Hot and Dry
by Sinclair Noe
by Sinclair Noe
DOW – 123 = 16,960
SPX – 9 = 1978
NAS – 22 = 4449
10 YR YLD - .04 = 2.47
OIL - .13 = 101.94
GOLD + 13.30 = 1308.20
SILV + .35 = 20.82
SPX – 9 = 1978
NAS – 22 = 4449
10 YR YLD - .04 = 2.47
OIL - .13 = 101.94
GOLD + 13.30 = 1308.20
SILV + .35 = 20.82
For the week, the Dow is down 0.8%, the S&P is flat and the Nasdaq is up 0.4% in its second straight weekly rise.
In economic news, durable goods orders were up 1.4% in
June, but May’s numbers were revised lower to show a 1.2% decline. Shipments of
core capital goods fell 1%. Core capital goods shipments are used to calculate
equipment spending in the government's gross domestic product measurement. The
government will release its first snapshot of second-quarter GDP next
Wednesday. The economy contracted at a 2.9% rate in the first three months of
the year, with business spending on equipment falling at a 2.8% rate.
Investors have been selling junk bonds. In the past week
investors pulled $2.3 billion from junk bond funds. That marked the biggest outflow
since June 2013, when the Fed was hinting about tapering. The high-yield market
has pulled back in recent weeks, sending prices lower and yields higher. The
bond market is not as liquid as it once was; trading volume is down across the
board, and trading desks have been cut back, meaning a big sell-off could look
more like a run on bonds.
Yesterday we told you about Amazon.com’s earnings report,
or more specifically, a lack of earnings. Amazon has a unique business model
where they manage to consistently increase sales without actually turning a
profit. If it seems like this kind of model has limitations, you are correct,
and today Amazon hit the wall. Yesterday’s non-earnings report went from bad to
worse as Amazon announced the current quarter will result in bigger losses than
the last quarter. The $126 million dollar loss will swell to a $400 million
dollar loss, maybe as much as $800 million.
Breaking down the forward guidance, about $410 million of
the current quarter loss will be in the form of stock compensation. What makes
this even more interesting is that the company lost about $14 billion in market
cap today. Jeff Bezos lost $3.5 billion from his personal fortune; Bezos may be
an internet visionary, but lacks some basic math skills.
Also yesterday, Visa reported net income for the quarter
ended June 30 rose 11 percent to $1.36 billion, or $2.17 a share, from $1.23
billion, or $1.88, a year earlier. Analysts had expected $2.10 a share. Visa’s
losses accounted for about one-third of the decline in the Dow today. So, the
earnings side was good but the company reduced its revenue forecast for the
rest of the fiscal year. One reason for the reduction – Russia. After the US
imposed sanctions on Russia, Putin recommended Russia create its own payment
system. Visa said that tensions with Russia may affect earnings by “several
pennies,” and that headwinds, in the form of lower cross-border volumes, are
likely to continue in the short term in international corridors such as Ukraine,
Venezuela and Argentina.
The European Union has been holding meetings in Brussels
to find agreement over imposing sanctions on Russia over its behavior in
Ukraine. They’ve decided to put together an outline on sanctions and get
together again next week; the outline would exclude the crucial gas sector.
Following the downing of Malaysia Airlines Flight 17,
many Europeans are eager for their governments to do something to punish Putin
for fomenting instability in the Ukraine. But the debate over economic sanctions
is shining an awkward spotlight on the large and important trade relations
between Russia and Europe. Russia is Europe’s gas station, and if Europe
decides to stop doing business with Russia, they will have to figure out a new,
and likely more expensive way to put gas in the car and to heat their homes.
According to the Energy Information Administration, oil
and natural gas accounted for 70% of Russia’s export revenues in 2012; and most
of those exports go to Europe; and most of Europe hasn’t figured out how to
provide their own energy. Oil reserves in the North Sea are expensive to tap;
fracking technology hasn’t happened for a number of reasons; and so Europe
depends on Russia for about 30% of its natural gas. Many of Europe’s biggest
corporations are directly involved in importing fuel from Russia, and many of
Europe’s biggest industries, such as utilities, power-hungry manufacturers, car
manufacturers, transportation systems, and anyone else who uses electricity –
all rely on fuels imported from Russia.
If the EU were to suddenly grow a spine and just say no
to Russian oil and natural gas, it would certainly inflict some short- term
pain on Russia, but oil and gas are fungible and the market is global. One of
Putin’s first moves was to sign a deal with China to make Russia a major
supplier of natural gas. Europe does not have a quick replacement for Russia’s
natural gas and winters in Europe can get very cold.
The US does not depend on Russian fuels, however there
are a couple of strange side stories coming out of the sanctions. First, is the
as-yet-unaddressed need to restart NASA, so we don’t have to depend on Russia
for ride sharing to the space station. The other, is that Americans don’t
really care much about Russia anyway; last week the US imposed a fresh round of
sanctions on Russian companies, including weapons manufacturers. How did
patriotic Americans respond? Well, you can no longer buy Kalashnikov AK-47s.
Technically you can, you just can’t find any. The move sent American gun buyers
into a frenzy, seeking to buy any and all AK-47s on any store shelf.
So, it should come as no surprise that Russia has stepped
up its direct involvement in fighting between the Ukrainian military and
separatist insurgents, unleashing artillery attacks from Russian territory and
massing heavy weapons along the border. So, while the EU considers drafting a
new outline of possible sanctions for further possible consideration; Russia may
send in the troops.
About 34% of the contiguous United States was in at least
a moderate drought as of this week.
Things have been particularly bad in California, where more
than 80% of the state is in “extreme” drought, state officials have approved
drastic measures to reduce water consumption. California farmers, without water
from reservoirs in the Central Valley, are left to choose which of their crops
to water. Parts of Texas, Oklahoma and surrounding states are also suffering
from drought conditions. East of the Mississippi, rainfall has been rising. But
global warming also appears to be causing moisture to evaporate faster in
places that were already dry. Researchers believe drought conditions in these
places are likely to intensify in coming years.
A new
study released yesterday by NASA and the University of California Irvine
shows we are losing water at a shocking rate in the West. Using a satellite
designed to track changes in groundwater, the research team found that the
Colorado River basin—which supplies water to 40 million people in seven states—lost
15.6 cubic miles of freshwater in the last 10 years. From December 2004 to
November 2013 the Colorado basin lost nearly 53 million acre feet, or almost
double the volume of the nation’s largest manmade reservoir, Lake Mead.
(Actually, Lake Mead is no longer the biggest reservoir in the country; a lake
in North Dakota takes that honor, as Lake Mead has shrunk.) More than 75% of
that loss was due to excessive groundwater pumping. It’s the first study to
quantify just how big a role the overuse of groundwater plays in dwindling
water resources out West.
How did this happen without anyone noticing it? The
answer, basically, is that up until this study, nobody had a good way of
measuring how much water is stored underground. And the researchers aren’t
certain how much groundwater is left. Water above ground in the basin's rivers
and lakes is managed by the U.S. Bureau of Reclamation, and its losses are
documented. Pumping from underground aquifers is regulated by individual states
and is often not well documented.
In the last seven years, Lake Mead’s dwindling has
accelerated. The lake is now just barely more than 1,080 feet above sea level,
slightly below its previous record low set in November 2010. Lake Mead is
expected to drop another 20 feet into record territory by summer 2016. The low
water level is already affecting hydroelectric power production. If the water
level drops below 1050, the Hoover Dam might not be able to produce
electricity.
Well before then, perhaps as soon as next April,
downstream water rationing will kick in—which has never happened before. A 2007
shortage-sharing agreement sets three elevations for which water restrictions
will be imposed on the Lower Basin states of Arizona, California, Nevada, and
New Mexico. The first shortage level, 1,075 feet, will likely come into effect
in the next several months. It would require a total water use cut of 4.4%, with
Arizona taking an 11% cut, Nevada a 4% cut, New Mexico 3.3% and California
remaining the same.
Right now, Phoenix has officially recorded just over one
inch of precipitation since the start of the year; the normal amount is just
under 4 inches. The problem is that when above-ground water supplies run low -
which is happening now, and it is common in California, even when there isn’t a
drought - water managers use groundwater to meet public and farming needs. The
study finds that so much groundwater has been used that it will be impossible
to recover it naturally; overall supply of available freshwater will continue
to decrease as a result.
