Why the initial mortgage payment on a home is typically higher than its market rent.

A conventional mortgage’s payment is fixed, in nominal dollars, as of the date of issue. Rent, in nominal dollars, generally increases in line with wage inflation; so today’s higher-than-rent mortgage payment is buying payments down to a (probably) lower-than-rent level in future decades.Moreover, the appreciation of the underlying asset in nominal dollars(even if there is no real appreciation, which isn’t far from the truth)accrues entirely to the homeowner. Separate out this highly leveraged investment opportunity, and you may find that, in the early years of an 80% mortgage, half or less of the homeowner’s carrying cost (including maintenance, insurance, and property taxes) is attributable to the privilege of living there.

It would therefore be entirely justifiable (on a planet where analysis from first principles carried any weight in a tax court) for me and my neighbor to run our mini-REITsat a perpetual loss in cash-flow terms. We could even periodically refinance to recoup this “operating loss” and re-leverage our investments. More realistically, we could rent from, and invest in, areal estate holding company which operates on a scale that allows frequent realization of the “profits” of nominal appreciation. This is the model of tax and capital efficiency against which ownership ofone’s own home should be measured.

If this analysis is correct,then without the mortgage interest (and property tax) deduction, owning one’s own home (rather than a securitized slice of everyone else’s) would not be a rational choice in purely financial terms. Many Americans would choose it anyway, especially if they feel strongly about stability in their children’s lives; few attractive single-family homes can be leased for decades on a pre-negotiated rent schedule.Happily for them and their communities, the consensus in Washington(however flawed the reasoning on which it is based) continues to support the mortgage interest deduction—for those not so unfortunateas to be caught by the travesty of “tax fairness” that is the AMT.

It is not ‘unthinkable’ at all ‘that the US may default on its debt’. In actual fact this has already happened.

By virtue of the US$ still being the de-facto world currency, any
overseas entities holding US$ debt have already seen their assets’
values slide versus their own currencies by between a third and a half.
It is not very long ago that the Euro was US80c, now it is close to
double that. This collapse represents the world’s biggest effective
government default in history – a fact that has passed almost unnoticed
in the media.

“If there’s anything worth arguing about, either bet on it or shut up.”- Amarillo Slim

Bill Miller’s basic problem is that he doesn’t have a clue about how to value businesses and never has. He’s all about reversion to the mean, go opposite the crowd, etc. It worked when the Greenspan put was in effect to keep bad companies from going under and the Legg Mason sales force was shoveling new money in for him to average down on his many losers.

Amazon is often cited as evidence of Miller’s “skill”. Amazon is trading for less than what it was when Miller first bought it 10 years ago. So he averaged down on it like a maniac while it dropped 90% from his first purchase. Is that skill or just stubborn arrogance?

Now he has no captive sales force and his shareholders have finally had enough so he’s having to sell his dogs into a down market because of an ongoing stream of redemptions. No doubt there are hedge funds short-selling Miller’s book. He is done.

How does somebody who can allegedly value businesses end up in ALL the following stocks?

Enron
WorldCom
Eastman Kodak
Countrywide Financial
Bear Stearns
Freddie Mac

I’m looking forward to Miller’s latest litany of excuses for his miserable performance in the upcoming Q2 letter.

1. Capital Budgeting Analysis
   (xls) – Basic program for doing capital budgeting analysis with
   inclusion of opportunity costs, working capital requirements, etc. – Aswath Damodaran
2. Rating Calculation (xls) – Estimates a rating and cost of debt based on the coverage of debt by an organization – Aswath Damodaran
3. LBO Valuation (xls) – Analyzes the value of equity in a leverage buyout (LBO) – Aswath Damodaran
4. Synergy (xls) – Estimates the value of synergy in a merger and acquisition – Aswath Damodaran
5. Valuation Models (xls) – Rough calculation for choosing the correct valuation model – Aswath Damodaran
6. Risk Premium (xls) – Calculates the implied risk premium in a market. (uses macro’s) – Aswath Damodaran
7. FCFE Valuation 1 (xls) – Free Cash Flow to Equity (FCFE) Valuation Model for organizations with stable growth rates – Aswath Damodaran
8. FCFE Valuation 2
   (xls) – Free Cash Flow to Equity (FCFE) Valuation Model for
   organizations with two periods of growth, high growth initially and
   then stable growth – Aswath Damodaran
9. FCFE Valuation 3
   (xls) – Free Cash Flow to Equity (FCFE) Valuation Model for
   organizations with three stages of growth, high growth initially,
   decline in growth, and then stable growth – Aswath Damodaran
10. FCFF Valuation 1 (xls) – Free Cash Flow to Firm (FCFF) Valuation Model for organizations with stable growth rates – Aswath Damodaran
11. FCFF Valuation 2
    (xls) – Free Cash Flow to Firm (FCFF) Valuation Model for organizations
    with two periods of growth, high growth initially and then stable
    growth – Aswath Damodaran
12. Time Value (xls) – Introduction to time value concepts, such as present value, internal rate of return, etc.
13. Lease or Buy a Car (xls) – Basic spreadsheet for deciding to buy or lease a car.
14. NPV & IRR (xls) – Explains Internal Rate of Return, compares projects, etc.
15. Real Rates (xls) – Demonstrates inflation and real rates of return.
16. Template (xls) – Template spreadsheet for project evaluation & capital budgeting.
17. Free Cash Flow (xls) – Cash flow worksheets – subsidized and unsubsidized.
18. Capital Structure (xls) – Spreadsheet for calculating optimal capital structures using different percents of debt.
19. WACC (xls) – Calculation of Weighted Average Cost of Capital using beta’s for equity.
20. Statements (xls) – Generate a set of financial statements using two input sheets – operational data and financial data.
21. Bond Valuation (zip) – Calculates the value or price of a 25 year bond with semi-annual interest payments.
22. Buyout (zip) – Analyzes the effects of combining two companies.
23. Cash Flow Valuation (zip) – Walks through a valuation of cash flows under three models- capital cash flows, equity cash flows, and free cash flows.
24. Financial Projections (zip) – Spreadsheet model for generating projected financials along with valuation based on WACC.
25. Leverage (zip) – Shows the effects on Net Income from using debt (leverage).
26. Ratio Calculator (zip) – Calculates a standard set of ratios based on input of financial data.
27. Stock Value (zip) – Calculates expected return on stock and value based on no growth, growth, and variable growth.
28. CFROI (xls) – Simplified Cash Flow Return on Investment Model.
29. Financial Charting (zip) – Add on tool for Excel 97, consists of 6 files.
30. Risk Analysis (exe) – Analysis and simulation add on for excel, self extracting exe file.
31. Black Scholes Option Pricing (zip) – Excel add on for the pricing of options.
32. Cash Flow Matrix – Basic cash flow model.
33. Business Financial Analysis Template for start-up businesses from Small Business Technology Center
34. Forex (zip) – Foreign market exchange simulation for Excel
35. Hamlin (zip) – Financial function add-on’s for Excel
36. Tanly (zip) – Suite of technical analysis models for Excel
37. Financial History Pivot Table – Microsoft Financials
38. Income Statement What If Analysis
39. Breakeven Analysis (zip) – Pricing and breakeven analysis for optimal pricing – Biz Pep.
40. SLG Ratio Master (exe) – Excel workbook for creating 25 key performance ratios.
41. DCF – Menu driven Excel program (must enable macros) for Discounted Cash
    Flow Analysis from the book Analysis for Financial Management by Robert C. Higgins – Analysis for Financial Management
42. History – Menu driven Excel program (must enable macros) for Historical
    Financial Statements from the book Analysis for Financial Management by
    Robert C. Higgins – Analysis for Financial Management
43. Proforma – Menu driven Excel program (must enable macros) for Pro-forma
    Financial Statements from the book Analysis for Financial Management by
    Robert C. Higgins – Analysis for Financial Management
44. Business Valuation Model (zip) – Set of tabbed worksheets for generating forecast / valuation outputs. Includes instruction sheet. Bizpep
45. LBO Model – Excel model for leveraged buy-outs
46. Comparable Companies – Excel valuation model comparing companies
47. Combination Model – Excel valuation model for combining companies
48. Balanced Scorecard – Set of templates for building a balanced scorecard.
49. Cash Model – Template for calculating projected financials from CFO Connection
50. Techniques of Financial Analysis – Workbook of 11 templates (breakeven, valuation, forecasting, etc.) from ModernSoft
51. Ratio Reminder (zip) – Simple worksheet of comparative financials and corresponding ratios from Agilicor
52. Risk Analysis IT – Template for assessing risk of Information Technology – Audit Net
53. Risk Analysis DW – Template for assessing risk of Data Warehousing – Audit Net
54. Excel Workbook 1-2 – Set of worksheets for evaluating financial performance and
    forecasting – Supplemental Material for Short Course 1 and 2 on this
    website.
55. Rule Maker Essentials – Excel Template for scoring a company by entering financial data – The Motley Fool
56. Rule Maker Ranker – Excel Template for scoring a company by entering comparable data – The Motley Fool
57. IPO Timeline – Excel program for Initial Public Offerings (must enable macros)
58. Assessment Templates – Set of templates for assessing an organization based on the Malcolm Baldrige Quality Model.
59. Cash Gap in Days – Spreadsheet for calculating number of days required for short-term financing.
60. Cash Flow Template – Simple cash flow model with explanations of each cash flow component – Arkansas Small Business Development Center.
61. Six Solver Workbook (zip) – Set of various spreadsheets for solving different business problems
    (inventory ordering, labor scheduling, working capital, etc.).
62. Free Cash Flow Valuation – Basic Spreadsheet Valuation Model
63. Finance Examples – Seven examples in Business Finance – Solver
64. Capital Budgeting Workbook – Several examples of capital budgeting analysis, including the use of Solver to select optimal projects.
65. Present Value Tables (rtf) – Set of present value tables written in rich text format, compatible
    with most word processors. Includes examples of how to use present
    value tables.
66. Investment Valuation Model (zip) – Valuation model of companies (must enable macros) – Excel Business Tools
67. Cash Flow Sensitivity (xlt) – Sensitivity analysis spreadsheet – Small Business Store
68. What If Analysis – Set of templates for sensitivity analysis using financial inputs.
69. Risk Return Optimization – Optimal project selection (must enable macro’s) – Metin Kilic
70. CI – Basics #1 – Basic spreadsheet illustrating competitive analysis – Business Tools Templates.
71. CI – Basics #2 – Basic spreadsheet illustrating competitive analysis – Business Tools Templates.
72. External Assessment – Assessment questions for organizational assessment (must enable macros).
73. Internal Assessment – Assessment questions for organizational assessment (must enable macros).
74. Formal Scorecard – Formal Balanced Scorecard Spreadsheet Model (3.65 MB / must enable macros) – Madison Area Quality Improvement Network.
75. Project Plan – Project Scheduling Template currently setup for a Balanced Scorecard Project.
76. Gantt Chart – Gantt chart for project management with work plan –
    Jim Chapman’s Web Site
77. E O Q Model – Simple Inventory Models for calculating Economic Order Quantity.
78. Inventory Simulation Control Model – Formal model for simulating inventory shortages, delivery times, costs, backorders, and optimal inventory levels – John McClain
79. Financial Projections Model – A comprehensive financial model for forecasting a complete set of financials with breakeven and valuation tabs developed by Frank Moyes and Stephen Lawrence at Leeds School of Business.
80. Option Trading Workbook – Educational toolkit for using Excel for Options – Option Trading Tips
81. Financial Model – A nice clean financial model driven by different calculators (such as Company, Market, Subscribers, etc.) developed by Bill Snow.
82. Forecasting Model – Step by step financial model for forecasting financials created by Sam Gui
83. Economic Evaluation – Step by step workbook for evaluating the economics of a system investment – Automated Concepts
84. Project Management Templates – A collection of templates (charter, budget, risk register, issues log, etc.) for managing a project – International Association of Project and Program Management
85. Project Cost Estimating Workbook – A workbook model for developing a cost estimate on a software development project – ProTrain China
86. Risk Assessment Register – A workbook for establishing a risk management register – Emergency Preparedness Capacity Builders
87. Project Investment Model – A comprehensive financial model for evaluating projects from the book: Mastering Financial Modelling by Alastair L. Day
88. Simple ABC Model – A simple model that illustrates Activity Based Costing
89. Six Sigma Tool Kit – A large collection of templates for doing six sigma tasks – Fara Vesh
90. Project Management Tool Kit – Collection of useful templates for managing projects – Michael D. Taylor
91. Intellectual Property Valuation Model – A simple and easy to use model to help assign value to intellectual assets such as patents, copyrights and trademarks

Click to Enlarge:

Finance is a tool for greasing the wheels of an economy, and when it
serves its proper role, finance can be a very good thing. But it can
(and should) never be the economy itself; it is fundamentally
derivative on the labor of real people doing real work. By extension,
an economy that gives pride of place to what should be a tertiary
concern is an economy that is winding down and running out of ideas.
Just as the ascendancy of the lawyers is the death knell of an industry
(cf. the dying spams of the major record labels and the RIAA), so the
dominance of financial services signals an economy that has become
tired and spent.

The Black-Scholes PDE is a “Wick rotated” Schrodinger
equation for a charged particle in an electromagnetic field, where the
risk-free rate plays the role of a gauge connection.

What’s more –

The gauge connection for the Black-Scholes PDE is given by

PDE results in

PDE is a “Wick rotated” Schrodinger
equation for a charged particle in an electromagnetic field, where the
risk-free rate plays the role of a gauge connection.

What’s more –

The gauge connection for the Black-Scholes PDE is given by

. Inserting the corresponding gauge factor

into the Black-Scholes PDE results in

, which is simply the heat equation from physics!

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Accounting ingenuity speech by David Einhorn

Multiple Alpha Sources and Risk Management by Edward Qian at PanAgora

Via BankersBall :

Now take a Bad Boy, put him in a Brioni suit and you have Mr. Junk Bond.

Dating Mr. Junk Bond (JB) is akin to the non-investment bond grading system. Initially, Mr. Junk Bond is a Ba/BB. JB is charming, unpredictable, decisive and intense. His offer of a high interest rate despite the speculative aspects is irresistible. JB’s late hours in finance indicate hard work and intelligence. You reconcile JB’s bad boy behavior with the nascence of the relationship.

JB quickly plummets to Caa/CCC rating when you can’t remember when your last real date was and he only calls you “babe”. You begin to wonder if JB remembers your name. Then again, you realize, he has to know your name – it’s in your email address.

Nonetheless, the D rating of payment default is looming. JB only seems to have time for you after 10 pm (aka the booty text).

Booty texts may take the form “U awake?” or “U out 2nite?” and often make you wonder whether JB sent the text message to more than one girl. Was it some kind of mass mailed booty text? Perhaps even booty text spam?

As investors, you are cognizant of why you shouldn’t play with junk bonds, but resisting the temptation is difficult. Sometimes you have to dive in and make a really bad investment to learn. Unfortunately, you may have to keep adding more than one JB to your portfolio repeatedly before you learn the lesson of JB’s danger and allure.

Via Dealbreaker

The High Yield Debt (“Junk Bond”): The untamed and often uncontrollable vixen, commonly referred to as the mistress. She’s not looking for any long term investment, but she could offer a mind-blowing weekend in Maui, as long as she doesn’t pick up the tab. There is no middle ground with these types—they enjoy either the high flying adventure or nothing at all; they come with a price. If their partner slips up in any way or ceases to perform, she will immediately default, leaving a trail of broken hearts in her often destructive path. The Junk Bond is perfect for the young and the immature—those who have not experienced the ups and downs of the dating world and simply want to reap the benefits of lust and adventure. They won’t stick around to raise your children, but they will give you a great escape from them.

The Investment Grade Security: The 1950’s housewife. She’s quiet, calm, sweet, and patient; she’ll never get too riled up and will stick with you even in the worst of times. Considered by many to be the ideal wife and future mother of one’s children. Perfect for the well seasoned and experienced individual—one who has seen the highs and lows of the dating scene and is ready to settle down into a stable, committed relationship. They’ll never make you rich, but will also never let you down.

The Bridge Loan: Perfect for the recovering heart-broken man. She is generally kind and gentle, often not requiring much from her partner, but generally giving exactly what is needed—a short term tryst that will leave her partner confident and more experienced upon her leave. She rarely leaves a trail of broken hearts in her wake because she always has the grace to end the relationship amicably. In fact, many men call upon the bridge loan several times in their lives for quick fixes to broken hearts. She, being the selfless type, is always willing to accommodate.


The Asset Based Revolver (“ABR”): The ABR is the trickiest of all the breeds of women—often the most superficial, but generally the most desirable by those with great ambition. She can help her partner reap great benefits, but can take them away just as quickly. She is a social climber, socialista, and often the life of the party—constantly armed with Christian Louboutins stilettos, Balenciaga handbags, and a perfectly sculpted slender body accented with wildly untamed hair. She will make an initial investment in various types of men, but will only stay with those who continually build upon their fortunes. Any faltering in realized ambition will cause her to immediately walk away, taking with her not only her partner’s pride, but often a significant portion of his assets—not to mention his social circle. She carries great penalties, but for the ambitious, she will give continually greater rewards proportionate to her partner’s increased net worth. Great marriage material for the superficial and ambitious men of the world, but be warned: If she files for divorce, the consequences will be catastrophic.


The Convertible Bond: Often the most complex and difficult to value of the group, but just as often the most desired. Generally referred to as proverbial “hooker with a heart of gold.” Upon first glance, she is often seen as being merely rentable material—a short term fling that rarely sticks around for the duration. But, hidden within the lust-inducing exterior, is a hidden gem of warmth with the heart of a housewife and a fealty that will tame even the most promiscuous of men. She is perfect for the post-player type; she will lure her partner in with her sexual prowess but because of her loyalty and kindness, will often be invited by her partner to share in his future growth.


The Subordinated Debt: Generally the second, third, fourth, etc. wife. She’s often a short term fix to a misguided life, frequently brought about by some midlife crisis filled with dreams of reinvention. Arriving in the picture only after her partner has already made his considerable wealth, she rarely reaps the financial benefits of the first wife, to whom her partner owed the most, and to whom her partner always gave, and will continue to give, the most. The subordinated debt will generally have to sign a bullet-proof prenuptial agreement that will reap her modest, but never outsized returns upon the almost guaranteed divorce. She’s perfect for the self-made man who needs the affection of a beautiful (and often younger) woman and the appearance of stability with a marriage. The subordinated debt is always hoping that upon her partner’s death, she will be favored in the will, but she is always disappointed when the children from the first marriage get the lion’s share of the wealth.


The LEAP Option: The consummate “friend with benefits.” Perfect for a good heart to heart, but also equally great for a weekend rendezvous or a late night hook-up. Her partner has borne his soul to her and she has borne hers to him, but they’ve always gone their separate ways to explore other relationships. She, however, is always in the back of her partner’s mind as a potential life-long mate. And if her partner determines she is “in the money,” he will forsake all others just for her. Because there is already intimacy between them (and often years of affection) the love blossoms immediately between the LEAP and her partner. The relationship often begins with the partner making a grand romantic gesture of his undying love filled with a blabbering speech about how he has been a fool for not realizing it before—a sentiment which is often reciprocated freely by the LEAP. For this reason, the engagement period for the LEAP is generally short and the relationship tends to weather the tests of time. Perfect for the commitment phobic types who can never quite let their guards down, but who also have a secret and deep sense of romance.


The Collateralized Debt Obligation: Upon first glance she’s the debutant donned in pearls. The perfect specimen of woman, whose high cheekbones and slender waist immediately bring to mind images of summering the Hamptons, sailing on the Cape, and professionally photographed images of a family-to-be (golden retriever included) lounging aside the dock, shoeless and dressed in seersucker. A perfect marriage candidate for any man desirous of merging his life with that of a well-bred woman whose pedigree includes a generous trust fund compounded by generations of wealth. But behind the ribbons and pearls, she is a soul-sucking black widow—the most frightening of all the types. She grew up on the wrong side of the tracks (probably in a trailer park) listening to “Fancy” while dreaming of seducing heads of states and CEOs. Though she hasn’t a penny to her name, she is able to lure the most talented of men with her well trained charm that effortlessly conceals her subprime roots. All should be wary of this type, though most will never know they have encountered a CDO until their bank accounts are empty, their house is in her name, and she is speeding off in the benz with the tennis pro.

$145 for oil in December 2016, as the futures market is prices, does
not mean that the price of crude oil will be $145 in Dec ‘16.

Currently,
oil is at $131.25 for delivery in the month of July. If I contract to
buy oil from a supplier, in the year 2016, I effectively have paying a
higher price than today for “storage” costs. The price structure where
nearby prices are cheaper than deferred prices is what we call
contango. This is normal and not indicitive of a bubble. It means
supplies are adequate.

When that price structure changes,
whereas nearby prices are more expensive than deferred prices
(backwardation), that is a bullish market. Effectively, the market
punishes those who sit on supplies. It brings available supply to the
market by making it a losing proposition to store supplies.

Looking
at the current price structure, the market is backwardated from ‘08 to
‘12 and then in contango. The market is very concerned over available
supplies in the market for now, largely due to increased demand and
stable production. There certainly is more oil in the world to be
tapped, but it will take time to bring it to the market.

As for
US prices, we are perhaps the only country in the world with known
existing supplies that the government forbids oil companies to explore.
Our own government forbids exploration and drilling on the outer shelfs
over the Pacific and the Eastern gulf of Mexico where large quanties of
oil and natural gas exist. Oil companies are also barred from exploring
oil shale in Colorado, Whyoming, South Dakota, and North Dakota.

This country has a 250 year supply of coal, but we hamstring the new construction of even clean coal power plants.

We have the energy reserves but the US government needs to get out of the way.

Supply in the US might be near average levels, but oil is a global
commodity. A supply disruption in Nigeria impacts global prices. A
refinery outage in France cause prices to go up in the US because it
reduces the availability to import refined products (which is a
bottleneck in the US). By the way, oil traders don’t care about Kenya,
its Nigeria or other oil producing countries in Africa. That said, if
tension in Kenya might spread into Nigeria….

As far as ‘speculators’ are concerned, we can make money selling markets, too, not just bidding up prices endlessly.

Essential
raw commodities must be priced by the marketplace. Will prices go too
high or too low on the fringe, sure, but that is how prices are
discovered. How many consumers were complaining when a gallon of gas
was $1.00? Price too low? Well, there wasn’t enough incentive for oil
companies to invest in more production. So when an supply shock
happens, prices have to rise to provide an incentive to produce more.

During
all the 90s, food prices were so low and crops yields came in so high,
that countries began imported food on an “as needed” basis. Stockpiles
of grains for a rainy day dwindled.
Well, over the past two years,
because of poor yields in wheat around the globe and increased demand,
supplies of food have decreased materially, and created a panic in
wheat prices. But what did producers do in response? They planted a
record amount of wheat this past year. That is what markets do.

The
high price of oil is bringing changes. People are changing habits,
trying to reduce demand. New technology is heavily researched and
hybrid cars are rolling out. But it will take years for new oil wells
to be drilled, and it will be costly.

From Exxon: Exxon Mobil is
the largest U.S. oil and gas company, but we account for only 2 percent
of global energy production, only 3 percent of global oil production,
only 6 percent of global refining capacity, and only 1 percent of
global petroleum reserves. With respect to petroleum reserves, we rank
14th. Government-owned national oil companies dominate the top spots.
For an American company to succeed in this competitive landscape and go
head to head with huge government-backed national oil companies, it
needs financial strength and scale to execute massive complex energy
projects requiring enormous long-term investments.

To simply maintain our current operations and make needed capital investments, Exxon Mobil spends nearly $1 billion each day.

Iranian oil is a heavy sour crude oil. It is more expensive to refine
into products than light crude oil, like that of Saudi Arabia and WTI.
That’s the reason that WTI oil is usually priced lower than Brent Oil.
Crude oil is not the same where ever its drilled from. It comes in many
different grades and some are much cheaper to refine than others. So
Iran has a surplus of heavy sour that isn’t as valuable right now.

Second,
OPEC only accounts for 40% of the worlds oil supply. You know who the
largest supplier of oil to the US is? The United States of America! If
congress ever let oil companies drill off the Pacific coast and the
eastern shore of the Gulf Coast, we would be swimming in oil and
natural gas. Our second larget supplier of crude? CANADA. Third?
MEXICO. OPEC is only part of the equation.

Thirdly, we don’t
have to run out of oil before prices go up. OPEC typically producers a
surplus of oil of about 2.5 million barrels per day. That surplus
production however, dropped by 80%, from 2000 to 2005. The price of oil
in 1999? $10 a barrel.

Why should OPEC pump oil for $10 a barrel? oil prices bottomed in 1999 and rallied to $35 a full year before 9/11?
Can you explain how prices more than trippled from ‘99 to ‘00?
Easy, there was huge excess supply in the market. Oil producers cut back on production.

Uh
oh, then 9/11, concern about flow from the Middle East. Uh oh,
economies in India and China begin cranking up. Uh oh, huge hurricane
in the US wipes out oil production in the Gulf of Mexico. Uh oh,
violence in Nigeria wipes out 500,000+ barrels per day for over a year.
Uh oh, Iran working on nuclear weapon. Uh oh, China begins creating
stockpiles of raw goods. Uh oh, 30 year old refineries in the US can’t
keep up with demand for products. Prodcution in Alaska is declining.
Production in Mexico is declining. Venezuela nationalizes most of the
oil industry. Production in Venezuela drops.

We will come out of
this bubble in prices, but as the saying goes, “The cure for high
prices is higher prices.” High prices encourage more supply to come
online, encourages alternatives, or reduces demand. The market, however
painful, is doing its job. If prices have overshot ‘fair value” then
prices will correct.

New technology will compliment crude oil, not completely replace it.

Think
of all the plastics that are produced today. The only known substitute
currently is bio-oil and then we’re entering the food/fuel debate. But
certainly if we get the food situation cleaned up and streamlines (no
thanks to Argentina) then we can continue to produce some excess
bio-oil for manufacturing processes.

Crude oil and its
products are portable energy. Why in the world do we use oil to produce
electricity in stationary power plants? Nuclear power is one solution.
As is clean coal technology. So are other renewable sources. Many of
these ideas of been on the board for quite some time (geo-thermal,
solar, hydro, wind, etc) but have been too costly in comparisson to
fossil fuel. That’s all changing. Its not to say that eco-friendly
solutions are necessarily pocket-book friendly solutions, but it does
add some spare capacity to the system (think ethanol).

Definition of Level 1, 2 and 3 Assets: FASB: Summary of Statement 157