The Four Risk Threats To The Economy / Stock Market : David Rosenberg

Printer Mario Draghi

Printer Mario Draghi (Photo credit: Ondrej Kloucek)

Gluskin-Sheff’s bearish economist David Rosenberg took a page from the Book of Revelation today, when identifying the major risks to U.S. growth over the next year.

August 8

Here are what he calls the “Four Horsemen:”

1) Europe:

The situation in Europe remains highly unstable, writes Rosenberg. And the violent market gyration to every “passing comment” by ECB boss Mario Draghi (Like this one last month: “The ECB is ready to do whatever it takes to preserve the euro”) ” says something about the manic mindset of today’s algorithm-dominated fast-money backdrop,” he said.

Speculation that the European Stability Mechanism (which isn’t even up and running yet) will be granted a banking licence and save the eurozone experiment is actually beyond the central bank’s purview, he wrote. In the final analysis it would be a political decision — which ain’t going to happen.

 ”Every German knows what happened in the 1930s and anyone with a keen sense of history knows that Germany is never going to vote for outright debt monetization. What one can reasonably expect at some point is a partial fragmentation of the nonsensical monetary union.”

2) Soaring food prices

More than half the counties (1,584) across 32 U.S. states have been deemed an agricultural disaster as American suffers through its worst drought in 50 years. As a massive global food producer, the U.S. plays a key role in influencing food prices. Corn is expected to top $10 a bushel, but the big question is whether rain will come in time to salvage the soybean crop — which has more far-reaching implications.

A failed soy harvest in the States could spur Asian countries to impose rice export bans like they did in the financial crisis. And as Rosenberg points out, one of the main reasons for the tensions that fuelled the Arab Spring was rampant food inflation.

3) Negative export shock

The eurozone’s recession is deepening and spreading, having an increasingly unfavorable impact on its neighboring economies and trading partners.

That’s why one of the most significant pieces of data last week was the drop in the ISM export orders index from 47.5 to 46.5 to the weakest level since the depths of the downturn in April 2009, Rosenberg says.

4) The proverbial fiscal cliff

More than 40% of companies in a recent Morgan Stanley poll said they were restraining spending now just in anticipation of America’s pending “fiscal cliff” — That’s the expiration of US$600-billion worth of tax cuts and spending programs in late 2012 to early 2013, which threatens to lop off around 3-5 percentage points of GDP if Washington doesn’t act.

“Recessionary pressures are building, and at a time when the pace of U.S. economic activity has precious little cushion.”

OPEC – Pursuing higher prices to pay for domestic programs

King Abdullah ibn Abdul Aziz in 2002

King Abdullah ibn Abdul Aziz in 2002 (Photo credit: Wikipedia)

from The Financial Post July 6

OPEC’s pursuit of higher prices has underpinned the growth of non-OPEC producers,” says Julian Lee, senior energy analyst at U.K.-based Centre for Global Energy Studies. “Non-OPEC developers should be extremely grateful for OPEC for keeping the price of oil high and making all the exotic and expensive sources of oil economically viable.”

Of course, the cartel’s oil policies are driven by domestic politics rather than a desire to share the spoils with their rivals.

Middle East producers, which dominate OPEC, enjoy low crude development costs but need higher oil prices to fulfill their increasing commitments to their restive populations.

On the surface, Saudi Arabia, the world’s largest producer of oil and OPEC kingpin, has a breakeven cost price of US$22.11 per barrel, compared with US$88.3 for a barrel extracted from Canadian steam-assisted gravity drainage (SAGD) technology (plus upgrader), according to energy consultants IHS Inc. research.

However, that does not paint the full picture of the cost of keeping Saudi Arabia’s monarchy in power.

Deutsche Bank has a more novel “budget breakeven price” for OPEC and other producers, which factors in the price needed to balance the overall budgets of the regimes that use state-owned oil revenues to pay for public sector wages and infrastructure and offer subsidies to their populations.

By that reckoning the Saudi budget breakeven price for 2012 stands at US$78.30 and for the U.A.E. US$90 per barrel, which are comparable with the Canadian SAGD and upgrader breakeven price.

Until 2006, Saudi Arabia’s breakeven budget price was US$38.70, but by 2011 it had shot up to US$82.20, according to Deutsche Bank estimates. The kingdom’s breakeven price escalated as it injected petrodollars to stimulate its limping economy after the global financial crisis; it also opened its coffers to appease its citizens as the Arab Spring movement swept across the region. As neighbouring Egypt, Tunisia, Libya, Yemen and Bahrain were in the throes of popular revolts, Saudi’s King Abdullah bin Abdulaziz Al Saud pledged a US$131-billion spending and investment package — 30% of its GDP — which included public sector jobs for 60,000 citizens and double-digit wage hikes for existing government employees to keep dissent at bay.

“Unlike investment spending which can be scaled back, current spending involves wage bills which are far more sensitive to changes, especially if they are revised downwards,” said Paul Gamble, head of research at Riyadh-based Jadwa Investments, adding that the government’s wage bill has risen 76% in six years.

These costs are effectively now baked into assumptions as the world’s most powerful oil producer contemplates what price suits its domestic needs. And while Saudi Arabia has been cheering recent price corrections — driven by its desire to be seen as a responsible oil producer ­— expect the kingdom and its allies to move swiftly if Brent moves south of US$90, analysts say.

While the rate of increase in Saudi public spending may start to slow, it’s unlikely to swing into reverse, said Robert Burgess, chief economist at Deutsche Bank. “The pressure on breakeven prices is, if anything, likely to be upwards rather than downwards.”

Natural Gas Shale Deposits – A North American Game Changer

Texas Barnett Shale gas drilling rig near Alva...

Texas Barnett Shale gas drilling rig near Alvarado, Texas (Photo credit: Wikipedia)

May 2, 2012

The development of North American shale deposits represents a revolutionary shift for the energy sector as well as the region’s industrial base, which Norm Lamarche, portfolio manager at Front Street Capital, believes will improve the fiscal situation in both Canada and the United States, while ultimately altering the geopolitical balance of power.

“Game-changing technology will make North America self-sufficient in energy,” Mr. Lamarche said. “It is responsible for driving U.S. oil production up to eight-year highs and pushing the price of natural gas down so much that it has created a competitive advantage for North America’s industrial base for decades to come.”

His fund targets companies such as Dow Chemical Co., which uses a lot of natural gas in its chemical processing and is building massive amounts of new capacity. Other companies like Methanex Corp. are shuttering plants overseas and moving to the U.S. because of cheap energy.

“The president of U.S. Steel thinks this is the best thing that’s ever happened to America,” Mr. Lamarche said. “There is an industrial renaissance going on, which is feeding a lot of new industrial demand for exports.”

The manager also owns energy service providers and drillers, and is particularly fond of U.S. mid-stream operators of pipelines and liquid processing plants, because the U.S. power industry is turning away from coal-fired plants toward cheaper, cleaner-burning natural gas to replace aging infrastructure and meet electricity demands.

“To meet that growing demand for natural gas, you cannot escape the need to drill more wells every year,” Mr. Lamarche said. “The new supply of oil, natural gas and liquids, means the entire North American supply-demand fundamentals are changing rapidly.”

While economists have pointed out that much of the recent U.S. employment gains are coming from what are traditionally perceived as lower-paying service jobs, Mr. Lamarche disagrees, noting the shortage of truckers, rail car workers and rig hands.

Trillions of dollars are expected to be invested into the U.S. in order to accommodate the industry’s expansion, which Lamarche notes, is occurring regardless of the pace of China’s growth or the situation in Europe.

“The story doesn’t rely on government funding to make it happen,” he said. “In 10 to 15 years, America won’t be so dependent on the Middle East and North African oil production. Its relationships with countries like Russia and Saudi Arabia will also likely be very different.”

BUYS

WHITECAP RESOURCES INC. (WCP/TSX)

The position: Owned for two years

Why do you like it? This intermediate oil producer, which acquires, develops and produces crude oil and natural gas in Western Canada, has a nice growth profile.
“Whitecap produces mostly oil, thereby generating high operating netbacks,” Mr. Lamarche said. “It also has a strong balance sheet and is looking at instituting a dividend structure sometime next year.”

Biggest risk: Weak oil prices

CANELSON DRILLING INC. (CDI/TSX)

The position: Added to existing position in past year

Why do you like it? This junior oilfield driller manufactures and operates drilling rigs in Canada’s Western Sedimentary Basin, the Permian Basin (West Texas), North Dakota and the Ebano-Panuco-Cacalilao field in Mexico.
“All of its 35 drilling rigs are custom built for unconventional and horizontal drilling, where the future of drilling is,” Mr. Lamarche said, adding that the company has no debt and pays a 4.7% dividend yield.

Biggest risk: Commodity prices, because they are a major driver of drilling activity

U.S. STEEL CORP. (X/NYSE)

The position: Recent addition to portfolio

Why do you like it? U.S. Steel is an integrated producer of flat rolled steel.
“We like it because it is also a large producer of tubular products (drill pipe) that the energy industry is increasingly using as they drill more wells, and longer-reach horizontal wells,” Mr. Lamarche said.

Biggest risk: Weakness in the U.S. or global economy

SELL

NATURAL GAS STOCKS

The position: Various short positions

Why don’t you like it? The portfolio has been short natural gas stocks for a number of years because Mr. Lamarche has a bearish view on the commodity.

Potential positive: Government-imposed fracking bans would send natural gas prices higher

What Do You Think ?

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Construction Equipment Survey – Credit Suisse

New York Stock Exchange

New York Stock Exchange (Photo credit: inkwellmusings)

Caterpillar (CAT : NYSE : US$106.21)

April 4

THESIS: The new AMP  editon has a bias , as discussed , based on 2012 being a time of economic recovery. Therefore , it is especially important to check the health of the sector that relies on economic strength and forceasts growth . The latest book devotes space to the stocks that will benefit from the forecast recovery. CAT is a symbol of the need to build in the energy , mining and construction sectors we see benefiting most from the economic recovery  momenetum .

Credit Suisse most recent survey of private construction equipment dealers shows forecasts for a 15-20% improvement in sales consistent with last quarter, driven by replacement demand.

 60% of dealers implied Q1/12 was trending ahead of expectations. Also encouraging, housing is on the path to recovery coupled with some pockets of strength in commercial construction and infrastructure (except military).

Large engines remain on fire tied to strength in power generation and oil & gas. There is less optimism on coal mining reflecting tougher emissions standards and regulatory uncertainty.

 Last, most dealers ended 2011 ahead of expectations citing only modest help from bonus depreciation (i.e. there was little pull forward). While China remains challenging, dealers noted an improvement in equipment utilization over the past two weeks along with improved bidding prospects. For dealers, China is still forecast up 10% for the year.

Demand in Saudi Arabia is “through the roof” driven by oil & gas, the UAE is forecast flattish and Qatar to improve with the World Cup ahead. The Oil Sands, South Africa and broader Asia Pacific (outside China) remain very solid and are forecast up in the double-digit range.

Europe remains challenging, in particular Southern Europe. Dealers noted that Caterpillar’s market share is up broadly,reflecting improved quality and troubled competition, despite rational pricing. Lead times are improving in small equipment, now below 3 months, whereas larger equipment remains extended at 12-18 months on average, in particular excavators, mining, and D-10-11’s. Mining equipment is now further out versus Q4 with most quoting backlog through 2014 despite recent concerns of slowing.

 Bottom line: “Doug Oberhelman (Chairman & CEO) is getting it done” by most all dealers

Gold Target $ 2,175 – Bearish On Oil -Morgan Stanley

Pirate investing

Pirate investing (Photo credit: RambergMediaImages)

Morgan Stanley projects gold prices will rise to $1,845 per ounce in 2012 and $2,175 in 2013. For now they see that absence of central bank sales, limitations in size of the scrap gold pool, the rising demand from ETFs and coin sales is likely to see the bull market last into 2012 – 2013

Fed action, including the likely adoption of QE3 in the first half of the year, is expected to boost gold prices. Moreover:

“…Recent coordinated actions by six central banks and separate actions by the ECB suggest that non-gold related measures to ease access to USD swaps will be successful, reducing downside pressure on the gold price.”

Drawing on this they think gold prices will depend on the persistence of four pillars of the original bull market namely:

1. Decline in producer hedging. Last year gold mining companies growing cautious on gold volatility began hedging to lock-in prices for their future output. But Morgan Stanley analysts say a decline in hedging or a potential de-hedging could be a “positive demand factor”.

2. The decline of developed market central bank sales and rise of emerging market central bank purchases

3. The inability of gold mining companies to increase gold supplies materially

4. Long-term growth in physical investment demand.

In a bear case Brent crude oil prices could fall to $85 per barrel

2012 average year price:
$105.00 / barrel

2013 average year price:
N/A

Oil prices have been supported by supply outages and geopolitical concerns for the moment but in the absence of a major supply shock prices are likely to decline from here. If strategic petroleum reserves (SPRs) are released, or geopolitical tensions ease, prices are likely to fall. Current high prices are likely to slow demand and support more production by OPEC causing “bearish inventory trends”.

Is There An Oil Glut OR Shortage ?

Flag of the Organization of Petroleum Exportin...

Flag of the Organization of Petroleum Exporting Countries (Photo credit: Wikipedia)

Updating Oil Thesis:

Risks aplenty though bearish market aspects outweigh bullish influences . Risks to prices tilted to downside:
Call on OPEC to rise this year given continued non-OPEC supply outages. While this is positive for oil prices, we believe strong supply from Libya, Saudi Arabia, OPEC NGLs and Iraq should push the oil market into a significant oversupplied condition.

Recognize Iran remains an upside risk for oil prices, though
elevated supply from Saudi Arabia represents a downside risk (albeit of a lesser magnitude). Further, the possibility of OECD governments releasing strategic stockpiles partly to offset ongoing disruptions in Sudan, Syria and Yemen. While some market participants believe SPR withdrawals are of limited effect given their transient nature, we believe past government actions have at the very least coincided with market inflection points and can represent a very real downside risk to oil prices.
In summary, risks to oil prices appear tilted to the downside. An oversupplied market given higher production from Saudi Arabia and a potential call on  lowering non-OPEC supply estimate yet again:.

Since last month reduced  non-OPEC supply estimate by ~400 Mbpd. Old bugaboos in the Caspian Sea appear to be rearing their head, leading to planned and unplanned maintenance that should knock an average of ~250 Mbpd offline this year.

Middle East War Reductions

Syria, Yemen and Sudan comprise the remaining ~150 Mbpd downward adjustments. We now expect cumulative declines of ~200 Mbpd in Syria, ~125 Mbpd in Yemen and ~325 Mbpd in Sudan.

Assume production lost due to these geopolitical factors does not reenter the market.

Increasing OPEC supply estimate yet again:

2012 OPEC supply estimate increased 1.2 Mmbpd as Saudi Arabia and Iraq appear poised to capture market share at the expense of their historic rival Iran.
Saudi Arabia has shown no signs of cutting back output, so we have left estimated production from the Kingdom near current levels of 10 Mmbpd through the USelection.

We have heard Saudi Arabia is preparing to increase production to as
much as 11 Mmbpd, though will believe it when we see it.
In Iraq, we expect output to ramp ~250 Mbpd to 3 Mmbpd in Q3/12 as the country increases exports from a new 900 Mbpd export facility in the south. This places us essentially in line with IEA estimates of capacity though below Iraqi government insistences that output is already 3 Mmbpd.

Iranian Sanctions:
As to Iran,- maintained our expectation for a ~200 Mmbpd decline this year. The IEA indicated Iranian exports fell below 2 Mmbpd in
February versus 2.6 Mmbpd in November and expects another 0.8 Mmbpd to be removed from the market when sanctions take full effect in July. Yet, industry observers note the Chinese, Indians, Italians and Greeks will likely skirt the sanctions. In fact, ~450 Mbpd of Iranian exports could be laundered via Egypt to Europe. Again, we will wait and see, though risks to Iranian supply admittedly appear to the downside.
Prices materially impacting demand/ consumption,

 US demand estimate -
plunged ~350 Mbpd from our prior estimate while higher Japanese oil demand  for electricity generation offset declines elsewhere. We believe current US demand is 5-7% lower y/y versus the ~4% decline per preliminary EIA estimates. The y/y decline should moderate over the year to year.

Obama and The Strategic Reserve

And then of course there is President Obama. There have been several articles written since this talk about unleashing some reserves from the Strategic Reserve and it centers around the pipelines that are needed to move the oil from the four huge caverns on the Texas Coast to where consumers need it. And there’s a huge surprise  there…many of the pipelines that used to flow from the Texas Coast up to where American consumers are, are now being reversed, to move a glut of Bakken and Canadian oil and take it from Cushing and other places down to the Texas Coast.

In other words, there is now not enough pipeline capacity around to move all the oil out of the Strategic Reserve as had previously been thought possible. And if other  pipelines don’t get built, that situation can get worse.

So if something did go wrong and you did need that oil, the suggestion is there is no way the Strategic Reserve could be emptied as quickly or efficiently as had been previously thought…again, you need pipelines to do that and Mr. Obama doesn’t seem to like those things.

 

Don Coxe ( one of our gurus in the new book ):

“Obama is losing big with voters on Keystone, and he may need to disappoint his deep-pocketed environmentalists backers who invest in government-backed windmills that slaughter birds and bats, and in government-backed, money-losing solar panels, and cars that catch fire. Naturally, they hate profitable pipelines that supply low cost, reliable energy with near-zero impact on animal populations.” 

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Exxon Wheelin ‘ and Dealin’ In Iraq – Positive For Stock Price

English: To create this SVG-format logo, I too...

Image via Wikipedia

Exxon Mobil (XOM : NYSE : US$85.55

Shares of Exxon Mobil ended Monday day in the green and started off higher Tuesday after the world’s largest oil company reportedly reached an agreement with Iraq over payment for its work on the West Qurna-1 oil field.

An Iraq official told Reuters the two sides reached an informal agreement. The reported agreement comes despite moves by Exxon to ink exploration agreements with the Kurdistan Regional Government, an entity considered illegal by the Iraq central government.

Last week, Exxon’s CEO Rex Tillerson told reporters that Exxon would like to continue its work both in Kurdistan and West Qurna.

Separately, it was reported that Exxon has held talks with Turkey’s state energy company TPAO on exploring for shale gas in Turkey. Turkey has an estimated 15 trillion cubic feet of technically recoverable shale gas, reserves that Exxon could help TPAO tap. TPAO’s Chief Executive Mehmet Uysal told Reuters, “We have carried out our studies…We have big shale gas potential…This attracts a lot of foreign firms, Exxon Mobil in particular”.

Exxon is one of the most active drillers for shale gas in Europe, and is already exploring in Poland and Germany.

Dividend Boost ?

 Following Exxon’s 2012 analyst meeting in New York late last week, an analyst at JP Morgan is now looking for a possible dividend yield boost in the coming weeks. The analyst told clients that management comments seem to signal that Exxon was more open to moving toward a dividend yield closer in line with its peers. Exxon shares current yield 2.2%, significantly lower than the 3.7% average for peers Chevron (CVX)BP (BP) and Royal Dutch Shell (RDS-A)

.

What’s In Your Library ?

 

Rule No.1  First Invest In Yourself

Rule No. 2 You Can’t Profit From Books You Don’t Read

                              

This review is for: Apprentice Millionaire Portfolio 2012 http://amp2012.com/2012/03/10/

The first edition of Stock Market Magic: Building Your Apprentice Millionaire Portfolio authored by Jack A. Bass, was published in March 2012. This review is based upon reading that edition and the author’s stock market letter at http://www.amp2012.com

This comprehensive volume (some 500 pages ) offers the reader the nuts and bolts as to what the Apprentice Millionaire Portfolio strategy is based upon – investing , trading and selection.

While many investors today talk about an ” investing” style, I challenge how many have actually developed their own criteria – here in this 500 page volume is a written system and series of selections. Many of the basics have stood the test of time. The volume also allows for junior companies to be considered with the ” blue chips” of each sector. More than 150 companies are profiled.

The books offers Watchlists of stock selections in a variety of sectors such as energy and precious metals. This will allow the reader to create a portfolio in line with the AMP process and thinking. In that way a great deal of hard work has already been done.

It should be noted that the book contains information on how to analyze a wide variety of stocks. Actually a great proportion of the book is devoted to giving the investor the basic thesis of why an industry such as energy was chosen and why particular stocks are the top picks for each industry or sector analysis. Information is in a clear and readable format.

Different from Graham and Dodd’s disdain for “speculators,” or what we might call “traders” the author gives actual trades to back up the assertion that not every selection has to be made until ” death do you part “.

Stock Market Magic : Building Your Apprentice Millionaire Portfolio is a “must have” book for any serious investor’s library.

The E-book Apprentice Millionaire Portfolio is available on amazon.com

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War Talk Increases – Market Speculation Ominous

Early weapons models, such as the "Fat Ma...

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Richard Russell is known for publishing the Dow Theory Letters since 1958, which now have over 12,000 subscribers. He previously wrote for Barron’s.

He senses something momentous building in the markets and he’s waiting for the right catalyst.  He thinks that catalyst will be an eventual nuclear stand-off between Iran and Israel.

  In his Friday note he said:

“I’ve been sensing something BIG and ominous is in the offing. What could it be? Ah, a front page article in Sunday’s NY Times supplies the answer. Israel will attack Iran with nuclear bombs. Israel must attack this year for this is the year when Iran will have nuclear capabilities.     

Actually, the stock market is acting as though something momentous and frightening is ‘out there.’ The roof of a monster top is building. Gold keeps creeping higher.      

If Israel attacks the Mid-East will go up in flames.     

Suggestion — dollars and gold. If the dollar collapses, gold will make up for the losses by sky-rocketing.     

The next target for gold — to trade into the 1800s, and it’s getting close.     

The Dow is fluctuating around the 12700 area, not surging above it or falling decisively below it.      

If you listen carefully, you can hear the heart-beat of the market. It’s a slow, heavy beat, as if the market is waiting for something. That something is going to be BIG. Bigger than what anyone is expecting.      

2012 is fated to be a monster year. Keep your eyes on the dollar and gold, and the newspaper headlines!”

It might sound far fetched, but the tension between the two countries is building with every day.  As the LA Times noted just yesterday, there’s no telling where this is all headed.  The ripple effect would be staggering if tensions flare up into something bigger.  The asset class most effected would certainly be oil prices as the Middle East would become a war zone again.  Surging oil prices might be temporarily viewed as bullish for equity markets, but would likely turn into a repeat of last year with surging prices ultimately causing recession fears.

I think it’s irrational to make big bets on outlier events like this, but if the headlines deteriorate it would be wise to understand the market impact before the market begins to price everything in.

www,jackbassteam.com

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