THREE THINGS I THINK I THINK

  • Are the problems in Europe having a real impact on corporations yet?  Peter Boockvar at Miller Tabak has a smattering of opinions:
  • The new big question for the US economy is of course what impact the prospect of European weakness will have on our growth. While its still early on and thus uncertain what the impact will be, here are some comments today from some US co’s: “DOW ceo says seeing strong demand in Europe.” The ceo also said “China is still very robust.” “GM sees euro zone effect to be neutral.” Warren Buffet said “European crisis not yet threatening Berkshire.” Avnet, a large distributor of computer and related products, said at a conference today that they are not seeing any impact on demand right now from Europe.

    I expect to hear a lot of this during the upcoming earnings season.  CEO’s will be a bit more cautious, but I don’t think we’re anywhere near experiencing the sort of negativity that will put a serious damper on the upcoming earnings season.  On the other hand, with high second half expectations already built into estimates it should not be shocking to see a less than optimistic (or at least cautious) outlooks from most companies.

  • The hypocrisy of Warren Buffett just never ceases to amaze.  Regular readers know I think Buffett is one of the most misunderstood investors of all-time.  He has sold his folksy image to the American public and they’ve swallowed it up like it was a delicious Cherry Coke.   This time, Buffett is defending the ratings companies.  Meanwhile, FCIC Chairman Phil Agelides (and just about every other rational American) thinks the ratings agencies played a central role in misleading investors.  This fact is plain as day to anyone who doesn’t own millions of dollars worth of their stock.  This is the second major blow to the Buffett ego (and portfolio) in as many months (Goldman Sachs of course being the first).  Are investors beginning to see Buffett for what he truly is – just another Wall Street banker who just happens to live closer to a corn field than a skyscraper?
  • A reader recently asked me what I think of the oil spill in the Gulf of Mexico.  I wrote the following:

The whole thing is a mess.  Environmentally it’s obviously a disaster.  Economically, it’s a mess because the U.S. can’t afford to keep relying solely on foreigners for energy sources.  Politically it’s a mess because the Republicans look silly after years of “drill baby drill” while Obama’s leadership skills pale in comparison to Bush’s Katrina response.  There’s nothing good that comes of this.  Absolutely nothing.”

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Just more confirmation of the macro trend of weakness in the private sector and the consumer. I’d be careful shorting equities here. I still think the risk/reward in shorts has been marginalized in the near-term.

  2. What would give you reasonable assurance to go either short or long equities or specific sectors? Are you waiting for a technical indicator like the 50-Day MA crossing the 200-day MA or something else?

    Thanks.

  3. living in florida and regularly traveling to all areas of the gulf, you are correct on your oil spill assesment….

    this will be the largest enviromental/economic disaster in US history by a wide margin….apochalyptic……

    it will be catastrophic here for everything except disneyworld.

    the whole florida keys IS a NOAA marine sanctuary……the EFFECTIVE coastline length JUST in the keys is 18,000 miles……..yes……measure around every rock and island….the loop current goes directly there,right in front of all the west coast beaches….

    do not buy BP on this dip…..they will be toast….BK’d……done.

    they talk about 20-40 billion in cleanup n other liabilities on CNBC….they have NO idea……none…..they’ve never been there.

    this is a whole lot bigger deal than even i think it is.

  4. The European economy doesn’t necessarily need to be contracting for problems to arise. If there are markdowns on any debt held, this will have a direct impact on earnings.

    Re: Buffet – I agree on the Moody’s debacle. This is a company which is supposed to be in the business of gauging the quality of financial products. In failing miserably to do so, they’ve shown that essentially they add nothing (and perhaps even INCREASE risk). It’s almost laughable for them to essentially be saying “Well not all financial products are rated, look at CDS”….WHAT??!? Equally bad is Buffet saying that an investor should be doing their own research. He seems to be really treading a thin line considering his defense of Goldman while at the same time saying each MBS instrument entails the careful analysis of hundreds of thousands of pages involved with these contracts. Buffet is very obviously an incredibly savvy investor and unbelievable salesman but it really bothers me how he tries to exist on both sides of the fence.

    Re: Gulf Oil spill – this is an absolutely horrendous situation that just seems to be getting worse and worse. I mean, calling in Kevin Costner and James Cameron to find solutions is utterly unbelievable – I can only imagine the rest of the world is keeled head over heels in laughter. It’s also incredibly hypocritical of the liberals to completely avoid the subject of this administration’s response given the hurricane of criticism that came after Katrina. Is this because Ridley’s Sea Turtles can’t stand on their rooftops for the cameras?? I mean, if adequately protected people called in to assist with cleanup need to be Medivac’d out of there after a few days of exposure to these toxic chemicals, what’s going on to the life that live, breaths, eats and drinks in this soup?? Meanwhile, the reactive call for criminal and civil charges against BP after the fact simply compounds the negative sentiment and though not entirely inappropriate – it really adds nothing at all at this point.

    I agree that risk/reward of taking any position right now is too high. Perhaps an option spread trade is plausible but I see a low probability of profitability given high vol. But given the massive deflationary environment/dollar strength, why hold anything except dollars (or short term debt) at this point?

  5. It’s absurd to suggest that Obama is doing a worse job with this crisis than Bush did with Katrina! It’s an empirically false statement. There have been government resources, like the Coast Guard, on site from Day 1 of this unnaturual, fully man-made disaster. The two situations are wholly unanalagous.

    The President gets slammed for “overreaching” in addressing the many other problems our country is facing and now you slam him for a lack of leadership on this crisis? Hello! The laws we passed in the aftermath of Valdez REQUIRE BP to shoulder the responsibility here. Furthermore, if the company that drilled the well doesn’t know how to manage the spill, what do you expect the President to do? Maybe he should sail out there with his magic sceptre and part the water for you?

    If the government has any culpability here it is in the fact that its regulation of this industry was corrupt and, thus, essentially, non-existent. And that is not a situation that has just materialized in the last 18 months.

    You should lash out at the appropriate parties here. Once again, our President is doing his very best under extremely difficult circumstances, literally trying to clean up a another mess that some other party created. He is bringing to bear what resources he can.

    I swear I think the guy could be Jesus himself and snarky commentators would still throw him under the bus. If you know so much about what needs to be done, why don’t you throw out some viable suggestions?

  6. the coast guard……….you have obviously never dealt with them…….i have 23 times………being a licensed captian….and done contract work for them…..9 times out of ten they are idiots.

    a captain friend is an obozo supporter he even thinks they’re worthless.

    show me a government group and i’ll show you worthless to dangerous without fail.

    bush’s(or anybody’s) FEMA included.

    and by the way,obozo thinks he is wayyy past jesus.

  7. I just find it hard to believe that the US Navy doesnt have the capability to deal with something like this. How can we not have engineers in the Navy who would fix this? Or at least see thru BP’s plans to salvage revenues and intervene? I am ignorant when it comes to this sort of engineering stuff so I might be totally off base, but common sense tells me there is a better way.

    Perhaps we’re being too hard on Obama, but he isn’t really taking the bull by the horns here….

  8. That is a reasonble word of caution regarding BP, thanks…it looks tempting to buy, but I think I will sit it out…

  9. by the coast guard’s own admission they don’t have the capabilities of solving this issue and of course they were there day one; there was an explosion at sea at lives were lost. That’s hardly a sound defense of the governmeny response so far. The admin was quick to halt drilling permits and go after BP on media outlets but that’s nothing more than PR and distraction. Worse yet is the rhetoric that BP should be taken over “temporarily” until this issue is resolved. Perhaps that’s so the admin can claim victory once the leak is stopped. Yet another mess that Obama cleaned up….what a guy.

  10. I don’t think you can classify criticism of Obama as empirically false – its a qualitative assessment, not quantitative.

    Of course the Coast Guard was there from the beginning – there was a 200 ft inferno blazing on a billion dollar deep sea oil rig 40 miles off the Gulf coast! Had they not been there, then what purpose do they serve??? This certainly isn’t any sort of accomplishment that should be attributed to Obama (beside the fact that the end result was that the entire rig sank – not to blame this on the Coast Guard as I don’t think anyone could have stopped the chain of events from that point).

    This was an accident – plain and simple. No one wanted this to happen and though investigations as to whether this could have been prevented are underway, the simple fact is that hindsight is 20/20 and given the opportunity, everyone involved would have done things differently. However, to classify this as a wholly man-made disaster is a bit too simplistic. Oil wasn’t being sought simply to prove that it exists; it was done to feed our insatiable thirst for energy. But if you insist on deeming this as a wholly man-made disaster, well wouldn’t you also be forced to concede that the REAL disaster of Katrina was man-made insomuch as we allowed poorly constructed under-engineered levies to exist knowing full well that eventually a hurricane exceeding their limitations would wipe them out (and that they had failed in the past)?? Additionally, wouldn’t you also need to add in the fact that the mayor allowed people to stay in their homes knowing that a huge hurricane was barreling towards them – inevitably leaving the the federal government with the task of “cleaning up” afterward? The problem appears to be that of a double standard and if the previous administration was criticized so harshly for that disaster, shouldn’t we be doing the same for this administration?

    The response has been tepid at best and regardless of “how hard” Obama tried to fix this problem the end result is that everything thus far has been a failure. This isn’t kindergarten where anyone who shows up gets a gold start just for being there. A failure is a failure and this has been an outright failure.

    Finally, why is all the blame being lumped on BP and why is the government allowing them to be the fall guy when they know full well that TRANSOCEAN managed the drilling, NOT BP (who simply owned the well)??? Why did the Supreme Court throw out BP’s lawsuit against Transocean to cover the costs?? Could it be simply because BP is 10x the size of Transocean and thus a much richer company to pillage? Furthermore, Obama authorized only $130 million for this disaster which seems to be an appallingly low figure considering that daily management of this mess is running at a clip of $22+ million per day. So he can spend $1 trillion on a boondoggle Healthcare plan which was obviously not deemed a high priority task by the public, but only 0.1% of that amount on a real disaster which everyone agrees should be considered the highest priority?? This disaster will inevitably run into the 10s of billions of dollars when its all said and done and that’s only the monetary cost; you can’t really put a number on the priceless natural habitats that will be destroyed. The Gulf was already the largest “dead zone” in the world – this disaster could be the proverbial nail in the coffin.

    More than 50% of Americans believe that Obama is handling this disaster poorly. His polling numbers are plummeting. Yes, of course Obama cannot be completely blamed for this nor is anyone suggesting such. However, the gauge of one’s success should be how they react to such unpredictable events and the ultimate outcome; as TPC mentioned, Obama has not grabbed the bull by the horns here. If so many people are involved with this disaster, why are we coming up with such simplistic solutions – each after the previous has failed? Granted this is a rare disaster that is occurring at the limits of our technology, but still – can’t we come up with better solutions than pouring chemicals on top of chemicals or dumping massive amounts of sludge onto the seeping hole?? We sent men to the moon 50 years ago, yet somehow we can’t plug a hole we drilled in the ocean?? I don’t buy it – throw 10 billion at this issue and I guarantee it will be solved in short order.

    This administration should learn how to listen to their majority voting base if they want to bask under the title of “Democratic Party”. Clearly, they are not listening.

  11. Warren is a classic inside baseball player and rigged the silver market.

    As far as the oil spill, why hasn’t the military been mobilized, why haven’t the states been given immediate authority to create barriers to the coasts, why hasn’t Obama called on the heads of major oil companies to create a brainstorming commission on how to stop this, why haven’t tankers been brought in to suck up the oil like the saudis do, why, why, why. this is an absolute nightmare and obama has taken two vacations during it and visited the spill for all of 3 hours. 2 hours less than his golf game.

    This fool is a one termer methinks.

    Finally, TPC, I think a very bullish setup may occur in the markets. Slack demand in the US may be able to be masked and blamed on the problems in “Europe”. That is already baked into the cake I think. So, if we are still growing and Europe can be blamed for any lackluster results, and we get the stimulus programs in both America and China, snp 1300 look out!!!

    Stocks, gold, and interest rates will rise.

  12. living in florida and regularly traveling to all areas of the gulf, you are correct on your oil spill assesment….

    this will be the largest enviromental/economic disaster in US history by a wide margin….apochalyptic……

    it will be catastrophic here for everything except disneyworld.

    the whole florida keys IS a NOAA marine sanctuary……the EFFECTIVE coastline length JUST in the keys is 18,000 miles……..yes……measure around every rock and island….the loop current goes directly there,right in front of all the west coast beaches….

    do not buy BP on this dip…..they will be toast….BK’d……done.

    they talk about 20-40 billion in cleanup n other liabilities on CNBC….they have NO idea……none…..they’ve never been there.

    this is a whole lot bigger deal than even i think it is.

  13. “I just find it hard to believe that the US Navy doesnt have the capability to deal with something like this. How can we not have engineers in the Navy who would fix this?”

    They just don’t have it. I’m an engineer and a regular reader of http://www.theoildrum.com A lot of oil engineers and geologists hang out there. They all said that the attempts like top kill etc. would fail and that only a relief well would work. Exactly the same thing happened 31 years ago

    http://www.youtube.com/watch?v=GHmhxpQEGPo&feature=player_embedded

    But even the relief well isn’t a sure thing

    BP Needs ‘Lottery Win’ to Seal Oil Leak at First Try

    http://www.bloomberg.com/bb/n/ayEGpyXteAqg

    sorry, no easy solutions in sight. “Nuke it” (chliché chliché) wouldn’t work either.

    Nuclear Option on Gulf Oil Spill? No Way, U.S. Says

    http://www.nytimes.com/2010/06/03/us/03nuke.html?hp

  14. How can we not have engineers in the Navy who would fix this?

    There are no magic bullets to be fired here. There is no secret stash of government equipment that can magically suck up the oil in ways or to degrees that the private sector cannot. You can’t use Harriers to strafe the oil, nor can the Marines be used to attack or intimidate the oil. The technology is simply not adequate for dealing with such things.

    The best thing would be to not spill it in the first place, but even then, expecting a 100% success rate would be wholly unrealistic. Just so long as we use oil, this sort of thing is going to happen on occasion. Spill, baby, spill.

  15. Thanks Daniel. I know I am way out of realm of expertise talking about an oil spill, but it appears to me as though BP is spending more time trying to produce remedies that salvage revenues rather than ways that just stop the leak.

    But what do I know?

  16. i misspoke ……..they do not pay INCOME taxes…..so you are correct.

    and thank you for your thank you…….i listen to everyone and try my dangest to not get defensive or cop an attitude…….it is amazing how easy it is to do to get defensive thru the coldness n impersonality of type.

    good day, sir

  17. Not to defend Obama but you do not want socialism yet you want govt to have a private sector solution? What deep sea oil expertise does any soul of fed govt have? TPC just spewing general nonsense. My only wish as a non partisan that laughs at our 2 headed politcal monster is what would the outroar be if this happened under bush cheney. Or almost as great theater would be mccain and drill baby drill palin. can u imagine? I guess the GOP will have to come up with a new slogan at next convention to placate the dumbed down electorate.

  18. If a lady can get $10M for burning her crotch with hot coffee, BP is triple toast. Whoever takes over BP in bankruptcy will find a less litiguous country to drill off of … probably Canada. Hell if a Canadian sues you, you just give him a pair of hockey tickets and they settle.

  19. Warren Buffett’s PR fiasco defending the ratings companies before the committee is an eye opener for all. ‘If it’s to good to true’…well we all know the rest of the line! I guess we in North America fall asleep easily and believe anyone with massive wealth and a point of view…there’s. I think the common person has a more accurate representation of reality and the truth than the one’s we are asked to put our attention to and lend validity to. To shift blame to all common citizens is proof in the pudding Warren Buffett wants only to protect his own financial profits. He just wished he had sold earlier. The old adage, ‘a man is revealed by his own shadow’ came to full light in a room full of people to hear it, including myself.

  20. Sadly, I have to agree. I think that Warren Buffet’s positions with respect to Goldman Sachs and Moody’s are extraordinarily hypocritical, even dishonest. For heaven’s sake, this was the man who warned us all about credit default swaps and other derivatives as weapons of mass financial destruction.

    I always thought that Mr. Buffet was the paragon of virtue in business. It appears that business corrupts, and absolute business corrupts absolutely. At this stage in life, it is hard to imagine why Mr. Buffet risks the extraordinarily high regard which most people have for him. It is such a pity.

    With respect to the economic impact on Europe, I have given up on any pretense to decoupling in the global economy. We are all in it together, till death do us part.

    Last but not least, I think that Mr. Obama has shown flashes of extraordinary leadership. I think that the United States is very, very fortunate to have Mr. Obama as its president. Up until now, I would have said that the extraordinarily difficult, fractious nature of American politics has blunted his effectiveness.

    Mr. Obama’s handling of the fiasco in the Gulf of Mexico is just so awful that I wonder whether there is not some method behind his madness. From this catastrophe, perhaps now Mr. Obama can mobilize the nation into a new energy infrastructure for the country, one that is both clean, efficient and free of the unhealthy dependence on oil countries. If you had to spend a lot of taxpayer’s money given the country’s current financial situation, could there be anything more worthy? Hmmm… I guess that I might spend some money to fix up the rottenness of Wall Street. But, that’s for another post.

  21. Sell me some more BP please at a discount. I will take my chances while this mess drags on in court and the oil loving Republicans take some seats (maybe the Pres in 2012), and BP pays this off over 25+ years. Please, in 2006 Exxon (yes the Valdex from ’89) had their punitive damages judgement of 5 billion successfully reduced to 2. Lesson: expect a big political tongue-lashing which means nothing to their bottom line. Remember big tobacco? I know this is bigger… we’ll see.

    Media tends to get nutty in stuff and then poof! you forget about it.

    I just gobbled 40$ on some. I’m 37.50 bid and 35 for more looking for a panic scoop. Its just a political bet. But 6 times earnings plus 9 % on the div gives me a fighting chance.

    Psychotic? probably. You pays your money and you takes you chances. My money’s on the US Gov showing some love for big oil. Pray for me.

  22. while i’m talking my position , for the leverage lovers out there.

    Consider the Jan 2012 BP 70$ calls at 1.15….

    Recovery, Republicans, China bubble, inflation. Those are gonna look SWEET with BP at 100$/share and Vice-pres Palin influencing policy!!!!

    (easy guys just jokin on the Palin bit)