I had a busy media day yesterday. In the morning, I did an interview with Here & Now, a syndicated radio program that airs out of Boston's WBUR and is carried by many NPR stations. The interview focused on calls to boycott Citgo, the gas station chain owned by Venezuela's PDVSA. Host Robin Young wanted to know where I stand on the issue.
I gave her two answers. I said Vahan the Economist thinks the boycott would do more harm to Americans than to Citgo and Venezuela. That's because Citgo employs thousands of Americans, and a successful boycott could put many of them out of work. Furthermore, if we refuse to buy gasoline from Citgo, we'll simply have to buy it elsewhere. Because U.S. refiners are already stretched, chances are we'll have to import more gasoline at a higher cost. Citgo, on the other hand, will simply sell its gasoline to some other market. Take a look at Iran. The U.S. buys no oil from Iran. Yet Iran has absolutely no trouble selling all the oil it wants. Other countries are happy to buy it.
However, Vahan the American supports the Citgo boycott. I was extremely offended by Hugo Chavez's remarks at the United Nations and in Harlem. While I have no problem with him criticizing U.S. foreign policy, I object strongly to his personal attacks on our president, and to his calls to overthrow our government. Although the economist in me realizes that boycotts are not very useful, I have consciously been avoiding Citgo stations for about six months now.
Last night, I appeared on Hannity & Colmes on Fox News. First of all, I'd like to say that even though I have conservative leanings, I thought Alan Colmes, who plays the liberal on the show, is an extremely nice guy.
Colmes wanted to know why Americans don't feel better about the economy. He pointed out that gasoline prices are way off their highs, yet people still seem nervous. As I've explained before on this blog, a 50 cents per gallon drop in gasoline prices amounts to only about a $30 per month savings for the average driver. When you're paying $10,000, or $20,000, or more each a year in property taxes, you're not going to get very excited about saving $30 a month on gasoline. Furthermore, this myth that gasoline is once again cheap is false. Despite coming off its highs, gasoline prices are still very expensive.
I pointed out that people are more focused on the slowing housing market. Sean Hannity didn't buy that. He said housing is healthy. Indeed, new home sales were up slightly from July to August. But they were down 17% year-over-year. That's the more relevant comparison.
Hannity also said the stock market is near an all-time high. Unfortunately, there wasn't time to respond to that remark. The fact is the market is not near an all-time high. Only the Dow is near an all-time high. Most other indexes are still well off their highs. The reason the Dow is doing better than the rest of the market is because investors are getting nervous. When investors get scared they tend to rotate out of smaller-cap issues and flock to large cap stocks--the kinds of stocks you find in the Dow. Furthermore, it gives me no comfort that the best performing stock in the Dow by far is General Motors (GM), a money-losing company.
I finished up by saying a tax cut would do wonders to give the economy a boost. Hannity agreed with that. Colmes didn't. Yet what we need is a real tax cut. Bush's tax cuts were a folly. Although he lowered tax rates, he forgot to get rid of the Alternative Minimum Tax. I don't know about the rest of you, but after factoring in the AMT, state taxes, and property taxes, my after-tax income has gone down, not up.
Friday, September 29, 2006
Wednesday, September 27, 2006
New Home Sales Beat Lowered Expectations
This morning, the Census Department announced new home sales of 1.05 million for August. This was better than expected, but it wasn't good news.
Some insist it was good news. After all, August sales were up 4.1% from July. However, July sales were revised downward, and there is a good chance that August sales will also be revised downward. So this 4.1% gain doesn't provide much comfort. Furthermore, August sales were down 17.4% from August 2005, and the median sales price was down 1.3% during the same time. Any way you look at it, the new homes market is weakening just like the existing homes market.
Fortunately, many of the large homebuilders are publicly traded companies. As a result, we can get a better handle on what is really going on in the industry. The latest news came out of Lennar Corp. (LEN). The company announced better-than-expected earnings, but expectations weren't very good to begin with. In fact, earnings were down almost 40% from a year ago. The gross profit margin fell 760 basis points. New orders also fell. Management reduced earnings guidance for the fourth quarter.
Homebuilders are making concessions to keep selling. But buyers are getting smart. They are expecting even more and bigger concessions. They are also holding out for lower prices. Even falling mortgage rates haven't been enough to lure them off the fence.
Despite current problems, the overall housing market is still healthy. Will things level off nicely as those hoping for a soft landing say? Or will they deteriorate so badly that the economy sinks into recession? My view is somewhere in between. The housing slowdown will be worse than most economists are currently predicting. Yet I still believe we can avoid recession. A tax cut would certainly do wonders at the moment, but that seems about as likely as a camel passing through the eye of a needle.
Some insist it was good news. After all, August sales were up 4.1% from July. However, July sales were revised downward, and there is a good chance that August sales will also be revised downward. So this 4.1% gain doesn't provide much comfort. Furthermore, August sales were down 17.4% from August 2005, and the median sales price was down 1.3% during the same time. Any way you look at it, the new homes market is weakening just like the existing homes market.
Fortunately, many of the large homebuilders are publicly traded companies. As a result, we can get a better handle on what is really going on in the industry. The latest news came out of Lennar Corp. (LEN). The company announced better-than-expected earnings, but expectations weren't very good to begin with. In fact, earnings were down almost 40% from a year ago. The gross profit margin fell 760 basis points. New orders also fell. Management reduced earnings guidance for the fourth quarter.
Homebuilders are making concessions to keep selling. But buyers are getting smart. They are expecting even more and bigger concessions. They are also holding out for lower prices. Even falling mortgage rates haven't been enough to lure them off the fence.
Despite current problems, the overall housing market is still healthy. Will things level off nicely as those hoping for a soft landing say? Or will they deteriorate so badly that the economy sinks into recession? My view is somewhere in between. The housing slowdown will be worse than most economists are currently predicting. Yet I still believe we can avoid recession. A tax cut would certainly do wonders at the moment, but that seems about as likely as a camel passing through the eye of a needle.
Monday, September 25, 2006
I'll Huff and I'll Puff
Housing prices are falling. I'll say it again. Housing prices are falling.
Just to be clear, I don't mean to say that the rate of growth in housing prices is falling. It is the actual prices that are falling. This is the first time existing home prices have fallen on a year-over-year basis since 1995. I guess we can say the housing boom is officially over.
Yet investors cheered the news because existing homes sales came in a little better than expected. They fell 12.6% from a year ago instead of 14%. For some reason, investors concluded this was good news, so they reacted by bidding up shares of homebuilders.
That doesn't seem rational. After all, existing home inventories are up 38% from a year ago to a 7.5 months supply. On Wednesday, we'll learn more when new home sales figures are released.
Speaking of new home sales, I had the pleasure of dining with a major New Jersey homebuilder on Friday night who expressed concern about the weakening housing market. He also said something very interesting. Instead of building the same 3,000 square foot homes, but selling them at lower prices, he is now building smaller houses. He said he has to do this, otherwise his previous buyers would get very upset. This may make price comparisons more difficult, but it doesn't hide the fact that prices are falling.
The housing market represents a major portion of GDP. As the market weakens, so will GDP growth. I'm not yet predicting a recession, but there is no doubt that what is happening to housing right now will have a negative impact on consumer spending.
Just to be clear, I don't mean to say that the rate of growth in housing prices is falling. It is the actual prices that are falling. This is the first time existing home prices have fallen on a year-over-year basis since 1995. I guess we can say the housing boom is officially over.
Yet investors cheered the news because existing homes sales came in a little better than expected. They fell 12.6% from a year ago instead of 14%. For some reason, investors concluded this was good news, so they reacted by bidding up shares of homebuilders.
That doesn't seem rational. After all, existing home inventories are up 38% from a year ago to a 7.5 months supply. On Wednesday, we'll learn more when new home sales figures are released.
Speaking of new home sales, I had the pleasure of dining with a major New Jersey homebuilder on Friday night who expressed concern about the weakening housing market. He also said something very interesting. Instead of building the same 3,000 square foot homes, but selling them at lower prices, he is now building smaller houses. He said he has to do this, otherwise his previous buyers would get very upset. This may make price comparisons more difficult, but it doesn't hide the fact that prices are falling.
The housing market represents a major portion of GDP. As the market weakens, so will GDP growth. I'm not yet predicting a recession, but there is no doubt that what is happening to housing right now will have a negative impact on consumer spending.
Friday, September 22, 2006
Dunn Takes the Fall
Hewlett-Packard got rid of Patricia Dunn. Someone had to take the fall.
No one has been convicted of anything yet, but it does appear that laws were broken in H-P's attempt to find out who at the company was leaking information. The fact is there was a leak. H-P has every right to expect employees and directors to keep confidential information confidential.
So if Dunn knew someone had loose lips, what's wrong with her trying to find out who it was? She certainly should have used every legal means available.
Dunn maintains she wasn't aware the investigators she hired broke the law. Is she telling the truth, or is she merely a scapegoat? Cynics find it hard to believe Dunn is completely innocent. But if her hands are dirty, chances are other hands are dirty, too--perhaps even those of CEO Mark Hurd. I suspect a lot more shoes will drop before this case is over.
No one has been convicted of anything yet, but it does appear that laws were broken in H-P's attempt to find out who at the company was leaking information. The fact is there was a leak. H-P has every right to expect employees and directors to keep confidential information confidential.
So if Dunn knew someone had loose lips, what's wrong with her trying to find out who it was? She certainly should have used every legal means available.
Dunn maintains she wasn't aware the investigators she hired broke the law. Is she telling the truth, or is she merely a scapegoat? Cynics find it hard to believe Dunn is completely innocent. But if her hands are dirty, chances are other hands are dirty, too--perhaps even those of CEO Mark Hurd. I suspect a lot more shoes will drop before this case is over.
Thursday, September 21, 2006
Who's the Real Devil?
The president of Venezuela, Hugo Chavez, is in Harlem at the moment offering to sell cheap heating oil to the masses. That's mighty big of him now that oil prices have come off their highs.
Yesterday, Chavez addressed the United Nations. Several times he referred to President Bush as the devil. His buddy, Evo Morales of Bolivia, did an impressive impersonation of a drug dealer, waving around a coca leaf in his hand. Even President Ahmadinejad of Iran was more respectful. Yet the audience applauded Chavez enthusiastically, which makes me wonder why we host the U.N. in the first place. Why not pack it up and send it to Caracas? Then we'll see just how accommodating Chavez is to foreigners who insult him in his own backyard.
Back in 1994, when Venezuela's government was more friendly toward the U.S., I was invited to teach a short course in capital budgeting to PDVSA executives. PDVSA is the state-run oil company. The students were very smart and favorably inclined toward modern techniques of investment analysis. No doubt under the current regime many of my former students are out of work.
Countries like Venezuela and Iran are swimming in cash because oil prices went up so high. This windfall has made them arrogant and more willing to openly criticize the U.S., the world's biggest oil consumer. But if current trends continue, they will tone down the rhetoric.
Oil prices are headed lower because oil traders no longer fear impending shortages. We haven't run out of oil despite tensions with Iran and Venezuela, troubles in Nigeria and Iraq, and a production cut in Prudhoe Bay due to BP's pipeline corrosion problems. Not long ago, gasoline prices rose above $3 per gallon. That was enough to reduce demand on the margin. Oil and gasoline inventories are now higher than expected. But prices will eventually stabilize simply because lower prices invite more demand.
Conspiracy theorists are convinced that the Republicans have somehow managed to figure out how to manipulate oil and gasoline prices. According to this theory, the Republicans are pushing prices lower at the moment in order to improve their chances in the upcoming elections. Don't you buy it. Oil is a commodity. The price is set by buyers and sellers in the futures markets, not by politicians in a back room. If the Republicans were truly able to lower prices, they would have done so long ago. Besides, despite the recent drop, prices aren't cheap by any stretch of the imagination.
Yesterday, Chavez addressed the United Nations. Several times he referred to President Bush as the devil. His buddy, Evo Morales of Bolivia, did an impressive impersonation of a drug dealer, waving around a coca leaf in his hand. Even President Ahmadinejad of Iran was more respectful. Yet the audience applauded Chavez enthusiastically, which makes me wonder why we host the U.N. in the first place. Why not pack it up and send it to Caracas? Then we'll see just how accommodating Chavez is to foreigners who insult him in his own backyard.
Back in 1994, when Venezuela's government was more friendly toward the U.S., I was invited to teach a short course in capital budgeting to PDVSA executives. PDVSA is the state-run oil company. The students were very smart and favorably inclined toward modern techniques of investment analysis. No doubt under the current regime many of my former students are out of work.
Countries like Venezuela and Iran are swimming in cash because oil prices went up so high. This windfall has made them arrogant and more willing to openly criticize the U.S., the world's biggest oil consumer. But if current trends continue, they will tone down the rhetoric.
Oil prices are headed lower because oil traders no longer fear impending shortages. We haven't run out of oil despite tensions with Iran and Venezuela, troubles in Nigeria and Iraq, and a production cut in Prudhoe Bay due to BP's pipeline corrosion problems. Not long ago, gasoline prices rose above $3 per gallon. That was enough to reduce demand on the margin. Oil and gasoline inventories are now higher than expected. But prices will eventually stabilize simply because lower prices invite more demand.
Conspiracy theorists are convinced that the Republicans have somehow managed to figure out how to manipulate oil and gasoline prices. According to this theory, the Republicans are pushing prices lower at the moment in order to improve their chances in the upcoming elections. Don't you buy it. Oil is a commodity. The price is set by buyers and sellers in the futures markets, not by politicians in a back room. If the Republicans were truly able to lower prices, they would have done so long ago. Besides, despite the recent drop, prices aren't cheap by any stretch of the imagination.
Wednesday, September 20, 2006
Keep Your Options Open
Some investors think options are for investors with a high tolerance for risk. On the contrary, if used properly, options can actually reduce risk. For example, if you own a stock and are worried the price may fall, you can buy a put option on that stock. If the price does fall, your gains on the option will offset your loss on the stock.
Straddling is a strategy investors can employ if they are unsure about the market's direction. Suppose you can't decide if the market will go up or down. You can buy a call option and a put option on an index. You make money if the market rises or falls--just as long as it moves enough to make up for what you paid for the options.
The VIX is an index that measures volatility. More specifically, it measures implied volatility from options contracts. Right now, this index is at relatively low levels. Because the value of an option is positively related to volatility, this means that options are relatively cheap at the moment. If you are interested in buying options, this might be a good time to do so.
If used improperly, options can significantly increase investment risk. Make sure you know what you are doing before employing an options strategy. The Forbes Stock Market Course has a section devoted to futures and options contracts. It's a good place to start your options education.
Straddling is a strategy investors can employ if they are unsure about the market's direction. Suppose you can't decide if the market will go up or down. You can buy a call option and a put option on an index. You make money if the market rises or falls--just as long as it moves enough to make up for what you paid for the options.
The VIX is an index that measures volatility. More specifically, it measures implied volatility from options contracts. Right now, this index is at relatively low levels. Because the value of an option is positively related to volatility, this means that options are relatively cheap at the moment. If you are interested in buying options, this might be a good time to do so.
If used improperly, options can significantly increase investment risk. Make sure you know what you are doing before employing an options strategy. The Forbes Stock Market Course has a section devoted to futures and options contracts. It's a good place to start your options education.
Tuesday, September 19, 2006
Cruisin' Asia for Investment Ideas
If you're looking for a real good time, you should consider going on the Eleventh Forbes Cruise for Investors. The cruise, scheduled for April 6-20, 2007, starts with a tour of Beijing then goes to Shanghai, Nagasaki, Osaka, and ends in Hong Kong.
I'll be giving a presentation on this cruise and taking part in a couple of panel discussions. I've taken part in a few of these investment cruises before, and I can assure you they are fun and educational.
I'll be giving a presentation on this cruise and taking part in a couple of panel discussions. I've taken part in a few of these investment cruises before, and I can assure you they are fun and educational.
Monday, September 18, 2006
The J Curve
I just conducted a fascinating MoneyMasters video interview with Ian Bremmer, President of the Eurasia Group. Ian, who completed his doctorate at Stanford University when he was just 24 years old, started his business less than 10 years ago. The Eurasia Group is a consultancy that specializes in political science. It helps corporations and hedge funds assess political risk in more than 60 countries.
Our discussion focused on his recently published book called
The J Curve: A New Way to Understand Why Nations Rise and Fall. The title refers to the shape of the curve you get when you plot a country's stability on the vertical axis and its degree of openness on the horizontal axis. Ian's thesis is that closed but stable countries such as North Korea and Iran, cannot transform themselves into open countries without going through a period of severe instability.
Even China is not immune to this rule. Of course, China has managed to transform its economy, but its political structure remains closed. Ian warns that the world could face significant dangers if China suffers instability as its political system inevitably begins to open.
This MoneyMasters interview will be available for viewing on Thursday morning at 6:00 am. By the way, for all you iPod fans out there, you can now subscribe to these videos for free. Simply go to the iTunes music store and search for "MoneyMasters" or "Janjigian". Enjoy!
Our discussion focused on his recently published book called
The J Curve: A New Way to Understand Why Nations Rise and Fall. The title refers to the shape of the curve you get when you plot a country's stability on the vertical axis and its degree of openness on the horizontal axis. Ian's thesis is that closed but stable countries such as North Korea and Iran, cannot transform themselves into open countries without going through a period of severe instability.
Even China is not immune to this rule. Of course, China has managed to transform its economy, but its political structure remains closed. Ian warns that the world could face significant dangers if China suffers instability as its political system inevitably begins to open.
This MoneyMasters interview will be available for viewing on Thursday morning at 6:00 am. By the way, for all you iPod fans out there, you can now subscribe to these videos for free. Simply go to the iTunes music store and search for "MoneyMasters" or "Janjigian". Enjoy!
Friday, September 15, 2006
Energy vs. Housing
As far as the economy is concerned, which is more important? Energy or housing? According to the Bureau of Economic Analysis, expenditures on gasoline, fuel oil and other energy goods made up 2.7% of our $13.2 trillion GDP in the second quarter of this year. Residential investment amounted to 6%. Another 14.1% went to housing-related services. Therefore, even a moderate decrease in home prices would likely offset the benefits of lower energy prices.
Not many people are talking about this. Right now, they're simply celebrating the fact that gasoline prices have come down from their recent highs. When it comes to gasoline, consumers have very short memories. They remember well what they paid the last time they filled the tank. But they have trouble remembering how much they paid 100 tankfuls ago. If gasoline is cheaper today than it was a week ago, they feel good. They don't really care to remember that it's more expensive than it was just two or three years ago. Those days no longer seem relevant.
However, as an investor, I would focus more on housing right now. Although the official figures show that prices haven't yet fallen on a year-over-year basis, appreciation has slowed considerably. Coming reports will no doubt document falling prices. That is when we could see a significant hit to consumer spending.
I'll be discussing some of these topics on MSNBC on Sunday morning around 10:45 EST. Tune in if you can.
Not many people are talking about this. Right now, they're simply celebrating the fact that gasoline prices have come down from their recent highs. When it comes to gasoline, consumers have very short memories. They remember well what they paid the last time they filled the tank. But they have trouble remembering how much they paid 100 tankfuls ago. If gasoline is cheaper today than it was a week ago, they feel good. They don't really care to remember that it's more expensive than it was just two or three years ago. Those days no longer seem relevant.
However, as an investor, I would focus more on housing right now. Although the official figures show that prices haven't yet fallen on a year-over-year basis, appreciation has slowed considerably. Coming reports will no doubt document falling prices. That is when we could see a significant hit to consumer spending.
I'll be discussing some of these topics on MSNBC on Sunday morning around 10:45 EST. Tune in if you can.
Wednesday, September 13, 2006
Expensive is the New Cheap
As gasoline prices were going up, a number of vocal economists told us we shouldn't worry. They said the U.S. economy could weather much higher prices. They said consumer spending wouldn't take a hit.
For the most part they were right. Gasoline hit $1.80 per gallon, then $2 per gallon, eventually rising to more than $3 per gallon. We didn't really see a slowdown in consumer spending until prices hit those highest levels.
Yet I have to laugh at today's article in the Wall Street Journal. It argues that the recent drop in gasoline prices bodes well for consumers. There is no question that consumers are better off paying lower prices. But if we are to believe that rising gasoline prices won't hurt consumer spending, why should we believe that falling prices will give spending a boost?
The bottom line is that the price of gasoline has to move considerably before consumers take notice. That's because, contrary to popular belief, gasoline represents only a small component of the overall cost of driving. It is dwarfed by the cost of other things, such as the cost of buying or leasing the vehicle, the cost of maintaining the vehicle, and the cost of insuring it.
Look at this way. If you drive 12,000 miles in a year, and you get 18 miles per gallon, you need to purchase 667 gallons of gasoline. If the price of gasoline falls by 50 cents per gallon, you save just $333 dollars, or $28 per month--about the cost of one meal in a decent restaurant.
Let's not forget that despite the recent price drop, gasoline prices remain much higher than they were just a few years ago. John Gibson who anchors "The Big Story" on Fox News, asked me back then if people should think about canceling their vacation plans. At the time, gasoline prices had inched up to $1.80 per gallon and the media were in a frenzy about painfully high prices. Today, with the national average price at $2.60 per gallon, we're supposed to believe gasoline is cheap?
For the most part they were right. Gasoline hit $1.80 per gallon, then $2 per gallon, eventually rising to more than $3 per gallon. We didn't really see a slowdown in consumer spending until prices hit those highest levels.
Yet I have to laugh at today's article in the Wall Street Journal. It argues that the recent drop in gasoline prices bodes well for consumers. There is no question that consumers are better off paying lower prices. But if we are to believe that rising gasoline prices won't hurt consumer spending, why should we believe that falling prices will give spending a boost?
The bottom line is that the price of gasoline has to move considerably before consumers take notice. That's because, contrary to popular belief, gasoline represents only a small component of the overall cost of driving. It is dwarfed by the cost of other things, such as the cost of buying or leasing the vehicle, the cost of maintaining the vehicle, and the cost of insuring it.
Look at this way. If you drive 12,000 miles in a year, and you get 18 miles per gallon, you need to purchase 667 gallons of gasoline. If the price of gasoline falls by 50 cents per gallon, you save just $333 dollars, or $28 per month--about the cost of one meal in a decent restaurant.
Let's not forget that despite the recent price drop, gasoline prices remain much higher than they were just a few years ago. John Gibson who anchors "The Big Story" on Fox News, asked me back then if people should think about canceling their vacation plans. At the time, gasoline prices had inched up to $1.80 per gallon and the media were in a frenzy about painfully high prices. Today, with the national average price at $2.60 per gallon, we're supposed to believe gasoline is cheap?
Monday, September 11, 2006
Why Didn't She Just Ask?
Hewlett-Packard (HPQ) has been making headlines recently, but not because of its outstanding financial results. Instead, the company is being accused of breaking the law. It hired private investigators to find out who on its board of directors leaked information to the media about a strategy meeting the board held with CEO Mark Hurd. Apparently, these investigators faked their identity in order to obtain telephone records. This practice, known as "pretexting," is illegal.
While it isn't yet clear if the company or Chairman of the Board Patricia Dunn were aware of the methods the investigators employed, it is clear that a director was indeed talking to the press. That director is believed to be George (Jay) Keyworth. He was asked to resign but refused to do so.
Dr. Keyworth has a stellar reputation. He has a Ph.D. is physics, worked at Los Alamos National Laboratory for many years, and served as Science Advisor to the Reagan administration. But none of that gives him a free pass. A company has the right to expect its directors to keep certain things confidential. After all, directors have a primary obligation to the stockholders. A company with a leaky board could lose its competitive advantages.
However, what is really odd about all this is Ms. Dunn's determination to unearth the culprit surreptitiously. Why didn't she simply ask the board members which one of them talked to the press. Chances are Dr. Keyworth would have admitted his indiscretion and apologized.
What Dr. Keyworth did was wrong, but it wasn't illegal. It was simply an exercise in poor judgment. Furthermore, it doesn't appear his discussions with the media did any harm to HPQ. It doesn't seem to have given HPQ's competitors any advantage.
What the investigators did was illegal. Even if Ms. Dunn didn't know what they were up to, chances are her days on the board are numbered. Indeed, it looks like we'll be seeing many new faces on HPQ's board in the very near future.
While it isn't yet clear if the company or Chairman of the Board Patricia Dunn were aware of the methods the investigators employed, it is clear that a director was indeed talking to the press. That director is believed to be George (Jay) Keyworth. He was asked to resign but refused to do so.
Dr. Keyworth has a stellar reputation. He has a Ph.D. is physics, worked at Los Alamos National Laboratory for many years, and served as Science Advisor to the Reagan administration. But none of that gives him a free pass. A company has the right to expect its directors to keep certain things confidential. After all, directors have a primary obligation to the stockholders. A company with a leaky board could lose its competitive advantages.
However, what is really odd about all this is Ms. Dunn's determination to unearth the culprit surreptitiously. Why didn't she simply ask the board members which one of them talked to the press. Chances are Dr. Keyworth would have admitted his indiscretion and apologized.
What Dr. Keyworth did was wrong, but it wasn't illegal. It was simply an exercise in poor judgment. Furthermore, it doesn't appear his discussions with the media did any harm to HPQ. It doesn't seem to have given HPQ's competitors any advantage.
What the investigators did was illegal. Even if Ms. Dunn didn't know what they were up to, chances are her days on the board are numbered. Indeed, it looks like we'll be seeing many new faces on HPQ's board in the very near future.
Tuesday, September 05, 2006
Don't Get Too Exuberant Over Lower Gasoline Prices
With the futures price of unleaded gasoline down about 25% from its early August high, investors are asking if the recent energy "crisis" is finally over. A few things to keep in mind:
First of all, there never was a real energy crisis. The Arabs didn't boycott the U.S. and gasoline stations didn't run out of product.
There is no denying supplies are tight. The world is producing close to full capacity and it is consuming almost everything it produces. And there is little slack left in the system. Most major oil-producing nations can't produce more without making significant additional investments.
But there is also a "fear factor" at play. Oil prices didn't go up because of shortages. They went up because of potential shortages. Oil investors and speculators are justified in being worried. After all, there are reasons to worry about Iran, Venezuela and Nigeria. Iraq still isn't producing to its full potential. In fact, many the top oil producing nations are anything but stable. And of course, we saw what kind of damage a hurricane like Katrina can do oil and gas production in the Gulf of Mexico.
However, fear has suddenly abated somewhat in recent weeks. The United Nation's deadline for imposing sanctions on Iran has come and gone, and nothing much has happened. As for hurricane season, so far it hasn't been too menacing.
But something else is happening. Oil prices are down about 10% from their early August highs, yet gasoline prices are down 25%. Gasoline prices have also fallen much more than diesel prices. According to the latest reports, gasoline inventories are up more than expected.
I believe this is evidence of that vicious cycle I've talked about before. When gasoline prices rise, demand falls at the margin. When demand falls, prices recede. Lower prices then invite consumers to fill up the SUV again. Demand goes up, and so do prices.
Today's news that Chevron discovered new oil in the Gulf of Mexico is certainly good. It will keep prices from rising higher than they would have, but I seriously doubt prices will fall significantly. Chevron is rumored to have spent about $100 million to develop this deep-water well. This kind of investment is justified only if oil prices are expected to remain high. It wouldn't have made much sense for Chevron to spend so much money if it expected prices to fall back to $20 or $30 per barrel.
While it's certainly nice to see gasoline prices lower, we shouldn't get too exuberant. After all, prices are still about 45% higher today than they were just two years ago. Gasoline prices will have to go much lower to really boost consumer confidence.
First of all, there never was a real energy crisis. The Arabs didn't boycott the U.S. and gasoline stations didn't run out of product.
There is no denying supplies are tight. The world is producing close to full capacity and it is consuming almost everything it produces. And there is little slack left in the system. Most major oil-producing nations can't produce more without making significant additional investments.
But there is also a "fear factor" at play. Oil prices didn't go up because of shortages. They went up because of potential shortages. Oil investors and speculators are justified in being worried. After all, there are reasons to worry about Iran, Venezuela and Nigeria. Iraq still isn't producing to its full potential. In fact, many the top oil producing nations are anything but stable. And of course, we saw what kind of damage a hurricane like Katrina can do oil and gas production in the Gulf of Mexico.
However, fear has suddenly abated somewhat in recent weeks. The United Nation's deadline for imposing sanctions on Iran has come and gone, and nothing much has happened. As for hurricane season, so far it hasn't been too menacing.
But something else is happening. Oil prices are down about 10% from their early August highs, yet gasoline prices are down 25%. Gasoline prices have also fallen much more than diesel prices. According to the latest reports, gasoline inventories are up more than expected.
I believe this is evidence of that vicious cycle I've talked about before. When gasoline prices rise, demand falls at the margin. When demand falls, prices recede. Lower prices then invite consumers to fill up the SUV again. Demand goes up, and so do prices.
Today's news that Chevron discovered new oil in the Gulf of Mexico is certainly good. It will keep prices from rising higher than they would have, but I seriously doubt prices will fall significantly. Chevron is rumored to have spent about $100 million to develop this deep-water well. This kind of investment is justified only if oil prices are expected to remain high. It wouldn't have made much sense for Chevron to spend so much money if it expected prices to fall back to $20 or $30 per barrel.
While it's certainly nice to see gasoline prices lower, we shouldn't get too exuberant. After all, prices are still about 45% higher today than they were just two years ago. Gasoline prices will have to go much lower to really boost consumer confidence.
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