news – Page 26145

Brent Oil Faces Headwinds in 2014

EIA Petroleum Report

In reviewing the EIA weekly petroleum report, the oil imports figure came in at 6.889 (Million Barrels per Day) for the week ending 01/10/14. This number compared to a year ago 8.030 (Million Barrels per Day) puts a nice cap on the downtrend which really started gaining steam in 2010 onward.

Compare this imports number with the U.S. Production number of 8.159 (Million Barrels per Day) and it is clear that oil is being managed quite effectively to keep supplies and prices in check. A year ago U.S. Production was 7.041 (Million Barrels per Day), and so the goal is to try and offset imports to the increases in U.S. Production by importing less oil.

Managing Oil Supply

This is inventory and supply management 101, but unlike solar panels where supplies from China flooded the market, and prices plummeted sending many manufacturers out of business, oil and Brent especially has remained relatively high. In fact Brent is actually considerably higher than 2010 when the US was importing much more of the commodity.

Sure one could say that China is utilizing all the spare oil that used to come to the United States, but one look at Australia`s export numbers versus the boom in China for commodities when they were building new cities seemingly every month, seem to tell a different story.

Dramatic Paradigm Shift

These are not small numbers we are talking about here, the differences in U.S. Production and Imports since 2010 to the current numbers is just an incredibly big delta. For example, in 2010 U.S. Production was around 5,500 (Million Barrels per Day) and Imports were around 9,500 (Million Barrels per Day) on average. When one starts running the numbers for the entire year, for three years successively, the dramatic commodity paradigm shift is huge, and the overall number is quite large.

Price Independent of Fundamentals

Moreover, to think that price actually went against this trend in the largest oil consuming market in the world is even more astonishing when you think about it. Sure QE liquidity has in some sense inflated many of these commodities like Gold, Silver, and Copper along with every other asset known to humankind that is traded in financial markets.

But the major disconnect between the collapse in Iron-Ore prices with the slowdown in China and the rising with Brent Oil prices over the same time period with Global production outpacing demand on a weekly, monthly and annual basis is just an interesting feat in and of itself.

Sure the Middle East has flared up several times, almost every January to April time period for the last three years the Middle East flares up for a short time period. However, no real supply disruptions have materially occurred, and after several weeks of demonstrations, things routinely go back to normal. In the overall big picture these Geo-Political events are mere blips on the radar screen in the oil market.

Middle East Production Changes

Interestingly now that Iran, Iraq and Libya are all set to pump more oil in 2014 is this finally going to be the nail in the coffin for the Brent contract, so that it trades the bulk of the year on par, or even at a discount to WTI? Not if the US Refining Industry has any say in the matter, this WTI-Brent Spread is crucial for their business model, and they have a vested interest in defending the spread at all costs.

You don`t think this spread exists solely due to natural supply dynamics of the underlying products do you? There are vested interests and stakeholders at play here; the spread is encouraged because it meets the needs of many stakeholders on both sides of the pond so to speak.

Where is Supply Really Going?

It is obvious that a lot of this oil is just staying in the ground; some of it is probably being stored in China on a resource play as they build up their reserves.

But at some point reserves fill up, and these Middle East countries need more and more revenue to meet their expanding budget commitments. Therefore, holding back production to artificially manage global prices by limiting supply works for a while but eventually these same producers are going to need to start producing more to meet the expanding revenue requirements, especially if price is unable to compensate substantially for much lower production volumes.

Consequently, when this happens the world could experience its first real meaningful break in oil prices in the last 10 years (apart from the financial crisis temporary drop) even with a slightly improving global economy.

Final Thoughts

The three contributing factors would be the dynamics of the North American Oil Production market, the ending of QE Stimulus, and the eventual increased production from the Middle East (both in terms of New Oil coming onto the market & the increases in existing supply to meet revenue objectives which is currently being purposefully withheld from the market).

It may take towards 2015 for this to all play out, and with more fuel efficient vehicles in the developed world, and China already struggling with pollution overload ( the last thing they can handle is more cars on the road), it makes intuitive sense that at some point the fundamentals are going to dictate a lower oil price.

Furthermore, one would think that Brent comes under increased pressure in 2014; and accordingly it would seem that any rally in Brent should offer up a nice entry point on establishing a short position in the commodity.

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Tom Coburn Resigning From Congress, in a Year

didn't see his shadow Senator Tom Coburn (R-Okla.) announced he would
be
resigning from Congress at the end of the current session, in
January 2015. Coburn’s term lasts through January 2017, so his
resignation will trigger an election, but maybe not until after the
mid-term elections this year. The Washington Post blog The
Fix
suggests he could tender his resignation early enough to allow
Oklahoma to schedule an election concurrent to the November ones.
Coburn insisted in a
written statement the decision wasn’t about his latest prostate
cancer, and said in his video statement he
would be coming back to Oklahoma to live under the laws passed
while he was in office, including “many” he had hoped to stop but
couldn’t.

Coburn did
not vote on yesterday’s trillion-dollar spending bill, but did
vote
against the stop-gap measure. He voted
against the October bill suspending the debt ceiling and ending
a partial government shutdown, unlike 27 Republicans who voted for
it and then for a resolution disapproving of the president’s use of
the new authority to suspend the debt ceiling. Coburn might be best
known for his
annual report on ridiculous earmarks, and a 2007 Reason

profile of Tom Coburn starts with a review of the Senator’s
first earmark battle, over Ted Stevens’ “bridge to nowhere.” He
lost that battle, but his observation about the coming “rumble” of
anger from Americans about “out-of-control government spending” was
certainly prescient, despite continuing losses. But as Reason noted
in 2007, Coburn, a staunch social conservative, is no “libertarian
hero,” voting on the Patriot Act and other measures running counter
to civil liberties, and has
defended the NSA’s efforts. The last Republican senator
to resign was Jim DeMint, who once insisted you couldn’t be a
fiscal conservative without being a social conservative. He went on
to take over the Heritage Foundation. Coburn, too, says he’ll
remain in public life.

Watch an extended interview Reason TV conducted with Tom Coburn
in 2012 about how both parties helped bankrupt America:

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Los Angeles Police Testing On-Body Cameras – Hooray!

Body Camera Yesterday, Reason 24/7 noted the Los Angeles
Times article reporting on that city’s police department’s
trial deployment of body-worn cameras on 30 foot patrol officers.
Requiring police officers is a great idea. As the LA Times
noted officers have already
reported good results:

LAPD Officer Jesus Toris said people notice the cameras.

“People have a different reaction when you approach them, so it
does help,” he said.

Supporters of the on-body cameras said the goal is to eventually
have them for the entire Los Angeles force, ultimately saving the
city millions in lawsuits.

“You wind up getting sued or wind up getting a complaint or
something like that, it could have been alleviated had we had audio
and video,” LAPD Sgt. James Sterling said.

Police Chief Charlie Beck has said the addition of on-body
cameras will be a helpful investigative and accountability tool, as
well as a less expensive option than in-car video…

“The nice thing about this is there’s a real consensus among
some of the biggest critics of the department and the officers and
the union that they all want this transparency,” said [LA mayor
Eric] Garcetti. “Everybody’s convinced, look, this is going to show
how bad the officers are or how good they are.”

One quibble – the Times reports that the police intend
to retain the video for five years. That is way too long. I
outlined more reasonable policies in my article, “Watched
Cops Are Polite Cops“:

…police officers should be subject to stiff disciplinary
sanctions if they fail to turn their cameras on each time they
interact with the public. In addition, items obtained during an
unrecorded encounter should be deemed a violation of the subject’s
Fourth Amendment rights against unreasonable search and seizure and
excluded as evidence, unless there were extenuating circumstances,
such as a broken camera. Similarly, failure to record an incident
for which a patrolman is accused of misconduct should create a
presumption against that officer.

Officer-worn video cameras do have the potential to violate the
privacy of citizens. After all, the police frequently deal with
people who are having one of the worst days of their lives. Police
often enter people’s houses to investigate disturbances and
disputes. In such cases, video of someone’s metaphorical (or
literal) dirty laundry is nobody else’s business.

Consequently, Stanley argues that strong rules regarding the
retention, use, and disclosure of videos from police-worn cameras
must be established and enforced. For example, videos should be
retained for no more than 30 to 60 days, unless flagged. Of course,
if the video contains evidence of a crime it should be retained
just as any other evidence would be. Flagging would also occur for
any incident involving force or that produces a citizen complaint.
With the appropriate privacy protections in place, very little of
police-recorded video would ever be retained or viewed.

Body-worn cameras should soon become standard equipment for all
police officers.

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Matthew Feeney Discusses Guns on RT at 4pm ET

At 4pm ET, I will talking about guns and the effect concealed
carry laws have on murder rates on RT.

Earlier
this month, Detroit Police Chief James Craig said that legal
gun owners can deter crime.

My Reason colleague Ron Bailey
wrote about a study written by Quinnipiac University economist
Mark Gius on the effects assault weapons bans and concealed carry
laws have on murder rates last month. The study found that “assault
weapons bans did not significantly affect murder rates at the state
level.”

Watch live here.

“Euphoric”-er

US equity investors have not been this “euphoric” since the peak of the US equity market in 2000. As Citi’s Tobias Levkovich notes, while he is longer-term a believer is the secular bull, one has to remember that there can be a secular run with substantive bumps along the way. No one questions the 1982-2000 equity bull market but there were some awful moments in that 18-year period including the stock market crash of 1987 and the sharp pullback in 1990 as well as in 1998.

With Citi’s proprietary Panic/Euphoria model at levels that imply an 80% probability of a negative return in the next 12-months, Levkovich warns chasing the tape simply on the basis of momentum may not be a good strategy since expecting another 25%-30% appreciation in 2014 seems rather excessive.

Source: Citi

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"Euphoric"-er

Source: Citi

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The New Normal Paradox: All The Job Gains With Half The Hiring?

While everyone obsesses over the monthly payrolls report, which on a trailing 12 month basis is once indicating the creation of roughly 2 million jobs each year, or roughly where it was before the crisis (red line chart below), one aspect that is largely ignored is the amount of hiring.

Why is hiring important?

Because that is the actual process by which those without a job end up with a job. And as we just learned today after the latest JOLTS release, which showed that there were over 4 million job openings (4,001 to be precisely) for the first time since 2008, a far more important number is the update on Hires which at 4.5 million barely changed from last month, but more importantly, is barely a fraction of where it should be based on the number of job gains reported by the BLS monthly. The chart below confirms this stunning discrepancy: a surge in jobs with barely half the pre-recession hiring?

How does one explain this discrepancy in which the US economy supposedly is growing at its historic peak pace while hiring is at half the peak pace? Simple: the gains in nonfarm payrolls are due a decline in layoffs and other separations, not an increase in hirings: i.e., normal labor demand driven growth.

Which means that anyone hoping for a brisk increase in wages, i.e. worker leverage, is in for a prolonged shock.

The chart above simply shows that the leverage is and continues to be with the employers – instead of letting people go (or workers quitting at their volition) at anything close to a traditional pace, employers have a huge bargaining chip – a job. Because if a worker does not want to perform a job, tough: there are about 3 people willing to fight for every job opening. It also means that those who lose their job will find it doubly more difficult time to reenter the workforce as there simply is not enough hiring.

Which means that wage deflation, at least among prevailing jobs, will continue leading to declining real disposable income, a declining in personal savings and the continued use of “student loans” (since credit card deleveraging continues) to fund everyday lifestyles, at least until such time as the hiring trend has normalized.

The really bad news: while such a normalization will eventually happen, according to our back of the envelope calculations, it will take place some time in… 2020.

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If You Are A “Value Investor”, Whitney Tilson Has A Deal For You

It’s just not Whitney Tilson’s year/decade… the “money-manager” and co-founder of the invaluable Value Investor Insight newsletter has decided, with the exit of yet another partner – John Heins – that it is time to sell. In an email from the ex-financial-media-darling, Tilson explains “the business is a beautiful, high-margin cash cow,” is looking for a partner to buy the business.

From Whitney Tilson:

As Value Investor Insight enters its 10th year, my long-time partner and co-founder, John Heins, is contemplating a next stage of his career. This has prompted our contemplating a next stage in Value Investor Insight’s evolution as well. We’re exceedingly proud of VII and will ensure that it doesn’t miss a beat, but we’re starting to look for a partner or partners who might be interested in buying all or part of the business and taking over John’s full-time responsibility in running it.

(My involvement in the day-to-day operation is almost nil, both because John does an exceptional job interviewing investors and producing the newsletter and because my energies are focused on being a money manager, not interviewing other ones!)

The business is a beautiful, high-margin cash cow. If you or someone you know might have an interest in it, please let me know and I can give you further information.

Good luck with that… when all anyone needs to know is BTFATH, BTFD, and BTFMS (“most-shorted”) and fundamental (value investing or otherwise) is entirely irrelevant (see AXP today).

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If You Are A "Value Investor", Whitney Tilson Has A Deal For You

From Whitney Tilson:

As Value Investor Insight enters its 10th year, my long-time partner and co-founder, John Heins, is contemplating a next stage of his career. This has prompted our contemplating a next stage in Value Investor Insight’s evolution as well. We’re exceedingly proud of VII and will ensure that it doesn’t miss a beat, but we’re starting to look for a partner or partners who might be interested in buying all or part of the business and taking over John’s full-time responsibility in running it.

(My involvement in the day-to-day operation is almost nil, both because John does an exceptional job interviewing investors and producing the newsletter and because my energies are focused on being a money manager, not interviewing other ones!)

The business is a beautiful, high-margin cash cow. If you or someone you know might have an interest in it, please let me know and I can give you further information.

Good luck with that… when all anyone needs to know is BTFATH, BTFD, and BTFMS (“most-shorted”) and fundamental (value investing or otherwise) is entirely irrelevant (see AXP today).

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An Update On The Housing “Recovery”

Submitted by Lance Roberts of STA Wealth Management,

In July of last year, I asked the question of whether housing was really recovering or not? There has been much hoped placed on the "housing recovery story" over the last few years as it relates to the economy and I thought it was time to update the data to see how far we have progressed. With each passing month, all eyes have been glued to television screens, and headlines, as the latest estimations of housing starts, completions, new and existing home sales, etc. are trumpeted as a sign of a renewed housing cycle. This is no trivial matter as real estate is seen as a bedrock to economic strength as much as it is the sign of achievement of the "American Dream."

It is true that in past housing was a large contributor to the strength of economic growth in the U.S. Just recently Chris Puplava wrote:

"While residential investment represents a small portion of gross domestic product (GDP), housing is perhaps one of the most cyclical sectors of the economy and tends to lead economic swings by months to years. As such, keeping a close eye on housing provides a valuable insight into future economic trends. While housing represented a major headwind to the economy after the housing bubble burst, as I show below, it is now providing a major tailwind instead."

While Chris is correct in his assumptions, the question is really how sustainable is the current recovery in housing. More importantly, what really drives long term economic growth is not residential investment as much as "household formation" where a couple buys a home, raises a family and continues the consumption cycle that supports economic growth.

At The Margin

The problem with most of the analysis each month is that it is based on the transactional side of housing which only represents what is happening at the "margin." The economic importance of housing is much more than just the relatively few number of individuals, as compared to the total population, that are actively seeking to buy, rent or sell a home each month. In order to understand what is happening in terms of "housing" we must analyze the "housing market" as a whole rather than what is just happening at the fringes. For this analysis, we can use the data published by the U.S. Census Bureau which can be found here.

Total Housing Units

In an economy that is roughly 70% driven by consumption it is grossly important that the working age population is, well, working. More importantly, as discussed in "Obama's Economic Report Card:"

"Full-time, benefit providing, employment is the only type of employment that matters for the average American. Full-time employment allows for an increasing standard of living, household formation, and higher personal savings rates."

To present some context for the following analysis we must first have some basis from which to work from. Our baseline for this analysis will be the number of total housing units which, as of Q3-2013, was 132,845,000 units. The chart below shows the historical progression of the seasonally adjusted number of housing units in the United States.

As an example, the most recent report of "existing home sales" showed that 4,900,000 homes were sold on an annualized basis in November, 2013 (the last reported month). Since this is an annualized number, we must divide it by 12 months to see the estimated seasonally adjusted number of sales in November was actually just 408,333 homes. This number of existing home sales represents just 0.3% of the total number of homes available. This is what I mean by "activity at the margin." When put into this context the "existing home sales" report doesn't seem nearly as exciting.

What about new homes? New home sales were 421.000 on an annualized basis this past November (the last reported month) which equates to 35,023 new homes per month. This makes up an even smaller percentage of the total homes available at just 0.02%.

Understanding "sales" represent only a very small fraction of the housing market we must look at what is happening within the total housing market to get the real story. In this regard, we can use the Census Bureau data to see how many homes are just sitting vacant, owner occupied or being rented. From this data we can get a much better picture of the real strength of the economy, and how much of a potential "tailwind" there may be.

Vacancy Rate

Out of the total number of housing units some are vacant for a variety of reasons. They are second homes for some people that are only used occasionally. They are being held off market for one reason or another (foreclosure, short sell, etc.), or they are for sale or rent. The chart below shows the total number of homes, as a percentage of the total number of housing units which are currently vacant.

If a real housing recovery was underway, the vacancy rate would be falling sharply rather than hovering only 0.5% below it's all-time peak levels.

Owner Occupied Housing

Another sign that a "real" housing recovery was underway would be an increase in actual home ownership. The chart below shows the number of owner occupied houses as a percentage of the total number of housing units available.

Despite the Federal Reserve flooding the system with liquidity, suppressing interest rates and the current Administration's efforts to bailout banks and homeowners, owner occupied housing remains near its lows.

Home Ownership

The simple reality is that there has really been very little actual recovery in housing. With five years of economic recovery now in the rear view mirror, it is clear that the average American is really not recovering as evidenced by the lowest level of home ownership since 1980.

At 65.3%, the current level of home ownership shows the lack of household formation which is a detraction from longer term economic growth. The weak economic growth rates and widening wealth gap certainly explain the fall in homeownership rates and the lowest level of birthrates on record.

However, the recent reports of sales, starts, permits, and completions have all certainly improved in recent months. Those transactions must be showing up somewhere, right?

REO To Rent

While the Federal Reserve, along with the current Administration, have tried a litany of programs to jump start the housing market nothing has worked as well as the "REO to Rent" program. With Fannie Mae/Freddie Mac, and the banks loaded with delinquent and vacant properties, the idea was to sell huge blocks of properties to institutional investors to be put out as rentals. This has worked very well.

The chart below shows the number of homes that are renter occupied versus the seasonally adjusted homeownership rate.

Do you see the potential problem here? Speculators have flooded the market with a majority of the properties being paid for in cash and then turned into rentals. This activity drives the prices of homes higher, reduces inventory and increases rental rates which prices "first time homebuyers" out of the market. The problem is that when the herd of speculative buyers turn into mass sellers – there will not be a large enough pool of qualified buyers to absorb the inventory which will lead to a sharp reversion in prices.

Maybe this is why the Federal Reserve, and the FDIC, are looking to relax the regulation put in place after the last housing bubble which required banks to have "skin in the game." By removing that restriction banks can now go back to providing mortgages to unqualified buyers, pool them and sell them off to unwitting investors. Haven't we watched this movie before?

While the surge in housing activity, which still remains at historically low levels as shown in the chart below, has certainly been welcome it should not be forgotten that it has taken massive bailouts, stimulus and financial supports to induce such relatively small amounts of activity.

The mistake, however, as I addressed in "Housing Recovery, What Has Been Forgotten" is that:

"There is no argument that housing has improved from the depths of the housing crash in 2010. However, while the housing market remains at very recessionary levels, recent analysis assumes that this has been a natural, and organic, recovery. Nothing could be further from the truth as analysts have somehow forgotten the trillions of dollars, and regulatory support, infused to generate that recovery.

I recently penned an article showing the $30 trillion, and counting, that has been thrown at the economy, and financial system, to keep it afloat over the last 4 years. Of that, trillions of dollars have been directly focused at the housing markets including HAMP, HARP, mortgage write downs, delayed foreclosures, government backed settlements of 'fraud-closure' issues, debt forgiveness and direct buying of mortgage bonds by the Fed to drive refinancing and purchase rates lower. Of course, the Fed has also maintained its ZIRP (zero interest rate policy) during this same period with a pledge to keep it there until at least 2015.

The point here is that while the housing market has recovered – the media should be asking 'Is that all the recovery there is?' More importantly, why are economists, and analysts, not asking the question of 'What happens to the housing market when the various support programs end?' With 30-year mortgage rates below 4% we should be in the middle of the next housing bubble – not crawling along a bottoming process."

The housing recovery is ultimately a story of the "real" employment situation. With roughly a quarter of the home buying cohort unemployed and living at home with their parents the option to buy simply is not available. The rest of that group are employed but at the lower end of the pay scale which pushes them to rent due to budgetary considerations and an inability to qualify for a mortgage.

As I stated previously, the optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating a self-perpetuating recovery in the economy – it did not turn out that way. Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression.

The rising risk to the housing recovery story lies in the Fed's ability to continue to keep interest rates suppressed. It is important to remember that individuals "buy payments" rather than houses. With each tick higher in mortgage rates so goes the monthly mortgage payment. With wages remaining suppressed, 1 out of 3 Americans no longer counted as part of the work force or drawing on a Federal subsidy the pool of potential buyers remains contained.

While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2014 – the lack of recovery in the home ownership data suggests otherwise.

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