I keep pondering the fate of Canada's tar sands. I do not wonder if they will save North America from a debilitating energy crisis. Nothing can avert that. But can they be mined and refined profitably in any way? The process of heating all that sand just to get heavy, high sulfur, sludgy oil, and then trying to make gasoline out of the oil, seems like a losing proposition.
I know that Syncrude does make nice gasoline out of tar sands now, and that they like to say that they can make a profit if the the price of crude oil is anywhere above $30/barrel. Syncrude naturally like investors to think it is that simple. Syncrude likes the hundreds of billions of investment dollars being thrown at tar sand projects these days. But can they make gasoline if natural gas goes to $14 faster than oil goes to $120? I doubt it. Not profitably, anyway. Natural gas is both highly volitile in price and prone to very sudden depletions. North America will run out of it soon.
But maybe this will happen: tar sand will be processed into dirty, high sulfur, and very expensive deisel oil. It will be produced in big iron tanks with crude, polluting, low cost technology, such as burning wood. Why would anyone buy such fuel? Because there will not be any gasoline on the market. Any gas that the US does manage to import, at huge expense, will go to military and goverment elites. Jet fuel will be the rarest of all commodities.
All transportation fuels will be expensive, so only the most economical forms of transport will be used. There will be a functional rail system again. To cross an ocean, people will travel by ship.
Saturday, August 06, 2005
Tuesday, August 02, 2005
On Corporate Debt
A currency trader corresponant wrote:
So, I realized I needed to look deeper in to corporate debt. The figures I uncovered are revealing. As for where I get my numbers, I just look them up on my brokerage site — harrisdirect. The number that caught my eye is the figure for the S&P 500: 1.08. 108% of equity! Also, the S&P has a P/E of 20 [these are the most recent figures. Debt is actually trending down, from 110% in March. But the P/E is trending up, from 17 in March]. Normal corporate debt should be around 1/3 of equity. And in an era of rising interest rates, companies should pay down debt.
Much of the S&P 500's debt is related to housing and real estate: fannie mae and freddie mac are high on the list of topheavy S&P components. Fannie is at 23 times equity, Freddie is 16. Wow. Goodyear is a proposterous 105 (I double checked this, it is real). Of course we can ask who needs Goodyear, when we can buy better tires from Asia? Goodyear is just another rust belt relic. Goodbye, blimp. All of the american auto sector is heavily indebt, for that matter. But Fannie and freddie, if they turn turtle, we are in very big trouble. Of course the government would want to bail them out. But with what money? Fannie Mae’s debt adds up to almost a trillion bucks. Can even the USA float bonds that size? America's entire national debt is 8 trillion.
Looking up the numbers of the dow components, many of the large caps on the dow have normal to negligible debt. Disney, Home depot, Wal mart, Merck, and DuPont are all OK. Exxon, swimming in oil-revenue cash, has almost no debt at all. Others are outrageously overloaded: Citigroup is 1.9, GE, 1.89. Of course one could argue that fannie and freddie naturally have high debt, their business is to buy mortgage debt. And because homeowners are the last to default, it is relativly safe. But two things have changed:
a) people are buying homes on short-term speculation.
b) if homeowners' variable rate mortgages go up to a level that they cannot pay, and they don't have enough equity in the house to sell, then they will default.
Another problem with the banks' and mortgage companies' debt is they they have swollen to a huge proportion of the market. The manufacturing sector has practically no equity any more. There is no sector of the market that can hold up if the home-debt bubble collapses, because real estate is almost the whole market.
I am not sure where you get your figures on corporate indebtedness but everything I have read points to the relative health of corporate balance sheets.
So, I realized I needed to look deeper in to corporate debt. The figures I uncovered are revealing. As for where I get my numbers, I just look them up on my brokerage site — harrisdirect. The number that caught my eye is the figure for the S&P 500: 1.08. 108% of equity! Also, the S&P has a P/E of 20 [these are the most recent figures. Debt is actually trending down, from 110% in March. But the P/E is trending up, from 17 in March]. Normal corporate debt should be around 1/3 of equity. And in an era of rising interest rates, companies should pay down debt.
Much of the S&P 500's debt is related to housing and real estate: fannie mae and freddie mac are high on the list of topheavy S&P components. Fannie is at 23 times equity, Freddie is 16. Wow. Goodyear is a proposterous 105 (I double checked this, it is real). Of course we can ask who needs Goodyear, when we can buy better tires from Asia? Goodyear is just another rust belt relic. Goodbye, blimp. All of the american auto sector is heavily indebt, for that matter. But Fannie and freddie, if they turn turtle, we are in very big trouble. Of course the government would want to bail them out. But with what money? Fannie Mae’s debt adds up to almost a trillion bucks. Can even the USA float bonds that size? America's entire national debt is 8 trillion.
Looking up the numbers of the dow components, many of the large caps on the dow have normal to negligible debt. Disney, Home depot, Wal mart, Merck, and DuPont are all OK. Exxon, swimming in oil-revenue cash, has almost no debt at all. Others are outrageously overloaded: Citigroup is 1.9, GE, 1.89. Of course one could argue that fannie and freddie naturally have high debt, their business is to buy mortgage debt. And because homeowners are the last to default, it is relativly safe. But two things have changed:
a) people are buying homes on short-term speculation.
b) if homeowners' variable rate mortgages go up to a level that they cannot pay, and they don't have enough equity in the house to sell, then they will default.
Another problem with the banks' and mortgage companies' debt is they they have swollen to a huge proportion of the market. The manufacturing sector has practically no equity any more. There is no sector of the market that can hold up if the home-debt bubble collapses, because real estate is almost the whole market.
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