Tuesday, July 16, 2013 - No Inflation Except if You Drive

No Inflation Except if You Drive

by Sinclair Noe

DOW - 32 = 15,451
SPX - 6 = 1676
NAS – 8 = 3598
10 YR YLD - .02 = 2.53%
OIL - .55 = 105.77
GOLD + 8.30 = 1292.50
SILV + .08 = 21.11

Start with the big economic report of the day; the Consumer Price Index, or CPI, which measures inflation at the retail level, increased 0.5% in June. A 6.3 percent surge in gasoline prices accounted for about two thirds of the increase. In the 12 months through June, the CPI advanced 1.8 percent. Stripping out energy and food, consumer prices increased 0.2 percent for a second straight month. That took the increase over the past 12 months to 1.6 percent, the smallest rise since June 2011. No real inflation except for energy prices.

A separate report from the Fed showed output at the nation's factories, mines and utilities rose 0.3 percent in June after a flat reading in May.

Another report showed confidence among single-family home builders at a 7-1/2 year high in July, with expectations of stronger sales and buyer traffic.

In earnings news, Coca Cola reported earnings of $2.6 billion, down from $2.7 billion a year ago. They tried to blame the shortfall on bad weather but I think people are cutting back on drinking soda.

Goldman Sachs posted second quarter net income of $1.9 billion compared with $962 million, in the period a year earlier. So, profits are up 100 percent. How is that possible, especially considering the new capital requirements and all those terrible regulations being forced on the big banks? And it's not just Goldman. Just the other day, JPMorgan reported a 33% increase in profits and Wells Fargo reported a 19% jump, and Citigroup's profits are up 42%. Banks are smashing their old profit records in a sluggish economy, with moderate M&A activity, and all sorts of regulations that were supposed to keep the banks from becoming unmanageable behemoths.

Actually, most of the regulations aren't really in place, only about 40% of the rules are affecting the banks, and they are still fighting the rest of the regulations; so maybe they don't really want to talk too loudly about record profits in a harsher regulatory environment. It's like the kid who's forced to take medicine, and his health improves, but he still cries about having to take the medicine.

Tomorrow morning, Fed Chairman Bernanke will appear before the House Financial Services Committee as part of his 2 day testimony before Congress on the economy and monetary policy. He'll deliver prepared remarks and then there will be a question and answer session, which generally provides the Congressmen a chance to demonstrate their economic incompetence and for Bernanke to speak without saying anything. Sometimes Bernanke slips and there is a nugget of information. He might just give a hint about when the Fed will exit QE, or what might serve as a trigger for taper; but mainly he'll repeat the mantra that monetary policy will remain accommodative from here to eternity. Expect a boring recitation of what Bernanke has been trying to repeat and repeat again and again; that essentially QE continues. Of course, you never know. Bernanke is going to leave his role at the Fed, so maybe he could just break out and speak truth.

That might be fun. Can you imagine if Bernanke, or even Greenspan before him, had decided to cut through the Fedspeak and tell the blunt, plain truth to the politicians? Maybe Bernanke could talk about how the Fed really made the crisis of 2008 much worse than it should have been; maybe he could talk about how the Fed has failed in its role as a regulator of the big banks, and now they represent an even bigger risk than in 2008; maybe he could tell the politicians how the sequester and austerity moves are hurting the economy, and the fiscal policy is akin to bleeding a patient to restore health.

Maybe Bernanke could tell Washington that the last four years have offered the federal government a borrowing and investment opportunity that's unprecedented in modern history; and that window of opportunity won't last forever. Interest rates have been at World War II-era levels, thanks to ZIRP, while investor confidence in Uncle Sam (and fears about other investments) created a situation where they were effectively paying the government to borrow money.

We could borrow the money, invest it in job creation, and be rewarded with an expanding economy that pays us back for our investment in both human and financial terms. And it's not like we'd be creating make-work. America's falling down. Our highways and bridges are crumbling; our electric grid is vulnerable; our water systems are antiquated; our public transportation is a joke, only surpassed by the cellular network; and that's just for starters. Maybe Bernanke could tell the politicians that we are on the verge of missing a once in a lifetime opportunity to really make a difference.

Yea, that's not going to happen.

But then who would have thought the politicians would agree on anything; turns out they can, and did. The Senate has voted to confirm Richard Cordray as director of the Consumer Financial Protection Bureau, as senators approved the first of a batch of President Barack Obama's nominations freed for votes by a bipartisan agreement.

The vote came hours after Senate leaders worked out a deal freeing up seven stalled appointments for the consumer bureau and other agencies for simple majority votes by the chamber. In exchange, Democrats agreed to abandon for now an effort to change Senate rules to weaken the minority party's ability to block nominations with filibusters, and Obama agreed to submit two different nominees for two labor posts.

Obama had used a recess appointment to put Cordray in charge of the agency, an appointment that expires in January. Republicans had solidly opposed Cordray's nomination, demanding that Obama first agree to change the agency's financing and structure.

So, this proves that politicians can come together, and all it took was the threat of the “nuclear option” on filibusters. Simple.

You Will Be Paying Higher Gasoline Prices. It Is Essential You Begin to Understand Why!

In the face of escalating gas prices, the oil patch, their allies and Wall Street are counting on your ignorance permitting them to pick your pockets, spoon-feeding you nonsense while they cash in massively. Oil prices recently touched $107, a level during the current run-up not reached since May of last year. This while inventories in the U.S. are near all-time record levels, U.S. production is accelerating, the world is awash in oil, and natural gas in the U.S. is selling at an equivalent BTU content to that of oil costing $24 a barrel or less.

It just doesn't make sense, and it is not explained away by the usual industry placebos: "The driving season is upon us", "production difficulties in Libya, Nigeria or you name it," "Iran is becoming recalcitrant," "Egypt is falling apart," "the dollar is weakening," "Chinese consumption is impacting markets," and so forth. Lots of hot air without real substance nor actual impact on the price of oil at Cushing, Texas, the delivery point for WTI crude. Misinformation propagated often enough both by the industry and a somnolent press to make an otherwise bilked public (paying extortionate levels for gas and petroleum products) blindly accept the oil industry's palaver. This combined with massive industry lobbying resulting in a total lack of effectual oversight of oil industry pricing and Commodity Exchange excess and the gross distortions resulting from the financialization of energy markets.

My saying so doesn't necessarily make it so. But consider the following- only yesterday Mr. Joe Petrowski, the CEO of Gulf Oil, posited on CNBC that the price of oil should be half of yesterday's $105/bbl exchange-quoted price or closer to $50 a barrel. He cited that record amounts of oil are being produced in the United States and Canada, and that OPEC supplies are higher.

Add to this the comments of Rex Tillerson, Chairman and CEO of ExxonMobil. In case you missed it, only last week, Exxon's 2012 earnings were cited as the second most profitable corporate earnings in the world, ever.

Yet some two years ago, before a Senate Committee, the same Rex Tillerson testified that the price of crude oil was $30 to $40 higher (at that time quoted at $100/bbl on the exchanges) than it should have been were it not for the "financialization" of energy futures and options on the Commodity Exchanges. With this coming from a man of Tillerson's stature and expertise on the issue, one would have expected that someone in government would have acted to protect the public's interest, but clearly the 'oiligopoly' and the commodity exchanges have a higher priority in Washington and the Beltway.

As an example of the excesses of the financialization of oil and energy derivatives trading and how they have lost all bearing to 'supply and demand' of physical product, let me cite but one example. On Feb 8, 2012 the Chicago Mercantile Exchange Group (CME), the world's leading derivatives marketplace, announced it set a new record for trading volumes of its energy products on February 7, 2012. Their trading volume for energy futures and options contracts totaled 3,489,302 contracts higher than the previous record of 3,098,129 contracts on 02.22.10 The CME group controls more than 90 percent of listed U.S Futures Trading including the New York Mercantile Exchange (NYMERC) and according to theWall Street Journal has outspent rivals on lobbying in Washington to ensure its views are heard.

Consider trading 3,489,302 energy or crude oil equivalent contracts in one day represents 3.48 billion barrels of oil (each oil futures or option contract is for 1,000 barrels). With world consumption some 85 million barrels a day, this would mean that in one day's trading on the New York Merc, the equivalent of 41 days of the total WORLD'S consumption will have been traded. And then we are told, of course, that it's all about supply and demand.

Remember, your silence is letting the oil boys and the oil desks of the bank-holding companies and the myriad speculators take you to the cleaners.