Thursday, April 17, 2014 - The Growth Industry for the Next 20 Years

The Growth Industry for the Next 20 Years

by Sinclair Noe

DOW – 16 = 16,408
SPX + 2 = 1864
NAS + 9 = 4095
10 YR YLD + .08 = 2.72%
OIL + .83 = 104.59
GOLD – 7.60 = 1295.60
SILV + .02 = 19.75

Stocks ended a holiday-shortened week with mixed results. Stock markets will be closed tomorrow in observance of Good Friday. The S&P 500 had its best week since last July. For the week, the Dow rose 2.4%, the S&P 500 added 2.7% and the Nasdaq advanced 2.4%.

With less than one-fifth of S&P 500 companies having reported results so far, about 63% have topped earnings expectations and 52% have topped revenue expectations. Of course that’s part of the dance between corporations and analysts, but it does move stock prices. For example, Goldman Sachs reported an 11% drop in quarterly profit and revenue fell 8%, but the results were better than estimates and share price was higher on the day.  Among the other earnings related movers today, Google, IBM, Mattel, and United Health were down on poor earnings news, while Morgan Stanley, GE and Pepsi moved higher.

The number of Americans filing new claims for unemployment benefits rose less than expected in the latest week and came near pre-recession levels. The Labor Department also reports weekly earnings of the typical full-time worker rose 3% in the first quarter compared to a year earlier, the fastest pace since 2008. Median earnings came in at $796, that’s the point where half of all workers made more and half made less. This means that earnings growth is now outpacing inflation in consumer prices, which increased at 1.4%. Earnings that rise faster than costs mean workers will have more money to spend on discretionary purchases, or maybe to shore up their personal finances.

This might indicate that the labor market is getting tighter, or at least working through some of the slack, as companies have to pay a bit more to retain or attract workers. Consumers that spend more, boost business profits, which means companies respond by producing more, which means more hiring and an even tighter labor market, which leads to higher worker earnings. Of course, this is just one report, and one report does not make a trend.

One of the reasons it might not be a trend is that the income is not evenly distributed. Recent Labor Department research shows that the top 20% of earners accounted for more than 80% of the rise in household income from 2008-2012. Income fell for the bottom 20%. That had a direct impact on spending. The top households increased spending by about $2,300 from 2008-2012, notably on health care, transportation and education. The 20% of households with the lowest incomes cut spending by about $150.

Top diplomats from Ukraine, Russia, the European Union and the United States have agreed on a set of measures to ease mounting tensions in eastern Ukraine. In Geneva today, Secretary of State John Kerry said the measures include disarming pro-Russian militants occupying buildings in eastern Ukraine and the return of the buildings to their legitimate owners. A joint statement from the four powers says amnesty will be granted to protesters who surrender weapons and leave the buildings, except for those found guilty of capital crimes.

Speaking at the White House, President Obama said he hopes Russia will honor the agreement but he also said that given past practices, there are no assurances of cooperation from Moscow. He said the administration is holding talks with European allies about possible new sanctions if Russia reneges on the deal.  The agreement does not specifically require Moscow to withdraw 40,000 troops massed on its border with Ukraine, and does not reference Russia's annexation of Ukraine's Crimean peninsula last month. It also does not obligate Moscow to hold direct talks with the interim government in Kiev. Peace monitors will be put in place and dialogue will continue, but this is a very real diplomatic move toward de-escalation. That’s good.

This has been a most unusual geopolitical act of aggression in Ukraine; it has revealed the use of sanctions as an economic weapon going up against the threat of cutting off natural gas supplies as an energy weapon.

In Russia, the economic costs have been masked by recent patriotic fervor but could soon haunt the Kremlin, as prices rise, wages stall and consumer confidence erodes; the major Russian stock market index dropped 10% in March; by some accounts, more than $70 billion in capital has fled the country so far this year; key interest rates jumped to 7% from 5.5% to combat inflation and support the ruble, a step that could slow growth; and unemployment has spiked. Beyond the whipped up patriotic fervor there isn’t much reason for Russians to feel good about their situation. The only thing positive for the Russian economy is its energy supplies.

And when Russia intervened in Crimea, they threatened to turn off the energy supply to Ukraine and Europe. The clock is ticking. Europe has about 6 months before the cold weather returns, to wean themselves from dependence on Russian nat gas.

One way to replace Russian gas is through home-grown renewable energy production. Today, the Ukrainian embassy in Washington DC hosted officials from the renewable energy industry to try and lure investment in green energy such as solar, wind, and biofuels. It will be interesting to see where this goes.

The oil industry would like to take the crisis in Ukraine and use it as an opportunity to flood the European market with fracked-in-the-USA natural gas. For this ploy to work, it's important not to look too closely at details. Like the fact that much of the gas probably won't make it to Europe because any gas fracked in the US would actually be sold on the world market to any country belonging to the World Trade Organization.

Plus, it would require massive infrastructure bailout in Ukraine and Europe; a single LNG terminal can cost $7 billion and it still requires massive infrastructure beyond the terminal. There could be a couple of very cold winters in Europe before those massive industrial projects are up and running.

Plus, there is the environmental problem of even more fracking in the US; Americans might put up with fracking in their own back yard if it results in energy independence and more jobs, but when you switch the argument to energy security for Ukraine and Europe, it becomes a tougher sell.

Plus, there is the concern about expanding fracking in light of the recent studies coming out in very plain and blunt language stating the climate is changing and fracking and burning carbon based fuels is a huge culprit. The gas industry itself, in 1981, came up with the clever pitch that natural gas was a "bridge" to a clean energy future. That was 33 years ago. That’s a long bridge.., to nowhere.

The answer is in renewable energy sources. If Russia wasn’t threatening to take away the nat gas, nobody would pay any attention to Putin. Real energy independence is also energy security, and it will be impossible to achieve as long as we rely on the oil and gas industry. So, how long would it take to become energy independent? Less than you might imagine.

It would take a big change in thinking and in political will, but we’ve done it before. During World War II, the US retooled automobile factories to produce 300,000 aircraft, and other countries produced 485,000 more. In 1956 the US began building the Interstate Highway System which eventually extended more than 47,000 miles and changed commerce and society. Clean technology is the answer, and not just because fossil fuels are cooking the planet but because the clean tech is more efficient.

Today the maximum power consumed worldwide at any given moment is about 12.5 trillion watts, according to the US Energy Information Administration. The agency projects that in 2030 the world will need almost 17 trillion watts of power as the global population and living standards rise, with almost 3 trillion watts being consumed by the US. That forecast is based on the idea that we continue with the current mix of energy sources we use today, which is heavily dependent on fossil fuels.

If, however, the planet were powered by clean technology, with no fossil fuel or biomass combustion, an intriguing savings would occur. Global power demand would only be about 11.5 trillion watts and the US demand would drop to only about 1.8 trillion watts. That means that in 2030, we would need less wattage than we need today; and that decline occurs because, in most cases, electrification is a more efficient use of energy. For example, less than 20% of the energy in gasoline is used to move a vehicle and the rest is wasted as heat, whereas 85% of electricity delivered to an electric vehicle is used to provide motion.

Of course clean technology would require massive infrastructure investment as well. The good news is that it is not money handed out by government or consumers but rather an investment that is paid back through the sale of electricity and energy, and because of the efficiencies and the advances in the technologies, it is cheaper than fossil fuel based energy. Energy will be the growth industry of the next 20 years; it is essential for a growing population and a standard of living; and as Putin’s intervention in Crimea has reminded us, it is essential for geopolitical stability.

Monday, August 12, 2013 - The End of Mandatory Draconian Punishment

The End of Mandatory Draconian Punishment

by Sinclair Noe

DOW – 5 = 15,419
SPX – 1 = 1689
NAS + 9 = 3669
10 YR YLD + .02 = 2.60%
OIL+ .19 = 106.16
GOLD + 22.60 = 1338.30
SILV + .87 = 21.53

This week's economic calendar includes retails sales reports tomorrow, plus a look at inflation on the wholesale level tomorrow, and inflation at the retail level on Wednesday; also reports from the Philly Fed, plus a look at industrial production, housing starts, and consumer sentiment. The over-riding question is whether the economy is seriously showing strength or if we are just grinding along. Most of the expectations for this week's data suggest more of the same old, same old. It's doubtful we will see anything that could sway the Federal Reserve to change policy, and that means the stock and bond markets may have gotten ahead of themselves in pricing in an improving economy.

The Treasury Department reported this morning that the US government spent $98 billion more than it took in last month, with the deficit driven by spending on healthcare programs, pensions for the elderly and the military. So far in the current fiscal year, which began in October, the federal government has run $607 billion into the red, a narrowing from the $974 billion deficit chalked up in the same 10 months of fiscal year 2012.

A major change today from the Justice Department; Attorney General Eric Holder is calling for sweeping and systemic changes to the American judicial system. Holder made the announcement today during a speech to the American Bar Association, outlining a reform plan he calls “Smart on Crime”.

Holder says the Justice Department would direct federal prosecutors to charge defendants in certain low-level drug cases in such a way that they would not be eligible for mandatory sentences now on the books. Prosecutors would do this by omitting from official charging documents the amount of drugs involved in a case. By doing so, prosecutors would ensure that nonviolent defendants without significant criminal history would not get long sentences.

The Smart on Crime reforms also include allowing for the early release of non-violent elderly federal defendants who had served significant portions of their sentences, thereby helping to reduce the overall federal prison population. Holder also called for greater use of incarceration alternatives and renewed focus on prevention, pointing out reforms in typically conservative states that have steered funding towards treatment and supervision, rather than funneling more money into prisons.

Holder said: “The bottom line is that, while the aggressive enforcement of federal criminal statutes remains necessary, we cannot simply prosecute or incarcerate our way to becoming a safer nation. To be effective, federal efforts must also focus on prevention and reentry. We must never stop being tough on crime. But we must also be smart and efficient when battling crime and the conditions and the individual choices that breed it."

He also noted that sentences are often racially disproportionate, referencing a February report indicating that, in recent years, black male offenders have received sentences nearly 20 percent longer than white offenders convicted of similar crimes.

Since Richard Nixon declared the "war on drugs" in 1971, US prison numbers have soared to account for 25% of all the world's prisoners even though it has only 5% of the world's population. Drug-related offenses drive the vast majority of the increased prison population.

Some of the proposals unveiled by Holder, such as giving federal judges the leeway to depart from mandatory minimum sentences for some drug offenses, require congressional approval,and getting any consensus in Washington DC is tough, even though this should be an issue that attracts bi-partisan support.

Forty years of a failed war on drugs has destroyed communities and families all across our land. Hard earned tax-payer dollars have been wasted on ineffective policies that have resulted in over-incarceration, pushing state and federal budgets to the brink of bankruptcy.

The attorney general said 17 states have directed money away from prison construction and toward programs and services such as treatment and supervision that are designed to reduce the problem of repeat offenders.

In Kentucky, legislation has reserved prison beds for the most serious offenders and refocused resources on community supervision. The state, Holder said, is projected to reduce its prison population by more than 3,000 over the next 10 years, saving more than $400m.

Holder also cited investments in drug treatment in Texas for non-violent offenders and changes to parole policies which he said brought about a reduction in the prison population of more than 5,000 inmates last year. He said similar efforts helped Arkansas reduce its prison population by more than 1,400. He also pointed to Georgia, North Carolina, Ohio, Pennsylvania and Hawaii as states that have improved public safety while preserving limited resources.

Five years after Wall Street's malfeasance nearly caused a global financial metldown, and after four years of hearing Jamie Dimon whine about how regulations would hurt his bonus, and long after tens of billions of dollars have been lost to bankster fraud, we're about to see the first arrests of Wall Street bank employees. What's more, the suspects work at JPMorgan Chase, a bank which, ironically enough, politicians and pundits insisted was the "good bank" after the financial crisis hit in 2008. This in connection with the London Whale case.

Despite the overwhelming evidence of criminal behavior in a large number of cases, this will have been the first time since the financial crisis that a banker's been arrested on criminal charges, assuming the arrests take place as planned, of course.

Let's be clear: These arrests are a good thing. Justice demands that anyone, no matter who they are, be made to answer for their deeds. What's more, bankers at "too big to fail" institutions have the power to shatter, and even bring down, the global economy. The lack of arrests up to this point means there's been no deterrent effect, no reason for them not to keep committing fraud. And when you compare and contrast the banksters antics, compared to the kid who smokes a joint and goes to jail under mandatory sentencing laws, well it makes a mockery of justice. But even if arrests are made, it is expected to be junior level traders, it won't be Bruno Iksil, the trader known as the London Whale; he's worked out some sort of deal and he's cooperating with investigators. It won't be the Whale's boss, or anybody higher up the corporate food chain. It'll be low-level guys.

There is good reason to look up the corporate chain. Senior management was either complicit or asleep at the switch. The bank's own risk management rules and guidelines were violated 330 times. JPMorgan Chase stonewalled their regulator and as losses grew, Chase provided less and less information to the OCC. Dimon ordered the bank to omit critical data from its standard reports to the OCC.

Now sometimes the Department of Justice arrests low-level workers in an attempt to get them to provide information against upper level management; they use them to build a case. Sometimes, the low-level guys are nothing more than sacrificial lambs. We'll see.

News out of Mexico today that could have a big impact on the energy sector. Mexican President Enrique Peña Nieto proposing to end a ban on foreign firms taking part in the state-run oil industry. Now, this is not a new idea, and in the past it has not been well received.

The proposal would allow state-oil agency Petróleos Mexicanos, or Pemex, to partner with foreign firms and share profits, a practice prohibited by the Mexico constitution. It would also allow more private participation in electricity generation in an attempt to drive down prices that the government says are 25% higher than in the United States.

Peña Nieto says the oil and electricity industries would remain under government control and that private companies could not claim petroleum reserves as their own even as opponents railed against changes they say run contrary to the national interest and risk handing over the country's greatest treasure to foreigners. Pemex has not been employing new technologies, and the thinking is that bringing in foreign firms might modernize practices. Oil output has dropped from nearly 3.4 million barrels per day in 2004 to 2.5 million barrels per day in 2012. The flip side is the fear that foreign firms will do more than modernize, they will claim Mexican reserves as their own, or employ environmentally harmful drilling techniques.

Meanwhile, north of the border, Texas has been employing modern techniques for quite some time; the result is a boom in exploration and production; the oil is flowing, but the water supply is running dry. Three years of drought, decades of overuse, coupled with the oil industry's demands on water for fracking are drying up reservoirs and underground aquifers. The Texas Commission on Environmental Quality says 30 communities could run out of water by the end of the year. And while most of those communities are small rural towns, there are nearly 15 million people living under some form of water rationing, barred from freely watering their lawns or refilling their swimming pools or in the case of the small town of Barnhart Texas, they've just run out of water; turn the faucet and nothing happens.

Fracking is a powerful drain on water supplies. In adjacent Crockett county, fracking accounts for up to 25% of water use. Fracking isn't the only reason for water shortages. Big cities soak up plenty of water, agriculture takes its share, climate change and the drought have added to the problem, but fracking seems to be the straw that might break the camel's back. Last week, heavy rains hit much of Texas, but it wasn't enough to recharge the aquifers.

Tuesday, May 14, 2013 -

Booms

by Sinclair Noe

DOW + 123 = 15,215
SPX + 16 = 1650
NAS + 23 = 3462
10 YR YLD + .03 = 1.95%
OIL - .94 = 94.23
GOLD – 5.00 = 1426.80
SILV - .24 = 23.51

So, we have record highs. I went back to check some of the earlier in the year predictions. Last December, Goldman Sachs was predicting the S&P 500 would hit 1625; sounded good, even a little bold back then. Of course, in the past week, we've blown past those numbers. Many experts are calling for a correction here. Maybe, maybe not. If your memory is still sharp, you'll recall a few weeks back I was talking about the “Sell in May” strategy; and if you're really sharp, you'll recall I said the way to play that strategy was to wait for a MACD sell signal for an exit, rather than just an arbitrary date on the calendar. We still haven't had the exit signal.

The market is in full melt-up mode, extending further above its longer-term moving averages every single day. The riskier stocks helped pushed the market higher over the past week or so. Technology names blasted higher. Materials broke out and helped lead the market to record heights. This shows that we are finally seeing investors beginning to believe in the market again.

In a recent Gallup survey, only 52% of folks said that they or their spouse own any stocks (that includes mutual funds). That's a jaw-dropping number if only for the fact that the S&P 500 has more than doubled since its 2009 bottom. The data shows that, left to their own devices, most individual investors sold into that 2009 bottom, and they kept selling stocks as the market recovered and pushed to new highs. So, there is a lot of money on the sidelines. If we do get a correction, it will probably happen right after Mom and Pop investor jump in.

The Congressional Budget Office just did a new series of baseline budget deficit projections and they're a lot lower than the old ones. The short-term deficit, in particular, is way lower; $200 billion lower; or a $643 billion deficit for 2013 rather than an $845 billion deficit. That's about half higher-than-expected tax revenues and about half higher-than-expected payouts from Fannie Mae and Freddie Mac. A big reason for the smaller-than-expected deficit is stronger economic growth.

The CBO is also revising the 10-year deficit forecast down by $618 billion, primarily because of the slowdown in health care spending. This doesn't mean the deficit problem is completely fixed. The current projection has the deficit shrinking for the next couple of years and then growing again. So, things will get better before they get worse, but that leaves us with a manageable 2024 deficit. The problem is that it's trending upward, and nothing in this revised projection changes that fact. There's no need to panic about the 2024 deficit, or for that matter, no need to strike a grand bargain. It is possible that we could start to control health care costs and do more to boost economic growth, and ten years from now, we might not have much of a problem at all. Key here is economic growth.

The Department of Labor reports US import prices fell in April due to a drop in oil costs, a positive sign for household finances that also pointed to benign inflation pressures. Import prices slipped 0.5 percent last month, the biggest decline since December. March's data was revised to show a 0.2 percent decline instead of the previously reported 0.5 percent drop. Stripping out petroleum, import prices dipped 0.1 percent.

The tame inflation environment should allow the Federal Reserve to stay on its ultra-easy monetary policy; so this flies directly in the face of those who are worried about the Fed “tapering off” of QE. At its policy meeting earlier this month the central bank decided to continue buying $85 billion worth of bonds every month to push long-term interest rates downward. At the same time, the economy has lately shown signs of resilience despite austerity measures.

The National Federation of Independent Business reports its gauge of confidence for small U.S. businesses rose in April to its highest in six months. Lower oil prices are also helping household finances. The United States imports much of the fuel it consumes. Last month, imported petroleum prices fell 1.9 percent. The Labor Department report also showed export prices fell 0.7 percent last month, the largest decline since June.

Meanwhile, there is a boom in North American energy that may be one of the biggest stories in the global economy, even though we haven't really felt the positive impact in the US; not yet anyway. The boom is related to the shale exploration in the US and the oil sands fields in Canada.

A new report from the International Energy Agency, the IEA, discusses the consequences of the boom, and they are looking at this as a boom. The report describes the US supply "shock" as that is sending "ripples" throughout the world, affecting every aspect of the market.

Here's the key part from the press release announcing the report:

The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15, the International Energy Agency (IEA) said in its annual Medium-Term Oil Market Report (MTOMR) released today. The shift will not only cause oil companies to overhaul their global investment strategies, but also reshape the way oil is transported, stored and refined.

According to the MTOMR, the effects of continued growth in North American supply – led by US light, tight oil (LTO) and Canadian oil sands – will cascade through the global oil market. Although shale oil development outside North America may not be a large-scale reality during the report’s five-year timeframe, the technologies responsible for the boom will increase production from mature, conventional fields – causing companies to reconsider investments in higher-risk areas.

In virtually every other aspect of the market, developing economies are in the driver’s seat. This quarter, for the first time, non-OECD economies will overtake OECD nations in oil demand. At the same time, massive refinery capacity increases in non-OECD economies are accelerating a broad restructuring of the global refining industry and oil trading patterns. European refiners will see no let-up from the squeeze caused by increasing US product exports and the new Asian and Middle Eastern refining titans.

“The good news is that this is helping to ease a market that was relatively tight for several years. The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves. But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”

While geopolitical risks abound, market fundamentals suggest a more comfortable global oil supply/demand balance over the next five years. The MTOMR forecasts North American supply to grow by 3.9 million barrels per day (mb/d) from 2012 to 2018, or nearly two-thirds of total forecast non-OPEC supply growth of 6 mb/d. World liquid production capacity is expected to grow by 8.4 mb/d – significantly faster than demand – which is projected to expand by 6.9 mb/d. Global refining capacity will post even steeper growth, surging by 9.5 mb/d, led by China and the Middle East.

Now, when you look at this energy boom, you might think this would be a real positive for US manufacturing. We just haven't seen it yet, and we might not. There has been talk about a renaissance in US manufacturing, and factory output continues to rise, but the truth is that manufacturing has dropped to just 9% of jobs, and in the last month, there were no new manufacturing jobs added. For every $1 of manufacturing output in a community, there’s another $1.48 of wealth created. And there has been a push for new manufacturing jobs which unfortunately has been hampered by austerity measures out of Congress. Any strength we've seen in manufacturing is probably just a short-term bounce reflecting more the relative weakness of Europe and Japan. Lower energy prices might help, but not yet. The ability to make things is fundamental to the ability to innovate things over the long term. When you give up making products you lose a lot of the added value.

Maybe we are on the leading edge of a new oil and natural gas boom in this country, but one thing we'll need to get there is water.

Water and energy are inextricably linked.

Power plants are the largest users of water in the United States, while substantial amounts of energy are needed to supply fresh water to homes, farms and factories and treat waste water prior to safe disposal.

Rising water consumption for hydraulic fracturing and production of biofuels, coupled with severe droughts across more than 60 percent of the continental United States in 2012, have propelled that link up the policymakers' agenda.

The threat to hydroelectric generation is obvious. But in 2007-2009, drought put the water supplies of 24 of the nation's 104 reactors at nuclear plants at risk.

The United States withdrew 410 billion gallons of water from aquifers, rivers and the ocean every day in 2005, of which 350 billion gallons were fresh water and 60 billion gallons were saline or brackish.

Cooling systems for nuclear plants and power plants that burned coal, gas and oil accounted for 41 percent of fresh water withdrawals and 49 percent of all water withdrawals. That put them ahead of irrigation (31 percent) and public supply to homes and offices (11 percent). The remaining uses including industry, mining, livestock and aquaculture accounted for less than 10 percent combined.

In addition to power plants, water used in growing crops for biofuels as well as for drilling and fracking oil and gas wells accounts for a rapidly increasing amount of total consumption.

The broader energy sector has been the fastest growing water consumer in the United States in recent years and is projected to account for 85 percent of the growth in domestic water consumption for the next 20 years.

Environmentalists and community groups cite water scarcity as one reason to ban or restrict fracking. Even in Texas, water conservation districts say they are considering introducing restrictions if reservoirs and the water table drop too low.

Most of the water employed in thermoelectric power stations is in the cooling system. In once-through cooling (OTC) systems, water is withdrawn from a source, normally a river or coastal location, circulated through heat exchangers, then returned to the surface water body. OTC systems withdraw large amounts of water but use comparatively little, returning most to the source.

Most thermal plants in the United States employ OTC systems. Net water consumption is therefore only 3 percent of the total, compared with gross withdrawals of almost 50 percent. The distinction between withdrawals and consumption is crucial. Water that is consumed cannot readily be used for another purpose.

Power plants need sufficient water at a low enough temperature to operate efficiently. Most states impose restrictions on the temperature at which water can be discharged back into rivers and the sea to prevent the animals and plants in the waterway from being cooked. If there is insufficient water or it is too hot, power plants may be forced to close or cut output.

In August 2012, the Illinois Environmental Protection Agency waived the normal environmental restrictions and allowed four coal-fired and four nuclear power stations to release hundreds of millions of gallons of hot water at nearly 100 degrees Fahrenheit into state lakes and rivers to keep the lights on.

On other occasions, low water levels forced power plants to turn down. During the 2003 heat wave in France, which was responsible for more than 10,000 deaths, nuclear plants had to reduce their output, worsening the crisis.

Nuclear and coal-fired power plants with OTC systems are especially vulnerable to droughts and heat waves because they rely on by far the largest volume of water withdrawals. Combined-cycle gas plants are much more efficient. And gas turbines, solar and wind generators use negligible quantities.

Options for reducing the power sector's vulnerability include switching the type of fuel from nuclear and coal to gas, solar or wind; switching to recirculating or dry and hybrid wet-dry cooling systems; or switching the water source from fresh water to saline or waste water.

The drawback is the capital cost and reduced efficiency of the plant.

Oil and gas extraction uses prodigious quantities of fresh water and produces large amounts of brackish waste water, which is normally reinjected far below the drinking water table. Drilling a conventional well uses relatively small quantities of water for drilling mud. Fracking uses vast amounts of water. A typical well drilled and fracked in the Eagle Ford uses 4.3 million gallons.

Pressure to reduce the amount of fresh water used in fracturing operations has led to interest in switching to saline or waste water, recycling water, or fracking with diesel or hydrocarbon gels, though all these systems are less efficient and remain experimental, and represent the threat of contamination to acquifers.

Biofuels present another problem. Huge amounts of water are being used to grow crops to produce ethanol.

Because biofuels need so much water for their growth, they are particularly vulnerable to droughts. Just as traditional agricultural crops are hindered in times of drought, so are energy crops.

We may be looking at a boom in energy production in this country, but it comes at a price.

Wednesday, April 17, 2013 - Austerity Oops

Austerity Oops

by Sinclair Noe

DOW – 138 = 14, 618
SPX – 22 = 1552
NAS – 59 = 3204
10 YR YLD - .01 = 1.70%
OIL – 2.35 = 86.37
GOLD + 8.20 = 1378.50
SILV - .03 = 23.41

The Federal Reserve released its Beige Book this morning. The Beige Book is just a survey of the 12 Fed Districts and the name is due to the fact that it has a beige cover. The survey covers the time from late February to early April. The info is more anecdotal than precise measurements. Of the Fed’s 12 districts, five reported “moderate” growth, five reported “modest” growth, and New York and Dallas reported slight accelerations.

“Particular strength” was seen in residential construction and automobiles, which confirms the report on Monday dealing with industrial output. Consumer spending grew modestly, with higher gasoline prices, the expiration of the payroll tax cut and winter weather restraining growth. Lat week, the Commerce Department reported that retail sales were at a 9 month low. The sequester has rattled the defense industry with the automatic budget cuts; no surprise there. Overall, the Fed remains optimistic, but still concerned about fiscal policy.

On the fiscal policy front, one of the main arguments for budget cuts and austerity comes from a 2010 study by two Harvard economists, Ken Rogoff and Carmen Reinhart. The study concluded that when a nation's debt grows too big, it can slow growth. The idea is that when the debt to GDP ratio hits 90%, the result is that growth will drop to 0.1%. So, the conventional wisdom, based upon the study, was that too much debt would make a country's economy grind to a halt. And the response was budget cutting and austerity programs from the European Union to the fiscal cliff and sequestration that came out of Washington.

Well now another set of academics at University of Massachusetts at Amherst have replicated the study. They discovered that the Harvard professors made a couple of errors in their research. The new review of the study shows the original study used a debatable method to weight the countries in their research and selectively excluded years of high debt and average growth, and they uncovered a code problem with the Excel spreadsheet.

Ooops.

I seem to recall that an Excel spreadsheet coding error was blamed in the collapse of the London Whale. Somebody really needs to come up with a foolproof spreadsheet.

Anyway, when the data is corrected, that 90% debt to GDP ratio isn't really the threshold that results in slower economic growth. It doesn't mean that high levels of debt should be considered as a positive, just that there is some wiggle room, and the appropriate levels of debt are a little different depending upon the situation, and it isn't set in stone, and maybe all this austerity isn't really the solution for everything right here, right now. And the new data shows that countries can have very high levels of debt and can have good strong growth.

Now in fact there is a reason to be concerned about the artificially low interest rates the Fed has and is certain to continue to engineer. They are a massive transfer from savers to the financial system and to speculators on asset prices. But the solution is more demand and more investment, and if the private sector won’t provide it, government needs to step in. The evidence, as even the IMF has been forced to acknowledge, is that government spending is stimulative, and with a fiscal multiplier over 1 (which is also what the IMF found is operative in low growth economies), spending makes the denominator of the debt/GDP grow faster than the numerator, reducing rather than increasing debt ratios.

Of course, it will be much harder to defend budget cuts and austerity, now that the data has been debunked, but the damage is already done. Science advances one funeral at a time.

The Senate failed to muster sufficient support Wednesday for a gun-buyer background check bill, voting the measure down in a procedural vote that likely dooms any major legislation to curb gun violence. The amendment failed 54 to 46, falling short of the 60-vote threshold needed to break a filibuster of the measure, even as victims of the Sandy Hook shootings and other shooting watched from the Senate gallery and activists at a vigil outside the Capitol read the names of people slain since then, hoping to prompt action.

"Shame on you!" shouted two women in the gallery after the vote. One was Patricia Maisch, who grabbed the third clip from the gunman who opened fired at then-Rep. Gabby Giffords in the Tuscon., Ariz., shooting in 2011. The other was Lori Hass, whose daughter was injured in the Virginia Tech shootings six years ago.

Passage of the background check amendment had been seen as key because it represented a bipartisan agreement in a highly polarized debate. It also would have preserved a major part of the overall bill that many advocates against gun violence saw as a minimum step toward stemming gun massacres.

Who says nothing ever gets done in Washington? Swiftly and without fanfare, Congress and President Obama have made it easier for top federal employees to trade on inside information.

On Monday, Obama signed into a law a change in the Stop Trading On Congressional Knowledge, or STOCK Act, which was passed in 2012. The change, which was approved unanimously by Congress last week, means that top federal employees, including staffers on Capital Hill and in the White House, will not have to publicly disclose their financial holdings online. That requirement was part of the original STOCK Act, but its implementation had been delayed again and again by Congress. And now it's dead.

A Pennsylvania judge has issued what might be considered a precedent-setting decision holding that there is no corporate right to privacy under that state's constitution. The ruling comes in an ongoing case where several newspapers sued to unseal a confidential settlement where major fracking corporations paid $750,000 to a family that claimed the gas drilling had contaminated their water and harmed their health. The Court ordered that settlement unsealed, enabling the papers, environmentalists and community rights advocates to examine the health issues and causes. The Court's ruling is significant because the fracking companies have relied on secrecy agreements with landowners to hide the environmental and health impacts of gas drilling.

Where the ruling is likely to make the biggest waves is in the corporate personhood debate. The Judge spent more than a third of her 32-page decision saying why corporations and business entities were not the same as people under Pennsylvania's constitution, and why, for the purposes of doing business in the state, that federal court rulings that blur the rights of people and businesses do not apply.

The Court wrote, "Nothing in that jurisprudence indicates that that right [of privacy] is available to business entities... There are no men or woman defendants in the instant case; they are various business entities," it wrote, saying business entities are created by the state and subject to laws, unlike people with natural rights. "In the absence of state law, business entities are nothing." If businesses had natural rights like people, "the chattel would become the co-equal to its owners, the servant on par with its masters, the agent the peer of its principles, and the legal fabrication superior to the law that created and sustains it."

The judge said the U.S. Constitution's 14th Amendment "use of the word 'person' that makes its protections applicable to business entities" does not apply to Pennsylvania's constitution. "The exact opposite is derived from plan language of Article X of the Constitution of the Commonwealth of Pennsylvania." And the Judge added, "Not only did our framers know how to employ the names of business entities when and where they wanted them… they used those words to subjugate business entities to the constitution."

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.