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Vulture Vulnerability

by Roger Wiegand
Trader Tracks from www.miningstocks.com
September 6th, 2005

"A bill is coming in that I fear America is not prepared to pay." - James Baldwin 1924-1987

The Ides of September is officially on the 13th. This year the date is moved to the15th when 16 of the world’s largest derivative-writing banks will be represented at a secret New York City locked-down meeting with Federal Reserve and Treasury Department officials. We think they had better have some paramedics on standby as the real meaning of naked fear hangs over that boardroom. The chickens are coming home to roost and there are some very big vultures sitting on the credenza. Financial trip wires cannot reproduce themselves, but when that meeting is over, their potential losses will be too high to imagine. On September 20, the Federal Reserve has a regular meeting. Both of these sessions will have very serious and ominous tones.

For those of us analysts who read market tracks, signs, and indicators, the red lights have been flashing for months. Meanwhile the investor-Sheeple blithely walk toward the cliff’s edge, conscious of nothing. Unconscious of anything might be more appropriate. Bertrand Russell said, “The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.” Financial shenanigans and tricks have reached new highs since the 2000 market bust. We wonder how many new ones are left and just how they will be applied. Does the head magician, the Greenman, have any more rabbits in his hat? What do you do in the face of cascading failing derivatives throughout the world while cascading waters shut down one of the largest and most critical shipping ports in the United States? These will be two topics at that September meeting.

It’s Sunday night, August 28, and we were imagining rivers of overflowing derivatives just like potential hurricane waters overflowing levees in New Orleans. At this hour we hope the storm turns and all are saved. Weathermen say otherwise and so do market analysts with solid understanding. Is this storm the market trip wire that closes the Mississippi port and all of its shipping terminals and refineries? This might just be the surprise trip wire, rocketing energy and food prices. If this region is closed for weeks as some expect, grain barges will not move, international shipping will cease, and gas prices will double. Two huge Venezuelan crude oil tankers unload in the area every day. With no place to dock and unload, that oil might be headed for Cuba, Ecuador, or China. The terminal area has unloading stations for LNG (Liquefied Natural Gas) used for residential and industrial heating and cooling markets. Other applications are fertilizer for agriculture. The big “MO,” the Mississippi River, is the Midwest’s transportation highway for soybeans, corn, and wheat. Parts of it farther north near the Ohio River have been closed due to drought-induced low water. Now it seems the other end might be shut down because of too much water. Some days you can’t win for losing.

Some Answers and Elaborations on Above Comments

Today is Wednesday, the hurricane has done its damage, and fears of some have been realized. The sky has cleared and the sun has come out, and the storm damage is now in full view while the world looks on in shock, slowly understanding what this really means. Listen a minute to the analysis from our senior advisor, who has seen this stuff firsthand all over the world.

Recovery Time Line for the Recovery of New Orleans

Even though the worst-case scenario storm track for Katrina was off by about 20 miles, New Orleans is basically dead for a very long time. The city has to be completely evacuated and order restored. Refugees are being taken away in buses to Baton Rouge and, most, to Houston, Texas. They have to fix the beaches and the levees first, and that may take days to weeks. Then the pumps have to be repaired to move water out of the city of New Orleans “bowl,” taking again more days and weeks. Once the pumps are fully operational they can only remove the water level one foot per day. It takes up to another 20 days for this removal process. Only at that point, can heavy equipment enter to repair the electrical grid, water, sewer, and gas networks, taking another three to four months. All of this initial stuff must be completed in sequence. It cannot be done simultaneously. Only then, can humans actually return to the city to begin the real cleanup and start the rebuilding process. My estimate, based upon optimistic news reports and forecasts, is that it will be at least one year before the city is fully habitable and functioning as an operating city. It may take New Orleans a decade before it can be rebuilt to anything near its former glory. This time line is possible only if no other natural disasters like hurricanes, tornadoes, windstorms, a tsunami, or some manmade-caused problem hits them during the recovery-rebuilding process. Fat chance of that, since O’Flanagan’s corollary to Murphy’s Law will most certainly apply. By comparison, Murphy was an optimist. The National Weather Service reported that a new hurricane, Lee, is forming as we speak, and the month of September is the worst of all for these storms.

Eisenhower was a great general but always knew plans can go awry with nasty, unforeseen surprises. This storm event has been feared for 40 years. Its aftermath was predicted. What was not predicted was the overwhelming severity of the flooding and the perfectly wrong timing as it hit just as global energy was going critical. Here is why we are in real trouble: This from Richard Berner of Morgan Stanley as reported in the WSJ: “This region accounts for 30% of America’s oil production and 20% of the natural gas production. Ten percent of all USA refineries are in the Gulf and of the 14 refineries nine are shut down. Without power they cannot run and some are flooded.” Trader Tracks says we now have permanently higher unleaded gas prices of $3.50 to $5.00 per gallon for the foreseeable future. Crude oil prices will be high but not critical. Gasoline, heating oil, aviation fuel, and diesel could go to rationing within a few weeks. It takes years to build a refinery, and we are short several right now. Exxon has eight new refineries planned and budgeted. When do they open and begin delivering fuel?

We say the earliest for the first one might be 2008. Trader Tracks’ forecast for April 2006 unleaded gasoline is $3.07 wholesale on the futures. Add on taxes and we are heading for $5.00 per gallon. On September 1, the October 2005 futures contract is $2.43, up 17 cents for this morning. Platt’s reported today that European traders are quickly taking advantage of the problem by buying as much refined product as possible in expectation that the USA will need to re-buy at higher prices. Trader Tracks reported some time ago that onethird of all refined unleaded gasoline is tankered into the USA, FULLY REFINED, due to a shortage of capacity in the states. In our view they will make a killing. The U.S. Government has offered to release crude from the Strategic Reserve and up to eight refiners are showing an interest. Who knows what they will have to pay, but it might be cheaper than the open market, considering all the problems.

All of these prices are for futures contracts and do not include local middleman profit markup, taxes, and expenses. The true impact will be felt when and if rationing is implemented, which we feel is almost a certainty. The northeastern New England region of the USA is a heavy user of heating oil. Poor people will not be able to afford heat and must be subsidized to even exist. This factor might have implications for relocation of industry and consumers who must rely on heating oil in those areas.

Very experienced traders and investors can trade these energy markets and do quite well. For those inexperienced with these contracts, we suggest you confine your investing and trading to stocks in energy supply companies and those corporations with an edge in this trying of times. Trader Tracks issued an Alert to buy Valero Energy (VLO) NYSE @ the market on 8-31-05, priced then at $103.55. Install a sell stop of $1.00 below your fill if you are not yet in this investment. Main support is $80. Our goal for the stock is $129.44, +20%. They have a lock on sour crude refining with 15 refineries having this capability. Some time ago Valero could see this problem coming and snapped up competitors’ existing sour crude operating refineries to meet expected demand. As this trade gains in price, move your stop up and stay within $5.00 below current stock price.

Pro traders using futures and options in energy should skip the crude oil contract and focus on heating oil and unleaded gasoline. In particular, the gas contract will make some major moves in both directions. Some futures traders this past week earned as much as $10,000 on one contract in a couple of hours. Margins are now more expensive to manage volatility. Trader Tracks will issue futures position buys and sells but most of our readers should not be buying these volatile contracts. Fund managers can use Trader Tracks information to their advantage, as they have large cash positions and need an active trading outlet. We plan a new pricing layout and format for major market sectors making the information easier to use.

Tesoro Petroleum is now refining much of the high-sulfur Alaska North Slope crude oil. Since the hurricane, TSO has moved up from $55 to $61.32 on 9-1-05. They are involved in both exploration and production and have nearly 70mm shares outstanding, which is small in this business. The 52-week earnings per share are $3.90 and we see this increasing over the next few months. Pivot price support is way back at $50 and $31 with main support at $20. Our goal for this stock is $80.65. We like the stock as they offer and specialize in marketing petroleum products, supplies, and services to marine and offshore exploration and production industries in the Gulf of Mexico. Trader Tracks feels the company has more room to grow in spite of the terrific rally this stock has had during the last three years. Their retail operation with convenience stores sells both gas and diesel. With the American market prices climbing, they can curtail open market and Asian selling in favor of their own outlets. In the production division they produce gas, gas blends, jet fuel, diesel, heavy bunker fuel, and other refined products. Buy TSO at the market (today $61.32) and hold with a stop loss at $59.50.

The Rude Awakening Report located on the Daily Reckoning Web site reported the Saudis recently outbid competition to spend millions to begin drilling in the Gulf of Mexico. Logic says if they had their own oil in Saudi land they wouldn’t be digging holes in our neck of the woods at outrageous prices.

Once again Trader Tracks reminds readers the energy markets are run by PRODUCT CHOICE AND TIMING. This means we are leaving the gasoline-manufacturing season and are headed into heating-oil production. Historically, this market has been filled and prices level or drop off at the end of September. Now however, there is worrisome doubt there will not be enough heating oil build-up to cover winter requirements. One knowledgeable insider said pray for a warm winter. We are not weather forecasters, but the way the weather is acting we could very well get a hard cold winter, creating a heating emergency.

Last we heard the Fed will be increasing the Fed Funds rate with two more increases of 25 basis points at each event. Now a couple of their senior guys are mumbling about no more rate increases, as hurricanes are inflationary events. This is true, but the recent mess has other important implications. Namely, it will severely impact grain, cotton, rice, freight, and other commodities. This is not your garden-variety hurricane aftermath. Many other economic factors will be affected and the Fed would be well advised to consider carefully what they do at the September 15th derivative disaster meeting and the following Fed Funds meeting on September 20. We fully expect this sad incident will be another “empty the national treasury event,” as Americans are generous and giving to help others in time of need. Especially generous are fellow Americans who give help and cash to those suffering terribly in this multi-state disaster.

by Roger Wiegand
Trader Tracks from www.miningstocks.com

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