My 2008 Year in Review

December 31, 2008 at 11:59 am
Contributed by: Chris

For my final Energy and Capital article of 2008, I rate my own predictions and analysis, both good and bad.

I’m sure you’re all as happy as I am to leave this year behind. Here’s hoping that 2009 is much better! Happy New Year, y’all!

My 2008 Year in Review

Sweet Success, and Humble Pie

By Chris Nelder
Wednesday, December 31st, 2008

This is my final column for 2008; so, it’s time for the requisite journalistic navel-gazing.

Join me as I dig into a big slice of humble pie with the calls I got right for dessert.

In my first column for the year, published on March 27, I said:

Despite last week’s Fed cut and the subsequent huge rally, I am far from certain that the carnage is over. As I see it, the true valuations of the underlying assets under all this mess are yet to be revealed, and many banks, particularly regional banks with a large book of mortgage-related business, may yet fall. I am not convinced that the Fed has enough ammunition to prevent it, and I wouldn’t call a bottom in the financials just yet.

Even I underestimated how true that statement would prove to be. The financials had only begun to slide. It would be July before the real selloff began, erasing more than half the value of the entire sector by the end of the year. Even so, there were pundits aplenty calling the bottom in March, trusting that the Fed had the tools to stop the bloodshed.

In that column I lambasted the $30 billion of taxpayer money that was extended to JPMorgan Chase to let them take over the assets of the failed Bear Stearns and compared it to the bailout of Chrysler back in 1979.

Little did I suspect that would look paltry compared to the massive socialization of the banking, insurance and real estate sectors that was yet to come, and that continues to this day with the automaker bailout. Bernanke and Paulson have now pulled out all the stops and made it clear that they’re willing to buy any amount of toxic assets from anybody in order to stem the market’s declines.

Now, 2008 will go on record as the year that the US gave up on its free market principles and became a socialist country, and under “conservative” leadership no less. I can’t think of a single prognosticator who saw that one coming.

I was also correct in saying:

Unfortunately, the crisis of confidence in the credit markets has caused a major shakeout in the stock market, and perfectly good energy stocks (including many that I have owned and promoted in these pages) have been whacked hard.

The bottom line is that we’re no longer in a trading environment that makes sense based on fundamentals. We’re now in a world that lives and dies on capital flows, a fairly esoteric world that most investors don’t follow, and one that is heavily influenced by hedge funds and other big money players.

That observation was roundly proven by the end of the year after a massive spike and collapse in commodities, especially oil.

On the other hand, as oil prices shot into the stratosphere in Q2, I was swept up in the commodity frenzy along with everyone else. In late July, about two weeks after oil prices peaked, I asserted that the new floor for oil was $125 a barrel on Yahoo’s Tech Ticker and that the prices were largely driven by fundamentals.

That probably qualifies as my worst call for 2008. I underestimated the influence of speculators in the market, the way that oil prices would respond to a very tight supply situation, and most importantly, the way the ensuing global deleveraging of investments would take the legs out of just about everything in the market.

Even so, I should point out that if oil had stayed above $100 a barrel, the world would still be drilling and investing enough in energy projects to ensure future supply. Instead, the crashing of commodity prices has now guaranteed that we will be facing a serious supply crunch when the global economy recovers, as I have written repeatedly for the last month.

On April 1, I observed that the trendline for oil prices since 2002 pointed to $85-90 for 2008 and ventured that oil would trade in the range of $85-150 for the year. I nearly nailed the high end (oil peaked at $147) and correctly forecasted that gasoline would be in the $4 range by summer.

I did not foresee the massive selloff that would occur in the second half of the year, though, or the depths to which oil prices would sink. Nor did I anticipate the glut of gasoline from foreign refiners that would crush the American independent oil refiners, which I discussed in late April. I did note that “until global demand cools off, there’s no way out of the oil price trap,” but there were very few analysts indeed who foresaw such a severe global recession unfolding by the end of the year, or the demand destruction that would attend it.

Back then, there were many who claimed that emerging markets had “decoupled” from the world’s top economies and would remain fairly unscathed by their financial meltdown. (So far, I haven’t seen a single one of them admit their error, though.) I never bought that argument, but there is no question the high gasoline prices were not, in fact, here to stay. I definitely did not expect to be able to fill up my tank for $35 by the end of the year.

Through the months of June and July, all was well for energy and commodity investors as prices skyrocketed to new highs. We were making good money while the rest of the market tanked. My read of the broader markets, especially the financials, was on the mark as well, and those who followed me profited by shorting financials through Q2 and Q3. My biggest concern then was the parade of bad ideas that was trotted out by our esteemed leaders in Washington to address the pain of high gasoline prices.

By mid-August, however, it was clear to me that the markets were behaving irrationally and that there were some big scary things moving under the carpet. I turned bearish, warning about the perils of trading in an “Upside-Down World,” a “particularly dangerous market for longs” that had “simply lost its mind.” While commodities were looking like good buying opportunities after a sharp selloff, I warned:

Just don’t try to be a hero. Watch the important support levels closely and choose your buy points carefully. Be patient. Accumulate your favorite long positions—and a few shorts for good measure, like SKF and FXP—gradually. And then hold them and hold on.

By mid-September, it was clear to me that “the selling is indiscriminate” and could “go on a whole lot longer than anybody would like.” “The better part of valor,” I said, “is to keep your head down and your powder dry, and live to fight another day.”

That now looks like my best call of the year. Just two weeks later, ironically coincident with the annual US peak oil conference, the market plunged and the S&P 500 proceeded to lose more than a third of its value through the year end.

I got my thanks for that in mid-October, when one regular reader of my column wrote to say that after reading the article “I found one of his analyses of this nation and the world’s economy so foreboding that with the exception of one small IRA, I liquidated all of my stock positions. Do you understand why I’d like to build a shrine to honor the man?”

As sweet as that was, I had another serving of humble pie still to come. I continued to lose money on the short side and the long side for several months more. I learned a valuable lesson then: to take my own advice!

For the remainder of the year, I became increasingly concerned about future supply, as low prices prompted the cancellation and delay of many important energy projects. Those concerns remain; although, it does look like oil may have found a new floor at this point, given the recent price action and the weak response to newly reduced demand projections.

On the whole, I’d say I read the market pretty well this year. I got cautious at the right times and capitalized on the greater part of the commodity spike and the financial downturn. But my firm predictions, like those of just about everyone else, were probably no more accurate than a coin flip.

I don’t berate myself for it though, and if you lost money in the market this year, you shouldn’t berate yourself either. There are plenty of much richer and more experienced people than us who lost just as much, or more. It was just a really, really tough year. I’m sure you all will join me in wishing it good riddance.

In the new year, I plan to start us off on a much better foot. The time is ripe for bargain hunting in the commodity sector once again, gold is making a rebound, and as I have been anticipating, the specter of inflation appears to be rearing its ugly head.

This time, I plan to learn from my errors and get it right. Won’t you join me?

Here’s to a happier, and more profitable, new year!

Until next time,

Chris Nelder

Chris Nelder

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1 Comment

  1. The top story of the year is that global crude oil production peaked in 2008.

    The media, governments, world leaders, and public should focus on this issue.

    Global crude oil production had been rising briskly until 2004, then plateaued for four years. Because oil producers were extracting at maximum effort to profit from high oil prices, this plateau is a clear indication of Peak Oil.

    Then in July and August of 2008 while oil prices were still very high, global crude oil production fell nearly one million barrels per day, clear evidence of Peak Oil (See Rembrandt Koppelaar, Editor of “Oil Watch Monthly,” page 1). Peak Oil is now.

    Credit for accurate Peak Oil predictions (within a few years) goes to the following (projected year for peak given in parentheses):

    * Association for the Study of Peak Oil (2007)

    * Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008)

    * Tony Eriksen, Oil stock analyst and Samuel Foucher, oil analyst (2008)

    * Matthew Simmons, Energy investment banker, (2007)

    * T. Boone Pickens, Oil and gas investor (2007)

    * U.S. Army Corps of Engineers (2005)

    * Kenneth S. Deffeyes, Princeton professor and retired shell geologist (2005)

    * Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

    * Chris Skrebowski, Editor of “Petroleum Review” (2010)

    * Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

    * Energy Watch Group in Germany (2006)

    Oil production will now begin to decline terminally.

    Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts could exacerbate the gap between supply and demand and drive prices even higher.

    Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

    Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

    “By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame.”

    With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

    It is time to focus on Peak Oil preparation and surviving Peak Oil.

    Comment by CliffordJ. Wirth, Ph.D. — December 31, 2008 @ 7:06 pm

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