Tuesday, July 1, 2008 0 comments ++[ CLICK TO COMMENT ]++

Wilbur Ross: Oil In a Bubble, plus Thoughts On Commodities

Wilbur Ross was interviewed CNBC on June 30th and commented about commodities, including his thoughts on oil.

He seems quite bullish on commodities such as steel but thinks oil may be in a bubble. He points out that when oil hit a peak in the 70's, there was a supply shortage, with people lining up at gas stations and the like. Right now, there aren't any lines anywhere so supply clearly is not a problem. He also points out that refiners have been suffering with their inability to pass on costs (you just need to look at a chart of best-of-the-breed refiner like Valero (VLO) to see how it is down 50%.)

Although I'm bearish on oil, I think oil can keep going up for quite a while. Bubbles really don't end when one expects it (many labelled the run-up in technology stocks as a bubble in 1998 but it only came tumbling down in 2000.) To make matters worse (bullish for oil though), Israel is rumoured to be planning an attack on Iran. Most of the Iran attack rumour has been talk for years but it looks like there is some serious push by the hawks. Whoever that wants to attack Iran really need to do it while the Bush administration is in power so I'm sure they are using all their influence to do something. Such an attack can easily cause higher spikes in oil.

Wilbur Ross also said he is writing 1yr CDS on safe corporate names. He finds the spread attractive. I still can't get my head around the CDS market. Ross' idea seems reasonable but who is writing CDS contracts on companies that are "not safe"? Unlike buying or selling a commodity or a share in a company or a bond, CDS seem more like quasi-insurance to me. How would one price them properly? Insurers have enough problems trying to price events, whether hurricanes or fires or corporate defaults, and I wonder how traders and hedge funds do it. For instance, who would be willing to write CDS on, say, GM?

Although some regional banks will collapse, Wilbur Ross said he likes the regional banks and is looking for good ones at the right price. He said funding is going to be a problem for years so those with funds are attractive. When he saying funding, I presume he is talking about banks with retail bank accounts.

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