Wednesday, December 5, 2012 - I Have Copyrighted the Term "Fiscal Cliff". Pay Up!

I Have Copyrighted the Term "Fiscal Cliff". Pay Up!

by Sinclair Noe

DOW + 82 = 13,034
SPX + 2 = 1409
NAS – 22 = 2973
10 YR YLD - .02 = 1.59%
OIL - .62 = 87.88
GOLD – 2.50 = 1695.30
SILV unch = 33.01

Let's take a look at the economic news.

The ISM services index moved up to 54.7% in November from 54.2% in October; indicating expansion in the services side of the economy. Earlier this week, the ISM said its manufacturing index fell back into negative territory for the fourth time in six months.

Third quarter productivity rose a revised 2.9%, the fastest rate in two years, compared to a first reading of 1.9%. Workers produced goods and services more efficiently than the first estimate suggested. This is an important number because it gives the Federal Reserve some wiggle room to continue to pump money into the Mortgage backed securities market, without the fear of inflation. It also means businesses are squeezing more output out of each worker, and so it reflects a reluctance to hire or raise wages.

Payroll processor ADP says employers added 118,000 jobs last month. That’s below October’s total of 157,000, which was revised lower; mostly because Hurricane Sandy shut down factories, retail stores, and other companies. The ADP report might provide clues about the Labor Department's monthly jobs report due on Friday. That report is expected to show the unemployment rate climbing to 8% from 7.9%. There is little sign yet that business concerns over potential tax hikes and government spending cuts next year are weighing on hiring.

Citigroup announced it will fire 11,000 workers. Hewlett-Packard leads the list of corporate layoffs for 2012, with more than 27,000 pink slips. Share of HP are down 45% for the year. They kind of missed the whole idea of mobile devices. Hostess Brands fired 18,500 workers as the company slid into bankruptcy court. They kind of missed the whole idea of healthy food. AMR, the parent corp for American Airlines planned to cut 14,000 jobs as the company slid through bankruptcy and looked for a possible suitor. They kind of missed the whole idea that travelers and their baggage should arrive at the same place at a specific time. And then comes Citigroup. They kind of destroyed the banking sector 13 years ago, pushing through the repeal of Glass-Steagall so they could purchase Travelers and become a mega-bank. In a way, this is just karma.

Henry Blodgett had a nice article saying that big American corporations aren't sharing the wealth with the rank and file. Big American companies now have the highest profit margins in history. The companies are now paying the lowest wages in history as a percent of the economy. If you happen to be an owner of a big American corporation, these charts could be construed as good news: You’re coining it!

If you happen to be a rank-and-file employee, however–or someone hoping to be such an employee–this is bad news: You’re sharing less than ever before in the success of American industry.

This situation, by the way, is only temporarily good news for the company owners. Because, by pumping so little back into the economy in the form of employee wages (and capital investments–the other area where companies are scrimping), our companies are constraining the growth of the economy.

Why?

Because the rank-and-file employees of America’s corporations are also mainstream American consumers–the folks who account for ~70% of the spending in the economy.

And so, today, Citigroup announced that they were facing tough times and their response is throw as many employees as possible under the bus.

Clerical workers and longshoremen at the ports of LA and Long Beach,the nation's largest port complex are back on the job, eight days after they walked out in a crippling strike that prevented shippers from delivering billions of dollars in cargo across the country. At issue during the lengthy negotiations was the union's contention that terminal operators wanted to outsource future clerical jobs out of state and overseas - an allegation the shippers denied.

Combined, the Los Angeles and Long Beach ports handle about 44 percent of all cargo that arrives in the U.S. by sea. About $1 billion a day in merchandise, including cars from Japan and computers from China, flow past its docks. Shuttering 10 of the ports' 14 terminals kept about $760 million a day in cargo from being delivered. The cargo stacked up on the docks and in adjacent rail yards or, in many cases, remained on arriving ships. Some of those ships were diverted to other ports along the West Coast.

Treasury Secretary Tim Geithner has laid down the gauntlet, saying there must be tax increases for the top 2% of wage earners or the debate will go over the cliff. So far, Wall Street has been largely unaffected by the fiscal cliff debate. A little up, a little down; no great sense of impending doom; no overwhelming urgency.

The rest of the world thinks the fiscal cliff makes the United States look pretty pathetic. Communist China calls the US irresponsible and hypocritical. The US tells other countries to be responsible and then...well. Out of Britain, the Financial Times is blaming the Republicans for being stubborn. In Germany, a newspaper compares the US economy to Greece. Another latched onto the hypocrisy of some economists and politicians, saying, if you're worried about the fiscal cliff, that means you're worried that tax hikes and spending cuts will hurt the economy when it's still weak, which is another way of saying you believe in Keynesian economics, which is another way of saying the fiscal cliff is an austerity crisis. Or as Jeff Foxworthy might say: If you think it will hurt to go over the fiscal cliff, you might be a Keynesian. Which is another way of saying that a lot of people are going to be unmasked.

Of course, the real solution to this fiscal cliff thing would have been for the government to put a copyright on the term “fiscal cliff” and anytime anybody said “fiscal cliff” they would have to pay maybe one-tenth of a penny. We'd have a budget surplus.

Freeport-McMoRan Copper & Gold says it is buying oil companies Plains Exploration & Production and the two-thirds of McMoRan Exploration they don't currently own, for about $20 billion combined. The additions of the oil and gas drillers are expected to create a natural resources conglomerate with assets ranging from oil rigs in the Gulf of Mexico to mines in Indonesia and Africa. The deals are expected to close in the second quarter

Thanks to new drilling technologies, we are unearthing vast new supplies of natural gas in underground shale formations across the country. The increased supply has pushed prices lower. And lower natural gas prices improve the profitability and competitive edge of many American industries – including chemicals, plastics, cement making, steel, power generation, and transportation.

Cheap natural gas produced from the U.S. shale revolution is transforming America into "the low-cost industrialized country for energy." Savings on input costs can increase profits. German and French manufacturers are now paying three times as much for gas as U.S. plants pay. Japanese companies pay even more. Japanese natural gas prices have routinely been six to seven times more than recent U.S. prices. In June, when U.S. natural gas was just over $2, Japanese natural gas sold for $17.

The low prices are a boon, especially for the plastics, chemical and fertilizer industries; a new steel plant is going up near Youngstown, Ohio. The plants cost $650 million to build, and 400 construction workers are currently building it. The 1 million-square-foot plant will make 500,000 tons of steel tubing per year, the kind used to produce natural gas from shale.

An Egyptian fertilizer manufacturer is building a $1.4 billion fertilizer plant in Iowa. It's the largest U.S. fertilizer plant built in 20 years. Dow Chemical and Chevron Phillips Chemical Company are both planning new multibillion-dollar chemical plants in Texas and Louisiana. Royal Dutch Shell is planning an ethylene plant in Pennsylvania. Fertilizer maker CF Industries will spend $2 billion boosting its U.S.-based production through 2016. Occidental Chemical Company, Chevron Philips Chemical, Formosa Plastics, LyondellBasell Industries, and Eastman Chemical have all announced plans to either build or reopen new energy and chemical plants in the U.S.

Pipeline operators own the assets needed to transport and store the massive amounts of fuel entering the market. They own assets that can't be replicated. And their profits are not tied to natural gas prices. They simply collect tolls.

The technology to pump out the natural gas, fracking, has problems, but for now, those problems are secondary; for better or worse. A study by Cornell University's College of Veterinary Medicine shows livestock in areas where hydraulic fracturing, fracking, is occurring are getting sick and dropping dead in alarming numbers.

Fracking a single well requires up to 7 million gallons of water, as well as an additional 400,000 gallons of additives. A 2011 study compiled a list of 632 chemicals used in natural-gas production and determined that 75% could affect the skin, eyes, other sensory organs, and the respiratory and gastrointestinal systems; 40-50% could affect the brain/nervous system, immune and cardiovascular systems, and the kidneys; 37% could affect the endocrine system; and 25% could cause cancer and mutations.

The new study finds that cattle are dying after being exposed to fracking fluid or wastewater; multiple cases in multiple states. And if cattle are getting sick because of fracking, what about the health of people who later drink their milk or eat their flesh?

According to the AAA Fuel Gauge Report, the national average for a gallon of regular is $3.38, which is about 4¢ less that it was a week ago, 10¢ cheaper than a month ago, and roughly 50¢ lower than the 2012 high. Gas in California now averages $3.69, roughly a fully $1 cheaper than in early October. The country as a whole is paying, on average, 10¢ more than we were exactly 12 months ago. 2012 will go down as the most expensive year ever for gas prices; the national average for the year stands at about $3.63.