Market Outlook: Risk On Thursday

Wednesday, August 15th, 2012

by EconMatters.com

Cisco

Well, miracles do still happen, that dog of a stock for the last (too long to count) actually beat for the quarter, yes I am talking about Cisco. Cisco quarterly reports often send the market down 200 points; they have woefully underperformed the market by a large margin. Not only did Cisco have a good quarter in this environment, but they raised their dividend by 75%. Can you say short squeeze tomorrow? If all goes well in the conference call with reasonable guidance, and given the preview on CNBC, expect a big Risk On day tomorrow for equities.

Chart Source: Yahoo Finance, Aug. 15, 2012

In fact, because we are right up against resistance in several markets such as Oil, Bonds and the S&P, the volume should finally pick up and some key resistance levels could get blown through on Thursday. Cisco is one of those bellwether stocks that either lifts or plunges the rest of the market; expect a nice pop at the opening as shorts are pushed a little outside their comfort zones on Thursday.

The next question is whether tomorrow`s potential rally if it does play out as I anticipate will be a rally that can finish the day on the highs or is a prime candidate for the fade team to come in at the highs and sell into with gusto. But hey one miracle at a time, what`s next HP beating and having a good quarter as well? That`s probably too much to ask for but if they do the shorts could get a much higher entry point.

Oil Markets

Other things to watch out for on Thursday are if Crude Oil can take the next leg up after a bullish inventory report. If WTI breaks above $95 on Thursday then the $100 level is in play again with that range being from $92 to $99.70 yes remember that range. Gas prices have been going up, not sure who is buying all this gas, but inventories are starting to get stretched.

Chart Source: FT.com, August 15, 2012

My first impression is that the US is now exporting more gas than previously as an arbitrage play with cheaper WTI versus Brent being attractive for exports in the southern region of the US. But whatever the case, whether Iran Oil has really been off the grey market it cannot be denied that US refineries are running like crazy and we have lopped off 20 million barrels off the Oil inventory picture in short fashion.

So watch Crude Oil, as Brent is already moving towards pricing in an Iranian escalation of tensions and seems headed towards $120 a barrel relatively quick. Some trial balloons in the media seem to be taking hold coming out of Israel, stay tuned to this circus show as it could get quite scary and provide some interesting election fodder for the candidates.

Bonds

Well, the 10-year is bumping up against the 1.8% area, let`s watch tomorrow for some continuation of this move with traders getting pushed to some extent, and does a big move tomorrow push some safe haven capital into riskier assets on Thursday. The bond market could steal the show at the opening as that trade is so crowded I would hate to see even a glimpse of what that repositioning might look like with its derivative effect playing out for Risk Assets.

Chart Source: Yahoo Finance, August 15, 2012

All in all, we should expect much higher volumes on Thursday with some key levels tested in some pivotal markets, much better than the snooze fest of the past three days. When in doubt follow the price!

© EconMatters All Rights Reserved

Tags: Arbitrage, August 15, Chart Source, Cnbc, Conference Call, Crude Oil, First Impression, Gas Prices, Gusto, Inventories, Inventory Report, Market Outlook, Miracles, Oil Bonds, Oil Markets, Prime Candidate, Quarterly Reports, Resistance Levels, Short squeeze, Wti
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Weak Economics Leave Energy and Natural Resources Mixed, Lower (June 4, 2012)

Monday, June 4th, 2012

Energy and Natural Resources Market Radar (June 4, 2012)

Strengths

• U.K. coal consumption was at a six-year 46 percent high in the first quarter. The exact opposite of what is occurring in the U.S. is happening in the U.K. where utilities switched from natural gas to cheaper coal supplies. The U.K.’s Department of Energy and Climate Change estimated that coal-fired power generation increased by 20.2 percent, or 6.5 terawatt hours, in the first quarter. The U.K.’s gas-fired power generation fell to 25 percent market share, the lowest in 14 years. Britain’s six largest utilities expect difficult market conditions for gas-fired power generation through 2016.

Weaknesses

• Utility inventories for coal were up again in March to 196 billion tons or 86 days of supply, 62 percent above the 10-year average of 53 days, according to industry research from Stifel Nicolaus.
• Based on Energy Information Administration data, U.S. monthly coal consumption of 57.6 million tons in March 2012 was a 25-year low. With total power generation down 3 percent year-over-year in March, coal generation was down 21 percent year-over-year while natural gas generation increased 40 percent year-over-year.  March utility coal inventories of 196 million tons represent 106 days of supply versus 71 days last year. The monthly increases in utility coal inventories have been declining, primarily due to production cuts across the industry.
• Copper producer China Nonferrous Mining Corp. has pulled its planned Hong Kong initial public offering of up to $313 million due to worsening market conditions, becoming the second major IPO to be scrapped in the city this week and underscoring tepid demand for new listings.

Opportunities

• China made stimulus announcements.  The Ministry of Finance announced RMB 98 billion ($15 Billion) in central government funding for social housing projects.  This compares to 153 billion spend by the government over all of 2011.  Also, the National Development and Reform Commission (NDRC) approved construction of three major steel projects, with combined investments exceeding RMB 130 billion.  And on Monday, the NDRC approved the construction of a new airport in Sichuan, joining recent approvals of three other airports.
• GlobalOre, the second major physical iron ore trading platform, and rival to the China iron ore platform, launched this week in a bid to boost its price-setting influence. Vale, BHP and Rio Tinto have also joined the platform, reports GlobalOre.

Threats

• BofA-Merrill Lynch warned this week that the global iron ore market may be oversupplied in 2013 due to 100 million tons of additional capacity coming online out of Australia.
• China’s Ministry of Commerce reported that domestic thermal coal prices are expected to drop further in the short term. In the week to May 27, domestic crude coal prices dropped 1 percent week-over-week, the sixth week in a row. Weak coal demand from the downstream power generation sector and high stocks at power plants have been behind the downward trend in coal prices. Coal stocks at China’s major power plants totalled 88.87 million metric tons on May 20, a record high, up 6.4 percent from the end of April.
• Argentina’s Mining Ministry this week ordered mining companies to prioritize the purchase of local products and services, as well as seek prior government approval 120 days before making overseas purchases of goods and services. Since February of this year, Argentina has subjected the import of all goods to a pre-registration and pre-approval regime, called the Declaración Jurada Anticipada de Importación. More than 600 product types must now obtain an import license, such as mining machinery and chemicals.

Tags: Administration Data, Central Government, Climate Change, Coal Consumption, Coal Fired Power, Copper Producer, Department Of Energy, Energy Information Administration, Gas Generation, Government Funding, Housing Projects, Initial Public Offering, Inventories, Market Radar, Mining Corp, Ministry Of Finance, Power Generation, Social Housing, Stimulus, Terawatt Hours
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Big GDP Miss: 2.2% Vs Expectations Of 2.5%, Composition Even Uglier

Friday, April 27th, 2012

So much for the +3.0% GDP whisper number. Instead of printing at the expected number of +2.5%, the first preliminary GDP data point (two more revisions pending) came out at 2.2%, a big disappointment for a quarter which had a substantial boost from the weather. And while of the 2.2%, Personal Consumption came in strong – as expected, as it was precisely the factor most impacted by pulling in demand forward courtesy of “April in February”, 0.59% of the 2.2% was an increase in inventories, something which was not supposed to happen as it means that the quality of the economic growth in Q1 was far worse than expected. Cementing the ugly composition of Q1 GDP was fixed investment which added just a paltry 0.18% – this is the number which is critical for ongoing cashflow generation and unfortunately, the very low print means that growth outlook for Q2 is now even worse than before and we expect economists will promptly trim their already bearish predictions for Q2 GDP. Finally, government “consumption” subtracted just 0.6% from the total number, a decrease from the 0.84% in Q4, which means that once again the government is starting to become less of a detractor to growth – a dagger in the heart to anyone who claims there is “quality” in GDP growth. And the number you have all been waiting for: At March 31, US Debt/GDP was 100.8%.

Full breakdown by category:

Tags: Composition, Dagger, Detractor, Disappointment, Economic Growth, Economists, GDP, Gdp Data, GDP Growth, Government Consumption, Growth Outlook, Heart, Inventories, Personal Consumption, Q2 Gdp, Q4, Revisions, Ugly, Weather, Whisper Number
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The Politics of Oil (Charles Lieberman)

Tuesday, April 17th, 2012

 
by Charles Lieberman, Advisors Capital Management

April 16, 2012

Oil prices have given a bit of ground recently, as rising inventories suggest that any possible supply disruptions may be more limited in scope than had been feared. The Saudis have increased supply, even as Libya and Iraq increase production, offsetting reduced supplies of Iranian oil and increased stockpiling by China. It is a bit soon to be confident that oil supplies will be adequate should a conflict erupt with Iran, but the evidence is less one-sided now. So, gasoline prices have retreated, reducing the drain on household income.

Higher oil prices deplete consumer spending power, so the recent retreat in oil prices is very welcome, even if it is modest so far. Users, notably the Chinese, have been adding to demand to grow strategic stockpiles, which has helped push up prices. The underlying concern is that a conflict will disrupt supplies coming out of the Persian Gulf, driving prices considerably higher. However, oil production has also increased to meet this demand, notably from Libya and Iraq, as their oil production gradually reverts to normal, and by the Saudis, who are increasing production to counteract the loss of Iranian supply. In March, global supplies increased about 1.2 million barrels per day, a solid advance. Should this stockpiling continue, it would relieve much of the anxiety over the possible loss of Iranian oil.

Europe’s planned oil embargo of Iranian crude is scheduled to begin July 1, but numerous countries have already begun to scale back purchases, if only because financial links are being turned off, so it has become quite difficult for nations to pay for any oil. Iranian oil exports are clearly falling, making the March increase in global inventories all the more impressive. A few more months of additions to global supplies would likely lead to a meaningful decline in prices.

Last year, a rise in oil prices was one of the key factors that helped slow growth, since it serves as a draw against household spendable income. The rise so far this year is fairly modest, yet investors are concerned that a repeat performance is possible. Few would dispute that higher inventories that push down prices would be rather welcome.

Tags: Additions, Anxiety, Capital Management, Consumer Spending, Decline, Disruptions, Gasoline Prices, Household Income, Inventories, Iranian Oil Exports, July 1, Libya, Lieberman, Oil Embargo, Oil Prices, Oil Production, Oil Supplies, Persian Gulf, Saudis, Spending Power, Stockpiles
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The Oil Conundrum Explained

Friday, March 23rd, 2012

Submitted by Brandon Smith of Alt Market

The Oil Conundrum Explained

Oil as a commodity has always been a highly valuable early warning indicator of economic instability.  Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases.  High energy prices derail healthy economies and completely decimate systems already on the verge of collapse.  Oil affects everything.

This is why oil markets also tend to be the most misrepresented in the mainstream financial media.  With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction.  While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…

The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically.  Neither of these claims is true…

The supply side of the oil equation is the absolute last factor that we should be worried about at this point.  In fact, global oil use since the credit crisis of 2008 has tumbled dramatically.  This decline accelerated at the end of 2011 and the beginning of 2012 all while oil prices rose:

http://www.energyasia.com/public-stories/markets-world-oil-demand-fell-3…

In its February Oil Market Report, the International Energy Agency (IEA) forecast a reduction in the growth of demand into the Spring of 2012, despite reports from the mainstream media that oil prices were spiking due to “recovery” and “high demand”.  Simultaneously, the IEA reported that petroleum inventories rose to the highest levels since October, 2008:

http://omrpublic.iea.org/currentissues/full.pdf

The Baltic Dry Index, which measures global shipping rates and the demand for freight in general, has fallen off a cliff in recent months, hovering near historic lows and signaling a sharp decline in world demand for raw materials used in production.  A fall in the BDI has on multiple occasions in the past been a predictive indicator of stock market chaos, including that which struck in 2008 and 2009.  A sharply lower BDI means low global demand, which should, traditionally, mean decreasing prices:

http://investmenttools.com/futures/bdi_baltic_dry_index.htm

So, supply is high across the board, inventories are stocked, and demand is weak.  By all common market logic, gasoline prices should be plummeting, and far more Americans should be smiling at the pump.  Of course, this is not the case.  Prices continue to rise despite deflationary elements, meaning, there must be some other factors at work here causing inflation in prices.

Ironically, stock market activity in the Dow has now come under threat from this inflationary trend in oil.  Rising energy costs have essentially put a cap on the epic explosion of equities, and many mainstream analysts now lament over this Catch-22.  The problem is that these investors and pundits are operating on the assumption that the Dow bull market is legitimate, and that the rally in oil is somehow an extension of a “healthier economy”.  This version of reality, I’m afraid, is about as far from the truth as one can stretch…

In the candy coated world of Obamanomics, high priced stocks are a valid signal of economic growth, and oil is rising due to demand which extends from this growth.  In the real world, stock values are completely fabricated, especially in light of record low trade volume over the past several months:

http://money.cnn.com/2012/01/19/markets/trading_volume/index.htm

Low trade volume means very few investors are currently participating in active trade.  This lack of investment interest in the markets allows big players (such as international bankers) to use their massive capital to swing stocks whichever way they choose, even to the point of creating false market rallies.  Throw in the fact that the private Federal Reserve (along with helpful hands-off approach by our government) has been constantly infusing these banks with fiat printed from thin air, and one can hardly take the current ascension of the Dow or the S&P very seriously.

Another issue which should be stressed is the renewed tensions in the Middle East, namely, the very distinct possibility of an Israeli or U.S. strike in Iran, and the possibility of NATO involvement in Syria (which has extensive ties to Russia and Iran).  Certainly, this is a tangible danger that would have unimaginable consequences in global oil markets.  However, the threat of growing war in the Middle East is in no way a new one, and has been ever present for the past decade.  It hardly explains why despite hollow demand and extreme supply, the price per barrel of oil has been an unstoppable rising tide.  Attempts by Saudi Arabia to reverse inflationary trends by promising increased production in the wake of Iran turmoil has so far been ineffective.

Simultaneously, large oil reserves have been discovered off the coast of Greece:

http://www.balkanalysis.com/greece/2010/12/08/greek-companies-step-up-offshore-oil-exploration-large-reserves-possible/

Off the coast of Ireland:

http://www.independent.ie/national-news/ireland-on-the-verge-of-an-oil-and-gas-bonanza-679889.html

Massive fields in Mongolia have been uncovered:

http://www.chinadaily.com.cn/bizchina/2009-08/08/content_8544985.htm

And of course, the vast shale oil fields in North Dakota and Montana are finally being tapped:

http://www.mtpioneer.com/archive-July-oil-reserves.htm

Oil supply has been ample and large oil reserves are being discovered yearly.  Speculation would be the next obvious assumed culprit, and there are certainly some signals of such activity.  Oil speculators traditionally use the forced accumulation of oil inventories to reduce market supply and artificially increase prices.  Inventories have indeed been high.  However, as previously stated, demand for oil has been static or fallen in most countries around the world since 2008, and there has been NO petroleum shortages due to manipulated markets.  In fact, there have been no petroleum shortages period.  Speculation has the potential to cause sharp but short term shifts in markets, but one must take into account the long term trend of a particular commodity to understand the root cause of its increasing or decreasing value.  Again, inadequate supply is NOT the trigger for the ongoing oil price problem, whether by threat of war, or by reduction through speculation.

This schizophrenic disconnection between the stock market, and oil, and true supply and demand, is, though, a symptom of one very disturbing illness lurking in the backwaters of the U.S. fiscal bloodstream; dollar devaluation.

We all understand that the Federal Reserve has been engaged in non-stop quantitative easing measures in one form or another since 2008.  We don’t know exactly how much fiat the Fed has printed in that time, and won’t know until a full and comprehensive audit is finally enacted, but we do know that the amount is at the very least in the tens of trillions (be sure to check out page 131 of the GAO report below to find their breakdown of Fed QE activities.  This is just the money printing that has been ADMITTED TO, in excess of $16 trillion):

http://www.gao.gov/assets/330/321506.pdf

The dollar is being thoroughly squashed.  Why is this not showing in the dollar forex index?  The dollar index is yet another example of a useless market indicator, being that it measures dollar value relative to a basket of world fiat currencies, ALL of which also happen to be in decline.  That is to say, the dollar appears to be vibrant, as long as you compare it to similarly worthless paper currencies that are being degraded in tandem with the greenback.  Once you begin to compare the dollar to commodities, however, it soon shows its inherent weakness.

The dollar’s only saving grace has long been its status as the world reserve currency and its use as the primary trade mechanism for oil.  This, however, is changing.

Bilateral trade agreements between China, Russia, Japan, India, and other countries, especially those within the ASEAN trading bloc, are slowly but surely removing the dollar from the game as these nations begin to replace trade using other currencies, including the Yuan.  I believe commodities, especially oil, have been reflecting this trend for quite some time.  The consequences of the dollar’s ties to oil are detrimental to all nations that consume petroleum, and they are clearly moving to insulate themselves from further devaluation.

Even after the release of strategic oil reserves back in the summer of 2011 in an effort to dilute prices, and the announcement of an even larger possible release of reserves this month, oil has not strayed far from the $100 per barrel mark.  High Brent crude price have held for years, even after numerous promises from government and media entities admonishing what they called “speculation”, and promises of a return to lower energy costs.  Not long ago, $100 per barrel oil was an outlandish premise.  Today, it is commonplace, and some even consider it “affordable” compared to what we may be facing in the near future, all thanks to the steady deconstruction of the last pillar of the U.S. economy; the dollar, and its world reserve label.

Ultimately, no matter how manipulated and overindulged the stock market becomes, no matter how many fiat dollars are injected to prop up our failing system, the price of oil is the great game changer.  As inflation is reflected in its price, and energy costs burn out of control, the Dow will begin to fall, regardless of any low volume or quantitative easing.  In all likelihood, this conundrum will be blamed on as many scapegoats as are available at the moment, including Iran, or China, or Russia, or Japan, etc.  Each and every American, and especially those involved in tracking the economy, will have to remind themselves and the public that at bottom, it was the Federal Reserve that created the conditions by which we suffer, including currency devaluation and high oil prices, NOT some foreign enemy.

The one positive element of this entire disaster (if one can call anything “positive” in this mess), is the manner in which the high price of oil tends to dash away the illusions of the common citizen.  It is an issue they simply cannot ignore, because it affects every aspect of their lives in minute detail.  Costly energy awakens the otherwise ignorant, and forces them to see the many dangers lurking on the horizon.  Hopefully, this awakening will not be too little too late…

Tags: Assertions, Brandon Smith, Commodities, Commodity, Conundrum, Credit Crisis, Culprits, Disinformation, Economic Instability, Energy Prices, False Conclusions, Global Oil, Iea, International Energy Agency, Inventories, Mainstream Media, Markets World, Oil Market Report, Oil Markets, Oil Prices, Russia, World Oil Demand, Wrong Direction
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Will Oil Continue Higher?

Sunday, March 4th, 2012

Will Oil Continue Heading Higher?

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Does it feel like it costs an arm and a leg to fill your car these days? While consumers may continue to feel the bite from higher gasoline prices, investors can use these rising prices to their advantage.

Beginning in March, crude oil has a seasonal wind at its back. For nearly 30 years, the third month of the year has been the best month for crude oil. As you can see in the chart below, over the past 5-, 15- and 30-year cycles, West Texas Intermediate crude oil prices head higher in March, and have generally continued to climb through September.

On Yahoo! Finance earlier this week, Daily Ticker host Aaron Task and I discussed the many factors that should continue to drive oil higher over the next year. While many would like to attribute the rise in oil to the geopolitical developments in Iran, there are more global supply and demand fundamentals to consider. Credit Suisse points to the world’s dwindling inventories of oil as an example. Currently, the number of days of oil demand cover is at a low of about 57, the same level we saw in 2004 and late 2007. This low supply to cover demand means that any disruption in supply will likely drive prices higher.

We expect inventories to be further depleted, as demand continues, especially from emerging markets. Inventories for February and March should show a further reduction, as “oil demand growth was building positive momentum in the fourth quarter in all our regions except Europe,” says Credit Suisse.

According to Bloomberg News today, China plans on stockpiling more oil to reduce its local price fluctuations. Countries such as the U.S. generally store emergency oil to ensure its residents, businesses and manufacturers have plenty of stock at a price that’s not too high. As part of a three-phase program to increase its strategic petroleum reserves, China is building four emergency oil-storage facilities across western China, in the east and in the south. By the end of this year, its oil facilities are “expected to bring national crude-storage capacity to 270 million barrels” when construction is complete, says Bloomberg.

By comparison, the U.S. currently has the largest emergency petroleum supply in the world, stockpiling about 570 million barrels of crude oil at four sites located along the Gulf of Mexico.

China is not the only emerging market expected to consume more oil. When I was in Bogata, Colombia a few weeks ago, I saw gas stations posting prices around $5 a gallon. And its citizens can only fill up their gas tanks a few times a week. Yet the economy is booming and the streets are jammed with cars. There’s still tremendous demand in this country, as well as many other growing emerging markets, even with higher gasoline prices.

One question I’m asked when oil jumps in price is, will it hurt the U.S. economy? I don’t believe so. Many analysts believe the economy is in a better position to adjust to higher prices, especially when you compare last year’s oil spike to this year’s.

In 2011, fuel prices rose more than 50 percent in a matter of only a few months, says BCA Research. This “very quick and forceful advance” occurred at the same time that U.S. consumers were driving more miles, the number of unemployed workers was at a high, and job creation was nonexistent, says BCA.

This year, the rise in fuel costs has been more gradual, says BCA. What’s more important to BCA is that “consumers are in better shape than they were last year,” with job creation, unemployment, and income expectations all posting improved numbers. In addition, the U.S. has experienced an unseasonably mild winter, giving furnaces a welcome respite and their owners lower heating bills, making the higher payment at the pumps a little more palatable.

In addition, central banks around the world are in “full-on expansion mode,” says BCA. This needed liquidity and support for growth provides an injection of confidence directly into the global consumers’ veins.

Beware of biases by oil analysts: Deutsche Bank research going back to 1999 found that analysts “consistently underestimate” the Brent oil price by an average of 27 percent. The chart below shows the forecasted price made by analysts compared to the actual Brent oil price outturn. Every year, analysts have underestimated how strong Brent will be, ranging from as little as 2 percent to as high as 54 percent. Using the average forecasting error, Brent could be as high as $135 a barrel.

We expect there to be corrections in the price of oil throughout 2012, just like the ups and downs commodities experience from year to year. While the world is hungry for energy, there’s no free lunch on the Periodic Table of Commodities, and historically, from year to year, commodities fluctuate. Crude oil, for example, has seen its share of ups and downs: In 2008, oil lost 53 percent; in 2009, it increased a substantial 78 percent.

On our interactive version of the Periodic Table of Commodity Returns, you can see this for yourself. Click on a particular commodity and see how it has performed each year over the past 10 years.

See the interactive table now.

While oil may remain elevated, use these higher prices to your advantage by owning natural resources companies that benefit from higher prices. The Global Resources Fund (PSPFX), which invests in global materials and energy stocks, gives investors a way to potentially offset those higher gasoline bills.

Tags: Chief Investment Officer, Credit Suisse, Crude Oil Prices, Disruption, Emergency Oil, Emerging Markets, Fourth Quarter, Frank Holmes, Gasoline Prices, Global Supply, Inventories, Month Of The Year, News Today, Oil Demand, Oil Storage Facilities, Phase Program, Price Fluctuations, Strategic Petroleum Reserves, Supply And Demand, U S Global Investors
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Q4 GDP Misses Estimates, Inventory Stockpiling Accounts For 1.9% Of 2.8% Q4 US Economic Growth

Friday, January 27th, 2012

The US economy grew at a 2.8% annualized pace in the supposedly blistering fourth quarter, yet the number was a disappointment not only in that it missed estimates of 3.0% (and far higher whisper numbers) but when one looks at the components, where a whopping 1.94% of the upside was attributable to a rise in inventories as restocking took place. And as everyone knows in this day and age a spike in inventories only leads to sub-cost dumping a few months later. In other words, the economy grew at a 0.8% pace ex inventories. Yet for all intents and purposes, this is considered “growth.” Personal consumption was also weaker than expected coming in at 2.0% on estimates of 2.4%. Perhaps the only silver lining was Core PCE which came at 1.1% on expectations of 0.9%, however as discussed extensively before, this was driven by an unsustainable surge in credit-binge spending, primarily for iStore trinkets, and is hardly sustainable especially as the US Savings Rate fell to 3.7% in the fourth quarter, the lowest since Q4 2007. In other words Joe Sixpack is living large, especially since Joe Sixpack no longer has to pay his mortgage. Unfortunately this is a collision course with every economic principle and the next taxpayer funded bank bailout is only a matter of time. Bottom line: the artificial economic pick up is over and Q1 will see inventories actually detract from GDP: as a reminder Q1 2011 GDP subtracted 1.8% points from the final 0.4% GDP, and that was following only a 0.9% inventory rise in the preceding quarter, Q4 2010. And that is not even mentioning the tight fiscal situation no longer being a benefit to growth. Oh yes, and gas is no longer falling. To paraphrase Lester Burnham, “It’s all downhill from here.”

Finally a chart of the GDP Price Index. It just printed the third lowest since 1963.

Tags: Bank Bailout, Binge, Collision Course, Core Pce, Economic Principle, Fiscal Situation, Fourth Quarter, Gdp Price Index, Intents And Purposes, Inventories, Joe Sixpack, Lester Burnham, Matter Of Time, Paraphrase, Personal Consumption, Q4 2007, Q4 Gdp, Silver Lining, Trinkets, Whisper Numbers
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What’s Up With the Chinese Economy?

Thursday, January 5th, 2012

The GDP-weighted Composite CFLP PMI that I calculate for China rebounded strongly to 52.6 in December from 49.3 in November. Much of the rebound can be attributed to seasonal factors, though.

While November is normally a weak month from a seasonal point of view the recent extreme weakness is noteworthy and cast serious doubt on the health of the Chinese economy. The strong rebound in December’s seasonally-adjusted Composite PMI (my calculation) to 52.4 from 49.5 in November allayed some of my fears of a possible further deepening of the growth recession in China.

Much of the rebound in the Composite PMI can be attributed to a surge in the CFLP Non-manufacturing PMI to 56.0 from 49.7 in November.

After adjusting for seasonality the CFLP Non-manufacturing PMI jumped to 55.2 from an extremely weak 51.4 in November.

The slump in the seasonally-adjusted non-manufacturing PMI in November was an extension of the weakness that set in since March 2010. The slump in consumer confidence was probably the main driving factor behind the weakness in November.

The strong showing of the non-manufacturing PMI in December may indicate that consumer confidence improved somewhat in December, but with the seasonally-adjusted PMI only at October’s levels consumer confidence is likely to remain at historically low levels. On top of the Eurozone’s malaise, the slump in consumer confidence probably also had an impact on the unseasonal slump in the seasonally-adjusted CFLP Manufacturing PMI in November. That obviously affected Japan’s manufacturing sector too.

Tags: Chinese Economy, Consumer Confidence, Crisis Levels, Eurozone, Extreme Weakness, Fears, Fourth Quarter, GDP, GDP Growth, Inventories, Malaise, Manufacturing Sector, Pmi, Point Of View, Rebound, Recession, Seasonal Factors, Seasonality, Serious Doubt, Slump
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Doug Kass: Ten Questions for the Bears

Wednesday, October 12th, 2011

Isn’t it amazing after a frantic run up in the first hour, we have sat in a +/- 2 point range on the S&P around that 1188 level I mentioned  for hours on end?  Ahh, computers….

Last week hedgie Doug Kass asked 10 questions for the bulls; this week he has 10 for the Bears… and not just how they expect to stop Detroit’s offense tonight on Monday Night Football. (duu duh duu duu)

1. Pace of domestic economic growth: Third-quarter 2011 GDP (in real terms) will likely expand by over 2.5%, well above 2011′s first-half growth of less than 1%. This pace of growth is stronger than the consensus forecast was as recently as a month ago, as business fixed investment, personal consumption expenditures and the improving trade deficit will all be positive contributors to growth. As well, third-quarter S&P 500 corporate profit growth (aided by a still-weak jobs market, strong productivity gains and rising production) should advance to a near $100-per-share annualized rate. Sure, beyond the current results, visibility is limited, as the manufacturing orders less inventory mix produced the third negative reading in four months and the household sector labors under a decline in stock and home prices, a contraction in government jobs and stagnating wages and little progress in real incomes.
   Nevertheless, both the residential real estate and the U.S. automobile industries are deeply depressed, represent historically low percentages of GDP and pent-up demand will be unleashed at some point. Almost all of the other recent domestic economic releases (e.g., jobless claims, the national ISM and lower food and energy prices) signal that the U.S. will muddle through into 2012. Meanwhile corporations have already proven that they are positioned to prosper even in a relatively sluggish backdrop — for instance, in the first half of this year, earnings exceeded expectations despite sub-1% GDP growth. Corporate balance sheets are liquid, inventories are conservatively aligned relative to sales, and profits are at record returns in third quarter 2011 (as profit margins having benefited from, among other factors, years of cutting fixed costs).
2. Europe and China: While Europe is a wild card, it rarely ever pays to bet on catastrophe. European leaders, though slow in response, no doubt have a full understanding of the consequences of not addressing their debt crisis. As I mentioned recently on “Fast Money,” the eurozone and its banks are now experiencing a La Dolce Vita moment — in the same way in which Marcello Mastroianni struggled between the allure of the cafe life in Rome and the responsibilities of living with his girlfriend. This was exactly what the U.S. and our financial institutions experienced three years ago — as a country, we were forced to find our way back to recovery and our banks were forced to accept responsibility (and recapitalize) for their misdeeds.
   My expectation is that the eurozone will become domesticated and accept the consequences of its actions (and recapitalize). Indeed, on Sunday, Merkel and Sarkozy agreed to a eurozone bank recapitalization.
   As to China, the September Chinese HSBC Markit Service PMI climbed back to 53.0, a blow to those who believe in a hard landing.

Read the other 8 here.

Tags: Automobile Industries, Contraction, Corporate Balance Sheets, Corporate Profit, Doug Kass, Duu, Economic Releases, Energy Prices, GDP Growth, Government Jobs, Household Sector, Inventories, Inventory Mix, Monday Night Football, Personal Consumption Expenditures, Productivity Gains, Profit Growth, Real Incomes, Residential Real Estate, Trade Deficit
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Oil Market: Rectifying The Broken Paper Pricing Model

Wednesday, August 24th, 2011

It has become quite apparent that major changes are necessary in the oil futures market after the latest year of volatility which had little relation to the actual fundamentals of supply and demand in the marketplace.

Oil is too an important commodity to have such a large dislocation from the actual physical market of supply and demand. It is used by people all over the world as a necessary commodity for daily transportation, businesses rely on the commodity to produce goods, and economies need a stable price reflective of fundamentals to flourish in an efficient matter.

In short, speculators have no business in the oil market, they distort prices, and sure helped slow global growth during the past year by running up prices well beyond the fundamentals based upon actual inventory levels of the commodity.

WTI & Cushing Inventory – A Curious Correlation

Let us look at WTI, it was trading at $115 a barrel while US inventory levels at Cushing were at record levels of over 40 million barrels in storage, in contrast WTI was trading at $76 a barrel when Cushing inventories were actually only 36 million barrels. (Back in May, when WTI was at $100/bbl, we wrote this piece predicitng oil would drop to $80 a barrel by Sept….We probably were too conservative.)

 

In addition, Libyan oil was offline the entire time, often cited by bullish speculators as a thesis to push up price regardless of the actual market effects of the offline oil which was more than made up for by Saudi Arabia. So now we can empirically validate that oil should never have been $115 a barrel, the market was actually over-supplied based upon inventory levels in relation to their 5-year averages.

Global GDP & Consumers Pay The Price

The run-up in the oil market is probably the single most destructive factor that is responsible for the deterioration in GDP growth the last two quarters, and signs of a potential recession. Why? Because it is one thing if the economy is booming and oil prices were high reflective of true dynamic demand in the economy, but it is an entirely different matter when prices are artificially high by a substantial amount and not reflective of demand in the market. That translates to a humungous tax being placed on the entire global economy which in the end is deflationary, and detrimental to economic prosperity.

Debunking The Brent & Libyan Oil Connection

Let us now examine the Brent Futures contract, which traded as high as $127 a barrel, and was trading as low as $97 a barrel just recently. Again, the fact that Libyan oil being offline was commonly used as the reason for it trading at such high prices, but notice there was no actual correlation between Libyan oil offline and $97 or $127 a barrel, and that alone is a $30 per barrel price discrepancy. The world needs a better pricing method for dictating price of such an important commodity.

Brent/WTI Record Spread Explained

The real problem with the Brent Futures market is that there is no transparency whatsoever, there are no inventories tied to the futures market to judge historical inventory versus current levels, and the market doesn`t have a physical delivery mechanism in place. It literally can be any price, just pull a number out of a hat, because it is completely divorced from a fundamental marketplace where price would be set by producers and consumers.

There are no producers and consumers setting the prices in either of these markets though as even WTI contracts that take delivery each year is so minuscule, i.e., so far less than 1% to be essentially a no delivery market as well.

The high premium for Brent oil compared to WTI (as much as $25 a barrel at times) is often rationalized as being based upon fundamental demand for Brent versus WTI, but that is just a smokescreen for the actual reasons which are that all the big players love the Brent market because it lacks any transparency, no inventories or delivery metrics, and the fact that it is such any easier market to obscure position limits. These are the primary reasons for the hefty Brent premium, and not fundamental supply issues.

From Jackson Hole to MENA Conflict

Another point worth noting is the QE2 affect on Oil prices, Bernanke steadfastly denied this but as we can examine in retrospect, it was absolutely a major factor in the rise of the commodity right after the Jackson Hole speech straight through to the MENA (Middle East & North Africa) conflict. It is just too tempting for Wall Street when $50 Billion is being created out of thin air each month to move some of this newfound capital electronically into the Oil markets.

After all, it was Bernanke`s stated goal to inflate asset prices, and the oil markets are assets the last time I checked, and commodity assets to boot, which get more love with loose monetary policy initiatives.

Oil Price Needs To Be Insulated from Monetary Policies

But the Fed at times will need to stimulate the economy with various policy initiatives, and the changes I am suggesting will help insulate the oil markets from such fed policy measures so that we can have the best parts of the stimulus, i.e., the wealth affects and business optimism, and leave out the worst parts of the stimulus in higher oil and gasoline prices which slow down the economy.

So here are the changes that need to be made to the oil markets, I actually feel that agricultural and some other key commodity groups may also need to addressed in the same fashion as these are too important commodities not to be based upon the fundamental supply and demands dynamics of a true marketplace and not a bunch of artificially created electronic/paper infused speculation but that is for another time.

Could This Be Rectified?

So these are the recommended changes to the oil markets:

1) WTI & Brent futures contracts opened for each month must be 100% deliverable, so you either provide delivery or take delivery each month or time frame in the future, and positions can be as large as any participant needs.

This will bring back some market fundamentals of true price discovery as all participants will actually utilize the commodity, no more paper market mechanism in place. So in short, a trader can speculate all they want, they just have to take delivery or provide delivery – this will cut out a bunch of the nonsense that currently goes on in these markets.

2) The Brent contract needs to be connected with some European storage facilities so that there can be a weekly transparent update which has historical benchmark capabilities so that inventory levels can be tracked and analyzed similarly to the EIA`s reporting on US inventory levels and statistics. This is long overdue, and for such an important commodity the fact that this has taken this long to occur in the era of modern technology is just ridiculous.

Paper Trading Benefits No One But Few “Elite Groups”

This isn`t the dark age. Isn`t knowledge and actual real data important for efficient economic resource planning and forecasting purposes?

The Brent contract shouldn`t be clouded in mystery, we shouldn`t have to take some anecdotal thoughts on Brent inventory levels, we should just be able to access the numbers in a weekly report that show the supply levels either well above or below their historical five-year levels just like the WTI contract and the total US Inventory Regions.

Yes, traders are going to have to find other markets to make their living, but frankly the oil market is too important to the vital health of the global economy to not return to price discovery based upon fundamental supply and demand, and not paper trading by large speculators for the sake of making money for a small elite group at the expense of the entire world population of consumers who are currently being artificially taxed by said speculators.

If these changes are made we will never again have to question the legitimacy of the price of oil for all practical purposes. Yes I know big speculators can do the contango trade by taking delivery and store oil off the market, but there are costs to doing this– capacity restraints, and at some point the oil will come back to the market.

Nevertheless, compared to what the current dynamics in place of 100% paper markets that exist in both the WTI and Brent Futures contracts, this will seem like a trivial “market price dislocation” and could be addressed if speculators seem to be purposely abusing the system on a case by case basis in the future. In reality this will be a major step forward in the right direction, if we have to make some minor tweaks along the way, then so be it.

As the 2007 run-up to $143 and then back down to $33, and this last year`s move from the mid $70`s up to $115 and then back down to $76 illustrate these markets are broken, and no true price discovery mechanism exists other than what the speculators say the price of oil is via capital inflows and outflows.

This current model leads to inefficient pricing and increased volatility which hurts economic growth and needs to be replaced by actual true price discovery of supply and demand fundamentals dictating the market price.

Price needs to be dictated by producers and consumers who actually either create or consume the commodity, and not the large speculators who neither produce nor consume the commodity but paper trade it. This leads to continual distorted and mispriced markets which in itself indicates that we have a problem in how these oil markets are being priced.

Tags: Bbl, Commodities, Commodity, Crude Oil, Cushing, Dislocation, Futures Market, GDP Growth, Global Gdp, Global Growth, Inventories, Inventory Levels, Oil Futures, Oil Market, Pricing Model, Recession, Saudi Arabia, Speculators, Supply And Demand, Transportation Businesses, Volatility, Wti
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