China auto sales jump 25% in February

This was a small story that grabbed my attention today. Amidst all the talk about crude inventories increasing by 700,000 in the US and shipments of crude to China dropping over last year, this is the one that intrigues me the most.

In February China sold 827,600 units in comparison to 688,909 in the US. They sold 735,000 in January. The trend is showing even higher sales expected in March. Why is this?

Part of China's latest initiatives is to provide subsidies to farmers to purchase vehicles as well as cutting sales taxes on small engine passenger vehicles that are more fuel efficient, especially in the country side.

These types of numbers will not have an immediate and direct impact on the price of crude, but as more and more Chinese start to take to the roads, the inevitable will be an increased demand on oil.

This will be an interesting stat to watch.

Oil Supply Cutbacks

The market is expecting OPEC to cut another million barrels out of the production pipeline after their meeting this weekend. That would bring the total production down by 5 million barrels per day. At an 80% compliance factor that would still be 4million a day.

My thoughts on this is that with the supply now coming more inline with demand there is more potential for smaller events to have more influence on the price of oil. For example today, a couple of Chinese destroyers were harrasing an unarmed US Navy vessel in international waters off the coast of China. The advent of potential political tensions, coupled with the belief that OPEC would cut back supply further sent crude to over $47.

Weather, political tensions, militant terrorism, mechanical problems, unions - all have the ability to affect the price of oil on the world market. I think that as supply reductions continue to take hold the potential for wild swings in prices to the upside are growing.

More Words Of Wisdom From Jim Rogers

Pending Oil Crisis

In reading the news stories and headlines over the past several months the world is being set up for an impending energy crisis that will make this past summer seem trivial.

With oil prices at their current levels the financial cost to producing energy is already starting to hamper current production. When oil begins trading in the $30-$40 range there are only few countries that can produce profitably at this price, Saudia Arabia being the main country that can. At these prices in makes sense for companies to simply stop production until prices rise again. The problem being that it is much easier to shut down production than it is to increase production.

Here in Alberta, companies are starting to lay off workers in the oil and gas sectors that do most of their business in the oil sands. Oil needs to be in the $70-$80 range to produce a profit. On the corporate side of the coin companies are doing the responsible thing by cutting back on projects and preserving capital while some are even acquiring smaller companies for the assets.

But on the commodity side all of these cutbacks will crimp the supply. The fact of the matter is there is no viable alternative to oil right now and we are still burning throught a supply that is non renewable. OPEC cuts to supply are starting to make their way into the system and my thought right now is that while the price is volotile and you need a strong stomach to ride the waves, the short to long term fundamentals are pointing towards a serious oil crisis.

Regardless of how the economy is doing or how well a company has access to credit, there is little to nothing a consumer or company can do if there is a shortage of energy supply. Governments have little to no control over energy prices as they are at the mercy of supply and demand.

In the short term interest of the economy we need higher oil prices if simply to keep the supply constant.

I'm continuing to increase my holdings in oil ETF's over this period of surpluss supply with the idea that these extrememly low oil prices will inevitably lead to drastically higher prices.

Canadian Banks

So far three of the big five Canadian banks have released their earnings for this period and they are quite impressive given what has been going on all over ther world with bank bailouts.

TD Canada Trust - $712 million dollar profit - Q1
RBC - $1.05 billion dollar profit - Q1
CIBC - $147 million dollar profit - Q1

If this isn't a sign of the strength of the Canadian financial system I don't know what is. While CIBC's profit would be considered unimpressive a few years ago, this is quite significant compared to the $1.46 billion loss they took for Q1 last year.

Considering that the UK has been dumping billions into their banks and the US is easily in the trillions, Canadian banks have not taken one dime from the governement and are posting profits. Yes, that's right, profits.

I think this is prime opportunity for Canadian banks to start buying up some great financial opportunities in the US. This is exactly when the strong need to take over the weak. Maybe its just me, but its time to stop being so frightened and make a few bold moves to increase our position of strength in the world.

Great Cartoon

Rick Santelli - The Silent Majority

I watched this on CNBC yesterday morning and Rick hit the nail on the head with this. I know I'm Canadian but I've always admired the US capitalist system to reward hard work and smart decisions.

Three years ago I was ready to make the jump into home ownership, not because I wanted to make a buck on my home but to live in and invest in myself. I watched many friends jump into houses they couldn't afford simply because they wanted to get in on the wave. People then started using their homes as ATM's and are now getting burned, yet it's my tax dollars that they are asking for to help them out.

I ended up not buying a home because the prices were inflated and I couldn't afford it. So I kept renting. Now our government is wasting money on stimulus packages that won't do anything and I'll end up paying higher taxes, preventing me from likely owning my own home in the future.

If someone wants to put up money for a home there is an inherent risk factor that it will go down and not up. That's the risk you take and if you bet wrong, that's tough and hopefully you learned from your mistake.

Getting the people who didn't drink the coolaid to pay for those who did is perverse and wrong and as long as this continues we are doomed to wallow in recession for years to come. Enjoy the rant. I did!

The Bull In China

China looks to be the first major economy to beging to see the effects of its stimulus plan, and my guess is that this bull will affect commodity prices worldwide. Here are some interesting facts that were published in a Bloomberg article today.

-China has a balanced budget and has much more ammunition of cash due to its foreign exchange reserves. It's overall debt is only 18.5% of GDP. It can relentlessly ramp up spending to create jobs and increase growth.

-China's banks can lend more effectively to businesses because they aren't saddled with the toxic debt that the American banks are.

-Coca Cola's sales in China rose 29% in the 4th quarter. McDonald's is reporting strong growth and is expanding its restaurants.

-Steel and Iron Ore prices are starting to rise as demand for infrastructure commodities increase.

Watch this economy closely because if it starts to show more signs of recovery the demand for oil may turn around the price of oil. With all the cutbacks on oil expansion it has the possibility of spiking quite fast.

DXO - Double Leveraged ETF

Crude Oil is getting hammered this week due to continuing rising inventories despite OPEC's cut backs. The NYMEX storage facility in Cushing, OK is almost at full capacity with 35 million barrels.

While demand has fallen over the past 6 months, crude at this price is unsustainable and will lead to price spikes in the near future. My concern is that companies are cutting back on exploration projects and laying off workers needed to produce. As Oil prices fall further it becomes extremely uneconomical to produce so production shuts down even more and inventories will eventually start to diminish. The problem truly arises when demand starts to creep back up. Even a small increase in demand will send the price higher very quickly. It will take alot longer to get supplies back online than it did to shut it down.

In order to play this scenario I'm invested in DXO, an oil etf that plays on the front months of crude contracts. It's trading in the mid 2.50's right now, and I'm accumulating anywhere below 2.45. The ETF is designed to double the percentage moves of crude oil prices. When oil hit $147 it was trading in the 28.00 to 29.00 range.

If crude moves like I think it will, this ETF will move. When that will happen is anyones guess, but it will happen.

CAT - $32.67

Caterpillar (CAT) announced some dismal looking outlook today for their company and the economy. As a company last year they did well however they took it on the chin in the 4th quarter. As a result they are anticipating a 25% reduction in revenues for next year.

In going through their annual report, much of their sales increases for machinery happened in the Asian and South American markets, alot due to higher commodity prices. The outlook for 2009 commodity prices is extremely bearish for the year with some hopeful recovery by the end of '09. They've forcasted oil to be trading in the $40 per barrel range and coal to be trading at depressed prices.

A couple of things that did stand out to me was that they felt alot of the mining and metals industry desperately needed to upgrade their equipment and that the out of date infrastructure could contribute to supply problems again when demand comes back. Also, they see some potential with the upcoming stimulus packages by various governments focusing on infrastructure projects.

I think CAT at this price is interesting. It got hammered today because of the 4th quarter results and their bleak outlook for 2009. Now that that initial knee jerk reaction is in and the bad news is being baked in, the stock could see a good pop down the road if things improve quicker than anticipated. Also, as a longer term hold this looks very attractive with higher commodity prices a certainty in the future.

FCX Roller Coaster

Freeport McMoran has been all over the place as of late, as has been the price of gold and copper. On Jan 6 it touched above the $30 mark, so if anyone was following since the recent low in Dec in the $19 range, it was a pretty good buck.

Commodites are all over the place right now and the big factor is demand. However, Freeport is the largest producer in the world of copper and two things come to mind when looking into the future. One, Freeport has cut back on the production of copper at these prices. Short term is won't necessarily affect the price but when demand comes back, its alot easier to stop than to start up and there will be a supply shortage. Two, demand will come back as governments all over the world have targeted infrastructure projects as a way to turn the momentum of the market. Huge construction projects in the US, Canada, China and Europe will all require alot of copper. I wonder if companies like Freeport will see a good run after Obama's launches his stimulus plan.

And of course, don't forget about Gold as the hedge to the upcomming hyper inflation from all the governments printing money. It will take some time to feed into the system, but the US government seems bound and determined to devalue their currency. The inflation play may be the biggest investment play for the next ten years.