Farrell: Of Congressional Idiocy & Oil
I need to pass along the beginnings of a note from JP Morgan strategist Michael Cembalest. In his latest commentary, he writes,
"'I have come to the conclusion that one useless man is a Disgrace, two are a law firm, and three are called a Congress.' So said John Adams.
"The same applies to energy independence in 2008. As the US endures an energy crisis and imports 60 percent of its energy needs, the House and Senate decided to take action: they overwhelmingly voted to allow OPEC to be sued in US courts for running a cartel. The mind reels.
"Over the past 30 years, elected officials blocked nuclear build-out and spent-fuel storage construction, impeded construction of oil refineries, refrained from passing meaningful alternative energy legislation, imposed a tax on cheaper Brazilian ethanol, prevented offshore drilling in Alaska, California, and Florida, blocked the construction of LNG ports, killed wind farms in their own backyards (or back bays) .......They got it wrong; Congress should sue itself."
On "The Call" today Bob Pisani made the excellent point that in a bear market all the sectors usually get shot. So it is today, as the materials and energy names, especially the natural gas names, are being sold. Byron Wein, a deservedly famous strategist, feels that the market is bottoming and will do better later this year. (See Market Insider blog post: "Market Strategist Wien: Stocks Are Bottoming")
Joe Belestrino of Federated Investors hasn't yet seen capitulation on the part of individual investors, as there haven't been large redemptions of funds by the private investor.
All of the above opinions can co-exist with one another. I'm thinking that by the time the markets are off the 20 percent needed to declare it a bear market, two-thirds of the damage has been inflicted and I'm more inclined to look for opportunities. A couple of names offered today on the show by different money managers were Monster Worldwide, Boeing, and Philip Morris International. I happen to own Boeing, but the quick case made for the other two names was intriguing enough to make me want to look at them.
Oil is off sharply, and I'm hoping this will continue as the inflationary implications of high oil prices are severe.
The highest marginal cost of production of a barrel of oil anywhere in the world is close to $75 and I'm probably much too high. Add to that some sort of geopolitical risk premium and my target for oil is towards $100. I think that oil will be only more expensive as time goes on, but this super-spike we are in should correct back to where demand won't be destroyed. I'm figuring that is around $100.
I'm not negative on the oil equities, as they haven't gone up with the price of crude. If I didn't own any I would try to wait a bit and then buy Chevron (which I own.) Lehman just issued a report and said if oil were to average $115 a barrel next year, CVX would earn over $13. With the stock around $98, the P/E multiple is less than 8 times.
Ben Bernanke also indicated in a speech that the Fed will keep the Primary Dealer Credit Facility (PDCF) open for investment banks. This is, in my opinion, necessary to allow the system time to heal.
Since there is a stigma attached to going to the Fed, the investment banks are avoiding this avenue of liquidity, but it's necessary to have the vehicle. If it were to become permanent, different regulations would be needed to put commercial banks and investment banks on the same page. But that can be worked out.
I will be on Larry Kudlow's show tonight (Tuesday) at 7pm NY time. Financials looking okay at this hour, so maybe I won't have the dotted line around my neck cut too much tonight.