December 2005 Archives

The Wall Street Journal through its article Russia Refuses to Back Down In Gas Fight With Ukraine (subscription required) and the Financial Times through its article Russia rejects Ukraine gas price freeze call (subscription might be required) are both reporting that Russia and Ukraine have so far failed to reach an agreement on gas exports from Russia through the Ukraine to other parts of Europe.

The two countries are at odds regarding the price the Ukraine should pay for its natural gas. Russia wants to impose a market rate (roughly $230 per thousand cubic meters of gas) that is more than a four fold increase over the prior price. The Ukraine counters that it is willing to pay the market price, but over time. It wants a series of graduated price increases in order to adjust to the new prices.

This brinkmanship negotiation is very interesting and highly important on many different levels. It is interesting because the two sides are clearly playing brinkmanship. Both have made proposals that the other side finds unacceptable. Failure to reach an agreement will be severe for both parties. Russia will be seen as an unreliable source of natural gas. Ukraine will be deprived of its natural gas. And both countries will be blamed for depriving Europe of natural during the dead of winter. There is also a political angle in that Russia is providing some satellite countries preferential pricing while not others. Most view Russia's desire to raise prices as a direct consequence of the Ukraine courting the West and leaving the Russian sphere of influence. Russia's viewpoint is that if the country wants to join the West, it is free to do so but it must recognize its rights and obligations that go with that decision. Both countries have driven hard positions and there does not appear to be an easy way out. By an easy way out, I do not see how both countries can find a settlement without one country losing face.

Both countries have merits to their arguments. I will be curious as to what the settlement will be on 1 January 2006. If I had to guess, I think Russia will greatly reduce, though not stop, the gas flow. By reducing the gas flow, pressure will remain on both sides to find a settlement quickly as the rest of Europe is without their normal volumes. That said, I hope that I am wrong and that the two countries are able to find an amicable solution that works for both.

Update:

Other articles indicate that Russia is planning to stop Ukraine's volume of gas on 1 January 2006 if no resolution. But Russia plans to keep the European volumes constant. Thus, if Ukraine were to take any gas from the pipeline, Russia would accuse Ukraine of theft.

The National Geographic has sent John Walkenbach, author of my favorite weblog J-Walk Blog, a Copyright Complaint letter.

I am disappointed because John's posts did not, in my opinion, take away from the National Geographic. He did not reproduce entire articles or even a substantial portion of articles. He merely posted interesting snippets with links to National Geographic for the entire articles. In my view, he merely provided free advertising.

I would have much more sympathy for the National Geographic position if John had claimed authorship, reproduced substantial portions of the articles, or was deprived National Geographic of revenue and profits. I do not believe National Geographic suffered any harm. Rather, I believe National Geographic only benefitted from John Walkenbach's exposure.

Although I have never met John, I have tremendous respect for him. While I do not agree with all, or even many of, his views, I do appreciate his willingness to voice his opinions. And I do appreciate his effort that he puts into his blog to entertain his readers. I am absolutely positive that John meant no harm and, indeed, caused no harm to National Geographic.

As a fan and fellow blogger, I want to add my voice to denounce National Geographic's position.

The Conference Board Consumer Confidence Index improves in December.

The Conference Board Consumer Confidence Index, which had rebounded in November, improved further in December. The Index now stands at 103.6 (1985=100), up from 98.3 in November. The Present Situation Index surged to 121.5 from 113.2. The Expectations Index increased to 91.6 from 88.4 last month.

...

"Consumer confidence continues to bounce back and is now at its highest level since Hurricane Katrina struck the Gulf Coast," says Lynn Franco, Director of The Conference Board Consumer Research Center. "The resiliency of the economy, recent declines in prices at the pump, and job growth have consumers feeling more confident at year-end than they felt at the start of 2005. Even though all of the improvement over the past twelve months has been in consumers' assessment of current conditions, and expectations remain below earlier levels, consumers are confident that the economy will continue to expand in 2006."

Taking this survey simply at face value, this information bodes well for the markets.

Meanwhile at the Mortgage Bankers Association Loan Application Survey, the results did not seem nearly so optimistic.

WASHINGTON, D.C. (December 28, 2005) The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending December 23. The Market Composite Index - a measure of mortgage loan application volume was 554.1 -- a decrease of 6.8 percent on a seasonally adjusted basis from 594.6 one week earlier. A holiday adjustment was included in the seasonally adjusted numbers to help account for the reduced application activity prior to the holiday weekend. On an unadjusted basis, the Index decreased 17.0 percent compared with the previous week and was up 3.1 percent compared with the same week one year earlier.

I cannot help but wonder how the confidence level will fair once the housing ATM is no longer able to dispense fistfuls of cash. As interest rates rise, housing activity slows. And as we know, many people refinanced their homes to support their lifestyle. I am curious to see how this plays out in 2006.

Those who have been reading my weblog know that I follow developments in South America. I have written about Argentina, Bolivia, and Venezuela. I have discussed how the continent is becoming more left of center.

Today in Street Insight (an expensive subscription site), Doug Kass (General Partner for Seabreeze Partners Short L.P.) wrote his list of 25 possible surprises for 2006. His surprises are not predictions, but rather potential events that you should put on your radar screen. His first possible surprise concerns South America.

1. Anti-American rhetoric in South and Central America becomes kinetic in 2006 and has broad market and economic implications. A plethora of left-wing presidents (creating another anathema to the Bush administration) are elected in this volatile and important economic area of the world as elections of leaders in nine countries from Nicaragua to Chile are staged next year. Most importantly, with the recent election of Evo Morales in Bolivia, a projected victory of anti-American Nicaraguan leader Daniel Ortega, a surprisingly easy victory in Mexico of Andres Manuel Loez Obrador (an anti-President Vincente Fox candidate) coupled with more aggressive nationalistic moves by Venezuela's Hugo Chavez turn into an epidemic of anti-American policy. This new wave of socialism and left-wing presidents contributes to a series of moves to nationalize certain industries, and supply disruptions in certain countries in South America are destabilizing, resulting in much higher commodity prices during the year (including oil, natural gas, copper, tin and grain). The CRB Index approaches 375 (now at 326). Fears of stagflation befall economies and markets dependent on imports of goods from South America like the U.S. Crude climbs to over $80/barrel, and the Dow Jones Industrial Average bottoms at 9000-9250 during the early summer (and closes the year at the 10,000 level). Gold trades above $675/ounce sometime during the year.

Keep South America on your radar screen. Most of us pay little or no attention to South America.

As I have mentioned in the past, Street Insight (a sister site to TheStreet.com) is a valuable service. Those serious about the markets should consider subscribing.

Overstock.com (OSTK) CEO Patrick Byrne dissappointed the market with news of the company's fourth quarter results. According to its press release:

"We've had a nice holiday season, just not as nice a season as we've had in the past or as I'd hoped for," said Byrne. "We have become the go-to shop for smart, savvy shoppers interested in high quality products at discount prices, and I made the determination that this holiday season would be critical for solidifying our brand in our customers' eyes. To get above the noise, we spent a few dollars more than we had hoped, but in my experience, over time, those dollars will pay large dividends. So I decided to do what is smart for the company in the long run, rather than focus on just the quarter's results -- because I plan to be around next season as well, and to be bigger than ever."

Yeah, yeah, whatever. The press release contains more information about the lawsuit, for those that are interested. My own simple thoughts are that this company and its stock are in trouble—maybe not today, but soon.

In terms of disclosure, I have no positions in OSTK, either in stock or options.

Update:

You should also read Jeff Matthews's article A Necessary Correction.