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Today's Market WrapUp |
Effects Are Felt From Venezuela's Turmoil
The U.S. economy runs on oil, and right now oil supplies are running short. According to the latest American Petroleum Institute (API) figures inventories of oil continue to fall as we approach the critical winter months. API figures show that oil inventories fell to 283.9 million barrels. The US, which imports close to 60 percent of its energy needs, is seeing its supply stocks of oil and natural gas dwindle at a time the country is preparing for war and when weather conditions have become much harsher.
The Paris based International Energy Agency (IEA), an advisor to 26 oil-consuming nations, expects the U.S. will be forced to tap its Strategic Petroleum Reserves this winter. Venezuela, the world’s fifth largest exporter of oil, currently supplies 13 percent of U.S. oil imports and is in a state of chaos. Much of the state’s oil production, Petroleos de Venezuela (PDVSA), is shut down. This has taken 2.3 million barrels of oil exports off the market. Most of that oil goes to the United States. At the present time striking workers in the state are playing a waiting game against the government of Hugo Chavez.
At the same time that Venezuela’s oil exports have been shut down, OPEC has made a decision to lower output by as much as 1.7 million barrels a day starting January 1st of next year. So at a time when Venezuela’s oil exports have been shut down, when colder winter conditions confront the US economy, and the U.S. prepares for war against Iraq, the US economy will face higher energy prices. This will act as another tax upon the economy slowing down economic activity. Previous recessions in the US have been associated with rising energy prices.
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The last recession in 1991 was associated with the Gulf War and a doubling of energy prices. Here we are again more than ten years later finding ourselves in the same situation. This time we aren’t as well prepared. Oil inventories during the Gulf War were as high as 400 million barrels. Our inventory levels today are down by a third. A Decade of Neglect Comes Home to Roost Over the last decade the US has allowed its energy infrastructure to deteriorate at the same time energy consumption has increased. The result is the US economy is more dependent today on foreign sources for oil and natural gas. That energy dependence will become even larger as oil and natural gas production in the US continues to decline. Unfortunately there is nothing on the horizon that will free us from that dependence. This makes the US economy subject to the political vagaries of the Middle East and Latin America. A country that is dependent on others for most of its energy needs is a country whose economy is vulnerable to geopolitical disruptions. The current situation with Venezuela is a case in point. Because of the loss of imports from this country the US will have to tap its Strategic Oil Reserves. According to the New York Times two of the nation’s largest oil refiners have begun talks with the Energy Department to explore the possibilities of borrowing oil from the SPR to make up for shortfalls in Venezuelan exports caused by strikes. Amerada Hess and Citgo confirmed that they have approached the government. Other major refiners are in a similar situation. A strike in Venezuela, a colder winter and a possible upcoming war are all impacting the price of energy as shown in the graphs of oil, heating oil, and natural gas. Oil prices are at a 12-week high and are up 42 percent this year. Natural gas prices are at a record high this year and are up close to 65 percent since the beginning of the year. Heating oil is also at a record high and is up close to 40 percent since January. Higher energy prices are acting as an additional tax on the American economy, on the consumer and the producer. This higher energy tax couldn’t come at a worse time when the economy is struggling to emerge out of a recession. |
This neglect of the US energy infrastructure over the last decade is going to take a big economic toll over this next decade. Unfortunately there isn’t much the US can do in the short run but tap its Strategic Petroleum Reserves and rely on foreigners to make up the difference. This will be the second energy crisis in the three years with many more to come as US production decline curves accelerate. According to the IEA world energy demand will grow by two-thirds in the next three decades. Fossil fuels will continue to dominate the energy mix. Auto manufacturers are working on cars that will be powered by fuel cells but conversion to fuel cells will take decades. Hydrogen and other forms of energy are a long way off from replacing fossil fuels.
Times Have Changed
This is one of the main differences between the US in the 1930’s and the US in the 21st century. During the 1930’s the US was a self-sufficient nation. It was self-sufficient in manufacturing with large trade balances with the rest of the world. It was self-sufficient in energy. During World War II the US supplied all of its allies with fuel and was the largest exporter of oil in the world. The US was also self-sufficient in capital. It was the world’s largest creditor nation. Today we find ourselves at the opposite end of the spectrum. We are no longer self-sufficient in manufacturing. Much of our manufacturing base has headed overseas. We now import many essential goods from raw materials such as lumber to finished goods. We are no longer a creditor nation, but have become the world’s largest debtor nation sucking in 80 percent of the world’s available savings. We now need to import $1.5 to $2 billion of capital a day to keep our economy running. In the area of energy we must import nearly 60 percent of all our energy needs.
Any nation that must borrow daily to meet its economic and consumption needs, import most of its energy, raw materials and manufacturing goods is a nation that is in economic decline. A nation that is this dependent on import goods, energy and capital is a nation that is subject to the inflationary whims of its currency. You cannot print and borrow your way to prosperity as many in the economic and financial community suggest. That is why I believe we will see both a deflationary and an inflationary storm front as the US confronts its next economic crisis. We will see deflation with all areas related to credit---the financial markets, both stocks and bonds, housing and related goods such as furniture, autos, and luxury goods from furs, jewelry, planes and yachts. The US will see inflation in all imported goods such as energy and other raw materials, manufactured goods, and the cost of capital. This will result from a dollar that depreciates and may indeed become worthless if the Fed continues on its present course of expanding the monetary base by over 20 percent a year. What may come to the US may be similar to what is now happening in Argentina.
Today's Market
All major indexes fell after several key companies reported lower earnings and news of another major bankruptcy. Conseco filed for bankruptcy protection from its creditors after mounting debts from a $6 billion acquisition of mobile-home lender Green Tree Financial exhausted the company’s cash. The company’s balance sheet shows $51.2 billion in debt and only $52.3 billion in assets. Conseco is the third largest bankruptcy filing after Enron and WorldCom.
The earnings warnings came with a wide swath of companies ranging from Micron technology, Bank of New York, Blockbuster and FedEx. Wall Street earnings expectations are still too high. Analysts will have to make major revisions to their estimates so that when companies report actual earnings they will come in better than expected. This is what needs to be done if Wall Street is going to be able to hype the markets. Current expectations for pro forma earnings are at 14.7 percent, down from 19.9 percent at the beginning of the quarter.
Oracle reported earnings after the market closed. Wall Street and the financial media went gaga over the company’s numbers, which were better than expected. This may be enough to ignite a rally tomorrow. Oracle’s sales declined year-over-year for the seventh consecutive year. Sales fell from $2.38 billion to $2.31 billion. Net fell from $549 million to $534.9 million. The spin will be that they beat estimates. It will be interesting to see if investors fall for this hype tomorrow when the markets open. Futures’ trading is up and Oracle’s shares rose in after hours trading. Their sales and earnings continue to decline each year but they keep beating estimates.
It now appears that with less than two weeks of trading left for the year, the major indexes will post their third year of consecutive double-digit losses, something we haven’t seen since 1930-32 and 1972-1974. Two shares fell for every one that rose on the NYSE. Volume picked up by 134 million shares on the NYSE to 1.383 billion. The VIX rose 1.59 to 31.75 and the VXN rose 1.5 to 49.64.
In final news, a major lawsuit was filed today by Blanchard and Co. of New Orleans, the largest retail dealer in physical gold in the United States on behalf of its clients against Barrick Gold and J.P. Morgan Bank for illegal manipulation of the gold market. The suit claims that Barrick and Morgan unlawfully acted to manipulate the price of gold. J.P. Morgan is the largest holder of gold derivatives in the United States. The suit charges the bank and gold company of making over $2 billion in short selling profits by working actively to suppress the price of gold. Blanchard says that since 1987 Morgan and Barrick have collaborated to inject additional reserves of gold into the market to profit from their short sales, using privately negotiated derivative contracts and concealing the addition of billions of dollars worth of physical gold with off balance sheet accounting. This was the same sort of practice used by Enron to hide its debts. The suit alleges that Morgan loaned gold to Barrick at approximately 1.5 percent, sold gold into the market and invested the money at 6.5 percent; then paid both the proceeds from the sales and the 5 percent difference to Barrick whenever it repaid any of the borrowed gold. Barrick is the single largest hedger of gold and has profited immensely from its derivative transaction.
Overseas Markets
European stocks fell, led by Infineon Technologies AG, after Morgan Stanley lowered its recommendation for the region's semiconductor industry, citing concern about recent share-price gains amid slowing chip demand. The Dow Jones Stoxx 50 Index lost 2.1 percent to 2442.04. The Stoxx 600 Index shed 1.8 percent to 204.46 with technology and energy shares accounting for a quarter of the decline.
Japanese stocks fell, sending the Topix index to an 18-year low. Exporters such as Sony Corp. dropped after U.S. retailers reported holiday season sales that were below or at the low end of their estimates. The Topix shed 1.9 percent to 815.74 and the Nikkei 225 Stock Average fell for the 10th day in 11, losing 2 percent to 8344.01.
