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Wednesday, May 11, 2011

May 11, 2011, Bob Brinker, Oil, Commodities and Dan Dicker Interview

May 11, 2011, Sunday, Bob Brinker's guest-speaker was Dan Dicker. This is part two of the Dan Dicker interview. Please see the post below this one for part one.

Caller Jack from Lancaster
asked Dan what is the chemical difference between propane and natural gas.

Dan explained that natural gas liquids are a part of propane and is a subset of what comes out of the ground when drilling. Dan said: “It’s true that the marketplace for the liquids has in fact not been related to the dry natural gas -- the methane that most people talk about when they talk about natural gas….there really isn’t a connection between the two. Both markets are independently traded. And in fact, the natural gas liquids have been pretty strong even though the dry natural gas has…..been under $5, and for the most part, closer to four."

Caller Mitch
wanted to know if gasoline had reached its pinnacle yet or if there was still time to get in.

Brinker said:
“Some trading advice for the speculator, Dan.”

Dan said:
“That’s one thing that I’m hard-pressed to do. I’ll tell you this, I think the market is under a lot of pressure now. Markets never generally go up when they come down as violently as they have in the last week, they tend to stay down. I think there are a lot of reasons for there to be pressure on the market over the next couple of weeks. Part of which is the death of Osama Bin Laden. I thought that took some of the security premium out of the market and will keep it out.

There’s a big IPO in Glencore coming up….And I think there’s going to be pressure, like Bob alludes to, for the president to put a lot of pressure on the exchanges to raise margins on oil, like the exchange did on silver. Because that brought so much froth out of the market, they’re going to want, for the sake of the consumer, to try and keep as much of the froth out of the gasoline market as they can. So right now, I think there’s a couple of reasons to stay out, or at least not be long this market. Although, anything going on in the mid-east, Saudi Arabia, could spike it again. It’s a tough game right now."

Honey EC: The final Glenchore IPO price is set to be released May 19th.

Brinker said: “Let’s just leave the current cast of characters out of it. Let’s just talk generic. I just think it disingenuous, Dan, for any politician, be it the president or anybody else in Washington in a position of power, to go out and say it’s those traders and speculators that are responsible for the $115 oil price and then be silent two weeks later when the thing goes back under a hundred. It’s just political pandering as far as I’m concerned.”

Dan agreed
with Brinker, but obviously for different reasons. Dan stammered then replied:
“Well, I think it is, I, I, I, I, uh, agree with you 100% that bringing the Attorney General into this game as opposed to just going to the real agencies that over-run these things, the CFDC, the FCC. But going to the Attorney General was a politic move. I agree with that. Whether he is going to keep silent over the next two weeks or actually apply some pressure to try put a little more of Dodd-Frank forward a little more quickly or get some of these margins a little more quickly applied to oil and gasoline, I don’t know.”

Honey EC: For those who are not familiar with Dodd’s last bill, it looks like his final legislative act was designed to drastically change things for the worse in the world of finance in the US. Here are some excerpts from a May 10th, Wall Street Journal article.
“Whatever your views on financial reform—whether you want the government to crack down on bankers or to disentangle itself from financial markets—you should fear Sen. Chris Dodd's financial reform bill. In 1,300-some pages, all it really does is legislate power to the government for fixes to be named later. It does this by using terms that are either totally undefined or defined in breathtaking generality.

This is a politically understandable solution. But it sweeps aside more than two centuries of accumulated wisdom: that checks and balances are essential to markets, and that rules must be known in advance."
Here’s the link. I recommend reading all of the article: The Treasury Financial Complex

Joe from Carmel
asked what might help smooth out oil prices. Dan replied: “The way that I would approach it is to try and remove some of these financial instruments that have sort of moved the price so violently over the past couple of years. And that would include some of these commodity indexes that are run by a lot of the big funds out there. All of the institutional investors use them. Big pension plans use them. If you are a private wealth customer, you use them. They are run by Pimco, they’re OpCo; they’re run by Goldman Sachs, everyone has a few of them. They are an enormous amount of what’s going into the oil and other commodities markets right now.

And I’d also like to see a ban on some of these futures based commodity ETFs, which allow anybody basically set or help to set the price of something so critical as oil by buying some of these shares that look like a stock, but in fact, they translate into futures buying. And that’s what manipulates. It sends the price upwards and downwards. And we saw the effect of that over the course of the last week in silver and to a certain degree in oil. So you can see how violently some of these financial instruments can affect the price – both on the upside and the downside.

Brinker said:
“I don’t think I’ve ever seen a trade that got more crowded than the silver trade at the end of April. And it was inevitable. You knew what was going to happen, and it didn’t take long.”

Dan replied:
“You may have known what was going to happen, but also, they took 7 ½ billion dollars of retail customers and flushed it down a toilet in 3 days. Who’s going to answer for that? Somebody has to turn around and say maybe these things aren’t so great for us. Maybe we shouldn’t sell these things to people. They’re bad……”

Brinker interrupted:
“As you well know as a trader, Dan, a lot of those people in the silver market were trading in the futures market where you were required to put up less than 10-cents on the dollar and they were immediately liquidated and wiped out."

Dan said:
“When will we ever learn? This goes on time and time again. It’s simply those kinds of things that I want to see happen to the oil market where people don’t get involved in the frenzy of a commodity that starts to run away from them – put a life savings, or half a life-savings – you know I heard a guy literally on the train platform praying, please get silver back over 40 and I’ll sell and never do anything this stupid again.”

Brinker said:
“There’s nothing new under the sun. You live by the sword of speculation; you die by the sword of speculation.”

Dan said:
“With something so critical, something in an economy like ours where we’re trying to create jobs, move ourselves out of a recession, we’re trying to grow, to allow something so critical – you know 55 of all the stocks on the New York Stock Exchange have oil either as their primary or characteristic input. To have something that critical under that same kind of control or non-control, to me, requires a little bit more care than something like silver. In the end, people may lose money, but who really cares? Whether or not you are engaged in the silver trade, you’re engaged in the oil trade.”

Brinker asked:
“What you’re saying is Dan, if it was up to you, would you outlaw all Exchange-Traded-Funds that deal in derivative products related to oil?”

Dan replied:
“I would…..I”m actually surprised, if we’re talking from a political standpoint, that someone who’s not looking to make some hay with his constituents, would in fact put a bill up saying that these futures-based that use derivatives to try to get at or try make stock-like products out of commodities should not be accessible by normal people.”

Brinker said:
“They’re listening right now on WMAL in Washington. Don’t be surprised if you see that legislation pretty soon.”

Mark in Michigan said:
“As far as the gas prices that we’re see right now compared to the oil prices. The last time oil was at $99 a barrel, our gas prices here in Michigan were at $3.32 a gallon. And that was just in March, 2011. Oil is back down to $99, or 97, 98 a gallon and our gas prices in town are still up at $4.19 a gallon.”

Brinker said:
“We get this complaint all the time, Dan, that the prices go up really fast at the pump when oil is going up, but when oil comes down, it seems like there’s a lag.”

Dan replied:
“Two points to be made. First, the callers from the mid-continent region, which always gets it a little bit worse because of the supply characteristics of that….area. That’s around Chicago and Detroit and Cleveland. But one thing is the crack-spread which talks about the relationship between gas and crude oil, has been especially wide this year for a lot of reasons I don’t really want to go into. So therefore, the same price you might have seen for crude a couple of years ago, does not translate into the same price for gas. It actually translates into a much higher price for gas…..Gas prices going up and not going down is a bit of a sham to a certain degree.

What happens is the retail guys will bet into….the forwards contracts on to the gasoline supply and have a certain lag that they have to have on prices coming down that they don’t have to have on it going up. And if they have a certain rational, for example, if the price jumps 6 or 7 cents during the day, they have no qualms about going right back out and plugging that into the retail price. But when it comes down, they have some contracts they have to run through. They have to wait until they expire before they feel comfortable dropping the price back down…..I will say this, you have lost 25-cents on the futures market in the past four days. If the price stays around here, you’ll get that by summer. It’s coming off…..sometime in June.

Dan and Brinker discussed using
natural gas in cars, especially government cars. Both agreed that they are speechless that the government hadn't done anything in that direction.

The last caller asked if the Bakken oil field
was the real deal. Dan said yes it was definitely not hype or nonsense. That there is an estimated 20 billion barrels of crude oil in the Bakken. For those interested in investing in it, he suggested two stocks: Whiting Petroleum and Connell Resources.

Dan Dicker's book is also available in Kindle for $16.99:

You can still download and listen to the Dan Dicker interview at KGO 810 Radio: Bob Brinker's Moneytalk on Demand/Audio Podcasting for free until next Sunday at 1pm. It is in the
3-4pm time slot. KGO Radio Sunday Archives

SJ Al, who is vacationing in Florida, sent this picture of the Pirate Ship that Dixiegeezer has also photographed. Al said it was 93 degrees and humid under the shade tree:

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