good news of a formal ceasefire in the works between Israel and Hamas but oil is so disconnected from fundamentals that we still expect a rise into inventories anyway.

Hopefully we’re just testing last week’s support at 12,100 before begining a serious move up.  If we do break down from here we may still be retesting our March lows but, either way, I’m bullish on the markets once earnings kick in as most of what is taking us down is old news, hopefully already priced in.