The market direction is...

[Sibling Zono (anon1mat0)]

1. Premise: The price of oil is rising and the trend will remain for the short to medium term.

• According to analysts, we are reaching (according to some we reached already) a production plateau with no easy ways to increase output.
• The current trend is for an increasing demand specially from resurgent economies like China and India
• The only unexplored place on Earth with potentially large reserves is the Antarctic continent, which is off-limits and would be very expensive for exploration and exploitation.
• Even if a large reservoir is found today it would take at least 5 years to put it into production.

Conclusion: Demand is growing faster than supply. Prices can only stabilize when the supply and demand are balanced.

2. Premise: The imbalance in oil supply and demand puts pressure on alternative fuels, specifically Bio-fuels.

• Legislations both in Europe and the US are forcing the use of some biofuels in regular gasoline and Diesel
• There is pressure from the public to get carbon neutral fuels.
• There is competition between production of biofuels and food.
• Even if biofuels are net producers of energy (like sugarcane ethanol) we still have the same arable land.
• This pressures are forcing the prices of food up as more 'valuable' crops are chosen by farmers worldwide

Conclusion: The price of food will rise more or less shadowing the price of oil until a balance is reached.
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Ok, so here are my questions:

1. Are those two premises above correct? What arguments can mitigate or even invalidate them?
2. Is it moral to profit from a bet on the market when the conditions of such market are likely to cause a huge distress on large portions of Earth's population?
And this is the cynical one:
3. What is the most effective way to profit from such market?

Discuss.

[Scriblerus the Philosophe]

Dear god, this is the exact topic(s) is ended up discussing* with an older customer of mine today.
_{*"Discussing" isn't the right word, really, since all I could do was slip a word or two in here an there, but still.}

1. Are those two premises above correct? What arguments can mitigate or even invalidate them?
I think they're absolutely correct. Look at the price of milk--it's gone up a lot since ethanol started taking up more of the corn produced.
I'll leave it to others to fight 'em.

2. Is it moral to profit from a bet on the market when the conditions of such market are likely to cause a huge distress on large portions of Earth's population?
Moral? I suppose not. You're benefiting indirectly from others' suffering.
But it's going to happen anyway, so you may as well get something out of it.

3. What is the most effective way to profit from such market?
Micheal, my customer, says he makes bank in the stock market by relying on the necessities.
And I agree with him. I'm contemplating getting into this mess myself, actually.

[beagle]

1. Are those two premises above correct? What arguments can mitigate or even invalidate them?

Reckon so, though this is one for Agujim. For mitigating factors I'd say:

Increased prices making alternative methods in oil extraction and food growing profitable. For example tar sands for oil. In food production, agricultural land has been very lowly valued in the UK for decades, but now it's bounding up in value, making it less attractive to knock down the cherry orchard and put up a housing estate.
Another factor is that India is hugely subsidising fuel. This may have to cease, though whether that's good is another question.

2. Is it moral to profit from a bet on the market when the conditions of such market are likely to cause a huge distress on large portions of Earth's population?

Guess that depends on whether you believe in capitalism, and how you bet. If you do it by buying shares in John Deere then you could argue you're providing the capital to build more tractors. Even if you dabble in derivatives you could still argue that by allowing the farmers to fix their risk exposure you're encouraging more to jump in and grow more. Day trading might be more problematical...

And this is the cynical one:
3. What is the most effective way to profit from such market?

I don't know the American mutuals/stocks much.  One philosophy is that like in a gold rush you don't invest in gold, you invest in the people who make picks and shovels. I put some money in the CF Eclectica Agriculture GBP fund at launch about a year ago and it's up about 30% (sadly one of my few investments that is, and I didn't put that much in, lest you think I'm crowing). They have that philosophy.  I'm told the CF Junior Oils Trust has a good record too. Standard disclaimer - don't believe either is for widows and orphans and probably don't operate in the U.S. anyway.

I noticed this weekend that several other asset managers have just launched agriculture funds. Don't know if that is a sign it's becoming mainstream belief, or the equivalent warning bell to the lift boy giving you share tips.  Some bloke at Societie General seems to be issuing doom notices on the whole stock market similar in tone to Aphos's poster on Topix.

I'd like to bet Agujim can give you some more racy commodity trading tips by the way.

Micheal, my customer, says he makes bank in the stock market by relying on the necessities.

Seems to work for Warren Buffett...

[Aggie]

1. Are those two premises above correct? What arguments can mitigate or even invalidate them?

Reckon so, though this is one for Agujim. For mitigating factors I'd say:

Increased prices making alternative methods in oil extraction and food growing profitable. For example tar sands for oil. In food production, agricultural land has been very lowly valued in the UK for decades, but now it's bounding up in value, making it less attractive to knock down the cherry orchard and put up a housing estate.
Another factor is that India is hugely subsidising fuel. This may have to cease, though whether that's good is another question.

Beagle's right re: alternative methods in oil extraction.  The oilsands boom in Northern Alberta wouldn't have happened without the high prices we've seen (above $40 barrel or so; the even higher prices we've seen have been providing some extra motivation, but are also upping construction costs).

Even if a large reservoir is found today it would take at least 5 years to put it into production

See the oilsands again.  We've had MAJOR development in the last 5 years, and much of it, SAGD in particular, is coming online now (pilot plants), or is switching from pilots to full commercial production.  It's messy stuff from a carbon perspective, and Canada needs to get some more refineries which can handle it instead of shipping it south as bitumen, but there's a fair amount of the stuff coming soon.

Also, there should be a LOT of new natural gas becoming available worldwide in the near future, and it's relatively quick to go from discovered to drilled to produced.  It probably won't directly affect oil, but might help with the overall energy picture WRT China and India (it's good for manufacturing / power generation).

Re: Food prices: I'm starting to believe that the price of oil is having more of a direct effect on the price of food, rather than it strictly being due to biofuels.  Biofuels are plausibly driving fertilizer prices, but so are food prices themselves - farmers may switch crops in some cases, but in others I think there will be strong motivation to do whatever it takes to up yields and put marginal land into production, which is going to take a whole lot of chemical fertility.  Check out what POT has done over the last year or two:
http://finance.google.ca/finance?q=pot

Due to increases in production motivated by price, I'm expecting to see a bit of a food-price bust for some commodities after this year's harvest (rice in particular), I hope I'm right for the sake of the hungry.

And this is the cynical one:
3. What is the most effective way to profit from such market?

I'd like to bet Agujim can give you some more racy commodity trading tips by the way.

CLL on the TSX, particularly if it drops near $3 again.  I did the water sampling for the pre-site environmental baseline assessment at Connacher (a lil' grizzly bear ate my sample cooler).  They are producing from their first pilot plant already, and indications look good for future development.  I've been in on this one for a while now and was up about 50% as of last week (it's cooled a bit since).  It's definitely a good long-term play and they will probably end up getting bought out by one of the big players over the mid-long term.

Mind you, Canadian oil stocks are at a high and if the price of oil slackens there will be a corresponding crash in many (good time to buy, hurts if you're holding them). 


The inner anti-capitalist in me is rexpecting / rooting for another crash in the financials, so I quite like 
ProShares UltraShort Financials (SKF) for the middle to end of this year.  Ultra-inverse indexed ETFs are a fun way to bet against Wall Street (but dangerous for the long term - if the index goes up 1%, they go down about 2% and vice-versa; internal fees are also high compared to most ETFs).  If you're sure a sector or the market in general is bottomed out, ultra indexed ETFs (go up/down 2x the underlying index, roughly speaking) are good for turning a quick buck.  If the financials DO crash, I'm switching the little bit I have in SKF over to UYG and riding it back to recovery.

Other than that, the best strategy as always is BUY LOW, SELL HIGH - we bought for RRSPs in Feb / March and are doing pretty well overall with what was supposed to be mostly long-term investments.  I expect to see it all come tumbling down later this year, but be fine over the time scale I was targeting (3-5 years, longer in some cases).  If you're looking to put some money in, it's my feeling (COMPLETE FREAKIN' GUESS) that it's worth waiting for another selloff - we could very well be going into a long-term recession, too, so it may be worth holding out for a while yet.

---------


As for ethics, eh...   I don't really like capitalism in the first place, but mostly I just draw the line at certain companies.  Won't buy McD's.  Won't buy Wal-Mart.  Won't buy tobacco.  Won't buy weapons generally (I'll pretend that Orbital only makes rockets for peaceful, scientific applications  ).  The market IS the tool by which the rich get richer - once you admit that, it's a matter of finding the balance between participating in the system and making a difference on the ground level with some of the profits you (hopefully) turn.   

[Sibling Chatty]

I know nothing of markets. I know nothing of technology.

I know only of the ethics I have defined for myself.

Having once been without sufficient money, shelter or sustenance for several uncomfortable periods of time, almost any legal means of attaining funds to secure your family might be considered ethical. I'd prefer (given the chance) to not profit from some companies, but I'm not a fool. Given the choice of survive or not survive financially, I DO buy some things at Wal-Mart...I'm in a limited market, and it's buy there or pay twice the price.

My Grandfather had a pretty solid way of protecting his money in the market, meaningful gains, no Big Winners. Necessities and small luxuries. (Chocolate, especially. He owned both Hershey's and Nestle's stocks, he bought Borden's not on the strength of 'milk', but on the ice cream market.) Avoid the absolute soul-suckers, but don't feel remorse over too much. Others will exploit the market ruthlessly. You've got to be able to protect your family in the same market they play in, and noble sacrifices do not feed a hungry child. (No, I know it's not at that point now, and it's hard to envision that happening. But, you do not know what WILL happen. And, believe me, you don't want to dwell on it.)

Would I own Wal-Mart stock? No. McD's? No. DeBeers? Probably not.  Segrams? Yep. (Anhauser-Busch? No, they make mostly crap beers, and they're serial trademark infringers.) Weapons systems, the actual instruments of war? I'd be hesitant, very hesitant. Handguns, sidearms, rifles and such?? Oh, HELLS yes. (If the food economy continues to be tough, you'll see a return to hunting for the table, and the US aversion to so many game meats will also wane. I've eaten squirrel and rattlesnake both in the past, and we may see the day when that's considered acceptable table meat again.)

I have NO FAITH in the current economy. I believe that Wall Street and The Corporate World are banking on the next US administration being compliant and continuing to be complicit. I also have a deep suspicion that IF that happens, the seeds of an overturned economy/system/whatever are already planted. The question is the level of lethargy...how effective are the tainted breads and how mind-numbing are the circuses?

You've got to set your level of tolerance. And you've got to both live with yourself and in this world...and with your son. Let the world you want for HIM help be your moral compass.

[Griffin NoName]

You've got to set your level of tolerance. And you've got to both live with yourself and in this world...and with your son. Let the world you want for HIM help be your moral compass.

....sorry.... merely a personal response (don't ask).

[Sibling Chatty]

You've got to set your level of tolerance. And you've got to both live with yourself and in this world...and with your son. Let the world you want for HIM help be your moral compass.

....sorry.... merely a personal response (don't ask).

Oh, if it were YOUR son (at least before HIS son came)?

[Sibling Zono (anon1mat0)]

I guess the follow up questions I have are related to how long you think the upward trend will last.

My thoughts on the subject were related to buy futures on the commodities market, possibly instead of the obvious (oil), bet on grains like wheat, which I hear today are reaching highs now. The thing is if a 6 month bet on the upward trend is worth doing.

Still, I don't have much to bet anyhow but if the trend is right it may be worthwhile.
------
Ah, my son and I were talking on the weekend about my retirement (). I was teasing him on how he would pay for my older years and he (in a well intentioned tone) suggested that I still have 'many years to work'....

[Scriblerus the Philosophe]

And you could tell him it could be worse. You could have him buy you a private island.

It'll last until either life settles down (my customer said all this was partly because of OPEC and the real estate crisis, which is related to Wall Street, somehow) or until we find a new energy source that doesn't rely on corn or liquefied animals. Sugar beets or something.

[ivor]

Oil I think has been up for seventeen straight years.  Oil has dipped recently, but it usually dips after Memorial Day.  The upward march will resume. 

When to get out?  When the people stop driving 85 of the freeways then it may be time to get out.

[Aggie]

Sold out of SKF today due to the big drop in financials (much of it was reversing yesterday's gains), which in addition to the bad news in the sector seems to be strongly driven by the spike in oil prices.

I think there's still a big drop in financials coming but expect a bit of a reversal on Monday due to the magnitude of the change today - if the weekend gives traders a chance to cool down on oil.  In any case, I couldn't pass up turning 23% since the end of April  (too bad I play such small amounts of money - I did better on working overtime last week than I did on this - IOW, don't quit my day job ).

[ivor]

I was up three percent on Friday. 

[beagle]

You evil hedge fund shorter you

[ivor]

I don't make the rulez!  

I just wish all this wasn't in my 401K and IRA so I could take some out without being skrewd.

[Aggie]

Bleah...  SKF ran up another 6% today (at peak).  Ah, better than leaving it in and having a 6% drop. 


For those looking to play oil directly, I found out about these:
http://finance.google.com/finance?q=TSE:HOD
http://finance.google.com/finance?q=TSE:HOU

Not sure how effective/stable they will prove to be, and they're on the TSE, so they are better for Canuckistanis (no exchange), but they are purported to be direct oil plays. 

I'm not confident enough in the direction of oil at the moment to stick my neck out, but if it takes a sudden run up I might try the inverse (HOD) to counterbalance my junior oil plays.

The same company has leveraged ETFs for agricultural grains as well, but they seem a bit thinly traded.