Given the excessive break since my last post, I have decided to get a fresh start at a new location.  In the 18 months since I quit on this blog, I have gained considerable depth of understanding on financial markets and feel that the analysis and insights to be found at the link below will exceed those on this blog by a considerable margin.


www.consideratecapitalist.blogspot.com

Well oil just keeps on falling. It closed today at $43.65, down almost 7% for the day and down a jaw-dropping 70% from its peak in July. Today's close marks a 4 year low. What happened to $200 oil that Goldman was predicting this summer? Merrill analysts today said that they are predicting oil at $25 next year. I remain a long term oil bull but am not making any plays until the market shows some signs of correction, beyond a week long bounce. When I say long term, I mean over the course of my working life. I am 22, so my investment horizon for oil plays is up to 35 years.

Moving on to the Big 3. Today they said they would be willing to accept strong government oversight in exchange for immediate aid (Chrysler and GM have said they need help soon, while Ford says they hope not to have to tap potential government credit lines, but would like to have them available just in case). They are looking for a total of $34B. I don't think they should get it, bankruptcy is a better option. My thinking is as follows: if the Big 3 enter Chapter 11 bankruptcy (something firms do regularly - think airlines), they will gain leverage in negotiations with both their creditors and the United Auto Workers (UAW). That is, they will be able to say to these parties "if you don't come to the bargaining table, we will go under and then we are all ******". They will be able to negotiate better terms on their outstanding debt, as well as cutting pay and benefits to UAW (which in my opinion are both excessive). Without entering bankruptcy, they will not have this advantage at the negotiating table and, while the UAW is granting some concessions, they are not nearly what they need to be for these firms to return to profitability.

The argument against bankruptcy is as follows: if the firms enter bankruptcy, customers will be unwilling to buy cars from these firms because they will be worried about the car companies' abilities to live up to their warranty obligations. This is where the government plays a role: they set up a fund to guarantee the warranties on these vehicles in the case of any of the Big 3 shutting down, much like the FDIC insures bank deposits.

I must confess, these opinions are not my own, I believe I read them on The Big Picture, but it may have been elsewhere. Regardless, now you've heard the much less publicized bankruptcy argument.

The market rallied again today. More choppy action, no surprises there. The question I am wanting answered is: when (if ever) is the precipitous fall in the price of oil going to stimulate the global economy?

So it seems I was right about a pull back this week. Man was yesterday harsh. After that I was not surprised at all by the rally we saw today. This range bound trading accompanied by high volatility is what I anticipate over the next 6 to 9 months. While we may set new lows over this period, I think it depends on how rough the recession gets over the coming quarters. I feel the market has priced in something pretty serious, but only time will tell whether the drop has been sufficiently large. As far as the recovery, I really can't see it happening until we get some good news (or no bad news for a while from financials). A string of earnings that surprise on the upside, or a series of better than expected economic data are the kind of catalysts I am looking for. Not sure exactly what is causing the unprecedented levels of volatility, but it seems to be here to stay as well.

Moving on, I saw an excellent video on YouTube last night. It is a speech Elizabeth Warren gave at Berkeley about the death of the American middle class. I found a lot of the information she presented somewhat surprising, but she has clearly done her homework, so I don't have any reason to doubt her. It is nearly an hour, but in my opinion time well spent (you can skip the first 6 minutes). There is also a story on Naked Capitalism quoting her talking about the lack of method surrounding application of TARP funds. She is the head of the TARP oversight committee and doesn't have good things to say about Paulson's methodologies.

Finally, another interesting piece on major university endowments selling private equity stakes at huge discounts. Apparently private equity has different accounting rules which has allowed them to not mark down the value of their holdings by as much as they should.