Saturday, July 2, 2011

Barron's Says $150 Crude Coming Soon

The U.S. economy is never completely ready for higher oil prices, which is one reason they take a nasty economic toll when they arrive. But readiness can be enhanced by awareness of the likely outlook for petroleum prices–and the outlook today is relatively grim, although probably not disastrous.
Despite the recent 20% decline from April highs, new highs on crude, heating oil, diesel fuel, jet fuel and gasoline seem likely over the next 12 months. Following some further easing over the summer, the second leg of the long-term bull market in petroleum–the first occurred in 2007-08–probably will begin this fall.

Friday, July 1, 2011

No Stopping Stocks

That ISM figure put stocks into overdrive today.

ISM: Not So Fast!

This from Tyler Durden at Zero Hedge:

While all the algos are scanning the ISM general business conditions headline, the New Orders Less Inventories spread, which leads the broader index by 3 months, has tumbled and the divergence between it and the ISM Composite is now at near record wide levels. The last time this spread closed in a favorable fashion was back in 2010, when QE1 and 2 goosed the market and the general manufacturing space. This time around, in the absence of another stimulus, the spread will close again all right, but not the way it did last time around, and explains why an ISM analyst just said new orders "not where we'd like it to be." The sub 50 ISM print is coming. Just not this month.

h/t John Lohman

Dow Up 650 Points In One Week!

Wow! What a week! Stocks are up 100-150 points each day this week!

ISM Pushes Stocks to New Highs

Just like earlier in the year, the global recovery is once again on the shoulders of the US. Manufacturing ISM just printed at 55.3, a major beat to expectations of 51.3, and up from 53.5 before. How this meshes with PMI data that is contracting across the globe is irrelevant: just BTFD as America is once again expected to push the world out of the "soft spot" although this time with no QE or fiscal stimulus. Among the various indices, employment mysteriously increased from 58.2 to 59.9 despite consistently weak initial claims and NFP numbers missing expectations, New Orders increased from 51.0 to 51.6 despite a collapse in comparable metrics in recent regional Fed surveys, and prices paid dropped from 76.5 to 68.0, despite ongoing inflationary pressures.

The Destructive Consequences of Inflation

By: Steve Saville, The Speculative Investor

Most people with a basic grounding in economics know that increasing the supply of money leads to a fall in the purchasing power of money. However, this is as far as most people's understanding goes and explains why monetary inflation is generally not unpopular unless the cost of living happens to be rising rapidly. Monetary inflation would be far more unpopular if its other effects were widely understood. We list, herewith, some of these other effects.

1. A greater wealth gap between rich and poor. For example, monetary inflation is probably a large part of the reason that the percentage of US national income captured by the richest 1% of Americans has risen from 9% to 25% since 1980. Inflation works this way because asset prices usually respond more quickly than the price of labour to increases in the money supply, and because the richer you are the better-positioned you will generally be to protect yourself from, or profit from, rising prices.

2. Large multi-year swings in the economy (a boom/bust cycle), with the net result over the entire cycle being sub-par economic progress due to the wealth that ends up being consumed during the boom phase.

3. Reduced competitiveness of industry within economies with relatively high inflation rates, due to the combination of rising material costs and distorted price signals. The distortion of price signals caused by the monetary inflation is very important because these signals tell the market what/how-much to produce and what to invest in, meaning that there will be a lot of misdirected investment and inefficient use of resources if the signals are misleading. In relation to this point it is appropriate to contrast the performances over the past decade of the manufacturing sector's of Germany and the US. Germany is far from being a bastion of economic freedom (its economy is hampered by a heavy regulatory burden) and German labour costs are high, and yet Germany's manufacturing sector has handily outperformed its US counterpart over the past decade. The only advantage that Germany appears to have had is the absence of an inflation-fueled boom. But what an advantage it turned out to be!

4. Higher unemployment (an eventual knock-on effect of the misdirection of investment mentioned above).

5. A decline in real wages over the course of the inflation-generated boom/bust cycle. Even during the boom phase of the cycle, wages will usually be near the end of the line when it comes to responding to the additional money. During the bust phase, the higher unemployment rate (the excess supply of labour) will exacerbate the tendency of wages to be slower to rise than most other prices in response to inflation.

Note that while a lower average real wage will partially offset the decline in industrial competitiveness resulting from distorted price signals, it won't result in a net competitive advantage. It should be intuitively obvious that an economy could never achieve a net competitive advantage from what amounts to counterfeiting on a grand scale.

6. More speculating and less saving. The greater the monetary inflation, the less sense it will make to save in the traditional way and the more sense it will make to speculate. This is problematic for two main reasons. First, saving is the foundation of long-term economic progress. Second, most people aren't adept at financial speculation.

7. Weaker balance sheets, because during the initial stages of monetary inflation -- the stages that occur before the cost of living and interest rates begin to surge -- people will usually be rewarded for using debt-based leverage.

8. Financial crises. Rampant mal-investment, speculation and debt accumulation are the ingredients of a financial crisis such as the one that occurred during 2007-2009.

The above is a sampling of what eventually happens when central bankers try to 'help' the economy by creating money out of nothing.

China, India, South Korea Show Softening Manufacturing Data


Chinese manufacturing growth has fallen to its lowest level in more than two years and soft data from India and South Korea have added to the picture of a slowdown in Asia after a battery of government moves to tame inflation.
With price pressures still high, though, economists said policymakers would be able to shift only gingerly from fighting inflation to supporting growth.

Thursday, June 30, 2011

Geithner Goes

The stock market spiked higher on the news!

from Bloomberg:

Treasury Secretary Timothy F. Geithner has signaled to White House officials that he’s considering leaving the administration after President Barack Obama reaches an agreement with Congress to raise the national debt limit, according to three people familiar with the matter.

Geithner hasn’t made a final decision and won’t do so until the debt ceiling issue has been resolved, according to one of the people. All spoke on condition of anonymity to discuss private discussions.

Stocks: Unrelenting Joy

We actually got some good news this morning on the economy, and stocks are up another 150 points. We've been up over 100 points for four days in a row! Unfortunately, the bad jobs report this morning is still being dismissed.

Grains, Cotton Plunge on USDA Report

Corn is limit down

Cotton is near limit down

Soybeans plunged

Wheat plunged, near limit down also

Wednesday, June 29, 2011

Now the Bounce

Solid Selling!

Sell the News?

Greek Vote Brings Market Mayhem

When one key Socialist Party deputy voted against the bailout package, the Euro plunged, but only for a minute. They kicked that deputy out! Can kicked -- again!

Tuesday, June 28, 2011

Hubris Obliviana!

Crude Oil Goes Parabolic

Obama's SPR Sale of Crude Oil Fails Miserably

That lower price  from the sale of Strategic Petroleum Reserve sales lasted what? Three days?

Consumer Confidence Continues to Slide

According to crossing headlines, US Consumer Confidence per the Conference Board, which was expected to print at 10:00am, has come out at 58.5, on expectations of 61.0 and down from 61.7.

But Wall St is happy:

Fact Fracking

The real risks of the shale gas revolution, and how to manage them.

The U.S. is in the midst of an energy revolution, and we don't mean solar panels or wind turbines. A new gusher of natural gas from shale has the potential to transform U.S. energy production—that is, unless politicians, greens and the industry mess it up.
Only a decade ago Texas oil engineers hit upon the idea of combining two established technologies to release natural gas trapped in shale formations. Horizontal drilling—in which wells turn sideways after a certain depth—opens up big new production areas. Producers then use a 60-year-old technique called hydraulic fracturing—in which water, sand and chemicals are injected into the well at high pressure—to loosen the shale and release gas (and increasingly, oil).


The resulting boom is transforming America's energy landscape. As recently as 2000, shale gas was 1% of America's gas supplies; today it is 25%. Prior to the shale breakthrough, U.S. natural gas reserves were in decline, prices exceeded $15 per million British thermal units, and investors were building ports to import liquid natural gas. Today, proven reserves are the highest since 1971, prices have fallen close to $4 and ports are being retrofitted for LNG exports.
The shale boom is also reviving economically suffering parts of the country, while offering a new incentive for manufacturers to stay in the U.S. Pennsylvania's Department of Labor and Industry estimates fracking in the Marcellus shale formation, which stretches from upstate New York through West Virginia, has created 72,000 jobs in the Keystone State between the fourth quarter of 2009 and the first quarter of 2011.
The Bakken formation, along the Montana-North Dakota border, is thought to hold four billion barrels of oil (the biggest proven estimate outside Alaska), and the drilling boom helps explain North Dakota's unemployment rate of 3.2%, the nation's lowest.
All of this growth has inevitably attracted critics, notably environmentalists and their allies. They've launched a media and political assault on hydraulic fracturing, and their claims are raising public anxiety. So it's a useful moment to separate truth from fiction in the main allegations against the shale revolution.
• Fracking contaminates drinking water. One claim is that fracking creates cracks in rock formations that allow chemicals to leach into sources of fresh water. The problem with this argument is that the average shale formation is thousands of feet underground, while the average drinking well or aquifer is a few hundred feet deep. Separating the two is solid rock. This geological reality explains why EPA administrator Lisa Jackson, a determined enemy of fossil fuels, recently told Congress that there have been no "proven cases where the fracking process itself has affected water."
Getty Images
A drilling team from Minard Run Oil Company pull out steel pipe during a fracking operation at a 2100 foot natural gas well in Pleasant Valley, Pennsylvania in 2008.
A second charge, based on a Duke University study, claims that fracking has polluted drinking water with methane gas. Methane is naturally occurring and isn't by itself harmful in drinking water, though it can explode at high concentrations. Duke authors Rob Jackson and Avner Vengosh have written that their research shows "the average methane concentration to be 17 times higher in water wells located within a kilometer of active drilling sites."
They failed to note that researchers sampled a mere 68 wells across Pennsylvania and New York—where more than 20,000 water wells are drilled annually. They had no baseline data and thus no way of knowing if methane concentrations were high prior to drilling. They also acknowledged that methane was detected in 85% of the wells they tested, regardless of drilling operations, and that they'd found no trace of fracking fluids in any wells.
The Duke study did spotlight a long-known and more legitimate concern: the possibility of leaky well casings at the top of a drilling site, from which methane might migrate to water supplies. As the BP Gulf of Mexico spill attests, proper well construction and maintenance are major issues in any type of drilling, and they ought to be the focus of industry standards and attention. But the risks are not unique to fracking, which has provided no unusual evidence of contamination.
• Fracking releases toxic or radioactive chemicals. The reality is that 99.5% of the fluid injected into fracture rock is water and sand. The chemicals range from the benign, such as citric acid (found in soda pop), to benzene. States like Wyoming and Pennsylvania require companies to publicly disclose their chemicals, Texas recently passed a similar law, and other states will follow.
Drillers must dispose of fracking fluids, and environmentalists charge that disposal sites also endanger drinking water, or that drillers deliberately discharge radioactive wastewater into streams. The latter accusation inspired the EPA to require that Pennsylvania test for radioactivity. States already have strict rules designed to keep waste water from groundwater, including liners in waste pits, and drillers are subject to stiff penalties for violations. Pennsylvania's tests showed radioactivity at or below normal levels.
• Fracking causes cancer. In Dish, Texas, Mayor Calvin Tillman caused a furor this year by announcing that he was quitting to move his sons away from "toxic" gases—such as cancer-causing benzene—from the town's 60 gas wells. State health officials investigated and determined that toxin levels in the majority of Dish residents were "similar to those measured in the general U.S. population." Residents with higher levels of benzene in their blood were smokers. (Cigarette smoke contains benzene.)
Fracking causes earthquakes. It is possible that the deep underground injection of fracking fluids might cause seismic activity. But the same can be said of geothermal energy exploration, or projects to sequester carbon dioxide underground. Given the ubiquity of fracking without seismic impact, the risks would seem to be remote.
Pollution from trucks. Drillers use trucks to haul sand, cement and fluids, and those certainly increase traffic congestion and pollution. We think the trade-off between these effects and economic development are for states and localities to judge, keeping in mind that externalities decrease as drillers become more efficient.
Shale exploration is unregulated. Environmentalists claim fracking was "exempted" in 2005 from the federal Safe Water Drinking Act, thanks to industry lobbying. In truth, all U.S. companies must abide by federal water laws, and what the greens are really saying is that fracking should be singled out for special and unprecedented EPA oversight.
Most drilling operations—including fracking—have long been regulated by the states. Operators need permits to drill and are subject to inspections and reporting requirements. Many resource-rich states like Texas have detailed fracking rules, while states newer to drilling are developing these regulations.
As a regulatory model, consider Pennsylvania. Recently departed Governor Ed Rendell is a Democrat, and as the shale boom progressed he worked with industry and regulators to develop a flexible regulatory environment that could keep pace with a rapidly growing industry. As questions arose about well casings, for instance, Pennsylvania imposed new casing and performance requirements. The state has also increased fees for processing shale permits, which has allowed it to hire more inspectors and permitting staff.
New York, by contrast, has missed the shale play by imposing a moratorium on fracking. The new state Attorney General, Eric Schneiderman, recently sued the federal government to require an extensive environmental review of the entire Delaware River Basin. Meanwhile, the EPA is elbowing its way into the fracking debate, studying the impact on drinking water, animals and "environmental justice."


Amid this political scrutiny, the industry will have to take great drilling care while better making its public case. In this age of saturation media, a single serious example of water contamination could lead to a political panic that would jeopardize tens of billions of dollars of investment. The industry needs to establish best practices and blow the whistle on drillers that dodge the rules.
The question for the rest of us is whether we are serious about domestic energy production. All forms of energy have risks and environmental costs, not least wind (noise and dead birds and bats) and solar (vast expanses of land). Yet renewables are nowhere close to supplying enough energy, even with large subsidies, to maintain America's standard of living. The shale gas and oil boom is the result of U.S. business innovation and risk-taking. If we let the fear of undocumented pollution kill this boom, we will deserve our fate as a second-class industrial power.

Monday, June 27, 2011

Dallas Fed Survey Drops Far More Than Expected

... and of course, no reaction on Wall Street!

from Zero Hedge:

The collapse in the manufacturing base continues: the Dallas Fed general business activity index just printed at a whopping -17.5 on expectations of -3.2,  number that was supposed to be a gain from before, and yet another confirmation that Wall Steet is populated by a bunch of illiterate lemmings. From the report: "Perceptions of general business conditions were mixed in June. The general business activity index pushed further negative, falling from –7.4 to –17.5. Twenty-eight percent of respondents said activity weakened this month, the highest share in nine months. However, the company outlook index rose from 3.2 to 7.2, suggesting manufacturers were more optimistic about their firms’ prospects for the near future."

More Disappointing Data

Not to worry, however. Wall Street is ignoring the bad news and has rallied out of the starting gate.  News, data, and analysis are irrelevant. We have printed prosperity now! Pollyanna Party on, Wall Street!

from Zero Hedge:

Not surprisingly, the personal household weakness continues into May, when both personal income and spending came lower than expected, the first printing at 0.3% on expectations of 0.4%, in line with a revised 0.3% in April, while spending printing coming unchanged in May on expectations of a 0.1% rise, down from a revised 0.3% in April. Most important was that the PCE deflator increased by the most since late 2009, surging from 2.2% to 2.5%, just as expected. Squatters rent component of income once again increased: "Rental income of persons increased $3.3 billion in May, compared with an increase of $2.9 billion in April." More importantly, "Private wage and salary disbursements increased $14.1 billion in May, compared with an increase of $26.4 billion in April." This in line with observed decline in tax withholdings by the government over the past several months. Net result, in May the savings rate increased modestly from 4.9% to 5.0%, much to the chagrin of spending advocates everywhere, as in addition to deleveraging, US consumers also saved more. And this is before the market flush in June...
Savings rate:

And here is Goldman's disappointed take on the numbers:

1. Personal spending fell short of expectations, remaining unchanged in nominal terms but falling 0.1% in real terms. Moreover, the level of real spending in April was revised down. Real personal spending in the first quarter is tracking at 1% or just below, compared with the latest Q2 assumption of 1¼%. This implies a bit of downside risk to our 2% GDP growth estimate for the second quarter. Personal income also fell short of consensus expectations in May, rising 0.3% from a downward-revised base. The saving rate increased by one tenth to 5.0%.

2. The price components of this report contained few meaningful surprises. The increase in the core index was a bit above our expectation (+0.26% versus 0.24%). The year-to-year trend accelerated to 1.2%, as expected

Consumer Spending Weak

from AP:

WASHINGTON (AP) -- Americans spent at the weakest pace in 20 months, a sign that high gas prices are taking a toll on the economy.
Consumer spending was unchanged in May, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1 percent.
April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first decline in inflation-adjusted spending since January 2010.
Incomes rose 0.3 percent for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1 percent in May, after falling by the same amount in the previous month.
Stock futures fell immediately after the report was released. Dow futures plunged 115 points.
Neil Dutta, an economist at Bank of America Merrill Lynch, pointed out that inflation-adjusted, after-tax income is now slightly lower than it was in January.
"It was a very poor report all around," he said. "I think it's clear that higher gasoline prices are taking a bite out of consumer spending."
Consumer spending accounts for 70 percent of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.
Fewer jobs and high unemployment have left workers with little leverage to ask for raises. And slow wage growth hurts the broader economy because consumers have less money to spend.
Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May, the lowest amount in eight months. That followed three months in which employers hired an average of 220,000 net new workers each month. The unemployment rate rose to 9.1 percent last month.
The economy expanded at an annual rate of 1.9 percent in the January-March period. Many economists believe that growth is only slightly better in the current April-June period.
The report also showed that prices are increasing across many goods and services. A key inflation gauge followed by the Federal Reserve rose 0.2 percent in May, after increasing 0.3 percent or higher in each of the previous five months.
But excluding the volatile food and energy categories, inflation rose 0.3 percent in May, the most since October 2009.
Gas prices have eased since peaking in early May at a national average of nearly $4 per gallon. In the past two months they have dropped to a national average of $3.57 per gallon, according to AAA's daily fuel gauge.
An Associated Press survey of 38 top economists predicts that rate will be about 2.3 percent. Economists are optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace. They note that two of the biggest factors slowing the economy are abating.
Gas prices are falling. And U.S. factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami in that country has led to a parts shortage, particularly for auto and electronics manufacturers.
Still, growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.
Americans boosted their savings a bit in May, keeping 5 percent of their after-tax income. That is up from 4.9 percent in April.

Stocks: Up, But Breaking

Stocks are barely positive just minutes before the day session.