The Popped Oil Bubble

*****The SEC and Madoff 

It still surprises me when investors get so excited about an interest rate cut. Yesterday’s half-point cut was well telegraphed – everybody knew it was coming. And yet investors still ramped the Dow Industrials 359 points. Not that I’m complaining. I’ll take the rally. 

*****As much as I and others have been critical of management at the Big 3 automakers, the fact that no one is buying cars is affecting even the well run companies. Honda just cut its 2008 earnings for the third time since October. 

The company is refusing to give any guidance for 2009. It’s also dropped out of Formula 1 racing. And directors are taking a 10% pay cut. That makes it sound like there’s no end currently in sight. 

If we consider credit problems as part of supply, then it seems the drop in car sales is very much on the demand side. Even if loans were readily available, people are cutting back on spending and not making big purchases as unemployment rises. 

That, in turn, suggests that whatever money the automakers receive now, more is likely to be needed later. I can almost guarantee the markets are not ready for that. 

*****While demand is certainly a major issue, yesterday’s rate cut highlights the supply side problems. Banks simply aren’t lending to consumers, businesses or each other. 

Banks are borrowing money from the Fed and sitting on it. Period. They’ll buy Treasuries to cover the interest rates on the loans and that’s the most risk they’ll take. 

And it’s not going to get better for 6 months. That’s what forward lending rates are showing. 

Yesterday, I wondered what could go wrong with the Fed’s new strategies for providing liquidity. First and foremost on the list is that nobody needs it. It doesn’t matter how much money a bank has if they’re scared to lend it. But at the same time, once you start opening the liquidity pumps, you can’t shut them off until the economy improves. 

*****OPEC is meeting to discuss a 2 million barrel a day production cut. Obviously, oil prices have fallen farther than anyone expected. And OPEC is starting to get desperate. 

2 million barrels is a huge production cut. It’s far larger than the drop in demand. And the markets are still responding to OPEC with a big yawn. Oil prices aren’t moving higher. 

Of course, compliance is always a problem with OPEC. It can make recommendations, and everyone can agree, but there’s no way to enforce its policy. As much as Hugo Chavez would love to stick it to us with higher prices, some member countries will certainly put their own budgets higher on the list of priorities. In other words, they’ll cheat. 

That’s good news for us. The one bright spot of this recession is that prices at the pump have come down so much.

Maybe you remember back when oil was making its meteoric run higher.  Every time the U.S. called on OPEC to raise supply, they’d respond by saying the "oil markets were well supplied." I always imagined the Saudis were laughing when they said this. But I’m starting to think it was true. 

If severe production cuts can’t affect prices, it seems likely that supply wasn’t the only issue with the rise in oil prices. Oil was as much of the liquidity bubble as housing. 

*****The SEC is now the focal point of the Madoff Ponzi scheme case. Apparently, the SEC failed to act on several specific accusations that something was not kosher with Madoff’s activities. 

I read one article that said many people on Wall Street thought Madoff’s consistently smooth returns were a sign that something was going on. Most thought Madoff was doing some kind of insider trading. And amazingly enough, that made some want to invest with him. 

*****TradeMaster Daily Stock Alerts members took a one-day gain of 9% on Cantel Medical (NYSE:CMN). The stock was recommended at $12.81 on Monday. And they sold it yesterday at $13.97. Nice job fellas. 

*****My email inbox is absolutely flooded with messages from Daily Profit readers. As always, I’m flattered that so many of you write in with your comments, questions and suggestions. I promise I’ll get a "Reader Mail" Daily Profit out very soon. In the meantime, let me thank you again for your support.