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EScroogeJr (< 20)

Now, here's the bubble that I like

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May 23, 2008 – Comments (11)

To pay $130 for a barrel of worthless liquid hoping that an even greater fool will buy it from you for $140 is bad enough, but at least you can burn it, producing some calories in the process. Now, buying shares of producing companies, drilling companies, exploration companies,and oil rig producing companies, and paying a PE of 10 for these shares at the very peak of the bubble is a much crazier idea. You have a dying industry that has maybe 10 years of life ahead of it, and you buy at the moment when the price reaches a level that would be unsustainable even in the absence of wind, solar, ethanol, etc., and you think 10 times this year's profit is cheap? Think again. The typewriter industry was profitable in 1985, but how many years of profit were still left ahead of it? How much money would you earn buying typewriter producers for 10 times 1985 profit? Well, let's see, you make 10% in 1985, 9% in 1986, 8% in 1987, then your company has to upgrade its manufacturing facilities to roll out its new line of electronic typewriters, so you get zero profit in 1988, then you earn another 5% in 1989, then your company spends the entire year 1990 fighing obsolescence of its new products that are no longer new, then it breaks even in 1991 and 1992, loses money in 1993 and 1994 and closes shop in 1995...Hopefully it did not get into debt...if its balance sheet is not a total disaster, then someone might conceivably buy the company for the sake of the crumbling factory building...Fast forward to 2008. You have solar companies that are about to achieve grid parity (think 80286 ready for launch), and you have investors standing in line to buy oil companies just as they are busy squandering their windfall profits to invest in infrastructure that can produce oil at a profit as long as prices stay above $80. Good luck with that! And now comes the sweetest part of the deal. When these speculators crash and run to Benny B. for help, what kind of help can he offer? The only way to make them solvent is to support oil prices, making everybody else pay $4 for a gallon of gas. Sounds like an easy bill to push through congress, doesn't it? House flippers were at least rational, they knew that the government would bail them out if the bet goes wrong.

11 Comments – Post Your Own

#1) On May 23, 2008 at 6:39 PM, LordZ wrote:

Scrooge how about you make all star status before you make such bold predictions...  Oil has way more than a 10 year lifespan... come on dude ??? what are you smoking ??? I'm sorry that you can't afford to start the car that you would have liked to purchase had you not bought that stock ~ LOL....

Typewritter industry ??? turned into word processing that turned into computer use that turned into personal computers and so on and so on.  So great one what stocks would you recommend... or would that recommendation sound like timber

so that everyone should run to avoid having that wood fall on them.

 

LORD Z

 

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#2) On May 23, 2008 at 6:51 PM, goldminingXpert (30.87) wrote:

LordZ strikes with his usual brutal accuracy.

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#3) On May 23, 2008 at 6:58 PM, IBleedConcrete (97.59) wrote:

Well said and I agree in spirit.  Hoewver a lot of smarter people than me are betting that oil will remain well above $80.

I see that your bearishness on oil is reflected in a few underperforms on the major oil companies.  IMO that's not the best way to play it.  If oil does decline I think you will get bigger returns from sectors turning their margins around: refiners, for example Frontier Oil (FTO), transportation, for example Air Methods (AIRM), etc.

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#4) On May 23, 2008 at 7:20 PM, EScroogeJr (< 20) wrote:

LordZ,

if the thesis plays out well enough, the all-star status will come in due time... 

IBleedConcrete,

That's a good point, but I don't want to short the oil bubble at once.  I'll do it one company at a time, starting with the big dinosaurs that won't move up or down too fast. The thing is, the oil bubble is not bursting today or tomorrow, and I have a feeling that we may still get another spike or two. Long-term, it's a great short at current prices. In the medium term, the insanity may well continue for a year or two. My first shorts will almost certainly stay in the red for a while. But if I continue to short one company a month, for the next 3 eyars, and then wait another 5 years, now, that will be the correct way  of handling this bubble.  The peak oil theory is crap. We're out of $20 oil, but there's twice as much $40 oil, and four times as much $80 oil, and 8 times as much $160 oil, etc. The parabolic growth of barrel prices you've seen is unsustainable. Meanwhile, look at installed solar capacity, this is where you'll see a sustainable exponential dependence.

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#5) On May 23, 2008 at 7:45 PM, FleaBagger (31.23) wrote:

Ha ha! The "big dinosaur" of the typewriter industry was IBM, and shorting them in the early days of the obsolescence of their flagship product would have been a funny thing to watch from a safe distance.

Also, solar isn't as grown-up or as profitable as you think (let alone wind power or ethanol). It will take a heck of a lot of technological advancement beyond anything we have now before solar can be profitable without huge subsidies, and even then, it will have to produce much more kwh/sq. ft. before we'll be able to afford the room to place all the solar panels needed to replace oil entirely. Wind is even further away from economical than solar is (and more lethal to birds and irritating to the tender aesthetic of rich, leftist hypocrites), and ethanol is a sick prank. Geothermal as an economically viable alternative to oil is more conceivable (though not much closer to realization) than any of those, but it's hard to find credible companies (i.e. not Raser Tech) that focus on it and are publicly traded.

Oil makes economic sense, but it does seem due for a correction. However, there are tremendous energy needs in India and China, a rapidly devaluing dollar (in which oil is priced, as I'm sure you've heard), and no economically viable alternatives coming available in the near future, except perhaps nuclear. Don't expect oil to see $80 ever again, unless it first sees an inflation-adjusted (from here) $300. That would bring alternatives into relative affordability, and peak oil would cause the rise of (which one?) solar, geothermal, or what have you.

By the way, big oil companies are not good investments, because they are having a hard time keeping their income growth at the rate of inflation under a (sort-of) Republican administration. Imagine what their income statements would look like under a Democrat congress and a Democrat president like Obama or McCain.

Good luck with your alternative energy! 

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#6) On May 23, 2008 at 7:46 PM, LordZ wrote:

SCROOGE if my AUnt had balls she would have been my UNCLE..... HMM maybe in about 200 years if you keep trying to short these stocks maybe your score might correct itself...

keep up the good work, meanwhile I'll enjoy staying one step a head of you if not thousands...

 

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#7) On May 23, 2008 at 7:49 PM, ATWDLimited (< 20) wrote:

yes, we will run out of oil, because no one will want it, so none will care, so it might as well not exist. Oil is not over yet, it has a long way to go, at least 15 years. Dose not mean we are there yet, any rate, nuclear power owns solar,, It is the MOST efficient mass to energy conversion we have, except antimatter, but it is extremely efficient, wait until they have fusion reactors like the sun, it will be awesome, the waste product would be helium, os we could make lots of balloons for the party.

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#8) On May 23, 2008 at 8:12 PM, IBleedConcrete (97.59) wrote:

"So great one what stocks would you recommend... or would that recommendation sound like timber

so that everyone should run to avoid having that wood fall on them."

It took me a couple times reading this post before I appreciated it in all its glory.

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#9) On May 23, 2008 at 8:14 PM, EScroogeJr (< 20) wrote:

FB, being bearish on oil does not mean buying solar stocks. Airlines displaced helium balloons, but they did not make investors much money if any. Right now, I don't see any alternative energy stock I want to buy except Nanosolar if it ever goes public.

ATWDLimited,

When the first steam engines appeared on the market, some people said they were too expensive, it was much cheaper to hire a hundred peasants to drag that heavy barge up the river. Mass production of steam engines changed that perception within two decades. So it will be with solar energy. 

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#10) On May 24, 2008 at 1:05 AM, devoish (98.76) wrote:

Peak oil is real, Peak affordable oil is even more real. Geothermal heating for homes can replace a lot of gas and oil heat (LXU or WFI in Canada)(long LXU). Geothermal for electric is harder to site but cheaper than coal, there is a lot of land area still open (ormat) RZ is in a tough financial state but waste heat to electric conversion has a lot going for it in terms of improved efficiency. Ethanol can work, corn ethanol cannot and was a tactic for buying votes and buying time. Todays solar panels are just about finished, as parabolic panels jump the effiency to 30% and the silicon cost to 1/8th (privately held) 1 year away. Ocean power runs all night long, Pelamis (privately held), Finevera on the TSX (longshot) and the early leader is OPTT (disclosure: I own it). But com'on these are todays growing bubble boys. The next one was born today. Or it is still in the hospital. Did you hear it? GW Bush in 2006 created the largest National Park in the US in the Pacific ocean in Hawaii. Now he is looking to protect more ocean and create more ocean parks and called upon environmentalists to help choose the most important areas. Bush is not FDR. You've got to ask yourself, where's the money in this?

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#11) On May 24, 2008 at 9:56 AM, devoish (98.76) wrote:

Oops. I meant TR, not FDR. National park system and all that.

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