Michael Gracie

Unless you’re Toyota, I guess…

What Business Week is plowing onto the American public here is garbage, at least as far as this SUV owner is concerned.

Just as this article was coming out, I got a call from Toyota. It seems my “contract is running out” ( i.e. I’m close to paying off my FourRunner). Toyota is contacting me, wondering whether I’d be willing to trade in this vehicle (now worth a bit more that Kelly Blue Book, according to them) for a new Toyota vehicle of equal or greater value than the one I now own. They are willing to give me several thousand dollar, as a “coupon” on a new vehicle. My vehicle is in excellent shape and probably has a good ten years of useful life left in it. I of course declined.

If gas prices fall off their spike, I can only think that the rush to dump SUVs, perpetuated in good part by the media, will retrospectively be the next, closest, convenient way to jam more indebtedness down the throat of US consumers. “Trade in that gas hog now! It’s worthless! Get a small car before it’s too late! By the way, we’ve got a financing deal for ya!”

PS: My SUV - the one the media says is a dog - is now exactly three years old.

UPDATE: Forbes thinks the swan song of the SUV is overblown too.

UPDATE 2: Five reasons to keep that machine.

In the midst of oil-mania, Southwest significantly hedged their fuel consumption. Delta and American did not.

Guess who’s winning?

This is a management problem. Hedging is NOT speculation - you shouldn’t “lose” because you hedge, as the cost of fuel should wind up fixed if the hedge is managed appropriately. You determine your need for fuel, and figure out how that flows through to ticket price. Then you purchase forward contracts for that fuel and fix your ticket price appropriately. If fuel prices go up you take your gains on the contracts, which in turn offset your rising costs at consumption time. If fuel prices go down, you lose on the contracts but your fuel price has fallen as you’re buying it. Margin on your service stays the same, as you set your prices in advance.

Not hedging your fuel costs in this environment is the real speculation. And I’ll add that those who do cover their butts have the addition perk of being able to raise their ticket prices (even if slightly) on the back’s of their competitors’ misfortune without significantly effecting volume.

UPDATE: Forbes says: “The sky may not be falling for airlines just yet, but darker clouds could be just around the corner.”

Agreed (particularly if they don’t update their financial management tools to at least late 20th century levels).

UPDATE 2: Southwest turns its 69th consecutive profitable quarter.

PhysOrg does a good job of convincing, at least for the short to intermediate term.

Since 2003, worldwide oil prices have quadrupled. According to a new study, the price of oil is rising at a faster-than-exponential rate, and cannot be sustained. In other words, we’re in the midst of an oil bubble, say researchers Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China.

Certainly goes against the previous note on the subject.

UPDATE: Gas consumption is dropping rapidly - high prices are the cure for high prices. When will the commodities markets come unhinged?

Like a linkfest link barrage, only post-nap

• George Soros says it’s an oil bubble; he could have been nice enough to comment here, instead of going straight to the mainstream media. Still, speculation is rampant.
• Jerome Kerviel didn’t act alone? Once again, no surprise here.
• Giving away your product, while praying, should not be part of your business plan’s executive summary. If that’s your strategy, then bury the praying part in notes to the projections (nobody ever looks at those).

It’s cloudy/gloomy out…good weather for more napping.

UPDATE: If you decided to sleep too, there’s now more on the oil speculation bit here.

Just a summary of nuttiness

• Congress is nearing a quest to sue oil producing countries over prices. Even if they won such a lawsuit, who would determine the damages, and who would enforce the judgement? Is the Justice Department going to say “pay up, or you can’t export your oil to us anymore”?
• It’s time to lay down further regulation of the commodities markets. Despite skyrocketing global demand (and blatant stockpiling on China’s part in advance of the Olympics), the government still wants to blame everything on speculators. Forget never ending trade deficits, soaring national debt, and a plummeting dollar…it’s time to further regulate the exchange of futures contracts by Joe Trader In The Bathrobe.

What is going to happen when and if this bubble bursts?

UPDATE: Revisting peak oil (seen the chart before, and I’d recommend downloading and looking at it on a big screen).

UPDATE 2: More blaming the traders.

UPDATE 3: Hoarding may be reality.

The Economist calls the latest move desperation. With only a week to go until the next meeting, a 75 bip cut might make an investor think the Fed knows plenty they don’t.

UPDATE: It’s funny that oil for March delivery had punched 7-week lows when the Fed made the announcement - I’m not sure how long that will last now. You’d almost think the Fed wants $5 a gallon gas.

Senator Charles Shumer (D-NY) is calling for a probe on purported gasoline price fixing.

“The bottom line is they are producing at 85 percent capacity when they should be producing over 90 percent. Are they scaling back production? Only by subpoenaing the companies and looking in their books will we get that answer.”

I wonder what anyone is going to get from a pile of corporate books and records, other than smoke and mirrors. Chances are, even if you get straight talk, it isn’t going to be of much help.

You want to find answers? Look here instead. If you are lazy, let me clue you in - all you are going to find is free markets at work. You want a 400 horsepower V-8 in that 7,000 pound vehicle that you drive 100 miles round trip to work each day, back and forth from your sprawling suburban home?

Well then. You are going to have to pay the price.