Common sense and the Beltway - incompatible

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Common Sense Seems to Have Left the Beltway
By Jeff Saut Jun 21, 2010 10:10 am
The political handling of the BP oil spill is one of many instances bringing down the economy... Well, the economic Chernobyl in the Gulf continues; and, if it wasn’t so tragic, it would actually be funny for it was none other than Richard Nixon who first uttered the phrase “energy independence.” At the time, our country was importing roughly 30% of its crude oil needs. Eight presidents and 18 Congresses later we're importing more than 60% of our needs.

Disgustingly, over the past 40 years the country’s energy policies have been aimed at anything but “energy independence.” And here they go again, as last week President Obama appointed a group of men and women to “study the causes of the Gulf of Mexico spill and make recommendations for the future of offshore drilling.” Amazingly, this group consists of environmentalists and academics, but doesn’t include anyone from the oil industry!

Meanwhile, stock market analysts continue to attempt to quantify BP’s (BP) liability for the Gulf tragedy. To this point, I was on TV late last week with an analyst who opined that since BP has created a $20 billion claims fund the situation is now quantifiable. While I'm certain this gentleman is smarter than me, I'm also sure I've seen more cycles than he. Indeed, I remember Chernobyl, Bhopal, Three Mile Island, etc., and let me assure you such events always cost more, and take longer, than forecast.

Consider this: What if oil guru Matt Simmons is right and there's more oil beneath the Gulf’s surface than people think? Also consider what happens if said oil makes it into the “loop current” and subsequently travels up the eastern coast. This is a paraphrased version of what Simmons said on Bloomberg:

Simmons was adding some additional perspective to his original appearance on the station, in which he initially endorsed the nuclear option as the only viable way to resolve the oil spill. Simmons refutes even the latest oil spill estimate of 45,000 to 60,000 barrels per day, and in quoting research by the Thomas Jefferson research vessel, which was compiled late last Sunday, quantifies the leak at 120,000 barrels per day. What's scarier is that according to the Jefferson the oil lake underneath the surface of the water could be covering up to 40% of the entire Gulf of Mexico. Simmons also says that as the leak has no casing, a relief well won't work, and the only possible resolution is, as he said previously, to use a small nuclear explosion to convert the rock to glass. Simmons concludes that as punishment for BP's arrogance and stupidity the government "will take all their cash." Now if only our own administration could tell us the truth about what is really happening in the Gulf.

Verily, if only our own elected representatives could tell us the truth! Let’s see, we’ve gotten a health care bill that was “pushed through” via thuggery tactics, a jobs bill that created very few jobs, proposed financial reform crafted by elected officials who have never run a business let alone have a grasp of basic economics, and now we’ve got a Gulf tragedy that should have elicited a massive response in the first week following the Deepwater Horizon horror. However, what we got is a slow-footed response that wouldn't even set aside the Jones Act and allow non-US flag ships, which were offered and had the capability of capturing 90% of the oil spewing into the Gulf, to sail into US waters and address the situation, driven by political fears of upsetting various labor unions.

Ladies and gentlemen, I'm not speaking to the difference between Republicans and Democrats, but rather the burgeoning lack of common sense inside the beltway. If you don’t believe me, listen to legendary business man Steve Wynn in this clip from CNBC. No wonder the stock market has stutter-stepped recently as it contemplates the lack of common sense permeating our nation’s capital.

Also worth considering is just how much business is being “brought forward” into 2010 on worries that tax rates will be higher next year. Despite what our elected officials think, people are indeed rational. According to a 2004 US Treasury Department report, “high income taxpayers accelerated the receipt of wages, and year-end bonuses, from 1992 to 1993 (by) over $15 billion in order to avoid the effects of anticipated increase(s) in the top tax-rate from 31% to 39.6%.” To be sure, if people think tax rates will be higher next year than they are currently, those folks will shift production/income out of next year into this year to every extent possible. Potentially alarming, spurred by the prospect of increased taxes, rising prices, higher interest rates, and more governmental regulations, participants could be shifting income, and demand, into 2010 from 2011.

Regrettably, if true, this increases the chances of a double-dip recession in 2011, an event we've argued against until now. Manifestly, the mid-term November elections, in my opinion, will have a dramatic impact on events going forward. If the progressives/liberals secure a “win” in November, I think it presents a huge headwind for the economy and the stock market as job-killing agendas such as cap and trade prevail. However, if there's a swing to a more fiscally responsible Congress, I think it would have positive ramifications for the economy and the various markets.

Since entering 2010, one of my mantras has been, “I think the trick this year will be to keep the outsized profits we made from the anticipated bottom of March 2009.” Most recently, during the entire month of April, I advised participants to raise cash and hedge portfolios to the downside. Following the "flash crash” (May 6), over the subsequent weeks, I recommended selling those downside hedges given the extreme oversold readings registered in that mini-crash.
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