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Five Things You Need to Know: Housing (obligatory), We're Doomed, GM Derivatives, Oil Shale, Extract This


What you need to know (and what it means).


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Obligatory Housing Update

Mortgage applications fell last week by the most since February.

  • The Mortgage Bankers Association's index of applications to buy or refinance a home dropped 6%, the most since February.
  • The seasonally-adjusted Purchase Index decreased by 7.1 percent to 396.4 from 426.7 the previous week whereas the Refinance Index decreased by 4.3 percent to 1480.5 from 1546.8 one week earlier.
  • The refinance share of mortgage activity increased to 35.7 percent of total applications from 35.0 percent the previous week.
  • Thirty-year fixed mortgage rates averaged 6.61% during the week, up almost 100 basis points, or a full percentage point, from the same time last year.
  • Later today, at 10 a.m. EST, the U.S. Commerce Department will report New Home Sales. Expectations are for a decline in new home sales by 6.4%, which would be the third decline in four months.

2. We're... (sorry, typo)... You're Doomed!

A London hedge fund icon has warned that the hedge fund industry could be doomed.

  • Crispin Odey, who runs Mayfair-based Odey Asset Management, says, "The hardest thing to do is to think in a different way to the crowd, but in an inflation world, hedge funds get killed," according to the Times of London.
  • Most hedge funds have for too long enjoyed the benefit of massive amounts of cheap money and will struggle in the coming era of rising inflation and interest rates, he said.
  • Odey, formerly with Baring's, founded Odey Asset Management in 1991, with $4.5 billion under management today.
  • Odey, 46, is married to Nichola Pease, CEO of JO Hambro Capital Management.
  • Odey and Pease are together known as the "Posh and Becks" of the London hedge fund industry, which is itself emblematic of a level of celebrity that only occurs just before an industry is, in fact, doomed.

3. GM Marketing Hatches Risky Gasoline Derivatives Scheme

GM has announced a plan that effectively caps gasoline at $1.99 per gallon for buyers of certain full-size SUVs and midsize cars in CA and FL.

  • According to the plan, consumers will receive a monthly credit to a pre-paid fuel card for the difference between $1.99 and the average price of premium gas in their state.
  • The amount consumers receive will be based on the number of miles they drive and GM says there is no mileage limit on the program.
  • Wait, why couldn't I just say I drove, like, 25,000 miles? How could the company possibly know how many miles everyone drives?
  • Nice try, but they'll check the OnStar communications system in your vehicle, Mr. Prevaricating Privacy Pants. OnStar knows everything, including your special Madonna sing-a-long sessions ("Mmm, mmm, my baby's got a secret.")
  • The GM marketing gimmick is aggressive and proactive, but the question is, "Will it help sell cars?"
  • No. In fact, we believe this is nothing more than a dangerous & risky gas scheme, potentially involving the complex use of derivatives.
  • The way it works is this: Basically, assuming a weekly fillup, the consumer is buying gas at $3 and selling back to GM 52 out-of-the-money put options on gas with a strike price of $1.99 a gallon, capturing the premium.
  • If I were GM, I would probably want to hedge my gasoline exposure and recapture some of the premium I'm paying between the weekly $1.99/gallon put and the spot price, which is a little more than $3.
  • But that hedge will actually require a directional bet on the future price of gasoline as well as an assumption on whether the current spread between the $1.99 basis and the spot gasoline price will narrow. The risk is that not only am I wrong on the widening or narrowing of the current spread, but I'm wrong on the future direction of the price as well! Yikes!!! Suddenly, GM marketing is looking more like Orange County, CA!
  • Otherwise, the whole scheme amounts to nothing more than General Motors giving money away. And no legitimate, self-sustaining & self-respecting business that is not headed straight for the bowels of bankruptcy would just give money away. Would they?

Welcome to the General Motors Marketing Department. Before developing any advertising campaigns, please familiarize yourself with the concepts of skew and kurtosis risk.

4. Oil Shale, the New Ethanol

With crude hovering near $70 a barrel, some people are looking at oil shale deposits in the Rocky Mountains.

  • What is oil shale exactly? Well, the funny thing about it is that it's not oil and it's not shale.
  • According to the World Energy Council, oil shale is actually a relatively hard rock, called marl. If processed properly, it can be turned into a substance "similar to petroleum."
  • The process by which oil is extracted from oil shale is called a "retort."
  • Backers of the process claim oil can be produced through the retort process for somewhere between $20-$35 a barrel, depending whom you ask.
  • According to National Public Radio, a study by the Rand Corporation estimates the sedimentary rock in the corner where Utah, Colorado and Wyoming meet, holds about 800 billion barrels of oil.
  • That's three times the size of Saudi Arabia's oil reserves.
  • Oil Tech is one company involved in the production of oil from shale rock.

5. Extract This

We don't like U.S. foreign dependence on crude oil anymore than you do. If only we could find a way to extract oil from something besides an OPEC country. Below are five things we wish we could extract oil from, and the subsequent Minyanville Estimated Reserves and cost of extraction.

  • Diet Mountain Dew
    Minyanville Estimated Reserves = 53 million barrels at a cost of $4.99 per case or $49.99 per barrel.
  • Pocket Lint
    Minyanville Estimated Reserves = 100 million barrels at $0.03 per pocket and $45 per fuzzy barrel.
  • Jell-o gelatin
    Minyanville Estimated Reserves = 500 million quivering, shimmying barrels at a cost of $0.39 per packet and $39 per barrel.
  • Yoo-Hoo chocolate-flavored fun drink
    Minyanville Estimated Reserves = 375 million chocolicious barrels at a cost of $19 per barrel.
  • Tears
    Minyanville Estimated Reserves = Depends on our mood, but possibly in the trillions if we continue to stay out late without calling home at a cost of, uh, free... in a way, but not really.
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