Wednesday, April 02, 2014 - Speak Your Mind by Blowing Your Wad

Speak Your Mind by Blowing Your Wad
by Sinclair Noe

DOW + 40 = 16,573
SPX + 5 = 1890
NAS + 8 = 4276
10 YR YLD + .04 = 2.80%
OIL – 33 = 99.29
GOLD + 10.10 = 1290.90
SILV + .22 = 20.08

The S&P 500 closed at another record high.

The Commerce Department reported that orders to US factories rose 1.6% in February, the most in five months. January's durable goods orders were revised to show a larger drop of 1.0% instead of the previously reported decline of 0.7%. Yesterday, the Institute for Supply Management said its manufacturing index rose in March.

A private survey showed that US companies stepped up their hiring in March. Payroll processer ADP said private employers added 191,000 jobs. ADP also revised February's job creation up to 153,000 from the 139,000 figure reported earlier. The report comes ahead of the government's monthly jobs report, scheduled to be released on Friday; the over-under number for Friday is 200,000 net new jobs.

We know the Federal Reserve will be watching the jobs report. St. Louis Fed President James Bullard speaking to reporters at his branch of the central bank, said a formal rate rise is "still a considerable distance away." Federal Reserve Bank of Atlanta President Dennis Lockhart said today: “Based on my working medium-term outlook, I see the latter half of 2015 as the likely time frame for the first move to higher rates,” but if the economy doesn’t grow as he current expects, Lockhart thinks, “a later liftoff date… will likely be appropriate.”

Lately bad weather was cited as the reason that Walmart and FedEx and Delta’s earnings were disappointing.  If it isn't one-time charges that happen every quarter being removed from reported results, it's the weather being blamed. Of course, even if the weather truly was awful enough to prevent people from shopping, or buying a house, that demand should simply show up in a later month. A certain amount of productive capacity is lost, but pent up demand should rev things right back up again. The March jobs report won’t be the final word on the weather and the economy, but if we don’t see some sort of significant improvement, then we are running out of bad weather excuses.

Russian, American, and European diplomats continue to talk about settlement talks that might halt further Russian military action in Ukraine; Crimea is a done deal, but Ukraine is another matter. NATO will suspend "all practical civilian and military cooperation" with Russia because of its annexation of Crimea, saying it has seen no sign that Moscow was withdrawing troops from the Ukrainian border.

Meanwhile, Gazprom, the Russian energy company has fired a shot across the bow, raising the price it charges Ukraine for natural gas. The price jumped from $268 per 1,000 cubic meters of gas to $385, or about a 44% increase. Gazprom execs attributed the price increase to an unpaid debt for gas. This is not the first time energy has been used as an economic weapon, nor will it be the last.

The US has been undergoing an oil and gas renaissance; the White House has promoted exploration and drilling, and output has jumped. When it comes to natural gas, the US is being compared to Saudi Arabia, or Saudi America. Of course, that provided no advantage to thwart Putin’s aggression in Crimea. One reason Saudi America has failed to instill fear in Russia is that we lack the capacity to export LNG to Europe, and probably won’t be able to export in any significant quantities for a few more years; and then it would probably be a few more years before Ukraine could build facilities to receive such exports.

Meanwhile, we ran into a rash of reports in the past week or so, all telling us that our reliance on fossil fuels is killing us. The American Association for the Advancement of Society, the Intergovernmental Panel on Climate Change, and the World Meteorological Organization all confirmed that the planet is getting hotter; 13 of the past 14 years have been the hottest ever recorded. The Antarctic ice shelf is melting, Greenland too; the rain forests are dying and the Gulf Stream is collapsing. It’s not just the melting ice and the poor polar bears; the reports warn of very human problems of hunger, disease, drought, flooding, refugees, violence, and war.

Necessity is the Mother of Invention, and the time is now for innovation; and the good news is that there are inventors who have been working on these problems and have created solutions; the bad news is that the status quo and the powers that be are entrenched. This is a defining moment, and energy is being used as an economic weapon, and that weapon is pointed directly at our own foot.

And the entrenched powers just became more entrenched. The Supreme Court has struck down the aggregate campaign contribution limits, opening the gates for even more money to flood into the political system. The good news is we have the best politicians money can buy. The bad news is we have the best politicians money can buy. The 5-4 ruling in McCutcheon v. Federal Election Commission was penned by Chief Justice John Roberts and joined by justices Anthony Kennedy, Samuel Alito and Antonin Scalia; Justice Thomas went a step further and called for a complete end to campaign finance reform.

The decision relies heavily on the assertion in the 2010 Citizens United ruling that influence and access are not a corruption concern. This means that a single donor will soon be able to contribute millions of hard dollars in limited contributions, to political parties, candidates and political action committees.

Federal law sets certain limits, so you can't just go write a candidate a check for a million dollars and call it a day. That means you can't give more than $2,600 to any one candidate per election. Even if you were to donate once in the primary election and again in the general, the absolute most you could give to an individual candidate's campaign is $5,200. And you can’t, or couldn’t just spread money across the board. For the 2013-2014 election cycle, Federal Election Commission rules state that a donor can give no more than $123,200 to all political committees, with two sub-limits of $48,600 to candidates and $74,600 to political parties and political action committees. In other words, there was a limit, a cap on aggregate spending. Those limits are no more.

 Now, a single donor can now give more than $5 million in individually limited contributions to every House candidate, every Senate candidate, every state party committee, every national party committee and every leadership PAC connected to one political party. The McCutcheon ruling also did away with the aggregate limit on donations to political action committees, or PACs, which can give money directly to candidates. While there's a limit on how much PACs can give to each candidate, there's no limit on the number of PACs that can exist. Without the aggregate limit, one donor can now give $5,000 each to 1,000 different PACs. And those 1,000 PACs can turn around and funnel that money straight to one candidate. Which means that one candidate could haul in $5 million in direct contributions from one donor, funneled through a network of PACs.

So, if you have a big wad of money that you would like to waste on buying politicians, the Supreme Court has just ruled that you can blow your wad just a freely as you can speak your mind.

The new Michael Lewis book, “Flash Boys” looks at High Frequency Traders front running trades, using technology to jump in front of a trade and skim some profits. The uproar from Wall Street has been hilarious. There are claims that front running isn’t really bad; it doesn’t hurt ordinary investors; it may actually add to liquidity, blah, blah, blah. This is kind of like saying a mafia hit man is good for the neighborhood because he spends his money at the local grocery store and he hasn’t killed anybody on my street.

As we said the other day, High Frequency traders front running the market is not new; it has been going on for years, but the book and the 60 Minutes interview and the publicity finally caught the attention of otherwise somnambulant sleuths at the FBI who are investigating front running, which is a criminal offense. Where this could get interesting is that the High Frequency Trading firms set up shop in close proximity to the stock markets in New York, and they pay for high speed access to the exchanges’ computer systems and data.

The New York Stock Exchange calls it “fully managed co-location space next to the NYSE Euronext’s US trading engines in a new state of the art data center”. The NYSE is the landlord. And they can set up the “super high density” fiber optic connections for an initial fee of $7,000, or a onetime upgrade fee of $9,200. In other words, the New York Stock Exchange and the Nasdaq are complicit in the skimming operation. I didn’t hear Lewis or 60 Minutes talk about that, but that is the ugly truth.

The other funny thing about the Michael Lewis book and interview is the notion that some clever fellows, backed by hedge fund guru David Einhorn and a few other Wall Street big dogs, had come up with a clever technical fix in a new and better exchange called IEX.  Protected by a spool of fiber to ward off the high frequency traders like garlic against vampires. Free market triumphs, mission accomplished. Don't even think about a minimum transaction tax, a speed bump rule such as a minimum order duration, or anything more comprehensive than that.

Thursday, March 06, 2014 - Energy as Arsenal

Energy as Arsenal

by Sinclair Noe

DOW + 61 = 16,421
SPX + 3 = 1877
NAS – 5 = 4352
10 YR YLD + 4 = 2.74%
OIL + .45 = 101.90
GOLD + 13.60 = 1351.40
SILV + .28 = 21.54

The Standard & Poor's 500 index closed at another all-time high. The number of people who filed for unemployment benefits last week fell more than expected. That's a sign fewer workers are being laid off. Tomorrow we have the monthly jobs report and we’ll see.

Does a string of weak economic data in recent months represent a genuine slowdown in US economic growth, or is it just weather-related noise? The February jobs report might not provide much clarity because the reference week for the household survey coincided with a mid-February storm that dumped ice and snow (again) on much of the eastern US. Federal funding for extended unemployment benefits expired at the end of December, so we’ll be watching the jobs data to see what happens to people who have been out of work for more than six months.

Of course, the jobs number is hugely important because it supposedly plays into Federal Reserve monetary policy. Fed officials have signaled they’re on track to trim the central bank’s bond-buying program in $10 billion increments this year. The jobs report probably would need to very ugly to change their minds. Of course, the past two months of jobs numbers have been ugly but that was dismissed as weather related. Maybe the February report will be affected by weather as well. One bad report can be explained away, but three starts looking like a trend, despite the weather.

The situation in Ukraine is stable but escalating. Today, Crimea's parliament voted to join Russia and its Moscow-backed government set a referendum in 10 days' time. The EU condemned Russian actions in Crimea as illegal, voiced support for Ukraine's territorial integrity but took only minor steps suspending talks with Moscow on visas and a new investment pact while warning of tougher steps if there is no negotiated solution within a short period. President Obama announced plans to punish Russians and Ukrainians involved in what he called "threatening the sovereignty and territorial integrity of Ukraine".

The US and EU allies unveiled a coordinated set of sanctions to punish Russia for occupying the Crimean peninsula, imposing visa restrictions on individuals. The White House said its visa bans will affect an unspecified number of Russian and Ukrainian individuals immediately, with the threat of asset seizures and bans doing business in the US hanging as a deterrent against further escalation in Ukraine. The EU agreed to suspend visa and investment talks with Russia and held out the prospect of a full-blown trade and economic conflict with Russia unless there was a diplomatic breakthrough. Secretary of State John Kerry continued meetings with Russian foreign minister Sergei Lavrov in Rome.

Specifically, the sanctions would target people who undermine Ukraine's democracy and new government; threaten the country's peace, security, stability and sovereignty; are linked to misappropriations of government assets; and try to assert governmental authority over any part of Ukraine without the consent of Kiev. They would also prohibit US citizens from doing business with those who have been sanctioned. The sanctions plan, outlined in an executive order, lays the legal groundwork for the Treasury Department to impose financial penalties on offenders.

The EU and the US have struggled to coordinate a response to Russia’s military moves. EU-Russia trade volumes, including vast gas imports and engineering exports, are 15 times the level of US-Russia trade. Washington has far less to lose from a trade war, and has been talking tougher. The White House rejected criticism that sanctions risked escalating the crisis.

 President Obama said there is a way for Russia to defuse the situation:  “While we take these steps I want to be clear that there is also a way to resolve this crisis that respects the interests of the Russian as well as the Ukrainian people,” repeating calls for international monitors to be allowed into the Crimea and other parts of the Ukraine to ensure Russian interests are not threatened. But Obama’s rhetoric was more combative than of late and he accused Russia of not just “violating sovereignty and territorial integrity” of the Ukraine but of “stealing the assets of the Ukrainian people”.

While the Ukraine story plays out, the European Central Bank met today to determine monetary policy. The ECB left interest rates on hold and unveiled no other measures to bolster a euro zone recovery. The ECB left its main interest rate at 0.25% and held the deposit rate it pays banks for holding their money overnight at zero. ECB President Mario Draghi also described as "relatively limited" the benefits of one technical option for loosening lending conditions, suggesting the bank will either do nothing or else take bold policy action should the outlook deteriorate.

Draghi said the latest economic information suggested recovery was on track and needed no extra push for now. The biggest concern right now for the ECB is inflation, or rather the lack thereof. The ECB’s primary goal is to maintain inflation at just below a target of 2%. But inflation has run at less than half of the target rate for some time, raising fears that the euro zone could tip into Japan style deflation. Draghi has said that inflation under 1% is in the “danger zone”. In 2016, the ECB reckons inflation will average 1.5%, or roughly double the current rate; and GDP growth was upgraded to 1.2% for this year; so, according to Draghi, everything is on track.  

According to the ECB’s forecast, the euro zone economy is in pretty good shape, all things considered. Although growth is weak and inflation is lower than the ECB would like, the bank believes that these indicators will continue to drift in the right direction. After each of the three rate-setting meetings so far this year, Draghi has said that the bank stands ready “to take further decisive action if required.” Based on his reading of the economy, he hasn’t yet seen the need to change course.

The situation in the Ukraine could change all that. Despite a few improvements, both European economic prospects and credit markets are showing signs of another slide. Unemployment remains high, financial indicators are moving south, and the likelihood of another interruption in Russian natural gas is hardly encouraging for either the residential or industrial end user.

This is anything but an abstract concern. Think of Ukraine as Russia’s fuel tank, or at the very least Russia’s pipeline to Europe. During the last Russian-Ukrainian spat, back in January 2009, during one of the continent's coldest snaps in recent history, a disagreement broke out between Gazprom and the Ukrainian national gas company Naftogaz Ukrainy. Before that, the Russians shut natural gas supplies in 2008 and 2006, resulting in a complete halt of the Russian gas pass-through across Ukraine, and some very cold folks further west.

Russia has always used gas as an instrument of influence. The more you owe Gazprom, the more they think they can turn the screws. Prices of some LNG cargos to Europe jumped above $30 per million British thermal units as a result of the disruption in 2009. Curtailing supplies now would be less disruptive to the market than in past years because a mild winter has kept Europe’s gas inventories 11% higher than at the same time last year.

The crisis has escalated a State Department initiative to use a new boom in American natural gas supplies as a lever against Russia, which supplies 60 percent of Ukraine’s natural gas. Europe, in turn, depends on Russia for 40% of its imported fuel. The administration’s strategy is to move aggressively to deploy the advantages of its new resources to undercut Russian natural gas sales to Ukraine and Europe, weakening such moves by Putin in future years. Although Russia is still the world’s biggest exporter of natural gas, the United States recently surpassed it to become the world’s largest natural gas producer.

The United States does not yet export its natural gas. But the Energy Department has begun to issue permits to American companies to export natural gas starting in 2015. American companies have submitted 21 applications to build port facilities in the United States to export liquefied natural gas by tanker. The agency has approved six of the applications. Even if the Energy Department approves all the pending permits from companies seeking to export natural gas, the fuel could not begin flowing overseas for at least a few years. Most American natural gas export terminals are in the early stages of construction.

In 2011, the Secretary of State Hillary Clinton created the State Department’s Bureau of Energy Resources for the purpose of channeling the domestic energy boom into a geopolitical tool to advance American interests around the world. It has been working, helping to lower Ukraine’s dependence on Russia for natural gas supplies to 60%, down from 90%. Now, there is a renewed push to allow nat gas exports.

This is not the first time energy resources have been used to gain geopolitical advantage. In 2012, in response to Iran’s nuclear program, the United States urged the Europeans to impose financial sanctions that greatly limited Iran’s ability to sell oil on the world market. Other countries feared that the move would raise prices, but officials assured other nations that a surge in American oil production would keep prices stable.

If you’re looking for companies involved in nat gas exporting, start with Cheniere Energy (LNG), Kinder Morgan (KMI) and Sempra Energy (SRE); but don’t forget other energy providers, especially in the renewable or green energy arena, for example the Solar energy ETF (TAN). These are not recommendations, only ideas for research.

Even after taking into account all the transportation, infrastructure, and storage costs, U.S. natural gas can easily compete with Russia's in terms of price. EU countries would probably be willing to pay a slight premium for US natural gas if it ensures energy security. It also serves American geopolitical interests.

The world is changing and energy runs the world.