Wednesday, April 24th, 2013
The recent outperformance of US natural gas over crude oil has been quite spectacular – some 25% just since the beginning of March-2013.
As usual, we want to understand the fundamentals behind this divergence. Natural gas of course is primarily used for power generation and heating in the US, while crude oil demand is driven by other, more global factors. We’ve discussed the recent weakness in crude oil earlier (see post). The strength in natural gas on the other hand has been impacted by two key developments.
1. The warm winter of 2011-2012 caused a large build in inventories, which ended up weakening natural gas prices. In areas like the Northeast however (and some other regions that rely on natural gas for heating), the warm weather pattern has been reversed this past winter.
Source: Rutgers University
2. Faced with a glut of gas in storage and protracted price weakness, energy firms such as Chesapeake Energy have curtailed production – as can be seen in the recent trend of rig count.
Source: Baker Hughes
That has led to declining amounts of gas in storage, which has reached levels that are more consistent with historical averages …
Source: EIA (blue = latest gas in storage for lower 48 states)
… and pushed natural gas prices comfortably above $4/mmBtu.
These higher prices will now halt and possibly reverse the declines in gas rig count and spur more activity in natural gas production. It may take some time to get to a balanced state, given the rapid changes in the US gas industry (see discussion). The oil-gas relative divergence however has likely played out its course for now.
Copyright © SoberLook.com
Tuesday, April 16th, 2013
The Bright Lights of Big Oil
April 10, 2013
Texas has seen incredible changes in oil production because of advancements in shale technology. From one 200-mile view at night, you can easily spot the urban areas of Dallas, Houston, San Antonio and Austin, but the strip just south of the Alamo City and U.S. Global Investors’ headquarters illuminates something else entirely: the bright lights of big oil generated by the Eagle Ford shale formation.
In its new report pictured here, the University of Texas at San Antonio provides more than just a satellite view of oil production in the area.
First, take a look at Texas’ overall crude oil production during the past few decades. Since hitting about 2.6 million barrels of oil per day in 1981, production began slowly declining, bottoming to just over 1 million barrels per day during the early part of this century, according to the U.S. Energy Information Administration (EIA).
Over the past few years, though, daily production has gone vertical, with the state pumping out more than 2.2 million barrels each day. Production has grown so rapidly, that if Texas were a country, it would be the 13th largest oil-producing nation in the world, based on international crude oil output from November, says Mark Perry in his Carpe Diem blog.
The primary driver of this incredible lift has been the Eagle Ford formation, an area 50 miles wide and 400 miles long. According to the UTSA’s Center for Community and Business Research, oil out of Eagle Ford has increased from about 5 million barrels to more than 110 million barrels in a matter of only two years.
This huge boom in oil production has had a tremendous economic impact on Texas as well. UTSA’s report calculates that within a 20-county area, the Eagle Ford Shale added more than $61 billion in economic impact in 2012. This number includes 14 counties that have actively producing wells, along with six counties that experience indirect activity from the Eagle Ford area.
According to UTSA, Eagle Ford is expected to continue contributing to the area over the next several years. “The region will support 127,000 jobs and produce an economic impact of $89 billion for Texas in 2022,” says the report.
We believe these economic bright lights have created significant opportunities for natural resources investors. See how you can access this trend.
Download your copy of UTSA report here.
Read The Significant Impact of U.S. Oil Production.
See how investors can benefit from rising oil production.
By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
Saturday, March 30th, 2013
What Maslow and Rand Would Tell Investors Today
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
I have always been fascinated by what motivates people. What motivates Tiger Woods to pursue the goal of being the world’s greatest golfer? What’s the motivation driving Warren Buffett to continue purchasing companies instead of retiring in Tahiti? Or how about the motivation behind the trucks allegedly packed with euros parked in front of the Central Bank in Nicosia?
What is most puzzling is the motivation driving investors to buy or sell their equity positions when research shows that holding an investment over the long-term is more successful than timing the market.
As Business Insider puts it, there’s “proof that [investors] stink at investing.” Its headline is catchy, and the chart shows the evidence, as the average investor has significantly underperformed oil, stocks, gold and bonds in the past 20 years. While, on average, investors returned 2 percent, oil, stocks and gold rose about 8 percent.
After inflation, the average Joe or Jill actually lost money.
You can easily attribute the meager returns to the emotional rollercoaster that drives buying and selling decisions, but to break the pattern of poor performance, it may be better to understand the motivation occurring on a subconscious level.
Anyone who sat in on a psychology course in university is likely familiar with Abraham Maslow’s classic hierarchy of needs driving human motivation. The most fundamental need is shown at the base of the pyramid. Our physiological needs for food, water, shelter and warmth are of the highest priority. Only after those needs are met, we try to meet our need for safety. After that, we can move to belonging, then our own self-esteem and, only until we feel confident that all those needs are met, can we achieve fulfillment or self-actualization.
I have to thank Christine Comaford, the dynamic presenter and global thought leader on corporate culture and performance optimization, for my proverbial light bulb moment when I connected Maslow’s observations from the 1940s to investors’ reactions to global events today.
I love learning about neuroscience and behavioral finance, so I looked forward to her presentation at a global leadership conference for CEOs that I attended in Turkey. But when I walked into the room, I was impressed with how many like-minded executives were interested in her research and insights.
These executives want to understand why customers buy certain products, why investors sell equities to buy bonds, and why their employees don’t seem to have a level of engagement they once had. Also, I believe leaders want to understand why people don’t feel secure or safe these days.
In a recent post in Forbes, Christine stresses how important it is for people to feel safe, to feel as if they belong and to feel as if they matter before they can get to what she calls the “smart state.” This state is when people have access to all parts of the brain and can respond from choice, rather than the “critter brain,” when one simply reacts in one of three ways: fight, flight or freeze.
The needs for people to feel safe, feel like they belong and feel like they matter “are programmed into their subconscious so powerfully that they literally crave them,” she says.
Her discussion particularly resonates with me today, as I believe governments’ actions around the developed world have perpetuated this lack of feeling safe, inhibiting investors from moving up Maslow’s Hierarchy of Needs and preventing their portfolios from achieving the outstanding returns offered by oil, gold and stocks over the past 20 years.
Now, with the most recent drama created by the triangular powers of the Cyprus parliament, the International Monetary Fund and the European Union, news of Cyprus’ bank seizures is sending shock waves rippling across the entire world. How can investors feel safe when governments have the audacity to confiscate their money?
Ayn Rand warned of such actions in her book, “Atlas Shrugged.” Here’s a snippet that is particularly appropriate today:
“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values.”
And to her, gold was the objective value, “an equivalent of wealth produced,” as paper is only “a mortgage on wealth that does not exist.”
This is precisely why many gold investors were disappointed that the yellow metal didn’t perform well. While gold’s performance in the short term has been counterintuitive, I plan to stick to my own advice. I simply feel safer with a small weighting in gold as insurance.
With Spring upon us, we welcome in a season of renewal and celebration of life, as millions of people around the world celebrate Easter and Passover. To all our shareholders, friends and families, we wish you a very happy holiday.
Monday, March 18th, 2013
Energy and Natural Resources Market Radar (March 18, 2013)
- The price of natural gas rose to a 16-week high of $3.85 per Mmbtu this week. This is a fourth-straight weekly gain on speculation of further late winter cold weather.
- U.S. crude oil output rose 0.9 percent to 7.159 million barrels a day in the week ended March 8, which is the highest level since July 1992, due to improvements in hydraulic fracturing and horizontal drilling, the Energy Information Administration (EIA) said.
- Chinese steel output soared in January-February 2013. Reported crude steel output for January and February combined was 125.452 million tons, up 10.6 percent year-over-year. Over the same period, reported pig iron production rose 7.8 percent year-over-year to 115.792 million tons and coke production was up 9.8 percent year-over-year to 73.607 million tons.
- Nickel stockpiles at the London Metal Exchange rose 0.4 percent to 161,646 metric tons, which is the highest since March 3, 2010.
- BHP Billiton reportedly settled April pricing for coking coal at $172-173 per ton FOB (HCC Peak Downs) as quarterly contract discussions dragged on. This price represents no month-over-month change and reflects weaker sentiment in recent weeks as HCC indices have declined about $12 (7 percent) since late-February.
- Brazilian iron-ore miner MMX scrapped a mining project in Chile over costs (write down of $114 million); walking away from investments it has already made to focus on primary projects at home.
- Vale suspended a $6 billion Argentine potash project on deteriorating economics. The company has shelved its Rio Colorado potash project (4.3 million tons per year of potash) in Argentina’s Mendoza; however, Vale left the door open to restarting the project if terms were to improve. The company has invested $2.2 billion in the project to date.
- Port data from Queensland shows minimal impact from the weather-related disruptions which took place in February. According to DTC, February exports from the main coking coal exporting ports of Queensland were 12.86 million in February and 26.66 million in the first two months of the year, up 11.3 percent and 6.4 percent year-over-year, respectively.
- Wilbur Ross is seeking funds for a new private equity fund that will buy distressed shipping and other transportation assets, according to three people familiar with the situation. WL Ross is teaming up with Oslo-based Astrup Fearnley AS to make investments in distressed assets tied to transportation.
- Peru’s mining sector will likely continue to see rising costs, making it more expensive for companies to develop projects, reports National Mining, Oil and Energy Society. Also opposition from rural communities that are worried about the environmental impact of new projects is another major challenge for firms, which have lined up a pipeline of projects that will require investments worth about $53 billion this decade, as per industry and government figures.
Wednesday, February 27th, 2013
Submitted by Felix Imonti of OilPrice.com,
Russia is back. President Vladimir Putin wants the world to acknowledge that Russia remains a global power. He is making his stand in Syria.
The Soviet Union acquired the Tardus Naval Port in Syria in 1971 without any real purpose for it. With their ships welcomed in Algeria, Cuba or Vietnam, Tardus was too insignificant to be developed. After the collapse of the Soviet Union, Russia lacked the funds to spend on the base and no reason to invest in it.
The Russian return to the Middle East brought them first to where the Soviet Union had had its closest ties. Libya had been a major buyer of arms and many of the military officers had studied in the Soviet Union. Russia was no longer a global power, but it could be used by the Libyans as a counter force to block domination by the United States and Europeans.
When Gaddafi fell, Tardus became Russia’s only presence in the region. That and the discovery of vast gas deposits just offshore have transformed the once insignificant port into a strategic necessity.
Earlier at the United Nations, Russia had failed to realize that Security Council Resolution 1973 that was to implement a new policy of “responsibility to protect” cloaked a hidden agenda. It was to be turned from a no-fly zone into a free-fire zone for NATO. That strategic blunder of not vetoing the resolution led to the destruction of Gaddafi’s regime and cost Russia construction contracts and its investments in Libyan gas and oil to the tune of 10 billion dollars.
That was one more in a series of humiliating defeats; and something that Putin will not allow to happen again while he is president. Since his time as an officer in the KGB, he has seen the Soviet Empire lose half of its population, a quarter of its land mass, and most of its global influence. He has described the collapse of the Soviet Union as a “geopolitical catastrophe.”
In spite of all of the pressure from Washington and elsewhere to have him persuade Bashar Al-Assad to relinquish power, Putin is staying loyal to the isolated regime. He is calculating that Russia can afford to lose among the Arabs what little prestige that it has remaining and gain a major political and economic advantage in Southern Europe and in the Eastern Mediterranean.
What Russia lost through the anti-Al-Assad alliance was the possibility to control the natural gas market across Europe and the means to shape events on the continent. In July 2011, Iran, Iraq, and Syria agreed to build a gas pipeline from the South Pars gas field in Iran to Lebanon and across the Mediterranean to Europe. The pipeline that would have been managed by Gazprom would have carried 110 million cubic meters of gas. About a quarter of the gas would be consumed by the transit countries, leaving seventy or so million cubic meters to be sold to Europe.
Violence in Iraq and the Syrian civil war has ended any hope that the pipeline will be built, but not all hope is lost. One possibility is for Al-Assad to withdraw to the traditional Aliwite coastal enclave to begin the partitioning of Syria into three or more separate zones, Aliwite, Kurdish, and Sunni. Al-Assad’s grandfather in 1936 had asked the French administrators of the Syrian mandate to create a separate Aliwite territory in order to avoid just this type of ethnic violence.
What the French would not do circumstance may force the grandson to accept as his only choice to survive. His one hundred thousand heavily armed troops would be able to defend the enclave.
The four or five million Aliwites, Christians, and Druze would have agricultural land, water, a deep water port and an international airport. Very importantly, they would have the still undeveloped natural gas offshore fields that extend from Israel, Lebanon, and Cyprus. The Aliwite Republic could be energy self-sufficient and even an exporter. Of course, Russia’s Gazprom in which Putin has a vital interest would get a privileged position in the development of the resource.
In an last effort to bring the nearly two year long civil war to an end, Russia’s foreign minister Sergei Lavrov urged Syrian president Bashar al-Assad at the end of December to start talks with the Syrian opposition in line with the agreements for a cease fire that was reached in Geneva on 30 June. The Russians have also extended the invitation to the Syrian opposition National Coalition head, Ahmed Moaz al-Khatib. The National Coalition refuses to negotiate with Al-Assad and Al-Assad will not relinquish power voluntarily.
The hardened positions of both sides leaves little hope for a negotiated settlement; and foreign minister Sergei Lavrov has made it clear that only by an agreement among the Syrians will Russia accept the removal of Al-Assad. Neither do they see a settlement through a battlefield victory which leaves only a partitioning that will allow the civil war to just wind down as all sides are exhausted.
The Russians are troubled by what they see as a growing trend among the Western Powers to remove disapproved administrations in other sovereign countries and a program to isolate Russia. They saw the U.S involvement in the Ukraine and Georgia. There was the separation of Kosovo from Serbia over Russian objections. There was the extending of NATO to the Baltic States after pledging not to expand the organization to Russia’s frontier.
Again, Russia is seeing Washington’s hand in Syria in the conflict with Iran. The United States is directing military operations in Syria with Turkey, Qatar, and Saudi Arabia at a control center in Adana about 60 miles from the Syrian border, which is also home to the American air base in Incirlik. The Program by President Obama to have the CIA acquire heavy weapons at a facility in Benghazi to be sent to Turkey and onward to Syria is the newest challenge that Putin cannot allow to go unanswered. It was the involvement of Ambassador Chris Stevens in the arms trade that may have contributed to his murder; and the Russians are not hesitating to remind the United States and Europeans that their dealings with the various Moslem extremists is a very dangerous game.
The Russians are backing their determination to block another regime change by positioning and manning an advanced air defense system in what is becoming the Middle East casino. Putin is betting that NATO will not risk in Syria the cost that an air operation similar to what was employed over Libya will impose. Just in case Russia’s determination is disregarded and Putin’s bluff is called, Surface to surface Iskander missiles have been positioned along the Jordanian and Turkish frontiers. They are aimed at a base in Jordan operated by the United States to train rebels and at Patriot Missile sites and other military facilities in Turkey.
Putin is certain that he is holding the winning hand in this very high stakes poker game. An offshore naval task force, the presence of Russian air defense forces, an electronic intelligence center in latakia, and the port facilities at Tardus will guarantee the independence of the enclave. As the supplier of sixty percent of Turkey’s natural gas, Moscow does have leverage that Ankara will not be able to ignore; and Ankara well knows that gas is one of Putin’s diplomatic weapons.
When the Turks and U.S see that there is little chance of removing Al-Assad, they will have no option other than to negotiate a settlement with him; and that would involve Russia as the protector and the mediator. That would establish Russia’s revived standing as a Mediterranean power; and Putin could declare confidently that “Russia is back.” After that, the Russians will be free to focus upon their real interests in the region.
And what is Russia’s real interest? Of course, it is oil and gas and the power that control of them can bring.
Copyright © OilPrice.com
Saturday, February 16th, 2013
Energy and Natural Resources Market Radar (February 18, 2013)
- Global oil price benchmark Brent has climbed 7 percent since the start of the year and, according to Deutsche Bank commodity analysts, it has been propelled by positive economic data that has renewed optimism about global growth and consequently global oil demand, including: January oil data for China confirming a strong start to the year with near-record crude oil imports, driven less by stockpiling and more by demand; indications that Saudi Arabia has cut production to around 9 million barrels per day, more than 1 million barrels per day below peak levels in the prior summer which has tightened global supply; and geopolitical tensions in Middle East/North Africa.
- According to Macquarie research, Indian thermal coal imports reached a record high of 140 million tons on an annualized basis in December 2012, overtaking Japan to make the country the second-largest consumer of seaborne coal in gross weight terms (behind China).
- Also in coal, the U.S. exported 10 million tons in December, the highest since September, which brought full-year coal exports to a record 124.4 million tons, an 18 percent year-over-year increase.
- The spot gold price fell to a six-month low this week, dragging gold mining equities down to nine-month lows as well.
- Natural gas fell 4 percent this week to a one-month low price on weaker demand, per weekly Energy Information Administration inventory data.
- Colombia, the world’s fourth-largest coal exporter, produced 89.2 million tons of coal last year, missing its full-year target after problems with strikes and environmental permits bit into output, the government said on Thursday. Colombia’s mining sector has been hit over the last year by a spate of labor disputes, including a strike at the main coal railway and a walkout at a Glencore-owned mine, as well as delays in environmental permits and a rise in guerrilla attacks. Coal production last year missed the 2012 target by nearly 9 million tons, according to the National Mining Agency, a new government body created to handle increasing demands on public institutions from a boom in the mining sector.
- China’s demand for commodities will grow “strongly” for some time, albeit at a slower pace, Reserve Bank of Australia Assistant Governor Christopher Kent said, “Because the Chinese economy is so much larger now, even a somewhat slower rate of growth represents a large quantity of new demand for raw materials.” Kent told the Committee for Economic Development of Australia forum, “For much of the past year we have been looking for signs that China’s growth might stabilize…. A broad range of indicators suggests that this has now occurred, with economic conditions improving through the second half of 2012.”
- PwC has issued a report that claims that “The global impact of shale oil could revolutionise the world’s energy markets over the next couple of decades, resulting in significantly lower oil prices, higher global GDP, changing geopolitics and shifting business models for oil and gas companies.”
- Australia’s long boom in mining investment is likely to peak sometime this year, creating much uncertainty about whether the rest of the economy can take up the slack, a top central banker said on Friday. Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said the long-term outlook for the country’s resources sector remained strong thanks to demand from an urbanizing China. But there were risks near-term. “Our expectation is that growth of economic activity will be a little below trend over 2013 before picking up a little in 2014,” said Kent, who heads the central bank’s economics unit.
- U.S. copper makers Southwire and Encore Wire are launching a legal challenge against the U.S. Securities and Exchange Commission (SEC) approval of JPMorgan Chase’s physically-backed copper exchange traded fund (ETF). The companies, which say the copper ETF will inflate prices for the metal and distort supplies, filed a notice of appeal on Tuesday asking the U.S. Court of Appeals in Washington, D.C. to review the SEC’s December 14 ruling that gave the green light for the copper ETF.
- Moody’s Investor Service warned that environmental factors, such as water scarcity, could adversely impact the ratings of global mining companies if they failed to proactively manage the accompanying operational and political risks to their businesses. In its “Global Mining Industry: Water Scarcity to Raise Capex and Operating Costs, Heighten Operational Risks,” Moody’s highlighted that mining projects were already competing with local communities for limited water resources, while having to comply with stringent environmental rules that could add to the capital expenditure (capex) budgets for new mines.
Monday, January 21st, 2013
Via Adam Taggart of Peak Prosperity,
On the heels of Chris’ recent report clarifying the global net energy predicament, he and PeakProsperity.com contributing editor Gregor Macdonald sit down to talk in depth about the broken relationship between energy costs and economic growth.
For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil’s apex, suddenly we find that “growth” is a lot harder to come by.
Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand.
For certain, shale gas will be a boon for the U.S. and some other countries. But very little is transported these days by gas, and there are no mega-sized infrastructure projects underway to change that anytime soon. Extraction of new tight oil plays is increasing production, but not by enough to offset other field declines elsewhere in the world, and not at the prices we were used to over the past century. The era of cheap oil is over, and these higher permanent prices act as a boot on the throat of economic growth. Hence the mired global economy we have been experiencing in recent years.
Rather than fooling ourselves with fanciful “energy independence” pablum, we should be looking hard at what kind of future we want to have now that oil is no longer cheap. And we should be asking ourselves in regards to the remaining fossil fuels we’re extracting: How can we put these non-renewable BTUs to their best use, before they become expensive, too?
I think the main conversation we are not having is that wages are very unlikely to ever return to a relationship to energy costs that would make the United States economy into a happy economic story once again. In other words, this whole idea that we will restore that unique relationship of high wages and low energy prices — that is what we are not dealing with. So by telling ourselves the story that we are producing more energy, you can clearly see the cultural impulse there. The cultural impulse is there is to suggest “See? There is a chance, there is a chance we can get the energy cost down again and then there is a chance that that wages will come up again. That relationship got very skewed and kicked into a nasty bad place over the past decade. That is very much a way of thinking about what our economic story is, why we had the crisis, and why this supposed emergence from the crisis that we have been plodding our way through the past several years, why it feels so dis-satisfactory, why it feels so insufficient in many respects.
This goes back to the Industrial Revolution. What caused a revolution in British wages? The appearance of coal in the British economy. Why is that? Because not only did you have human workers making stuff, but also, now you had coal helping you make stuff. Coal was the slave labor that you did not have to feed or shelter or clothe or house. And you could get coal to work for you and you could work for you, and you put it all together and it becomes high wages, and you get to pocket those high wages.
So this is the dream that we once enjoyed, here in the States with our cheap oil and our high wages. And since oil became less cheap, the wages have stagnated, and I just do not see how we are ever going to get back to that relationship again. Maybe we will talk about this; I do have some hope that we could stabilize the relationship in a future world, which is more weighted towards the power grid in which some manufacturing returns to the United States. But I think the main thing is – you asked the question, what is the main thing we are avoiding? We are avoiding the very painful prospect – likelihood – that we will not be able to return to high wages, low prices, cheap energy.
As you point out, one of the cruel things that we left in the wake of our higher rate of growth and our cheap energy era and our high wage era was the debt. We left a tremendous amount of debt. Of course there is the public debt, but I really think what has been governing the economy in the post-crisis era has been the intractable nature of the private debt. We have both done work on charting the course of the private debt and I am sure we would agree that there has been some deleveraging that has occurred, but it is not nearly the amount of deleveraging that the media either thinks or wishes has occurred.
When you compare private debt levels to assets in the United States, yes, we are off the peak, but we are only back to 2006 levels. Most of the people I know were worried about debt levels in 2006. So to “deleverage” back to 2006 levels is not an achievement.
This promise of greater energy supply is obviously dangling out the prospect that somehow that will translate into cheaper prices and that the debt can be serviced and possible extinguished or deleveraged. But as we are finding the process is grindingly slow, and that is a big reason why the economy is grindingly slow and just does not seem to make much progress.
These things can work for a short period in the short term, and that is what we have been doing in the last five to seven years. We have been adding either expensive or marginal sources to the liquid fuel supply, as you know. This process can be thought of as one where the older more cheap oil is continually swapped out for the more expensive, unconventional, more expensive oil, and that makes for some sort of new risks when it comes to how the global economy may slow or speed up and what it may do to oil prices.
Because what I think we are going to find, especially in resource plays like the tight oil resource plays: if price goes below what it is costing these companies to extract this oil, it is actually going to be quite easy for these companies to simply stop drilling; to just stop adding additional wells. Because if you look at the actual mechanics by which wells are currently being added, they are added on a highly discretionary basis. They go in, they produce a lot of oil for a short period of time, and then they go into steep decline.
I think what people do not understand is that the Bakken is not like a traditional oil field where you are developing the whole field at one time; you are really just sticking little pin pricks into the topography of the western Dakotas. It is not like a tar sands operation, in which you sink all of the steel in the ground first over a five- to six-year engineering project and then you try to get paid back for the steel that you sunk in the ground. This is more of an inch-by-inch incremental project in the Bakken.
So what it looks to me is if price goes below sufficient levels – and I currently put that if price goes below $80-$75 a barrel for any length of time – we will just lose supply much more quickly. I just do not think the market or the economy or Wall Street has gotten its head around the fact that a good chunk of our supply now is ready to go offline at the moment that price drops. And that is probably why price has been so sustainably high, because the global futures market for oil realizes that oil that you see now costs a lot more so it is not going to willing to sell you oil two years from now at $70 or $75 a barrel. It knows that the only way that $70 or $75 a barrel oil is available two years from now is if we are back into a deep recession. I mean a deep recession.
Click the play button below to listen to Chris’ interview with Gregor Macdonald (48m:43s):
Friday, September 28th, 2012
(Editor’s Note: Don Vialoux is scheduled to appear on BNN Television’s Market Call Tonight at 6:00 PM EDT)
The S&P 500 Index recorded surprising strength yesterday mainly on unconfirmed news that the Chinese central bank recently pumped up to $70 billion into the Chinese economy. The rumor has merit. Historically, the Chinese economy virtually “falls off a cliff” during China’s “Golden week”, a holiday similar to our Christmas season. China’s “Golden Week” is next week. Once again, the Chinese central bank moved in anticipation of “Golden Week”.
The other positive event yesterday was announcement of Spain’s budget. Equity markets responded initially to rumors that the budget was more austere than expected. However, equity markets retreated in late trading when a more rational analysis was made.
On the charts, the S&P 500 Index managed to recover to above its 20 day moving average. However, momentum indicators continue to trend down.
Natural gas prices have recorded an interesting breakout recently.
Updates on Seasonal Trades Recommended Since July
July 2: Accumulate the Software sector
Period of seasonal strength: early July to end of September
ETF: IGV at $62.18. Current price:$63.84
Comment: Selected technicals remain positive: Intermediate uptrend intact, bounced from near its 50 day moving average. Short term momentum indicators are trending down and strength relative to the S&P 500 turned negative last week. The period of seasonal strength is approaching an end. Preferred strategy is sell into strength.
July 6: Accumulate gold bullion
Period of seasonal strength: July12th to October 9th
Gold price: $1,578.90. Current price: $1,779.10
Comment: Technicals remain positive. Intermediate trend is up. Nice bounce from near its 20 day moving average. Strength relative to the S&P 500 Index remains positive. However, momentum indicators are peaking. Hold for now, but prepare to take profits (particularly on a break below $1,738.30. Possible stop is its 20 day moving average. Gold’s weakest month in the year is the month of October.
July 13: Accumulate Canadian gold equities
Period of seasonal strength: July 27th to September 25th
ETF: XGD at $18.01. Current price: $21.77
Comment: Great trade. Favourable seasonal period has ended. Short term momentum indicators have rolled over. Weakest month of the year for gold equities is the month of October. Take seasonal profits on strength.
July 13: Accumulate the Canadian Energy Sector
Period of seasonal strength: July 24th to October 3rd
ETF: XEG at $15.12. Current price: $16.37
Comment: Technicals have begun to deteriorate as the end of the period of seasonal strength approaches. Short term momentum indicators are trending down. Strength relative to the TSX Composite turned negative last week.
Comment: Take profits on strength.
July 27: Sell the Transportation Sector
Dow Jones Transportation Average at 5,126.65. Current price:4,941.20
ETF: IYT at $91.56. Current price: $87.90
Period of seasonal weakness: August 1st to October 9th
Comment: Technicals remain negative. Intermediate trend is down. Trades below its 20, 50 and 200 day moving averages. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index remains negative. Continue to sell/avoid/hold short.
August 6th Sell the Airline sector
ETF: FAA at $28.66. Current price: $29.48.
Period of seasonal weakness: August 1st to October 9th
Comment: Technicals remain neutral/negative. Intermediate trend is neutral. Trades back and forth through its 20, 50 and 200 day moving averages. Short term momentum are trending down. Strength relative to the S&P 500 Index remains negative. Hold for now but liquidate on a break above resistance at $30.20.
August 28: Sell the Semiconductor sector
Philadelphia Semiconductor Index: 397.04. Current level: 385.46
Period of seasonal weakness: End of August to October 9th
Comment: Technicals remain weak despite yesterday’s gain. Intermediate trend is down. The Index fell below its 20, 50 and 200 day moving averages last week. Strength relative to the S&P 500 Index remains negative. Short term momentum indicators are oversold. Hold for now.
Thursday, September 27, 2012
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TOP ASSET CLASSES AND SECTORS: HEAT MAPPING
There is still a push for “risk-on” assets as of the close of last Friday. This week’s close will undoubtedly show a slight uptick in strength for the “risk-off” or defensive assets such as bonds in the “Asset Class” table, telecom or healthcare in the TSX and S&P, and the US or Switzerland in the country rankings.
That said, we anticipate and are positioning for another upside move in the cyclicals before things get muddy later in the year.
For asset managers the most important thing to get right is the allocation between equities, bonds, bullion cash and currencies. (If you are a Broker or Advisor and would like to learn more about CMI Advisory Service please contact us by phone or e-mail. Robert 905.847.1125)
CHARTS of the WEEK
US Long Bonds
Long bonds, as presented here by the 20+yr ETF, show strong support above the cloud with indicators trying to bottom. We currently own 20% in CDN long bonds, but will look to raise overall bond allocation over the next while. Minimal upside for the Loonie will allow us to add US bond holdings.
Similarly the S&P shows strong support below, though the market is over extended at the moment. When comparing the two assets classes – US bonds to US stocks – a balanced approach is warranted by the evidence until further notice.
The TSX on the other hand appears to be now hitting resistance overhead on this weekly chart. A break above these levels would broaden the case that the TSX has only moved up from front-running the QEternity move by the US Fed. The case beyond has yet to be proven.
CDN Oil Stocks
The same pattern is reflected in CDN oil stocks. We own Husky as a conservative way to play the space – decent balance sheet (S&P quality ranking A-) and good yield (4.75% from our ACB)
CDN Gold Producers
Gold producers on the other hand have appeared to make the case, though a correction is in the works. When we look at our individual TSX company rankings on a weekly basis 7 of the top 11 are senior gold producers. Something is afoot; we’ll now gauge the persistence beyond what can just be a seasonal play.
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Buy, Hold…and Know When to Sell
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Eric Wheatley’s Listed Options Column
Good morning everyone,
Last week I looked at two options-related emails my Boss had received prior to his last appearance on BNN. There was a third which needs to be addressed here:
Peter in Mississauga asked “Many investors use the covered call strategy for downside protection but the risk is always there that the underlying could be called away. Recently Novartis (NOV) has had a good run up from $69 to $70.50 but the $70 covered call options expired. Can you discuss your recommended strategy to eliminate the damage? Is covering the current short and selling the covered call one month further out at approximately the same price point a consideration?”
“Eliminate” the “damage”.
For those of you who follow the NFL, you’ll sometimes hear of players who refuse to play because they consider themselves to be underpaid. The media will harp upon the fact that a running back is “only” making a million dollars for the season. What is ignored is that the player, upon signing his contract, received a fifteen million dollar signing bonus. This amount is paid up front and is the guaranteed portion of a contract. Yearly salaries aren’t guaranteed and an underperforming player can be cut from a team at any time without further compensation. Of course, the player who is making a fraction of his colleagues’ salaries feels disrespected, forgetting that he wilfully signed a contract which paid him quite handsomely ahead of time.
Peter in Mississauga is going through the same kind of cognitive dissonance NFL players who hold out do. He sold a call and received cash up front in exchange for giving up his stock’s upside beyond the call’s strike price. After the stock’s price had risen, Peter saw “damage” and wants to “eliminate” it. Of course, the damage is purely psychological and can’t be eliminated ex post facto. This is because, if Peter were to want to buy back his call, he would be paying the intrinsic value by which the stock has risen beyond the call’s strike price so he would still be owning the shares at the strike price on a net basis (on top of having paid a bid/ask spread and the fees for a trade).
As we’ve mentioned previously, covered call writers should WANT the stock’s price to rise. In this case, if NOV goes beyond $70, Peter makes his maximum profit. A proper, rational person doesn’t care whether the stock goes to $70.50 or $150, because the rational person made a good return on the call’s premium PLUS a little upside gain if the call was out-of-the-money when sold. Peter is prey to regret aversion, by which he will rue his writing of a call if the “worst-case” scenario happens. Similarly, people who are regret-averse find it very difficult to take profit on a stock which has risen, fearful that the stock may continue to rise and that they would miss out on further gains. Of course, if you never take profit, you’ll never make money.
As to people who are averse to getting assigned, I have a little story: I manage my mom’s money (I mention this only because my mom wouldn’t mind my exposing one of her holdings). Last week, she got assigned on her XIU October 17 calls when the stock was trading at roughly $17.60. Now, Peter would be pee-owed at this, but I was quite ecstatic. This is because I had gotten a very nice return on the premium – 41 cents per share when the stock was at $16.80 –for three months when I wrote them in July. As it turned out, I got an extra month for free, because the October call was assigned at the September expiry. I’m now able to write further calls right now instead of waiting until October’s expiry. This extra month is far from bad news; of course, Peter’d be looking at the sixty cents he’s forgoing and would sulk.
This week’s Twitter feed:
· Found a wonderful blog by a fellow Montrealer who is a big-shot economist. I’ve dedicated some very prime browser real-estate to him with a dedicated tab
· We are portfolio managers who manage money with a long-term view. Much of that view will be formed by China and its entry into the developed world. Or not. There are still a LOT of growing pains yet to come.
In this week’s French-language blog: my rules on life and investing, gleaned from my many screwups.
Éric Wheatley, MBA, CIM
Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.
Blogue en français : gbsfinancier.blogspot.ca
Little known fact about John Charles Hood #45
John Charles Hood only has one hard and fast rule which he uses in various circumstances: “Don’t get any on you”.
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Micron Technology, Inc. (NASDAQ:MU) Seasonal Chart
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Horizons Seasonal Rotation ETF HAC September 27th 2012
Thursday, September 27th, 2012
Global economic fundamentals are awful, bearish divergences are occurring everywhere, investor sentiment is nearing bullish extremes, political risks remain high and last week’s market performance can be summed up in four words – ‘lack of follow through’. As Gluskin Sheff’s David Rosenberg explains, more than two-thirds of the rally points the stock market has enjoyed since the summer-time lows occurred around central bank policy announcements. So the market is really a one-trick pony here, breathing in the fumes of central bank liquidity.
David Rosenberg, Gluskin Sheff: BUMPY ROAD
What the stock market lacked last week can be boiled down to two words — follow through. It’s as if all the QE and then some got priced in the week before. Not even the ballyhooed introduction of the iPhone 5 managed to elicit much excitement. It was interesting to see the Dow fail to hold onto its early gains on Friday and close with a 17 point loss and to see the sector leaders narrow to a group of defensives like health care and telecom services_ The financials and materials segments were very soft and yet in the past these were the major beneficiaries of Quantitative Easing. For the week, the S&P500 dipped 0.4% — which was not supposed to happen. What was supposed to happen, as the elites told us, was that the lagging hedge funds were going to throw in the towel and chase this market. Everyone expects this to be a major source of buying power.
Alas, but at what price level?
At the same time, what if the bulls who lucked out this year because they hung onto Ben Bernanke’s arm decide to take profits or at the least lock in their gains? Or what if there is no progress made on the fiscal front and we go into year-end with the gnawing realization that top marginal capital gains tax rates will be heading back to 43.4% on January 1 from the current 15%? It may be a widely-held view but it is no slam dunk that we finish off 2012 with the double- digit returns — twice what is normal — that have been posted thus far (for more proof, have a look at Money Managers Take a Timeout From Stocks in today’s WSJ. And the best quote goes to “nothing the Fed has done has increased earnings expectations’).
Further on the political front, it shouldn’t be lost on those who are proponents of capitalism that President Obama now enjoys a 49% approval rating — it is up six points in the past year (and election handicappers should note that this is the exact same thing that George W. Bush had at this same juncture of the 2004 campaign — which he won handily against another gaffe-prone opponent).
Interestingly, prices are up impressively this year, but trading volumes are down around 20%. Yet another non-confirmation.
And its not as if the equity market has been rallying off news at it pertains to the fundamentals like the economic data and corporate earnings. Indeed, more than two-thirds of the rally points the stock market has enjoyed since the summer-time lows occurred around central bank policy announcements. So the market is really a one-trick pony here, breathing in the fumes of central bank liquidity.
The global economic fundamentals are awful. China’s industrial sector is in decline_ France’s PM I data is at a 41-month low, and while Germany did manage to pull off an upside surprise, the whole euro area now has its manufacturing sector behaving as though it is 2009 all over again_ Italy just sharply cut its economic growth forecast (and the stock market there was clocked for a 4% loss last week), shortly after the Japanese government downgraded its own assessment of the economy. Declines occurred in U.S. household employment, real wages, Industrial production and core retail sales. In other words, this is not QE1, when the recession was coming to an end. This is not QE2 or Operation Twist when the economy stopped looking as though it was going to do a “double dip-. No. this latest round of central bank manipulation is happening at a time when there is no sign of an imminent turnaround in the economy, and the weakness has gone viral. The real problems for investor risk appetite comes if we see signs that inflation is heading higher which will limit what the Fed can do, or if we see the economy falter which would then expose Bernanke as the non- wizard that Toto exposed behind the curtain and the Fed as pushing on a string.
Investor sentiment is not at a bullish extreme yet, but it’s getting there — at just over 54% bullish sentiment in the latest Investors Intelligence survey. The wedge between the bulls and bears is flirting with the 30-percentage-point spread that typically signals interim market tops.
Earnings expectations are far too optimistic and destined to come down. The consensus has operating EPS accelerating to a 13.4% growth rate in 2013 from 5.4% this year. But with margins at cycle high levels (9.4%, rivaling the 2006 record, just as the market was about to put in its last gasp to a new high) ;and 30% above long-run norms, it will be difficult to see EPS growth that strong absent a return to vigorous corporate pricing power. And with the P/E multiple for the overall market already back to the high end of the range for the past two years, what I see at best is a sideways moving market from here. Some pundits will use interest rates as an excuse, but the weekend WSJ provided some nifty insight showing that the market multiple historically was 12x when the 10-year real bond yield was negative (versus around 14x now).
I don’t know but a 12x multiple on a forward earnings stream that will likely be flat around $100 in the coming year doesn’t sound like a market that has a whole lot of upside from here (or until we get another announcement from a major central bank).
There are various non-confirming developments taking place, and Dow Theory advocates know exactly what I am talking about as the Dow Transports slumped 5,9% this past week, the largest decline since November of last year That this ultra-cyclically sensitive sector is down 2,2% for the year at a time when the S&P 500 is up 16% is one of the great anomalies for 2012.
The railroad stocks not only sagged 7% last week but were also the fourth worst performer in the IBD’s 197 industry group. This is a warning sign, make no mistake, underscored by the last week’s guidance cuts by both FedEx and Norfolk Southern,
As someone from Miller Tabak put it to the WSJ this weekend:
This is a major divergence that should not be ignored. It tells me the risks of being in the market at these levels is growing. The Transports are the first major index to reflect an underlying change in the market. The market is now saying ‘yes, the economy does matter’. You can’t close your eyes and buy everything anymore.
Pretty heady stuff.
China is another anomaly as its stock market suffered its steepest decline in nearly a year as the Shanghai index closed last week at its lowest price since 2/2/12. It is down 8% for the year, and this is likely important insofar of what it is pricing in for the world’s second largest economy. It’s more that just the islands dispute with Japan and the looming political transition – profits there are in a recession, having contracted 2.7% this year and the diffusion measures of industrial activity flashed an 11th month in a row of receding manufacturing sector.
And what about Europe. Yet another non-validation. The stock market there, with an 11x forward multiple, 20% below normal, is close to telling us that the recession is getting worse. Since Super Mario embarked on his newest bond buying program in September 6th, Spanish two-year bond yields – the benchmark for global risk trades – have jumped 40 basis points.
What makes QE3 different and maybe even less potent than its predecessors is that the trend in global economic activity is still down. In the prior QEs, activity was already reviving and actually this may have played a more significant role in stimulating investor ‘animal spirits’ than the actual liquidity boost. Let’s not also forget that earnings, both operating and reported, are now contracting sequentially. And the ISM is in a multi-month sub-50 pattern. This was not the case during these other QE episodes and serves up a greater hurdle for market performance this time around.
Tuesday, September 25th, 2012
by Neuberger Berman Investment Strategy Group
The “BRIC” countries have been a focal point of investor interest since the early 2000s. Brazil, Russia, India and China account for about half of the world’s population, boast vast natural resources and are among the fastest-growing economies in the world. That said, progress at times has been uneven. Since 2010, the MSCI BRIC Index has largely underperformed the S&P 500 as economic growth flagged. In this edition of Strategic Spotlight, we discuss current conditions and the outlook for these markets.
Following the global financial crisis of 2008–2009, the BRIC countries enjoyed a strong economic rebound as forceful policy measures reignited growth. However, a surge in capital inflows stoked inflation and led to tightening measures in 2010 and 2011. Currently, the BRICs are experiencing varying stages of easing as growth and inflation decline. Unlike the synchronous rebound we saw in 2009, progress in the BRIC countries is diverging due in part to idiosyncratic policy initiatives aimed at managing structural changes within their specific economies.
BRIC GROWTH RATES HAVE SLOWED
Brazil’s real GDP growth declined from 9.3% in the first quarter of 2010 to 0.5% in the second quarter of 2012—a number that disappointed investors looking for 3.5% GDP growth for all of 2012. The slowdown is partly a function of so-called macro-prudential measures—meant to fight inflation and control the appreciation of the real currency due to capital inflows—as well as a slowdown in exports. The tightening measures have had the desired impact of reducing inflation from 7.2% from last September to 4.1% in August 2012, but have also caused investment spending to plummet as the outlook for commodities (a key sector for Brazil) deteriorated. Domestic consumption, which accounts for about 60% of Brazilian GDP, has held up surprisingly well, supported by the country’s still-low unemployment rate.
Since the end of 2011, the Brazilian central bank has reduced interest rates, complementing the government’s recent accommodative fiscal measures such as payroll tax cuts. The OECD expects growth to pick up gradually in the third quarter as these measures work through the system.
Russia: The Limitations of Oil
The Russian economy has held up reasonably well in the past few years despite turmoil in Europe. Since the end of June 2012, real GDP has grown at around 4% annually, which is close to the post-crisis peak of around 5% in 2010. This good fortune is mainly due to relatively high oil prices and, most recently, fiscal spending ahead of the presidential elections in March 2012. Unlike Brazil, Russia is grappling with rising inflation as record-low unemployment has supported wage growth. In September, the country’s central bank surprised investors by hiking interest rates as inflation had come in above the bank’s target range of 5%–6%.
For the most part, Russia’s domestic consumption has been strong but the impact of declining oil demands from key trading partners such as Europe and China could have spillover effects—weakening the outlook for budget and current account balances. Concerns about an overheating economy have led to predictions that further tightening measures could be introduced, marginally reducing growth in 2013.
PERFORMANCE AND VALUATIONS
Source: FactSet as of Sept 17, 2012.
Despite a year-to-date equity market return of about 20% (see display), India’s real GDP growth continuously slowed to about 4% in the second quarter—a level last seen during the crisis of 2008–2009. Declining global growth, reductions in foreign investments and monetary tightening measures have contributed to a slowdown in manufacturing and services. In June, government agencies reported that foreign direct investments had decreased by as much as 67% from a year ago, as economic reforms stalled and business conditions were increasingly viewed as being biased against foreigners.
In addition, India is dealing with rising consumer price inflation, as recent cuts in government fuel subsidies and the effects of the monsoon season feed through the system. Consumer price inflation ramped up to 10% in August, reducing the scope for further rate cuts by the Reserve Bank of India. Moreover, warnings of a downgrade have been issued by rating agencies, given that India’s government finances are weaker than other BRIC countries. Investors are closely watching reform measures designed to promote competition and improve market efficiency following the decision last week to expand foreign companies’ access to the retail and airline industries.
China: Political Transitions
Recent data indicate that China continues to slow from tightening measures enacted in 2010–2011 and a decline in exports. Investors have been somewhat surprised by the government’s passivity toward this slowdown. Following small cuts in interest rates and reserve requirement ratios earlier in the year, the People’s Bank of China (PBoC) has not done more despite inflation dipping below its 3%–4% target. And while most analysts did not expect a repeat of the 2008–2009 RMB 4.0T fiscal stimulus, the government has acted less forcefully than expected.
The failure to act could be a result of widely reported complications in the current once-in-a-decade change to the country’s political leadership. Moreover, the PBoC could be concerned about magnifying the inflationary impact of loose monetary policy in developed countries. The political transition is expected to conclude by March 2013, potentially paving the way for better policy engagement. Regardless, the IMF expects China’s growth to reaccelerate next year.
A More Nuanced Progression
In the past decade, the BRIC countries have experienced rapid growth, but are now showing signs of slowing down as cheap labor and abundant resources are beginning to yield a diminishing impact on their economies. As such, investors should consider looking towards the rising middle class to lead the charge in driving growth.
Before we reach that point, however, we believe some structural reforms will need to be made. Investors should remain vigilant of the various policy prescriptions during this period to avoid potential speed bumps. Not every policy change will be successful, but if imbalances are adequately addressed, the BRIC countries should continue to offer investment opportunity.
This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman’s Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of five investment professionals who consult regularly with portfolio managers and investment officers across the firm. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.