Saturday, September 6, 2008

Theoretical Declines of a Bursting Oil Bubble. And: Warren Buffett Swings By

What, wary reader asks, am I doing in the office on a Saturday evening?
As I mentioned in "Markets: I Scream, Triple Dip ":
Among other duties (coffee A.M, turn out lights P.M.) I think of likely (and more importantly, unlikely) scenarios of where the markets might be heading....
What with Fannie and Freddie, we will have a very emotional start to the week and I can't help thinking of Benjamin Graham's Mr. Market, as recounted in Warren Buffett's 1987 Chairman's Letter to the Shareholders of Berkshire Hathaway. (see * below)
The question is, will Mr. Market be manic or depressive?

Last week Bespoke had three posts that conveyed a lot of information. First up is the headliner:
...Again, odds are that oil has no shot of getting back to the $30s anytime soon, but since the rise in oil was very comparable to the tech and housing bubbles, it's interesting to see what a comparable decline would look like. (source, worth a visit)


Next, some nice charts on year-to-date oil complex inventories:
As the lower charts illustrate, natural gas and distillate inventories remain above average, while crude oil and gasoline inventories are still below average. While distillate inventories are above average, this year the build plateaued several weeks ahead of schedule. While these reports are generally bullish for energy commodities, this morning's article in the WSJ may cause traders to view the numbers with a more skeptical eye....CHARTS
Lastly a quick comparison:

Oil, Stock, and Housing Declines

Ironically, oil is now down more than the stock market and even home prices! From their peaks, oil is down 27.18%, the S&P 500 is down 22.16%, and the S&P/Case-Shiller 10-City Median Home Price index is down 20.46%.


*Mr. Market
...Ben Graham, my friend and teacher, long ago described the
mental attitude toward market fluctuations that I believe to be
most conducive to investment success. He said that you should
imagine market quotations as coming from a remarkably
accommodating fellow named Mr. Market who is your partner in a
private business. Without fail, Mr. Market appears daily and
names a price at which he will either buy your interest or sell
you his.

Even though the business that the two of you own may have
economic characteristics that are stable, Mr. Market's quotations
will be anything but. For, sad to say, the poor fellow has
incurable emotional problems. At times he feels euphoric and can
see only the favorable factors affecting the business. When in
that mood, he names a very high buy-sell price because he fears
that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble
ahead for both the business and the world. On these occasions he
will name a very low price, since he is terrified that you will
unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't
mind being ignored. If his quotation is uninteresting to you
today, he will be back with a new one tomorrow. Transactions are
strictly at your option. Under these conditions, the more manic-
depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning
or everything will turn into pumpkins and mice: Mr. Market is
there to serve you, not to guide you. It is his pocketbook, not
his wisdom, that you will find useful. If he shows up some day
in a particularly foolish mood, you are free to either ignore him
or to take advantage of him, but it will be disastrous if you
fall under his influence. Indeed, if you aren't certain that you
understand and can value your business far better than Mr.
Market, you don't belong in the game. As they say in poker, "If
you've been in the game 30 minutes and you don't know who the
patsy is, you're the patsy."

Ben's Mr. Market allegory may seem out-of-date in today's
investment world, in which most professionals and academicians
talk of efficient markets, dynamic hedging and betas. Their
interest in such matters is understandable, since techniques
shrouded in mystery clearly have value to the purveyor of
investment advice. After all, what witch doctor has ever
achieved fame and fortune by simply advising "Take two aspirins"?

The value of market esoterica to the consumer of investment
advice is a different story. In my opinion, investment success
will not be produced by arcane formulae, computer programs or
signals flashed by the price behavior of stocks and markets.
Rather an investor will succeed by coupling good business
judgment with an ability to insulate his thoughts and behavior
from the super-contagious emotions that swirl about the
marketplace. In my own efforts to stay insulated, I have found
it highly useful to keep Ben's Mr. Market concept firmly in mind....