$4 Gas Hurting the U.S. Consumer, Saudi Arabia and Russia on Oil Prices, Two Frightening Financial Figures, and More!

by Addison Wiggin & Ian Mathias

  • Is $4 the magic number? Latest poll says gas prices have most Americans cutting back
  • Oil’s stuck in the middle… Saudis say price is “unacceptably” high, Russians call for $250 barrels
  • UAE buys iconic NYC building, announces first nonstop flights from Dubai to the Big Apple
  • Two frightening financial trends… illiquid assets grow while reserves turn negative
  • Warren Buffett vs. hedge funds vs. Bill Bonner… the blow by blow, below
  • Plus, an important correction to yesterday’s 5

  83% of Americans say $4 gasoline is “a major problem or crisis.” According to the CNN poll released this morning, consumers may have found their breaking point. 66% of those surveyed said they are cutting back, in one way or another, to deal with current fuel costs. 55% are already worried about forced rationing and excessively long lines at gas stations. 

CNN snuck one last question in its latest survey: How do you feel about the U.S. economy? 78% say it’s in “poor or very poor” shape. Ouch. 

  Better make that $4.05 gasoline … the national average ticked up another cent this morning.

  At least the price of oil backed off a bit yesterday. Light sweet crude sells for $133 a barrel this morning. Oil fell a buck or two on Tuesday’s IEA report , but the real momentum seemed to come on the heels of this Middle Eastern decree:

  "Saudi Arabia believes the current [oil] price is unacceptable," OPEC chief and Saudi oil minister Abdullah al-Badri said yesterday. Badri said that Saudi Arabia will boost production by 300,000 barrels a day. He also suggested that “producers and consumers should get together to find a reasonable solution to return stability." We’re not totally sure how that’s going to work, but he’ll be hosting the international “get together” on June 22. We’ll keep you updated.

  But on the other hand, “We think the oil price will reach $250 per barrel in 2009,” said Gazprom CEO Alexei Miller yesterday. “There is a certain influence from speculators, but this is not a determining influence… The competition for resources is growing and the tendency is very noticeable.”

Miller also suggested Gazprom, Russia’s state-controlled energy biz, will be the world’s biggest business in less than 10 years, with a market cap of over $1 trillion. “We are already the biggest by gas endowment,” he was quick to remind. “We have eight times the reserves of Exxon Mobil.”

  Elsewhere in the oil patch, the Abu Dhabi Investment Council has set its sights on its next American investment:

The UAE sovereign wealth fund will soon own 75% of the Chrysler Building in New York City. The controlling stake in the world’s tallest brick building and Art Deco masterpiece went for about $800 million. Interestingly, we learn that the stake will be sold by TMW, a German subsidiary of an Atlanta-based fund.

Abu Dhabi officials assured Tishman Speyer Properties, the owners of the other 25%, that the UAE would remain a silent partner.

  In a not-so-bizarre coincidence, Emirate Airlines announced the first nonstop service from Dubai to New York this week. Starting Aug. 1, you can not only enjoy uninterrupted travel from the UAE to I.O.U.S.A., but you can do so in its spankin’ new Airbus A380s. The A380 is the bigger, faster, greener, cleaner future of air travel — the biggest passenger airliner in the world, actually. Emirate has plans to launch similar direct flights to L.A. and San Francisco this fall. The airline already offers nonstop service to Houston.

If there’s a crisis amid the airline industry, someone forgot to tell the UAE about it.

  “Ten companies now have more level 3 assets than capital,” observes Marc Faber . “The three magic words that make an asset a level 3 asset are ‘no observable inputs.’ What this means is that not only are they hard to price, but nearly impossible to sell. Recently, there’s been such deterioration in all types of mortgages that more and more assets are finding their way into this category.”

You might guess what types of businesses are squirreling away level 3 assets, but the ratios to capital are a bit unnerving.

“In order, they are (as a % of total shareholder equity):

1. Bear Stearns: 313.97%
2. Morgan Stanley: 234.88%
3. Merrill Lynch: 225.4%
4. Goldman Sachs: 191.56%
5. Lehman: 171.18%
6. Fannie Mae: 161.48%
7. Northwest Air: 142.02%
8. Citigroup: 125.06%
9. Prudential: 119.36%
10. Hartford: 108.52%.”

  What’s more, “nonborrowed bank reserves continue to sink into record territory,” reports government watchdog John Williams. According to data released by the Fed, nonborrowed reserves have sunk to negative $129 billion.

What does that mean? The Fed requires banks keep money in reserve. This data shows that the U.S. banking system at large could meet these reserves only by borrowing more than 100% of the amount the Fed requires. In fact, in order to meet the Fed’s minimum requirements, financials have had to borrow $129 billion in excess.

We’ve mentioned it before… when this chart crossed the zero threshold in January, it was the first time nonborrowed reserves were negative since the Great Depression.

  The U.S. stock market stayed largely unchanged again yesterday. Lower oil prices probably gave traders a bit of courage, but the larger-than-expected trade deficit  and still troublesome financials seemed to kill that buzz. In the end, the Dow finished unchanged, while the S&P 500 and Nasdaq fell but a small margin.

  Warren Buffett has placed a rather public bet on the S&P 500. The legendary investor said this week that a handful of carefully chosen hedge funds won’t beat the market over the next 10 years. Putting his money where his mouth is, Buffett bet the folks at Protege Partners, a firm that chooses the best funds for its clients.

The Oracle and Protege each waged $320,000 that the S&P would beat the returns of whatever five funds Protege selects. The bets will be stored in a 10-year Treasury. When the wager matures, $1 million will go to the charity of the winner’s choice.

“Our money is on Buffett,” says Bill Bonner. “Over time, the manager’s performance regresses to the mean of all investment advisers — which is to say, he gets about the same as the broad market itself. And over time, the effect of taking out large fees to pay the managers — typically 2% of principal and 20% of performance — reduces the investor’s capital. Mathematically, if you leave your money in a hedge fund long enough, it will all end up with the manager.

“But we will make a further wager: We bet that both bettors will lose. Here’s why:

“The have bought a Treasury bond. We did not look this morning, but the last time we took note of it, the yield on the 10-year Treasury was less than 4%. And the last time we looked, the official consumer inflation rate in the United States was over 4%.”

  Gold, where we suspect Bill Bonner would place his bet, has pulled back this week. The precious metal is down $30 from Monday’s high, to about $875 an ounce today.

  The dollar’s much to blame for gold’s recent slump. The greenback is still rallying on the barrage of “strong dollar” talk coming from Washington earlier this week. The dollar index crept as high as 73.6 this morning. That wasn’t quite enough to change the dollar’s nominal value versus the euro, pound and yen. Each stand about where they were yesterday.

  Last, we note that corn has hit another record high today. The story’s the same in the U.S. Corn Belt… cold, wet conditions have caused the USDA to lower its output estimate by 3.2% this week. Thus, the price of corn in the Chicago pits has risen for its sixth day in a row, to a record $6.83.

  “In your 5 Minute Forecast on June 10,” writes a reader, “you quote Chris Mayer saying, ‘The world burns through 31 billion barrels per day.’ Can that be true? Saudi Arabia has reserves of only 260 billion, give or take. If Saudi Arabia was the only source of oil for the planet, would we burn through its reserves in less than 10 days? Either that’s wrong or we are really in big trouble.

“I have no idea how much oil we burn and how many contracts futures dealers hold,” writes a reader, “but IF we really burn through 31 billion barrels per day, Peak Oil is well and truly past. Maybe this figure needs checking or we need to buy solar panels NOW.

  “You nincompoop!” declares another, “The world actually uses about 82 million barrels of oil a day. That works out to about 30 billion barrels per *year,* not per day. 31 billion barrels a day doesn’t even pass the common-sense test. With 6.5 billion people, the average person would have to use nearly five barrels of oil a day. Not even Al Gore uses that much.”

The 5: Whoa… quite the typo, wasn’t it? As hard as we try, every once in a while a “big one” gets away. For the record, the world burns roughly 31 billion barrels of oil each year, not day. We hope you forgive us for this nasty slip of the tongue.

Maybe more importantly, we apologize for the muddling of Chris Mayer’s observation. Even postcorrection, it’s still worth a place in our daily 5 Min. We’ve revised it for our enjoyment, here.  

  “So hedge fund holdings represent 12 times the daily consumption of the whole world,” figures another reader. “The better argument would be that the 1.1 billion hedge fund barrels are never delivered, as the contracts are rolled over as they near maturity. While one can say the hedge funds influence the price, the spot market sets the real price, which is influenced by supply and demand. T. Boone Pickens says the world production is at 85 million barrels a day and consumption is at 86.2 million barrels a day. When the supply is less than the demand, the price goes up.”

Enjoy your day,

Ian Mathias
The 5 Min. Forecast

P.S. Addison is still working on his latest book, the accompaniment to I.O.U.S.A. Rest assured, he’ll be back soon.  


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