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Thursday, May 23, 2013

China manufacturing contracts in May, after months of fitful near-stagnation, sez the HSBC Purchasing Managers' Index which dropped to 49.6 from 50.4 in April (under 50 = contraction), a seven-month low. A harbinger: New Orders in April had dropped to a five-month low. Ominously, in May, New Orders as well as New Export Orders fell again, as did Employment, Backlog of Work, Quantity of Purchases, among others. “The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds,” said Hongbin Qu, Chief Economist of Asian Economic Research at HSBC. “A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery.” Not very pretty. Though we’ve seen the manufacturing slowdown coming, the reaction on the Asian stock markets is brutal....

Nikkei crashes over 1,400 points, an 8.6% dive peak-to-valley from its morning high of 15,943, after having been up 300 points, to its current low of 14,573.... and still diving. For the day, it’s down 1,060 points so far, or 6.8%. That’s what happens when the air hisses out of a central-bank money-printing induced bubble. The hot money wants to get out.

Wednesday, May 22, 2013

H-P revenues plunged 10.1%, worse than expected, with PC revenues down 20%. Only uptick: lowly printing supplies, such as cartridges, paper, ink, up a measly 2%. Earning didn't "completely crater" like Dell's earnings, CEO Meg Whitman consoled her investors. But H-P had a huge write-off not long ago, and who knows what they plowed into it to make subsequent quarters look better. They always do that. Write-off accounting puts some lipstick on expenses, though it can’t do much about revenues. Props up operating income. “You can feel the turnaround taking hold at H-P,” Whitman said. Indeed, feel. Because there's no visible turnaround in the numbers. Nevertheless, stock jumped 13% after hours.

Justice Department admits: drones killed 4 Americans, in a letter sent to Congressional leaders. One of them was Anwar al-Awlaki, in September 2011 in Yemen. While widely reported, the government had never fessed up to it. The other three were Samir Khan (in the same strike); Awlaki’s son Abdulrahman al-Awlaki, also in Yemen; and Jude Mohammed, in Pakistan. Last year, Attorney General Eric Holder had outlined the government’s legal rationalizations behind knocking off Americans overseas – for example when they pose an “imminent threat of violent attack” and when capturing them is inconvenient. While the whole concept is iffy, the rubbery term "imminent" came under particular fire. But certainly, it won’t be abused; after all, there’s a Nobel Peace Prize winner in the White House.

Delta Air Lines rebels against taxpayer subsidies for Boeing because they benefit state-owned foreign airlines that compete with Delta. The US Export-Import bank is helping Boeing sell wide-body jets by helping foreign airlines buy them. CEO Richard Anderson said Delta would be “perfectly willing” to accept a “total moratorium” on financing of jets, which it also benefits from. "We are trying to do whatever we can to get a level playing field in a world where my government decides that they would rather have my competitors in the marketplace than Delta," he said. In April, Delta sued the Ex-Im Bank to put a stop to these shenanigans. It noted that 46% of the $106.6 billion in the Ex-Im Bank's activities are for aircraft loans or loan guarantees. Emirates and Korean Air were among the biggest beneficiaries, and as Anderson told Reuters, they could get funding without "the balance sheet of the US government." Ah the complex web of government handouts.

BOJ Governor Haruhiko Kuroda accepts jumpy yields on Japanese Government Bonds that nearly tripled from the April 5 low of 0.315% to today’s 0.90%, exact opposite of what money-printing and bond-buying is supposed to accomplish. Japanese investors have been fleeing JGBs; inflation, if it rises to 2% or more as per plan, will eat them up without compensation from yield. Add yen devaluation to make a nasty investment. He lost a bit of his brashness: "I am not expecting long-term interest rates to increase sharply considering the strong downward pressure being exerted on them by our quantitative and qualitative easing," he said at the press conference after the BOJ’s two-day huddle that left monetary policy unchanged, with the spigot wide open, committed to buying ¥50 trillion in JGBs a year, or 70% of all new bonds the government is issuing. "I believe it is quite possible to prevent any spikes in long-term interest rates," he said with even less certainty, then submitted to fate and accepted rising yields: "If expectations for economic recovery and inflation strengthen sharply, that could outweigh the risk-premium reducing effect and result in increases in interest rates," he said.

Japan trade deficit soars 69.7% in April to ¥879.9 billion, from April a year ago, the tenth months in a row of trade deficits, the worst series since 1980, and the worst April ever. For each of the last three Aprils, the deficit was worse than in the prior one; same for March, February, and January. The trend is relentlessly awful. Abenomics is deepening the hole, but it’s digging at a faster rate. The weaker yen nudged up exports 3.8%, but imports jumped 9.4%. Don’t blame oil: imported crude oil volume dropped 2.2%. Exports to China stagnated, but imports jumped 13.3%; the deficit skyrocketed 60.2%. However, exports to the US rose 14.8% while imports stagnated; the trade surplus leaped 32.5%. Japan exports twice as much to the US as it imports. Perhaps someone in the White House will someday get Japan to open up its auto market. The trade balance with Western Europe flipped from a surplus a year ago to a deficit; exports fell 3.5% and imports rose 11.4%. Abenomics and the money-printing binge have heated up consumption of imported luxury goods and other items that can’t be produced in Japan. For the rest, Abenomics appears to be a giant miscalculation. The graph for the years 2011, 2012, and 2013 shows the worsening trend:

Despite the awful trade data that was much worse than economists had hoped for, the Nikkei jumped 246 points or 1.6%, to 15,627 – oblivious to reality for months now, drunken with money the Bank of Japan is printing.

Tuesday, May 21, 2013

“Apple does not use tax gimmicks,” Apple wrote without twitching an eyebrow apparently, in response to a Senate investigation that showed that it sheltered at least $74 billion in profits from US taxes between 2009 and 2012 by using a "complex web" of offshore mailbox companies. One such Irish subsidiary with no employees and no physical existence made $30 billion in profits and didn't pay a dime to a single government anywhere, not even Ireland. Legal, and proof that the US corporate tax dodge code is a scam that bestows a tax-free environment and other welfare handouts to certain companies, while raking less fortunate and often smaller companies over the coals.

Impact of cheap natural gas in the US: the construction of 97 chemical and plastics plants that use natural gas as feedstock has been announced, with investments over $71 billion, sez the American Chemistry Council (ACC). Among them, in Texas alone: Dow Chemical’s plan to plow $4 billion into ethylene crackers and Exxon Mobil’s plan for an ethylene cracker and two polyethylene plants. Others lining up: Chevron Phillips Chemical, LyondellBasell, and Mitsui & Co. Via OilPrice.com. These companies vigorously oppose the export of liquefied natural gas (LNG) as they fear it would raise prices in the US to the levels natural gas trades for on the world markets. Their pleas fell on deaf ears, a dilemma and opportunity I wrote about.... The Quiet Triumph Of Oil And Gas In Obama’s Policies

Japanese Government Bonds: "Absolutely no guarantee" that Japanese investors will continue to buy them, warned an advisory panel to Finance Minister Taro Aso. Investors who lose confidence in the JGB can easily invest their funds overseas, the report nervously pointed out. Some have already made that shift. Hence the recent spike in yields, despite the Bank of Japan, which is mopping up around 70% of the flood of new bonds that the deficit spending of Abenomics generates. Investors only have to pick up the remaining 30%, but they appear to be reluctant to do so. Why is anyone outside of a government controlled institution still buying this crap?

Finding excuses: Japan supermarket sales dropped 1.9% in April, on a comparable-store basis, from April 2012, with food sales down 0.4% and clothing down 8.8%. Blamed was the "unseasonably cold weather." When sales edged up in February and March, the credit went to Abenomics, not the weather or some other silly thing. A broader media trend: when economic data points are positive, Abenomics gets the credit; when they’re negative, the weather and other reasons are dragged into the scenery, sometimes by their hair.

Mystery pollution in China: unknown foul-smelling goo emerges from cracks in the street, becomes huge, finally gets cleaned up ... and remains unknown.

Monday, May 20, 2013

“Every 10 years or so, banks make some horrible mistake and it usually starts with easy money,” said Mike Pinto, vice-chairman of M&T Bank, a regional US bank. “We are worried about the competitive atmosphere. It creates the temptation to do silly things.” He was talking about the credit bubble. US banks made $1.55 trillion in business loans through April, up 10% from last year; banks are falling all over each other trying to goose their profits by making risky loans. US corporations have also sold a record amount of bonds at record low yields and with historically low protections for investors. So now banks are loading up their balance sheets with business loans that will come to haunt them. But no problem. It will just be part of the next financial crisis that will give the eager Fed another opportunity to hand trillions to TBTF bankers to bail them out.

UK wages propaganda war against Scotland, which will hold an inconvenient independence referendum in September 2014. A new report by the UK Treasury, the third in the series, claims that the Scottish banking sector – composed of two large banks, Bank of Scotland and Royal Bank of Scotland, plus smaller ones – would put an independent Scotland at risk. Its assets would be 1250% of Scottish GDP, while the Cypriot banking sector, which brought down Cyprus, was 700% of GDP, the report said ominously. For the UK overall, banking assets are 492% of GDP, also very high. But the UK has “credibility” in the markets to manage that risk, something Scotland would lack. A "feeble attempt to undermine confidence in Scotland's ability to be a successful independent country," retorted Scotland's Finance Secretary John Swinney. "The Treasury, true to form, will outline what is in its own best interests, not what is in the best economic interests of the people of Scotland." He called these assertions misleading; "In terms of share of GDP, in fact, financial services are actually smaller for Scotland at 8.3% than the UK at 9.6%. So if the argument is about risk, then the risk is with the UK," he said.

Now Germany has a real reason to exit the euro: Goldman Sachs CEO Lloyd Blankfein wants it to stay! A bad sign. In an interview with the Welt, he said Germany had profited from the euro the most – from his point of view, “Germany” is “Germany Inc.” But real wages for working Germans have declined since the introduction of the euro, and workers have had a hard time, while wages in Greece, Spain, and other countries have shot up. Though German workers now have jobs, unlike people in Spain and Greece, they earn less than they used to in real terms. For that privilege, German taxpayers (not Germany Inc.) must pay a price, he said, namely bailing out banks and speculators who hold the crappy debt of periphery countries. He predicted utter economic mayhem for Germany if it left the euro. No, German taxpayers will have to bail out weaker countries, he said. And he raved about the "political project" behind the euro, the ultimately total integration of Europe (and of course, he defended TBTF banks, which were more secure, he said, than smaller ones). My question: is Goldman now seriously long the euro?

Weekend, May 18 - 19, 2013

Sales skid at S&P 500 companies: 458 companies of the 500 in the index have reported their Q1 results so far: earnings were up a measly 3.4% year-over-year, but sales fell 0.2%. Not exactly the foundation for the gigantic undying stock market rally that has plowed through whatever economic and corporate bad news with nary a twitch. When will this separation of reality from stock prices end? Someday, one way or the other! He who can pinpoint that day will make a lot of money.

Central bank success story: The global market for luxury goods grew 38.6% in three years. From $200 billion in 2009, luxury goods sales jumped 13% in 2010, 11% in 2011, and 10% in 2012, to end up at $275 billion. Despite the Eurozone debt crisis and austerity, despite the earthquake and tsunami in Japan in 2011... no matter what happened in those three years, luxury goods boomed, sez the the just released "Worldwide Luxury Markets Monitor," by Bain & Company for Fondazione Altagamma (PDF). “Absolute luxury items (high-end products with no logo, highest quality materials, and exquisite craftsmanship) lead the way,” the report reassured us, but there were some losers, including “watch consumption” which crashed in China. The report confirmed what we’ve seen everywhere: when central banks hand out trillions to their cronies, it doesn’t do much for the real economy as a whole, nor for employment, but it does one heck of a job at the very top of the pyramid.

"Threat of Default": US hits debt limit on Saturday, but by using a slew of shuffle maneuvers, shell games, tricks, and devices, the US won't actually run out of money until "after Labor Day," Treasury Secretary Jacob Lew told Congress in a letter. In his previous statement, the US would be "okay until Labor Day." Today, he was more frantic. He begged Congress to get its act together and do something "sooner rather than later" to “remove the threat of default.” In its infinite wisdom, Congress had suspended the debt limit till May 18, rather than dealing with it. The debt, though still over the limit, declined in April and early May; tax extractions were fattened by asset bubbles. But since May 10, the debt has once again been rising.

Friday, May 17, 2013

US Consumers haven’t felt this good since July 2007, just before all heck broke loose. An "encouraging sign," Reuters sez. For short sellers? The preliminary results of the Thomson Reuters/University of Michigan's consumer sentiment index jumped to 83.7 in May from 76.4 in April. Big part of the reason: households in the upper third of the income bracket felt flush from the ballooning stock market – the wealth effect. The Fed giveth.... They were able to brush off the payroll tax increase, which Wal-Mart shoppers, as we’ve seen, had a harder time brushing off. The Consumer Expectations index rose to 74.8 from 67.8. And the Current Economic Conditions index leaped to 97.5 from 89.9, the highest since October 2007, a month before the stock markets began to swoon. Impeccable timing, the hallmark of consumers.

Car sales in the EU crept up 1.7% in April, from a horrible April last year. The fact that the parade of ever worsening numbers has finally stopped, at least for a moment, was greeted with a huge sigh of relief. The details of the report aren’t that rosy: sales in the UK, now the second largest market after Germany, jumped 14.8%. Without the UK, sales for the rest of the EU actually dropped 0.46%. It wasn't exactly a smooth trend across the member states: Greece finally seems to have hit bottom, and sales increased 20.9%; in Denmark, they jumped 30.7% and in Finland 142.6%; but they crashed 26% in the Netherlands and 51.9% in Cyprus; they rose 3.8% in Germany but dropped 5.3% in France.

Deafening US media hype: Japan Core Machinery Orders jumped 14.2% in March, seasonally adjusted, from February. The eternal money-printing and fiscal-stimulus apologists dragged it out as proof that Abenomics is working massively. Alas, these are highly volatile big-ticket items, though “core” orders exclude container ships, nuclear reactors, etc., which are even more volatile. To iron out the volatility, the Cabinet Office also offers quarterly numbers. Soooo, core orders in the first quarter of 2013 were actually 4.8% lower than in the first quarter of 2012, when Noda was prime minister. Kampai!

The Japanese take care of their college grads: 93.9% of all those who graduated on March 31, the end of the academic year, had jobs by April 1, the beginning of the business year. This was the second year in a row that the percentage increased, so it’s NOT related to Abenomics, please! College recruitment, like so many things in Japan, is a highly structured process with the idea to get pretty much everyone squared away before the end of the academic year. But those who miss this entry into Japan Inc. have the greatest difficulty getting through the door later. The system is unforgiving punitive to those who don’t toe the line.

About that secret inflation in Argentina: famously, no one is allowed to accurately track or discuss inflation, but all the whisper numbers floating around peg it at over 20% annually. Now confirmation has come from official sources: wage negotiations between unions and the government of President Cristina Fernández Kirchner. Unions are her base. In fact, she personally met with the leaders of six unions that represent about 2 million workers, or 40% of all workers covered by wage negotiations, and made a deal, similar to the deals she’d made with Railway and Bus Drivers’ unions. The agreed-upon wage increases this year to keep the purchasing power of her voters intact? The closest estimate to official CPI that Argentina has? 24%!

Thursday, May 16, 2013

Last time French-made cars were sold is the US? 1980? Long time ago. But... French-made models of the Toyota Yaris are coming to the US, Canada, and Mexico, apparently to keep the plant in Onnaing, near Valenciennes, busy. Car sales in Europe have been catastrophic, and plant shutdowns and layoffs are hard to do, especially in France where even thinking about it causes a huge political ruckus. In 2012, 182,841 Yaris were sold in Europe, accounting for 22% of Toyota's total European sales - a highly successful model at the low end of the lineup. North America will get US versions, not EU versions. So no diesels.

Plunging price of gasoline shaves 0.4% from Consumer Price Index in April. Total energy prices dropped 4.3%, with gasoline down 8.1%. We’ll remember those days fondly because that cheap gasoline is now history; prices have been climbing in May! Food prices rose 0.2%. Core CPI, which excludes food and energy, rose 0.1%. For the 12-month period, CPI is up 1.1% and core CPI 1.7%. The Fed might complain that this is below target; but it’s still inflation, and it still whittles down the value of your and my dollars, and everything denominated in them, and it’s still higher than the interest that banks pay on most deposits and CDs, though it’s better than 4.3%, as we had some months in 2011.

Another blow to US manufacturing: Philadelphia Fed's Business Outlook Survey – for manufacturing in eastern Pennsylvania, southern New Jersey, and Delaware – dropped into the negative, to -5.2 in May, from 1.3 in April (below zero = decline). The New York Fed's Empire State Manufacturing survey, reported yesterday (below), had also pointed at a contraction. Ominous: new orders dropped to -7.9, the worst since June last year, from -1 in April; the Workweek Index dropped to -12.4, and the Employment Index dropped to -8.7. Manufacturing is only a small part of the US economy, and this region is a small part of the US, so we’re not going to panic just yet...

US Housing Bubble confirmed: Heard an ad on the radio on how to get rich quick by flipping houses – and we’ll show you how. It conveniently offered an 800-number. Something or other was free.... but keep your credit card handy. These kinds of things usually appear late in a bubble.

Death penalty for financial fraud in China. A court in Wenzhou slapped a local, 39-year-old gal, former general manager of Wenzhou Xinfu Investment Consulting Co., with the maximum penalty available, death, for having illegally raised funds for investments starting in 2007. Everything worked fine until October 2011, when her scheme collapsed and she ended up defaulting on a 428 million yuan loan ($69.6 million). Leaves open the question if they’d slap the same penalty on TBTF bank CEOs every time their banks need a bailout. A bit draconian maybe, but something the US might want to consider as well, after not having prosecuted anyone responsible for the financial crisis and for the Fed’s bailouts that followed, though they did hound, as in China, small-scale crooks like Bernie Madoff.

Bad loans at Chinese commercial banks swelled by 6.8% in the first quarter, to 526.5 billion yuan ($85.6 billion), the sixth consecutive quarter of increases, raising the non-performing loan ratio to 0.96%. And NPLs are expected to rise further. One of the many elements in a boundless debt-fueled scheme that will eventually, like the micro-case above, unravel.

The Japanese Diet rubber-stamped the ¥92.6 trillion ($926 billion) budget for fiscal 2013, which started April 1. A breath-taking ¥43 trillion ($425 billion) will have to be borrowed to make ends meet - that's 46.4% of the total outlays! But no problem. Abenomics will get Japan out of its fiscal quagmire, one way or the other, by printing money. Government spending on public works – welfare spending for Japan Inc. – will rise to ¥5.3 trillion. In a show of rare fiscal discipline, welfare spending for the poor will be cut by ¥67 billion. Priorities of Abenomics are becoming clear.

Japanese GDP growth less than a year ago! The economy grew 0.9% in the first quarter 2013 from Q4 last year, or a 3.5% annual rate. Private demand was up some, with investment in housing being fairly strong, but corporate investment lackluster. Public demand – government spending and investment, including boondoggles – jumped, as promised by Abenomics. Exports rose, and so did imports, but not as much. All seasonally adjusted. Great? Give credit to Abenomics for that 0.9% growth in GDP? Because it was the fastest growth since... oops, well, since the first quarter of 2012, when the economy grew 1.3%. Abenomics can't even keep up with Noda's maligned era.

Wednesday, May 15, 2013

Megabanks "are NOT too big to jail," claimed Attorney General Eric Holder today in a heroic about-face at a House Judiciary hearing, after he'd explained to the Senate Judiciary Committee in early March why exactly they were indeed too big to jail. The Justice Department has not prosecuted any megabanks despite their shenanigans leading up to the Financial Crisis and continuing to this day. A debacle I wrote about.... 'Regulatory Capture' Emasculated The Regulators Of Megabanks.

French purchasing power plunges 1.5% per capita, and 0.9% for all households together in 2012 (difference due to population growth), the worst performance since 1984. Combination of: disposable income creeping up only 0.9%, and prices rising 1.9%. Ah yes, the many benefits of "moderate" or even "below-target" inflation.

Tough day for US manufacturing: industrial production dropped 0.5% in April, after increasing in February and March; year-over-year, it's up only 1.9%. Within it, manufacturing fell 0.4%; fingers point at motor vehicles and parts, down 1.3%. Capacity utilization fell 0.5% to 77.8%, and is 2.4 percentage points below long-term average. Add to that: the New York Fed's Empire State Manufacturing Survey for May dipped into the red (-1.43, from 3.05 in April). Employment sub-indices were mixed, with number of employees up slightly, but hours worked down sharply. Darkest cloud: new orders were negative. Executive optimism for the next six months declined, second month in a row. Not an exemplary picture of a growing economy.

"My question is, who is going to jail?" wondered House Speaker John Boehner about the IRS scandal. So why didn't he and other Republicans ask that question after the financial crisis, the largest scandal in the US ever?

Swooning energy prices, particularly gasoline, pushed down wholesale prices by 0.7% in April, seasonally adjusted. Food prices also dropped, a godsend for those of us who like to eat, with veggies and meat down the most. Without food and energy, which are highly volatile, the core Producer Price Index rose 0.1%. For the 12-month period, the unadjusted PPI is up a scant 0.6%. If they could just keep it that way!

Warning shot: Russian car sales plunged 8% in April. For the year, they are now 2% below the same period last year, a record year during which sales had jumped 11% from 2011. The good times appear to be over. Is the EU malaise heading east?

Europe stuck in recession: the Eurozone economy shrank 0.2% in the first quarter, from Q4, the sixth quarter of recession in a row, another glorious record. The 27-nation EU contracted 0.1%. Year over year, they’re down 1.0% and 0.7% respectively. Germany's economy inched up 0.1% in Q1, after having plunged 0.7% in Q4, thus barely avoiding the red stamp of recession. Both quarters combined, Germany is in the hole. The lousy performance in both quarters surprisingly surprised pundits. France is formally in a recession; its economy contracted 0.2% in Q1, third contraction in four quarters. Italy and Spain both shriveled 0.5%. Unperturbed, German stocks, while down a smidgen for the day so far, are still above their prior all-time intra-day high of July 2007. This will be seen as the greatest accomplishment of the central bank money-printing binge: separating (at least temporarily) stock markets from reality and allowing them to float in a dream world.

China's pile of foreign exchange grew by 294 billion yuan to 27.363 trillion yuan ($4.41 trillion) in April, according to the People's Bank of China, the fifth month in a row of increases. For the first four months of 2013, the monthly influx averaged 400 billion yuan, nine times the average in 2012. Earlier this month, the State Administration of Foreign Exchange, the top forex regulator, had threatened to crack down on foreign money flooding the country. China is where the hot money goes – on the bet that the yuan will continue to rise against the dollar which, through the arduous and heroic efforts of the Fed, will continue to lose value.

Nikkei jumps 2.29%, to 15,096, highest since December 28, 2007. If it keeps going like this, it will be above 40,000 soon. This thing has become a joke – even more so than the US stock markets. Japanese government bonds continue their descent, pushing yields up, with the 10-year JGB hitting 0.90% but then settled down at 0.85%. The yen skidded.

Tuesday, May 14, 2013

Ex-leaders of consumer electronics: Sharp's huge loss is a sign of how Japanese powerhouses have lost the edge to Korean, US, and Chinese rivals. A doozy: ¥545 billion ($5.3 billion) in red ink, a record in its storied century-long history. A top exec reshuffle has been announced, but it won't fix the real issue that is bedeviling Sharp and other Japanese consumer electronics companies, once world leaders, now not even also-rans. Abenomics won't be able to cure that either. This isn't an issue of costs and exchange rates, but of innovation, products, and now increasingly brand (they squandered it).

China's white paper on human rights, helpfully issued in English so that foreigners like me can get their brains washed, starts out promisingly: "Since the arrival of the 21st century, the Chinese people have been making constant efforts in advancing human rights protection along the path of building socialism with Chinese characteristics under the leadership of the Communist Party of China (CPC) and the Chinese government." Further into it, the paper clarifies priorities: "China has a population of over 1.3 billion. For such a populous country, it would be impossible to protect the people's rights and interests without first developing the economy to feed and clothe the people." Money before rights. But it also points out how the government has become much more transparent in many ways, which few people will dispute (text in full).

Inflation hits Japan: wholesale prices rose for 5th month in a row in April, by 0.3% from March, with the index at 101.4 (2010 prices = 100). Electricity, gas, water, lumber, and wood products jumped over 3%. Some of it was due to the weakening yen that made imported fuels and raw materials more expensive. How exactly higher prices would cure Japan’s economic ills remains a mystery, though it will give a stylish haircut to all those owning Japanese Government Bonds....

Japanese Government Bonds skid once again: yields rose, for the 10-year JGB to 0.85%, from 0.79% yesterday, from 0.69% on Friday, and from 0.315% on April 5, the day they went bonkers. While yields are still ultra-low, the rise has been relentless, not at all what the BOJ wants – and now there's also volatility, rare sight in the JGB market. Japanese institutions and individuals are buying foreign bonds with higher yields to diversify out of the yen that has been doomed by Abenomics to decline. If this turns into a massive dumping of yen, if the BOJ cannot keep it under control, the selloff might turn into a rout, and the BOJ and government-controlled institutions will be the only ones left buying. In sympathy, mortgage rates are creeping up, as are bank loans. The opposite of what Abenomics wants to accomplish. Free money is suddenly becoming more expensive.

Click for Older Rumblings....

VIDEOS

Wolf Richter on Max Keiser's "On The Edge"
"The Pauperization of America"

Wolf Richter on the Keiser Report
"Where the Money Goes to Die"

Clarke and Dawe: European Debt Crisis
Two favorite Australian Comedians

Clarke and Dawe: Quantitative Easing
Big industrial-strength printers, all facing the window

The Fastest Drive Ever Through San Francisco
Don't try to do this yourself

humanERROR - by "Frying Dutchman"
Powerful, lyrical appeal to the Japanese. Slams nuke industry, MSM, bureaucrats, and politicians.

Saturday

May122012

Drilling Down into Oil & Gas Prices

Saturday, May 12, 2012 at 6:35PM

Contributed by Karen Roche and JT Long of The Energy Report (5/10/12). The private panel that began with three key speakers at the April 27-29 Casey Research Recovery Reality Check Summit continues with a second installment in today's Energy Report. This exclusive features Casey Energy Opportunities Senior Editor Marin Katusa, Global Resource Investments Founder and Chairman Rick Rule, and Casey Research Senior Editor Louis James discuss oil and natural gas prices and opportunities in equities.

The Energy Report: Has oil established a floor that will stick? Or, as Porter Stansberry predicted during the summit, is it getting ready to crash? He said that using the same sorts of technology that brought on the glut of natural gas will lead to finding too much oil and driving its price down.

Marin Katusa: Porter was basing his comments on the success of shale gas in North America, and with that you have natural gas liquids and some oil. In North America, gas became a victim of its own success, worsened by a warm winter. But understand that gas, in general, has very localized markets.

When it comes to the oil sector, people think Exxon Mobil, Royal Dutch Shell, and ConocoPhillips are the biggest players. The big players are actually the national oil companies (NOCs)—Saudi Aramco, Petróleos Mexicanos (Pemex) and Petróleos de Venezuela, which are not reinvesting in operations and exploration. Their production is decreasing as a result. Cantarell, in Mexico, is one of the greatest oilfields in the world, but it's decreasing by 3.5% every year. The NOCs are distributing profits to fund massive social programs. For instance, more than 55% of Venezuela profits from oil-funded social programs.

I don't necessarily agree that the same reasons why natural gas in North America went under $2 per thousand cubic feet (Mcf) would apply globally. India is signing $14–$15/Mcf and more; Japan is at $15/Mcf-plus. So North America is a unique case; the rest of the world is nowhere near that when it comes to shale exploration.

TER: Will that change when the U.S. starts exporting in 2015 or so?

MK: I think 2015 is a very aggressive timeline. Eventually, the market will fix itself. But to say that oil will go to $40/bbl by Christmas? I wouldn't take that bet. That said, for two years we've been using $60/bbl oil for our equations. We publish the best netbacks in the business every quarter. So if a company can make money at $65/bbl oil, it will make a lot of money at $105/bbl oil. But if you invest in companies that need $90/bbl oil to break even, you're not going to do so well.

TER: You said the market will fix itself. Will oil go down to, say, that $60/bbl you've been using?

MK: Not everyone is paying $103–105/bbl. The Canadian oil sands producers are selling as low as $63/bbl. In the Bakken, they're selling for $72/bbl. In the Canadian oil sands, existing production can be profitable at $60/bbl, which we've been saying for a couple of years. New production, if it's open pit, needs $90/bbl oil to be economic due to the massive inflation in equipment, trucks, tires and people.

TER: Why do we quote oil at $105/bbl if it costs $63–72/bbl?

MK: A lot of people think that Suncor Energy or any given oil producer is making $105/bbl for oil, but companies are selling their product for $63/bbl. It depends on the differential and Suncor's selling price versus the West Texas Intermediate (WTI) crude oil price, which is the posted price. Gas producers in Edmonton are getting much lower prices than what's quoted in the Henry Hub. The oil price in North America or the Brent price isn't necessarily the same price a company is selling its oil for.

Rick Rule: What people think of as the posted crude oil price comes from either WTI or Brent. That used to be the way the world worked, but we have localized differentials now. One of the differentials that Marin was speaking about is the differential between light sweet crude and heavy crude. And the differentials widen and tighten depending on a variety of factors.

For example, production efficiency in Venezuela, the traditional source of Gulf Coast sour crudes, is a factor. Transportation and infrastructure bottlenecks are factors. We're now to the point where a critical pipeline from the Gulf Coast to the U.S. Midwest, which used to take imported crude into the Midwest, has been reversed because of production declines in Mexico and Venezuela, which encourage U.S. Gulf Coast refiners to take heavy crude out of Canada.

All of this is what creates localized markets in oil. The international light sweet crude markets are very stout. Nigerian bonny crude and Brent crude's international trade is marked by tightness as a consequence of declining supplies in traditional frontier market exporters, such as Nigeria, Venezuela, or Mexico.

The North American domestic market is ironically awash in oil as a consequence of three factors: The high price of gasoline has begun to destroy demand along with the weak economy. The incredible de-bottlenecking that's gone on in the Athabasca tar sands has doubled tar sands production in four years. And the conjunction of technologies that Marin was talking about has produced a flood of shale oil, particularly in the Bakken.

TER: But when the gas at the pump is up, the excuse they give is that WTI is at $105/bbl. That's the logic presented to consumers.

RR: I can't speak to other parts of the country, but being an oil producer myself and a gasoline consumer, I'm certainly familiar with the California gasoline market. California municipalities constrain the construction of gas stations, so there are fewer and fewer outlets. Some communities that were really tough on how many gas stations they would permit have prices $0.25–0.30 per gallon higher than nearby communities that were more generous.

On top of that, California is a high-cost refining environment, with high taxes and constrained competition. Gasoline demand in the U.S. has grown 1.2–1.3%, compounded for 29 years, and the U.S. hasn't permitted a new refinery for 29 years. Maybe no new refineries would have been built anyway because refinery and marketing margins are so lousy. But that's the picture.

MK: Also, the older refineries need more downtime for maintenance. All these things factor into the equation, and that's why you have high prices at the pump. In Canada, more than 50% of the price is taxes. Major global production is coming from these NOCs, which I call the New Seven Sisters.*

*[Before the rise of the OPEC cartel and NOCs, the original Seven Sisters included Anglo-Persian Oil Company (now BP), Gulf Oil, Standard Oil of California (Socal), Texaco (now Chevron), Royal Dutch Shell, Standard Oil of New Jersey (Esso) and Standard Oil Company of New York (Socony) (now ExxonMobil). The Seven Sisters dominated the global petroleum industry from the mid-1940s to the 1970s, and up until the oil crisis of 1973, controlled about 85% of the world's petroleum reserves – Editor.]

Look at the coming nationalization of resources. Look at what's happened in Argentina. The private companies, the Exxons of the world, risk their capital and their shareholders' capital. When they have success, the country nationalizes these resources. So there's another factor to take into account if you want to understand how tight the oil markets really are.

TER: A number of people say the best bet now is to invest in the service companies—the drillers, pipeline builders, and so forth.

MK: Part of our portfolio in The Energy Letter is geared toward service companies, and certainly Kinder Morgan, which is one of North America's largest pipeline transportation and energy storage companies, has been very generous to our portfolio. In five months, there's been over a 30% gain.

But if you're going to go into the service sector, you have to make sure about a company's ability to cover its debt, because a lot of these services companies took on massive debt during the bull market and will blow up on it.

TER: Looking for other potential investments, Louis, you said that the secret is to figure out what real stuff people need, because it will retain value. When prices on valuable stuff go down ridiculously, it's a godsend, because you can buy when it's cheap and sell when it's expensive. Is the stuff people need cheap now?

Louis James: Stuff is not really cheaper. There is deflation in some asset classes and some equities, but life for the average Joe is not cheaper and commodities in general are not cheaper. Oil is still above $100/bbl. When commodities have not lost ground but the equities have, that's an alligator jaw pattern. I'm not speaking as a technical analyst—that's just a metaphor. But it's actually fantastic if you have high, driving prices in the commodities, and you find good, cheap companies with good management, money in the bank, and the wherewithal to weather the storms.

I also think we'll see more volatility, and the chances of seeing much lower prices are pretty good. When a bear sentiment grabs the market, it takes everybody down, both the best and the worst players. If you have the courage to face it, that's very good news.

If you're new to the game, you can get fantastic buys on things that others have identified as great plays, already worked on and de-risked. If you're already long, it's a matter of self-discipline, which few investors have. Most of them get burned again and again. They buy high when everybody else is buying. They feel confident. They jump in. Things turn against them. The tide goes the other way. They get scared. Everybody else gets scared at the same time and they get creamed. Investors need self-discipline, belief in what they're doing and they need to know why they're buying something to be able to happily take those shares off weaker hands.

I think there's a good chance we'll see much more of that over this summer and I'm looking forward to it. After the sector bounced back from 2008, I wrote that we should be so lucky as to have another one.

TER: Speaking of lower equity prices, Marin, last fall you told us that quantitative easing was deflating equity valuations. "He who has cash will be king," you said, "because he can afford to buy discounted stocks. If you do your homework and be sharp you'll make a fortune in the next three years." Is that still the case? Or are we too late?

MK: I still believe we're in deflating equity prices. By mitigating risk, being strategic, always taking Casey free rides, the portfolios for 2011 for both the Casey Energy Report (CER) and Casey Energy Confidential (CEC) gained over 20%. And Q1/12 was over 20% for both newsletters, too.

Throughout the year, a few of our buys had massive gains—like Poseidon Concepts Corp. (PSN: TSX), TAG Oil Ltd. (TAO:TSX; TAOIF:OTCQX;) and Africa Oil Inc. (AOI: TSX.V). Did we sell too early? Yes. But so what? We reduced our risk. We made money. We lived to see another day. And with one of them, we now have a dividend for free and the company's growing.

So if you do your homework and buy good companies, you can do well. I don't think you're too late at all.

The 300+ investors who attended the 3-day Casey Research Recovery Reality Check Summit discovered a multitude of natural resource investing strategies during daily Gold and Resource Stock Roundup sessions. These sessions featured Rick, Marin, Louis and Jeff Clark, senior precious metals analyst at Casey Research, who together revealed their favorite natural resource stocks to invest in now. You can hear all of their recommendations, as well as every recorded summit presentation—over 20 hours in all—with the Casey Research Recovery Reality Check Summit Audio Collection.

Founder and CEO of Global Resource Investments and President of Sprott Asset Management U.S.A, Rick Rule began his career in the securities business in 1974 and has been principally involved in natural resource security investments ever since. He is a leading American retail broker and asset manager specializing in mining, energy, water utilities, forest products and agriculture. Rule's company has built a sterling reputation for its specialist expertise in taking advantage of global opportunities in the resources industries. In 2011, Rule closed a landmark deal with Eric Sprott, Founder of Sprott Inc., another famous powerhouse in the arena. Sprott Inc. offers resource-oriented investors opportunities in segregated managed accounts, mutual funds, hedge funds and private partnerships. The collective organization offers unparalleled expertise and access to investment opportunities in all resource sectors. Sprott Inc. manages a portfolio of small-cap resource investments worth more than $8 billion and boasts a workforce of more than 130 professionals in Canada and the U.S.

Louis James is chief metals and mining investment strategist at Casey Research, where he is also the senior editor of Casey Investment Alert and Conversations with Casey. When not in meetings with mining company executives in Vancouver, B.C., James regularly travels the world evaluating highly prospective geological targets and visiting explorers and producers getting to know their management teams. For more than 25 years, Casey Research, headed by investor and best-selling author Doug Casey, has been helping self-directed investors to earn returns through innovative investment research designed to take advantage of market dislocations.

Investment Analyst Marin Katusa is the senior editor of Casey's Energy Opportunities and Casey's Energy Confidential. He left a successful teaching career to pursue what has proven an equally successful—and far more lucrative—career analyzing and investing in junior resource companies. With a stock pick record of 19 winners in a row—a 100% success rate last year—Katusa's insightful research has made his subscribers a great deal of money. Using his advanced mathematical skills, he created a diagnostic resource market tool that analyzes and compares hundreds of investment variables. Through his own investments and his work with the Casey team, Katusa has established a network of relationships with many of the key players in the junior resource sector in Vancouver. In addition, he is a member of the Vancouver Angel Forum, where he and his colleagues evaluate early seed investment opportunities. Katusa also manages a portfolio of international real estate projects.

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