Friday, February 24, 2012

February, Thursday 23, 2012

DOW + 46 = 12,984
SPX + 5 = 1363
NAS +23 = 2956
10 YR YLD -.02 = 1.98%
OIL +2.41 = 108.69
GOLD +4.30 = 1781.10
SILV + 1.11 = 35.47
PLAT – 2.00 – 1728.00

How much does it cost you to get to work each week? How much do you spend on gasoline? Is it $10 a day? $50 a week? Maybe a couple of hundred a month? Maybe more? For a whole lot of people, when the price of gas starts to go up, it has a definite impact on their budgets and on their lifestyles. Last year, the average American family spent 8.4% of their incomes on gasoline; that percentage has doubled over the last ten years.

And the price of gas doesn't just affect people who drive long miles; the price of energy gets factored into almost everything because almost everything we buy has to be transported. When the price of gas goes up, it tends to push prices up on everything. The strength of the economy is largely predicated on cheap oil. When the price of oil goes higher, we tend to cut back to compensate.

Americans are using less gasoline; as the price has increased, demand has dropped; we drive less, and still the price at the pump moves higher. The average price across the country is now up to $3.53 a gallon. In California, the average price is 3.96. The price is up 25 cents a gallon since the start of the year. The Oil Price Information Service is projecting an average price of $4.25 a gallon by the end of April.

There is a standoff between the US and Iran over Iran's nuclear program. Iran has already stopped selling oil to the UK and France. China and India are more than happy to buy from the Iranians. Approximately 20 percent of all oil sold in the world passes through the Strait of Hormuz. Any disruption could result in massive shortages and scary price spikes. You may remember when oil hit $147 a barrel in the summer of 2008.

Last night at the republican debate in Mesa, Newt Gingrich said he had a plan to bring the price of oil down to $2.50 a gallon – unfortunately, the plan involves time travel and something called a “Way Back Machine”. Actually, the ideas being tossed out mainly center around more drilling and tapping the strategic petroleum reserves.

Today, President Obama said, “That's not a plan, especially since we're already drilling. That's a bumper sticker, it's not a strategy to solve our energy challenge.” Oil and gas production has increased during the Obama administration, continuing the trend of the Bush presidency. The increase has reversed a decline that began in 1986, and the US Energy information Agency projects that by 2020 oil production will reach a level not seen since 1994. Today, President Obama promoted an energy agenda of oil, gas, wind, solar, nuclear and biofuel energy. Of course, if we go back to 2008, we'll see that the response to high prices was a global financial crisis that resulted in a major recession, you might even call it a depression; and as the economy came to a grinding halt, the demand for gasoline dried up.

The United States imports as much as 10 million barrels per day when the economy is humming along, and we import 8 million barrels per day when the economy slams on the brakes. Even if we drill like crazy, it isn't enough. The Bakken oil fields produce about 500,000 bpd, and they might be able to turn out 2 million bpd. The Bakken isn't the solution. It is expensive to get oil out of shale. The cost to produce a unit of energy is much higher in the Bakken case than in traditional, historical oil plays. The technology and expertise to squeeze oil out of the formation should be telling us that the days of cheap oil are over. If we are lucky, tapping into the domestic supplies will allow us to break our dependence on foreign oil, not by relying on domestic production but using it as a bridge to sustainable, renewable energy. If we don't make that transition we can almost certainly look forward to an economy that gets pounded by booms and busts riding on the price of a gallon of gas, or worse yet – war. What can be done to bring down short-term prices? Probably not much beyond jawboning. If the president were to announce an investigation into speculative trading in oil futures and price collusion among the major refiners, along with a new commission to consider price freezes on oil prices – hmm, yea, I got to think it's looking more and more like war.


The Greek parliament approved a plan to swap old Greek bonds for new Greek bonds. European Central Bank President Mario Draghi tried put it in perspective, he said: “It's hard to say if the crisis is over.” I think I know the answer to this – it's not over.

Americans filed 351,000 initial claims for state unemployment benefits last week, the same as in the prior week. So, there are some signs of strength in the labor market but there are still around 24 million people who are either unemployed or underemployed.

Over the past 3 years more than 400 federally insured banks have collapsed and this has resulted in costs of more than $87 billion to the FDIC deposit insurance fund. Over the past 18 months, the FDIC has filed 22 lawsuits targeting personal finances of former executives, their insurance policies, and sometimes their spouses' assets, in an attempt to claw back some of the money, and to deter reckless banking practices in the future. Of the lawsuits filed so far, none has gone to trial yet, and three have been settled. A look at the three deals suggests the FDIC is prepared to accept a fraction of the alleged damages as a settlement while some former executives deny wrongdoing and escape significant financial responsibility for bank failures. Last year, the FDIC says it collected $240 million from professional liability claims, a figure that represents most of such collections by regulators so far in the aftermath of the financial crisis. Most of that was paid by insurance companies.

The FDIC's biggest settlement so far targeted Washington Mutual. The FDIC sued several former executives, accusing them of gross negligence in pursuing high-risk lending that eventually caused the bank to lose billions of dollars and collapse in 2008. The FDIC sought $900 million in damages, but last December settled for $95 million, most of it covered out of insurance, with several executives contributing less than $500,000 between them. So, the lesson we learn from the FDIC's deals is that crime pays and bank executives can beat the system. What this really says is that the system is completely broken; it is not what you think it is.

As we look in the file marked “Things are not as they appear” we find the story of American International Group. Today, AIG reported net income was $19.8 billion, or $10.43 per share, compared with a year-earlier profit of $11.18 billion, or $16.60 per share. Part of that was an accounting determination that AIG is likely to post future profits that might allow it to release a valuation allowance against tax assets. What does that mean?
Well it means that AIG hired a whole bunch of accountants  and attorneys, and then they hired lobbyists who bribed politicians and that means that AIG will get a big tax break, or as Reuters explained it: “The move essentially means AIG will not pay tax on tens of billions of dollars of income in the coming years, thanks to benefits that stem from its financial crisis-era losses.” So, this means that AIG, which is still primarily held by the U.S. Treasury, Is in the process of repaying the bailout by using accounting gimmickry to stop paying taxes on future profits. It still doesn't make sense? O.K., let me break it down to the most base explanation; they're paying for the bailout by cheating on their taxes.  

And no, I couldn't make this stuff up if I wanted to.

SEC Chairman Mary Schapiro says a large portion of equities trading has little to do with “the fundamentals of the company that’s being traded.” She said it had more to do with “the minuscule aberrational price move” that computer-assisted traders with direct connections to the exchange can “jump on” in fractions of a second.  Basically, this is what used to be called “scalping” and “front-running”. And it's really nothing more than a video game based on the bid and offer on a trading platform. It does nothing to improve liquidity or, as Schapiro says, “the fundamentals”.  One solution would be forcing high-frequency traders to pay for the canceled trades that make up nine-tenths of all orders; what this is leading to is a financial transaction tax.

Last year the S&P 500 was flat, declined a fraction of a point. And last year, the majority of hedge funds underperformed the S&P 500, meaning they lost money. So far this year, the S&P 500 has gone from 1277 to 1363, a gain of just over 8%.  The typical hedge fund has generated a 3% gain for 2012 through February 10th.  Only 10% of the hedge funds have outperformed the S&P, which is to say that 90% have failed to beat the broader market.

Silver is up 23% year-to-date, and gold up 13%. Remember gold fell below $1,600 an ounce in mid-December, breaking below its 200-day moving average for the first time since January 2009. Gold spent four weeks below it's 200-day moving average, after having been up above it for two, almost three years; at the time we told you that it looked like a buying opportunity; I told you the long term trend in gold looked to be intact; I also told you that silver under 30 was an opportunity.

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