Saudi Oil

The last time we looked at the oil chart was in a post about CanRoys. At the time, there were plenty of oil bears on CNBC predicting $20-30 oil, but I was pretty sure that $50 was going to hold. Fast forward two months, oil’s back up to $63 a barrel. The talking heads would again have you believe that geopolitical tension is the sole cause while completely glossing over the fact that the rebound started long before this latest Iranian incident.

Personally I cringe every time I hear geopolitical events being used as an excuse for price increases, be it oil or gold or anything else. What’s usually left unsaid is that the prices invariably fall as such events subside. Except that quite often the prices don’t fall as much as they rise… While Iran may have contributed a couple of dollars to the oil price, there are greater forces at work. I’ll show a couple quick charts and links and leave you to make your own conclusions.

The first is Saudi oil output in the past five years. The data from four different sources were averaged to produce the black line. Over 2006, Saudi production declined from 9.4 MM bpd to just above 8.5 MM bpd. The full article can be found at the OilDrum.

The next chart is the Baker Hughes oil rig count for Saudi Arabia. The data is only up to early 2006. The rig count increased drastically in 2005, with no apparent corresponding increase in output. So it would seem that the new wells replaced declining production elsewhere, or Saudi Aramco embarked on a massive exploration program, or both. Oil price peaked in July 06, but other than a small supply bump in the middle of the year, Saudi production was a straight line down in 2006.

Click to enlarge

Was the reduction in Saudi oil output by choice or due to production limitations? I leave you to ponder that question. By the way, if you haven’t read Matt Simmons’ Twilight in the desert, now would be an excellent time.

Caveat: This is a look at the long term supply of crude oil, not a short term call to buy oil or oil stocks. As a matter of fact, I think oil will likely move down in the short term to form the right shoulder of an inverse H&S formation. If concerns about world economic growth emerge then $WTIC may retest the lows at $50. It would be a grand buying opportunity if were to happen.

Disclosure: I’m long oil stocks.

Roth IRA Conversion

One of the most exciting developments in terms of retirement savings for high incomer earners in last year’s Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, signed by President Bush on May 17, 2006) was elimination of the Roth conversion eligibility limit after 2009. In addition, in 2010 only, the extra tax incurred for this conversion can be spread over two years. Currently, married joint filers can convert their traditional IRA into Roth only if their modified adjusted gross income (MAGI) is under $100,000. Somewhat perversely, this provision is billed as a means to increase revenue, since taxes will have to be paid for the traditional to Roth conversion (at the expense of future tax revenue — but that’s someone else’s problem).

Today, joint/single filers with MAGI over $160,000/$110,000 are not eligible for Roth contribution. Phase-in starts at $150,000/$95,000 respectively. Non-deductible traditional IRA is pretty much the only IRA option for these people, assuming they are not self-employed. Many financial advisors are pointing out that the elimination of conversion eligibility limit creates a loophole where high income earners can simply contribute to a non-deductible IRA and immediately convert it into a Roth. The high income earner gets the Roth benefit without additional income tax liability. This plan works as advertised only if there is no other IRA with pre-tax contributions (traditional, SEP etc.). Since the IRS treats all non-Roth IRAs as a single pool of money, it’s impossible to single out the after-tax contribution for Roth conversion if there are other pre-tax contributions. [To calculate the actual income tax liability requires knowing the value of the IRAs and the basis in them. Some might still decide to do the Roth conversion even though they incur extra tax doing so.] However, all is not lost.

It’s a curious fact that although 401(k) plans share many of the characteristics as traditional IRAs, they are not included in the pool of IRAs when considering the characteristics of the withdrawals/conversions. Thus some interesting possibilities present themselves.

  1. For those intending to take advantage of the new Roth conversion rule and changing jobs between now and 2010, the best thing to do with their 401(k) is to leave them with the old employer or roll-over to the new employer’s 401(k) instead of rolling over to a traditional IRA.
  2. For those self-employed, consider a solo-401(k) [aka self-employed 401(k)] instead of a SEP-IRA if there is no employee other than the spouse.
  3. More research needs to be done but the Fidelity solo-401(k) appears to accept roll-over from a traditional IRA. If that were true, one can simply roll-over all IRAs with pre-tax contributions and voila, the trick mentioned above works beautifully!

In conclusion, those above the Roth eligibility limit and planning on doing the conversion should contribute to non-deductible IRAs now. Those having IRAs with pre-tax contributions should explore the possibility of rolling them into 401(k)s. By the way, the bar for establishing a solo-401(k) is not high. Check out these two articles at MyMoneyBlog (link 1, link 2) for more information. I have a sneaky suspicion that several PF bloggers would benefit from this financial maneuver.

Disclaimer: I’m not a tax professional. Make sure you consult with a CPA/financial planner before making any decisions.

Net Commercials And Adapting To Change

Frugal’s notes: This post was originally posted on March 26th at before some market setbacks.

Volatility Index

VIX [ ]
Commercials were sellers of the VIX index when it broke out, since, then the VIX has declined to retest old-resistance, which is now support at around 12 dollars. In the short-term, it looks like the VIX is overextended to the downside, so we will probably see a re-test of the 10-day moving average. From a longer-term perspective and the commercial setup, it looks like we are going to break below 12 and return to a period of low volatility.

Broad Markets

Russell 2000 [ ]
Commercials were big buyers last week of this index, as well as all the other indexes. Not too long ago, commercials were sellers at these price levels, and now they have turned around 180 degrees and are buying at these levels. I was anticipating the market to decline further before commercials would get interested in the stock market, but they proved me wrong. It looks like the double bottom at 760 is for real, and that we are headed towards higher prices in the intermediate-future.

S&P 500 [ ]
Total net-commercial position currently stands at -4,783. The last time net-commercial position was this high was back in late-2005. This is very bullish as far as COT setups are concerned. The double bottom near 1378 should hold, as this setup is forecasting higher prices in the intermediate-term.

NASDAQ 100 [ ]
Net-commercial position increased by roughly 20,000 contracts, confirming the other bullish COT setups on the rest of the indexes. Once again, the double bottom at 1,720 should hold, and higher prices are the forecast for the intermediate-term.

Dow Jones [ ]
Net-commercial position increased by over 25,000 contracts. This probably means that the double bottom at 12,050 should hold, as this COT setup forecasts higher prices in the intermediate-term.

After just one week, most of the index COT charts transformed from bearish setups to bullish setups. This just goes to show how dramatically the markets can change, and also that we – as investors – must be able to ADAPT to these sorts of changes. The key here is to stay open minded. A week ago the melt-down that started in late February looked like the beginning of something big; instead, it now looks like a critical bottom has been put in place. Also, notice the RUT broke right back above 800.


Crude Oil [ ]
Oil broke below $60, but found support near $57 and then rallied back above $60. Commercials continue to sell this market, so it looks like a bearish setup is in the works. There is very significant resistance above $64 for crude. For now, oil remains in a trading range (57 – 64); and even though commercials are sellers over the last little while, it is important to follow the trend which continues to point up…as long as oil remains above $60.

Gold [ ]
The picture with gold is not entirely clear. While commercials were buyers over the last little while, is this enough fuel for gold to go up and challenge its 2006-high near 730? This COT setup would have been much more bullish if net-commercial position moved to new highs on the 1-year-COT-chart, to roughly -75,000. For now, it looks like this market is poised to challenge its resistance at 690. Other than that, bullion continues to stay range-bound from a big-picture perspective, in between roughly 550 and 730.


US Dollar [ ]
The US dollars is setup for a rally, and is literally touching strong support at $82.5. If the USD holds above $82.5, then it looks like we will see a leg-up develop from these levels to perhaps challenge resistance at $85.5 – 87.5.

Robert Kiyosaki: A Smart Investor

Making predictions is a tough business, but learn from this master of words, Robert Kiyosaki (RK), on making “accurate” predictions.

What does this guy think of the recent stock market right now?

When my book “Rich Dad’s Prophecy” was released in 2002, most financial newspapers and magazines trashed it because I discussed a looming stock market crash. Ironically, much of what I predicted in the book is coming true earlier than I expected.

In fact, you can almost use RK as a pretty good contrarian indicator. Back in March of 2006, when I read RK recommending buying gold/silver, I really got a chill. I knew very well that he is not part of the smart money. And when the dumb money of the mass people come in, a significant top could be established. I didn’t follow my intuition, but rather I held out hoping for the PI date to come.

Do you still remember what books were published in bookstore near 2000 stock market mania? It was ‘Dow 36000″ and the like. Well, RK published his bearish book in year 2002 (when stock market bottomed), and now he wants to take credit for his “prediction”??? Don’t you think that if he is such a smart investor, he should have been publishing “SPY 1500″ to help people buying stocks at the bottom rather than the other way around?

I really wonder how much gold/silver RK is buying. I stand by my words, and I disclose my stake (3/20/07) by sectors here again (temporarily not available on my networth page, but I hope to make it available again as soon as possible on a daily basis):
Metals 57.5%
Energy 34.6%
Misc. 7.9% (water, agriculture, consumer staples)
Silver/Metals = 26%
My portfolio above is 61.24% of my total net worth.

For someone who never tells you what he is buying, and then tells you what he “did” with 20/20 hindsight, I would not take such “advice”. If you can really make some real money by reading RK’s books, I would be really surprised. No dates or concrete methods for any investing advice. Most of the things that he talks about are hard to achieve, making you to believe that “yeah, that’s why I’m not rich”.

A prediction without a date or a timeframe is usually not very useful. At the minimum, I’m willing to be wrong and add some dates or timeframe for my own expectation about markets. I think rather than playing to be always “smart” like RK, it is more pragmatic for you as readers if I take the chance to be wrong, and be battered by all of your comments.

Since RK has come out and said it again, I presume that by following contrarian thinking, stock market this year may not fall as hard. Unfortunately, I think his “glow” is waning, so this contrarian indicator is probably not as good as before.

I do believe that what he describes in that prophecy book may come true with some chance, but most probably NOT this year. I have marked his own words in boldface. He said it’s coming true earlier than he expected, so the best interpretation is that the scenarios in his book should be unfolding right now. We will see whether he is right or I’m.