U.S. GDP Suggests Transition Both Domestic And Foreign

by Ron McWilliams

U.S. GDP did show a decline last week, which in fact declined more than expected among analysts. Still, GDP demonstrated growth. While vehicles pushed growth for the last few quarters, evidenced by auto company earnings, we have also witnessed growth in other areas. First and foremost is the fickle gas station. A whole issue itself given ultimate infrastructure and potentially closing North East refineries. For retail gas right now, prices seem to be coming down in a fast manner. With all retail, it seems that increasing prices to fuel profits arrives at reduced traffic, and finally declining sales.

Otherwise stated, increasing prices foil at a point of inevitable decline in demand.

From gas stations, building materials and apparel showed up on reports recently and demonstrated advances. Tracking earnings, building materials and apparel have yet to report on a meaningful basis. Still, the numbers are encouraging. Concerning, however, is the extent to which such companies created profit out of increased pricing, as opposed to balancing price and demand. Should pricing show an exceeding of demand, future positive expectations will have to be adjusted south.

Essentially earnings expectations have been declining in a manner that almost parallels economic numbers. The last surprise was GDP and employment in Q4 2011, which were much higher than anticipated. All due to auto production, building materials and their extended reach into down-stream economic support.

Looking at recent reports from durable goods orders and industrial production, both showing a slowing, we might be witnessing an organic decline in the drivers that created the Q4 surge in production. That being cars and home improvement (or building materials, given no real advance on home numbers).

Along with Q1 industrial and durable goods reports, we have seen an employment situation report that revealed heavy and noted declines. These declines came from general merchandise and department stores. Against car and gas station causes of employment, conventional retail seems very cautious. To the point of shredding jobs, based on appearances.

On top of these economic results, one must consider the transition in U.S. gas and oil production. Noted previously on this space is gas production in this country is trying to shift into oil plays. Oil plays were already exceeding internal infrastructure capacity in its effort to move product to market. Should the gas rigs once operating on gas plays turn into added oil production......where are the rail cars? The pipelines and their direction of flow have proven incapable of moving existing, let alone further increasing, volumes to market. Perpetual gluts at the Cushing Hub is first evidence.

Second evidence is the insecurity of East Coast refinery capacity with its inability to leverage U.S. oil production over Brent petroleum pricing. If East Coast refineries can tap U.S. production, obviously their margins will improve, their profitability will improve, and they will become good business propositions. Currently, due to refining at Brent prices, they are closing their doors.

From potentially waning car and building material sales, and reasonably expected declines in overall natural resource and refining jobs, one might be seeing the future of U.S. economic indicators.

Should declines be realized in car and building material sales, along with a net loss of natural resource production, not only will we witness a loss of jobs. We will also witness declines of utilization, capacity, capital expenditure and company earnings.

Encouraging is the growth in consumer credit, especially its non-revolving component. Banks are lending, but not in a meaningful way for real estate, appears to be too much “shadow” inventory. Symbiosis has revealed itself between banker and consumer with cars and perhaps home improvement.

Right now, further transition might be telling among the BRIC nations, their currencies and extent of their continued demand. We can only see where it all goes from here.

A Little Too Quiet on the Western Front

By Keith Springer

It's awfully quiet in world markets right now...a little too quiet. The combination of world banks taking a break with any new stimulus and that we are in that quarterly lull period in between earnings releases is keeping stocks from surging higher. On the positive side, the same two issues will keep stocks from plunging as well.

As I have noted, the amount of the growth in liquidity in global systems has become staggering, with Helicopter Ben Bernanke's US. Federal Reserve's $2.9 trillion, the ECB's (European Central Bank) $3.6 trillion and the BOE's (Bank of England) $1.1 Trillion. Add in the BOJ (Bank of Japan) and other Eurozone members, we cross $15 trillion that was not in the system pre 2008. This is equal to over one-third of total world equity values. It is this massive infusion of liquidity from world banks which has kept this market afloat and what will keep it from plummeting... for now.

This massive coordinated injection of capital is the world's banks attempting to combat what will take years to overcome: the demographic overhang of 92 million baby boomers past their peak spending years, the massive over-indebtedness of the American consumer deleveraging at light speed and the powder keg in Europe set to explode again.

In addition to the colossal printing of free money, aka liquidity, there has also been a consistent pattern of stocks going down as we lead into earnings season a few weeks away. This is due from company warnings and lower of earnings expectations. That's where we are now. However, this tends to reverse as earnings come in above expectations. Of course this can't last forever, and look for a peak in the next few quarters... and you won't want to be in stocks at that point, that's' for sure.

The aging bull market is finally starting to show its age. We are over 3 years into this bull market, which is old by any standard. The fact that it has been liquidity induced and not consumer driven tells us that we are clearly in a bubble, so when it ends, it's going to be ugly...really ugly, like 2001 and 2008 bubble ending ugly.

The classic early warning signs are just emerging. Small caps, which have been leading the way for many months, are starting to diverge and not do as well as larger cap stocks. This is common at the end of bull runs as bigger capitalization stocks are generally the last stocks to turn down at the end of a bull market. Typically, once this deterioration begins, it tends to spread from small-caps through the mid-caps and finally to the weaker big-caps, as profit-taking panic ensues and support fades.

A confirmation of this new dangerous trend in the market would be confirmed by new highs in the Dow and S&P 500 but not in the smaller indexes. This stage typically lasts 3 - 6 months, which would coincide well with the normal strong fourth year and weak first year of a presidential cycle.

Of course it will come very quickly, without warning and there will only be a very few places to hide and prosper, so prepare in advance and stand ready with your personal exit strategy. When this bubble bursts, it's going to be déjà vu all over again.

Investor Strategy

Nimble traders can take advantage of this rally, but the key is to be "Tactical" and avoid buy-and-hold (buy-and-hope) at all costs. Moderate and low risk investors, most of us average people who would rather not have to work until the day we die, or lose sleep at night because of market volatility, should continue to have a managed portfolio in the market's "sweet spot" which is currently income investments such as corporate bonds, preferreds and MLP's, many yielding 8-10%. If the market does continue to rise, you'll likely get the best of both worlds of appreciation along with a healthy dividend, but with less risk.

For those that want a guarantee of principle with a decent yield or a guaranteed income for life, they do exist, if you know where to look, many with upside potential based on the market but with no risk of loss. If your portfolio can live with this option, take advantage of it. Why lose sleep the next time the market crashes.

Keith Springer is the author of "Facing Goliath: How to Triumph in the Dangerous Market Ahead", radio host of "Smart Money" on Talk 650 KSTE, editor of the "Smart Money Newsletter", a financial planner, a market technician, a financial writer, multinational philanthropist, founder of Top Down Tactical™ and President and founder of Springer Financial Advisors in Sacramento CA, an SEC Registered Investment Advisory Firm. He has developed a proprietary process for successfully building tax-efficient and retirement portfolios and has been providing specialty wealth management services for over 27 years. He can be reached at 916-925-8900, keith@keithspringer.com, or http://www.keithspringer.com

Article Source: http://EzineArticles.com/?expert=Keith_Springer


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Can U.S. Oil Offset Loss of U.S. Natural Gas Production

QUARTER OVER QUARTER, OIL DEMAND STILL EXCEEDS NATURAL GAS, CALLING FOR CHANGE IN U.S. ENERGY POLICY  (Previously posted April 24, 2012) 

Serious Transition In U.S. Gas, Oil Production

For the last couple of quarters, concerns have mounted on natural gas pricing and surpluses. Back in February I wrote on this space “How Do We Burn U.S. Natural Gas Surplus” wherein I describe substantial opportunity for the U.S. in the global LNG export market.

Last couple of days have seen Halliburton and Schlumberger announce results for Q1, which revealed a current state of affairs in North America and future expectations. Halliburton's CEO, David Lesar, described circumstances in the company's April 18 earnings conference call. The CEO pointed out that since the first of the year, gas rigs have declined by 151, or -19%. Contrasting declines in gas rigs, said Lesar, is the rise in oil rigs of 125, or 10%. A net decline in U.S. rig count comes to only -1%.

Lesar describes the different trends between gas and oil as “a significant rig shift that is taking place in the U.S. between natural gas and oil.” He also explained that “the shift from natural gas to oil was dramatic and disruptive to operations.” Disruptive to the extent that company margins were just short of expectations because the drop in gas rigs was more than anticipated.

Paal Kibsgaard, CEO of Schlumberger, in their earnings call on April 20 noticed similar issues. He however took circumstances a step further. Kibsgaard said “we have over the past two quarters, signaled that hydraulic fracturing pricing is starting to come under pressure.”

Between the two company heads, we see that reduction in natural gas production is now greater than expected and faster than anticipated. To the point it is disrupting operations and even effecting overall hydraulic fracturing prices.....indicating dynamics are reaching into creating a surplus of fracturing capacity.

Transition Tells Of Pressure On Oil Production

One would have anticipated such a dynamic on dry gas plays versus rich gas liquids plays (dry gas being simple methane gas versus gas with butane, propane, etc.). Dry gas has been the cheapest, while common expectation is that fields rich in gas liquids would command production given sustained pricing. But....

Under-utilization of capacity on gas in general seems occurring and certainly supported by evidence.

Schlumberger CEO said “during the first quarter, the downward pricing trend seen in the gas basins also reached the liquids-rich basins.” Telling of the natural gas industry, be it dry or liquid gas, is Kibsgaard's remark that “the pricing impact varies by basin as excess capacity is moved around, but we expect to see lower pricing reaching all basins in the coming quarters.”

Halliburton's CEO sees the same dynamic, but to an apparently reduced extent. Lesar said that “the dry natural gas basins will be the most challenged, followed by those more easily accessible oily basins that are located next to natural gas basins...”

Given market dynamics of unexpected and deeper declines in natural gas production, it does appear that vast capacity will have to be moved to North American oil production. Goals are for reductions in natural gas capacity to be offset by increases in demand for North American oil capacity.

Should such a goal not be realized, in North America, people will have to be laid off and production capacity left idle. Attending the proposition are losses on capital expenditures and production income.

I would appreciably enjoy goals of oil production offsetting natural gas production to manifest. We would then see sustained employment, capacity utilization, returns on investment and so forth.

Problems With Oil Production Increases Offsetting Declines In Gas Production

Troubling is the perpetual glut of the Cushing Hub. This glut is now notorious, constitutes no news and in fact a reason for obvious pipeline reversals and additions.

Only in February 2012, the U.S. Energy Information Administration produced a report regarding refinery activities in Northeast markets. Looks as if refineries are struggling in that location and infrastructure requires congruent transition to fix the struggle. Another potential solution is pricing optimization with U.S. production, but this also requires infrastructure changes. In the last year, an unknown quantity of resource has been realized in the U.S. How do we move with this knowledge? It is ultimately knowledge that begs the addressing of transition.

This country has huge potential for growth and a lead on comparative advantage, especially with clean fuels. Clean fuels are advanced products of the basic fuel products this world knows, needs, and currently uses. In this country, our ability is to help emerging economies clean the use of basic fuels.

Winds From Spain Now Bother Markets

Europe In General Raises All Eyebrows

Whenever a wind blows through European sovereign bond markets, be it cold or warm, U.S. markets respond. Any action in Europe that girds perceived weakness strengthens markets....until the next wind of insecurity. Earlier this week, a wind of insecurity in U.S. markets was realized, and had been developing over a few days. Last couple of days markets sloughed off insecurities through not only Alcoa's unexpected profits, but also by a speech made by a member of the ECB suggesting support for Spanish bonds.

Spain creates nervousness firstly because of its place in the Eurozone (EU member states using the euro). It ranks number 4 in economic size behind the lead of Germany, France, and Italy. Confusing is that the United Kingdom is a member of the EU, but doesn’t use the euro.

Most disturbing with Spain is while being number 4, or 5, among commonly regarded European economies, without dispute it leads unemployment....with a rate of 23.6%. Putting this number into perspective, Greece's unemployment numbers are not available and the country with the highest rate of CDS spreads recently, being Portugal, is at 15% . While the rate for the Union is at 10.2%.

Spain’s Unemployment Compounds With Export Data And Housing Prices

Troubles do compound for Spain. Reports from the IMF to the OECD tell of increasing goods flowing from high wealth countries into Emerging Markets (EM). South Korea is a microcosm of trade reported by Eurostat on March 27, 2012. Report says the EU trade deficit between the trade partners fell from a European deficit of 18B euros in 2006 to only 4B euros in 2011. Major advances on trade rebalancing. (China's trade surplus, turned deficit is also something to look at).

Point for Spain is that while global rebalancing has benefited the EU, Spain lags with a continued but improving deficit of 752 euro. Creating the European Union's advance on trade with South Korea are Germany showing a surplus of 3,377 million (M) euros, France with 1,809M in surplus, Denmark's surplus is 239M, and then a surplus among Finland, Sweden and U.K. of 338M.

A ranked number 4 European economy that only leads among all nations in unemployment, but lags other EU nations in developing export growth? Add to these considerations a real estate market that has fallen by 20.6% in home prices since 2008 according to the National Statistic Institute's Home Price Index. Spain set a record for itself in price declines just in Q4 2011, by declining 4.2%.

Austerity Against Declining Real Market Dynamics

Market problems in Spain may reflect more of a structural nature, by having become cultural. And, as with Greece, very hard to reform. Last year Spain pledged itself to fiscal discipline and austerity, but failed the target.

Trying to reduce reliance on raising money through issuing sovereign bonds, Spain said last year that it would cut its budget and thereby its public deficit to 6% of GDP. Spain also said it would cut its habit of debt financing and public debt in similar fashion. By the end of 2011, Spain missed its target and its public deficit came in at 8.5% of GDP.

Currently, Spain is setting an even more ambitious target than the one missed when GDP was positive. Spain currently promises to reduce public debt against its failed efforts when GDP was positive. Now, Spain proposes public deficit cuts of 5.3% of GDP in 2012, and then to 3% in 2013.  

Problems really magnify for Spain when recession comes and GDP declines, in fact for the entire EU. Public debt having previously been issued on stagnant terms, such stagnant terms don't move dynamically as does evolving GDP.

Spain’s GDP grew in 2011, but only minimally. Currently, its GDP is negative and projections for 2012 show Bank of Spain seeing a contraction of a full -1.5%. Echoing recession for the year is accounting firm Ernst & Young forecasting a decline of -1.2%.

Missing austerity targets in times of positive GDP tell of missing targets when GDP looks to decline. Declines in GDP (dynamic revenue) magnify existing debt (static payments), and probably was a reason why Spain’s public debt and deficit came in well above target reductions, despite real reductions.

Can ECB Really Save The Day Again

Confronting challenges, on Wednesday an executive board member of the ECB, Benoit Coeure, gave a speech wherein support will be given to Spain, and the markets have not rewarded Spain enough for actual efforts, or accomplishments….I remain confused between whether Spain has actually accomplished, or has simply set laudable goals. I might have missed the clarification in the speech. Nonetheless, on the day of the speech, Wednesday, markets moved very positively, as with today.

Looking at Spain’s place in the largest economy in the world through a union of countries, looking at Spain's unemployment, weak exports and real estate, one can’t help but get very cautious. Add to these factors Spain’s decreasing GDP and a debt that doesn’t correspondingly decrease. Where is the money going to come from?

ECB potentially? Can it? With so many sour sovereign bonds developing on its bloated balance sheet?

Examining The Employment Report

Conflicting Economic Indicators And A Harsh Jobs Report

Recently, a number of conflicting economic indicators have surfaced for the U.S. Most disappointing is of course the Employment Situation report released on Friday, a day when exchanges for equities were closed. Today, however, such markets fell by 1.00% to 1.14%. Similarly disappointing are national rail traffic volumes released last Thursday, and continue in a down trend.

Looking at the conflicting positive data, the Institute for Supply Management released its monthly, broadly based, PMI numbers for U.S. manufacturing last week. It showed continued growth. Supporting the manufacturing PMI are U.S. Census Bureau Factory Orders, also showing growth.

Employment Did Take A Crunch

Employment data is the most concerning at the moment. March jobs grew at an abysmal 120,000 versus February's gain of 240,000. Huge difference, even considering analysts were estimating 201,000 jobs. Disturbing loss on estimates, and month over month results.

Breaking down the Bureau of Labor Statistics' study, frankly expected suspects again reveal themselves. Construction jobs compressed by 10,600, comporting with existing home sales, existing home inventories that are now being managed by banks, and apparent weakness in demand for new retail space on the commercial side.

What also might be to come are considerable downward signals for commercial real estate. According to the employment report, between general merchandise stores and department stores, March employment declined by seasonally adjusted 53,300 jobs, the most notable decline in employment on the report.

For real organic loss of jobs is telecommunications. While the sector lost only 3,600 jobs in March 2012, since March of 2011, it has shred 45,200 jobs.

Retail's Crunch Not A Real Surprise 

Retail sales last reported on March 13 for February numbers. The next release is slated for April 16. For the last report, general merchandise saw sales declining in February by only -.1%, but still had a yearly increase of 2.9%. Department stores did better with a February advance of 1.5%, with a yearly gain of a weak .2%.

Reported previously on this space are potential explanations for retail's en masse loss of jobs. For so long, many retailers, whether grocery, general merchandise, or department stores, have been increasing price to sustain sales against reduced traffic. At the same time, they have not been controlling SG&A expenses. Sustainability of profit is challenged with such propositions. Major examples are SuperValue and J.C. Penny. With associated layoffs and restructuring.

Gas prices and the inevitable inelasticity of demand are revealed in two ways today. Firstly, gas station stores lead the retail sales report with a yearly increase of 10.3% and a February increase of 3.3%. Then we have the simple fact of gas price, and how it has helped gas selling retailers such as Costco (look at Sunoco's switch in business plans).

Growth In U.S. Economy Are Cars And Bank Lending, But Is It Sustainable

Still, due to the nature of gasoline/convenience store retail, customer service jobs don't increase congruent to increased sales as with general merchandise and department stores. Ergo, we see a net loss of retail jobs on the Employment Situation report of down 34,000 for February.

Despite such losses, again I have to mention a pattern of suspects. Where retail has faltered over time in its traditional concept, we have leads that do in fact ramify through this economy.

Cars and transportation equipment created a combined 24,600 jobs for March. Monthly gains lead to yearly job creation of 130,200. Job creation like this drives the index and overall tells of competition for consumer money.

Consumer Credit advances show that in the U.S. banks are lending money. But on shorter term loans backed by vehicle collateral. But what did I hear about car prices reaching a recent high?

Is this market getting ahead of itself and lending on over priced collateral. Wouldn't be the first time.

Seems Like Dogs and Ponies, But Real Life Is Serious

Economic Digester: Energy Is Priced Into Life

Dog and pony shows are very entertaining and needed on any “blog”. I happen to have a couple of dogs and ponies myself.

The first dog to jump through the hoop is constrained international tanker transportation reserved for U.S. petroleum service. Petroleum tanker prices have increased, and go to previously unknown highest bidders. Today those bidders are the Asian economies. One must recall past Asian rates of growth.

Growth in Asia brought a consequent need of energy, which is fueled by coal, petroleum and natural gas. Global economics is where we are, and a reality. The growth in Asia might slow, but their capital outlays must be fed and will become a part of the global economic cycle. Essentially, they will also fuel energy demand at higher rates than once known.

We have a second dog that hops like a jump-roping champion, but fails in fatigue. Nuclear and wind energy fit into this proposition. Sadly, nuclear once again encountered an unfortunate moment. Real problem is that an unfortunate moment contains untold waste.

For wind, it's intermittent, expensive to build and not reliable. Characteristics of such manner dispose wind to intermittency charges when connecting with established utilities. Still, nuclear and wind jump so high in hopes to appease, but in the end have only fatigued.

Still, so much money has been put into the two. Solar can have promise through a very real dynamic being realized currently in commerce. Look at Walmart’s roofing systems.

A prancing pony is now needed. Pony prancings are sustained quantities of what all know and have known…. that being conventional energy.

In this proposition, look at technological development among emerging economies. These countries happen to be the fastest, but hardly the largest, growing economies. Such emerging countries are only now engaging in this century, and its associated technology. They don’t have the capacity for scrubbers, digesters, paced burn-offs, or best practices.

These governments are learning how to integrate commerce with people, and the national forces that come. Like nature’s cyclone, they are learning a new human dynamic, aside from technology. That dynamic is in seeing people, for a first time, with the ability to earn cash on the proposition of work. It is a dynamic that allows these new citizens to buy something they want;  a new set of shoes, pants, a dress, maybe a house. Integrating these people into their systems of governance is the current challenge of rebalancing for emerging countries.

Some emerging countries such as Iran and Syria have declined the global invitation, in a manner that affronts civilization.

Sadly to say, ironic to say….is their particular place in international history and seat in petroleum production. Iran’s lament is obvious among partners in history, and to those that must have a kindred spirit. Mutual fathers found oil on that ground.
   

The Arab Spring started yesterday, on soil no one anticipated. Currently, the concept continues where least expected, and today has influence among those most expected.

Ultimately, we in the U.S. need work for our families. Our jobs can help fuel jobs for families across oceans. We need something, the working countries of this world need something.

Together, there is cause to be had among humanity and business.