So Much For Chinese Demand

"The International Energy Agency cut its oil demand estimates for every year through 2013 by about 3 million barrels a day, it said in its Medium- Term Oil Market Report today. Consumption will average 86.76 million barrels a day in 2012, the first year it will rise above 2008’s level of 85.76 million barrels a day, according to the Paris-based agency."

Well so much for demand for Energy from China. This demand growth has always been hyped by Energy bulls, but as I and many others have stated previously, what really matters is demand growth from the the U.S. and other industrialized nations.

Here is how the math works:

Oil demand in 2009 for the OECD countries is 45.2 million barrels per day, down 2.3 million barrels per day from 2008.

China oil demand is 7.9 million barrels per day. Let's assume that it grows at 5% a year, or about 400,000 barrels per day.

As you can see, the fall in demand from the OECD easily wipes out demand growth from China by a factor of at least five.

Two More Oil Bears

James Mulva, the CEO of Conoco Phillips said that the doubling in the price of oil off of its bottom to $73 a barrel was "a little bit ahead of the actual supply and demand situation and inventory levels."

Nouriel Roubini, the economist, said that the rally in oil prices was "too high too soon." Here's a short video of Roubini covering his full views on the current economy.

When General Motors Ruled The World - Part III

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

In 1936 and 1937 the United Auto Workers (UAW)attempted to organize the labor force at General Motors. This strike later became known as the "Flint sit down strike," where workers occupied the large General Motors plant in Flint, Michigan.

The strike spread to other plants and in February 1937, General Motors capitulated and recognized the UAW as the exclusive bargaining representative of workers in the union.

The first three pictures below are of John L. Lewis, and other labor leaders discussing the strike in January 1937 in Washington, DC.

Did the union victory in 1937 plant the seeds of the eventual destruction of General Motors? These men had no way of knowing, obviously, and were just fighting for basic rights that we take for granted. It certainly is not fair to blame the union for all of the ills of General Motors, as management made its share of bad decisions.

The final picture is the management of General Motors, including Alfred Sloan, discussing the strike with the Governor of Michigan and the U.S. Secretary of Labor. The management of General Motors refused to even sit in the same room with the Union leaders and all negotiations had to be done through intermediaries.

When General Motors Ruled The World - Part II

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

This is the one millionth car built by General Motors. It was a 1919 Oldsmobile 37-B model.



This is car number ten million for General Motors, a 1929 Buick sedan.



This is car number twenty five million built by General Motors

They Did Have Good Intentions

Another video from a lecture series called "The Culture that Spawned the Crisis: A Closer Look" held at The National Constitution Center in May 2009. The speaker is Peter Wallison, who worked in government during the Reagan Administration.

He argues that a push under the Clinton and Bush administration's to increase the homeownership rate was a worthy goal, but it was done by distorting the credit market by pressuring banks and the two Government Sponsored Entities to make loans that they should not have made. This is not the first time that someone has made this point, but it does bear repeating.

A Pathological Mutation of Capitalism

I wanted to share an interesting video from a lecture series at the National Constitution Center entitled "The Culture that Spawned the Crisis: A Closer Look." Several speakers argue that the changing culture of the United States led to the conditions that caused the financial crisis.

Some of these cultural changes include the concept of "thrift" which used to be an important part of American culture, but over a generation evolved into a culture of envy and personal gratification, where people expect something for nothing.

John Bogle, the founder of the Vanguard Group, speaks in this video. He uses the the term "pathological mutation" to describe the change in our capitalistic system, from a traditional owners capitalism where rewards went to the owner and providers of capital to a managers capitalism where the majority of rewards went to corporate managers and financial intermediaries.

When General Motors Ruled The World

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

The First Car Produced By General Motors



Source

White Mountains Insurance Analyst Day 2009 - Part II

Here are my notes from the White Mountains Insurance Analyst Day held on May 20, 2009. These are for the introductory section, the financial highlights and a review of bad news in 2008. When I went back to the events section of the White Mountains Insurance web page, the webcast link was missing, so I don't know if I'll be able to review the rest of the meeting. I have e-mailed the company asking for the link but haven't heard back. If anyone has the link to the webcast, please send it to me.

2008 – Bad News

WTM had $1 billion in excess undeployed capital last year because of a lack of investment opportunities – so the company bought back stock and did Berkshire transaction. Barrette admitted that with hindsight this was obviously, not a good idea. He doesn’t think it will destroy value but will not do what he thought it would do.

Equity Portfolio – Bad News

Equities as a percent of adjusted shareholder value has gone from 55% in December 2007 to 70% pro forma for the Berkshire transaction in June 2008, to just under 38% in the first quarter of 2009. He said that with hindsight the company should have sold down its equity portfolio, but instead paid Berkshire out of proceeds from its fixed income portfolio.



By December 2008, WTM altered its equity strategy to a goal of capital preservation. After first two weeks of October 2008, WTM found its capital falling to levels that came close to minimum capital levels necessary to keep credit ratings where they needed to be. Moved out of common stocks and de risked fixed income portfolio.

Barrette said the company likes what they own and would probably own some different things if they had more capital or flexibility. WTM owns things not because they have to but because they want to.

WTM Life Re – Bad News

This was a business that WTM got into that it didn’t fully understand what they were getting into. Alan Waters is in charge of fixing the business.

WTM has reinsured two blocks of Japanese variable annuity policies with same counter party that guarantees the return of initial deposit at death or maturity. These are ten year policies with average remaining life of 7 years. Outstanding guarantee is $2.5 billion for WTM, which is the difference between the account value and the guaranty value. Seventy percent is invested in fixed income index funds, and 30% in equity index finds.

Lost $188 million in this business in 2008, $181 million in last quarter of 2008. This loss comprised $93 million from assumption and model changes, which was the change in WTM assumptions on policyholders surrenders.

When a policyholder surrenders a policy the insurer does not pay full guarantee value of policy but only the account value so when account or asset values are low, high surrender are good. Unfortunately for WTM actual surrenders were well below what the company had estimated when they wrote the policy so they had to change the surrender assumption in the last quarter of 2008. WTM changed surrender assumption from 6.2% to 2.2% of all policies.

WTM lost $32 million in first quarter of 2009, but business is now marginally profitable now that the markets have calmed down.

WTM has reduced risk through increased hedging and improved method of hedging. WTM uses swaps instead of bond futures. Increased volatility coverage from 60% to 70%., and added local trading coverage in Europe and Asia.

WTM is still sensitive to surrender rates and if rate decreased to 1.1% then it would cost company $44 million.

Barrette says WTM ventured into a business it did not fully understand, and now he understands that they didn’t fully understand it, and he apologizes for it.

Barrette said it is a big loss but believes that they have it under control but there is still possible downside. The lesson is when something looks easy then look again. WTM usually laughs at those who get into its business who think it is easy and now they are on the other side of that.