Gimme More, Timmy, Or I’m Outtie!

How tired are you of listening to shills and mouthpieces for the status quo in executive pay for finance industry welfare kings?

This morning on Bloomberg TV, there was another one being interviewed about the new restrictions attached to the stimulus bill set to be signed into law later today in Denver by President Obama. I’m sure you’ve heard the reasoning against restricting the top pay in those businesses receiving financial assistance from the federal government.

The argument I’m hearing that grates the most is the threat that those in charge of these sinking ships being thrown tax-payer funded life savers will leave due to the new caps on top salaries. When will an interviewer follow up this statement with the simple question: “Where will they go?” Really, it’s hard to understand how that question doesn’t just flow out with an air of incredulity. It’s like watching some guy bluff in a game of 5 card draw when he’s only holding 2 cards. Makes you wonder if he really understands how the game is played, or if he knows that WE understand the rules of the game.

The next shill who voices those words really needs to be called to expand on this theory of brain drain. The only game left in town, so to speak, is Shanghai, where Wall Street bankers are being hired, but that’s probably so that down the road, when the global economy is recovering, the Chinese banks can swoop into New York with teams of experienced professionals ready to take control. Or at least, that’s one theory I heard. Otherwise, all this talk about offending the delicate financial sensibilities of the finance industry’s eliteis all just so Dubai.

Exxon Mobil’s $45.2 Billion in Profit

exxonmobil-reuters

Suck it, America!

Ever get the feeling you’ve been had?

Not content to rest on its laurels, Exxon Mobil beat its 2007 record high profit for a U.S. company.  XOM posted a new U.S. record $45.22 billion in profit for 2008 on what apparently was just a shitload of revenue.

“And we would also like to thank you, America.  Because without you, the little people, our dreams could never have become reality.  Again.”

Image: Reuters

Inauguration 2009

Waiting for the Parade at the Newseum

Yesterday’s Inauguration of our 44th President was, of course, historic for many reasons, but it was extra special to me for one reason in particular. Seeing the 2 mile span of The Mall covered with a million people eager to participate in that historic event was awe inspiring.

Now it’s the morning of the first full day, and the real world requirements of the position must now weigh heavily on our new President’s shoulders, as they should. The burden looks especially heavy to me in light of the previous Administration’s lackluster performance. My blog, my opinion.

Yesterday, the market hit 14-year lows, which sets up the potential for strong gains for long term investors’ new investments  by virtue of the lower starting point. Or not. I mention this because of the parallel between the Bush and Obama administrations. The previous one was such a cumulative disaster that the comparative performance the new one has a strong shot at out-performance given its low starting base. Again, my blog, my opinion.

All the best to you, President Obama.  I hope that you and the market knock our socks off with solid upside performance that exceeds our collective expectations and hopes.

The Real Source of High Gas Prices

The following is a paper I wrote a few months ago to respond to the question what should the federal government do about the skyrocketing price of oil & gas. I’m pasting this now, because of tonight’s 60 Minutes report.

In recent months, the price of gasoline has set record after record on its seemingly unending upward surge.  The jump in price has ignited a debate in the US as people seek to understand why the price of gasoline is high and rising, and to determine what policy prescriptions are available to bring it back down to Earth.  The most popular explanations for rising prices have focused on the standard economic relation of gasoline’s supply and demand curves, the US dollar’s weakening performance against other major currencies and the impact on prices of speculation in the futures markets.  Logic and anecdotal evidence tends to support the argument that US demand for gasoline, in the face of apparent supply constraints, have led to a series of upward shits in the supply curve, resulting in the rising price per gallon.  The rising price of gasoline is further exacerbated (from the consumer’s perspective) by the oil companies’ firm grip on pricing power, as one would expect from an oligopolistic industry, and the widespread lack of viable alternatives. The result is a commodity with inelastic demand and consumers best described as price-takers.  Yet a closer look at the events revels the current price of gasoline may be due to increased speculation outside of government oversight.

In May 2008, the nationwide average price of gasoline stood at $3.60 per gallon, climbing above $4.00 by mid-June 2008.   John Moroney, an economics professor  at Texas A&M, asserts that supply constraints are at the heart of soaring gas prices, citing production declines in Mexico, an unstable oil industry in Venezuela and possible shrinking production capacity in the Middle East as supporting evidence.    If one adds to this the increased demand for oil and gasoline in Asia and rising geopolitical tensions in the Middle East, the conclusion that starts to emerge is that the global demand for oil (and by extension gasoline) has shifted outward, outstripping the commodity’s supply.  From a straight forward application of the economics of supply and demand, one would therefore expect the price of gasoline to rise under such circumstances.  According to the International Energy Agency, global oil demand in 2008 is expected to grow by 1.7 million barrels a day, up from 0.9 million in 2007, in spite of record prices and an economic slowdown in the US.   Under the circumstances, one would expect supply to increase as oil companies are able to tap previously uneconomic sources of oil, such as the oil sands in Canada, and deepwater sites in the Gulf of Mexico.

Another important factor that has contributed to rising gasoline prices in the United States is our currency’s declining value.  Oil, like many other commodities, is priced in US dollars and the dollar’s decline in this environment has benefited consumers based in relatively stronger currencies – Euro, Yen and GBP – as they can pay more per barrel in dollars without felling as much of an effect at the gasoline pump as is felt in the US.

Despite this evidence, there are those that share the opinion of Michael Lynch, president of Strategic Energy & Economic Research, Inc., who states “[t]he fundamentals don’t justify anywhere near these prices, even when you factor in geopolitical problems,”  adding that demand has begun to wane. On April 30, 2008, the Associated Press reported that although gasoline prices have followed crude prices upward, the rate of change has not been the same.  Because gasoline demand fell for several months, refiners were not able to raise gas prices fast enough to keep up with the rising cost of crude, which was up about 76% year-on-year compared to the 22% increase in gasoline prices during the same period.  Speculation in the futures markets for oil and gasoline is the additional factor believed to be a major driver of the upward surge in gasoline prices:  “[t]he price of crude oil is not made according to any traditional relation of supply to demand.  It is controlled by an elaborate financial market system,…” according to Mr. F. William Engdahal,  who goes on to estimate that “[a]s much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”  At the root of this development is the change of trading platform for speculators in West Texas Intermediate crude futures contract.

In the US, the Commodities Future Trading Commission (CFTC) is tasked with “ensuring the integrity of the futures and options markets,” including the New York Mercantile Exchange (NYMEX).  Traditionally, US futures contracts on West Texas Intermediate (WTI) crude oil traded on exchanges, such as the NYMEX, subject to extensive regulatory oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud.   In 2000, the US Congress passed the Commodity Futures Modernization Act of 2000, which exempted OTC electronic exchanges from CFTC oversight,  severely limiting the CFTC’s ability to ensure the integrity of the OTC electronic exchanges through ongoing monitoring to detect price manipulation or fraud.  In January 2006, the CFTC further relaxed its oversight abilities by allowing US-based traders to route orders for WTI futures contracts, as well as US gasoline and heating oil futures contracts, through the ICE futures exchange in London.   By Mr. Engdahl’s estimation, more than 60% of the price of crude oil as of May 2008 is due to speculation on OTC electronic exchanges outside the CFTC’s regulatory purview.  In early May 2008, the Associated Press reported the price of oil neared $124/barrel as “investors captivated by the market’s upward momentum looked past the government’s report of an increase in crude and gasoline supplies.

A roll-back of that portion of the Commodity Futures Modernization Act of 2000 that exempted US-based OTC electronic exchanges from regulatory oversight is one viable policy prescription available to the government.  Such a move could potentially uncover manipulative or fraudulent activities related to pricing of oil and gasoline on US exchanges, and perhaps reduce price volatility through increased transparency.  A second, bolder remedy would be to restore the CFTCs oversight responsibility and authority with respect to US-based traders routing orders through OTC electronic exchanges, especially with respect to WTI, gasoline and heating oil futures contracts traded on London’s ICE.

Other remedies to lower the price of gasoline, such as the gas tax holiday and the increase of oil companies’ federal taxes, are unlikely to affect the price of gasoline as suggested by politicians.  If the federal tax paid at the pump were temporarily eliminated, politicians have intimated that the effect would be a one-for-one reduction of the consumer’s cost for gasoline.  Given the industry’s pricing power, which makes the consumer a price-taker, the more likely result would be a one-for-one increase in oil company profits.  Similarly, should Congress succeed in increasing the tax oil companies must pay, the pain would be passed on to the price-taking consumers, who would see the price of gasoline driven higher by the increased taxes.

In short, the government’s best route toward alleviate consumers’ pain at the pump is not to create new policies, but to undo two of their current ones.

Sources:

Chapman, Michael.  Pain at the Pump, Georgetown University, McDonough School of Business, May 2008.
Douglass, Elizabeth and Ronald White, Soaring costs are squeezing gas station owners too, Los Angeles Times, June 10, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Blas, Javier and Neil Dennis.  Oil flirts with $110 as demand remains robust, FT.com, March 11, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Mouawad, Jad. Oil Prices Pass Record Set in ‘80s, but Then Recede, The New York Times, March 3, 2008.
Associated Press, Will oil prices continue to stay high?, April 25, 2008.
Engdahl, William F., Speculators knock OPEC off oil-price perch, Asia Times, May 6, 2008.
Ibid.
Ibid.
Ibid.
Associated Press, Cost of oil nears $124 as gas starts to rise again, May 7, 2008

Gmail adds Tasks AND SMS in Chat!!!!

Guilty!

“Yer h0nor, the jury has reached a verdict:  We the jury find Gmail Tasks Guilty of being like buttah!  We ask, if it please the court, that Gmail be punished with excessive use given its flagrant act of deliciousness by enabling SMS in GTalk during the same week it drops the long-awaited and much-anticipated incorpration of a ToDo list in its supa-fwine email client.”

Gmail: “I Can Haz Task? Yes!!!”

Done

Hipster PDA

Just a real quick, short note about a monumental discovery I made last night: Gmail now has an integrated Tasks list! Oh sweet joy!

Detroit and Bankruptcy: Like Peanut Butter and Jelly?

Buy American?  Where do you think the house is?!

Jeeves? I'm going for a spin.

As GM, Ford and Chrysler continued their vaudevillian act in two parts up on Capital Hill today, the likelihood that the largest of the three automakers (GM) will be forced to restructure through bankruptcy continues to grow.  Both GM and Ford (F) touched 52 week lows today ($2.52 and $1.46, respectively), with their market capitalizations hitting $1.6 billion and $3.5 billion.  Wow. GM’s market cap is $1.6 billion.

At this stage, holding equity in GM is a risky proposition, but then again, I think the company needs to reorganize and management’s consistency in failing to find fault with themselves points to bankruptcy as being the most likely path to change.

This is the quote from the NYT.com piece on day 1 of the Big Three leaders’ testimony before the Senate that says so little but yet so much (emphasis added):

The cause of their misfortunes was not management mistakes, they said, but the weak economy and the inability of consumers to obtain credit to buy cars.

Really?  It’s the weak economy and lack of consumer credit that has brought the American auto industry’s leadership to my fair city, hats in hands, Armani-clad knees tastefully genuflected before Senate banking committee?  Poor strategic management decisions have played no part in creating the mess that is now the American auto industry?  Really?  Yeah, uhmm.  No, I don’t think so.  Furthermore, by their logic, it would make more sense to bail out the car buyer instead of the car maker if the only problem is a lack of consumer credit.

Sorry gentlemen three of Detroit, but you have failed to make a compelling case to the American taxpayer (many of us struggling with fear, doubt, uncertainty and our own goddamn problems).  Why should we collectively put ourselves $50 billion deeper in the hole just so you can prolong this tragedy?

Next!