Financial Review

Strange Days in Energy

Financial Review by Sinclair Noe
DOW + 305 = 17,666
SPX + 29 = 2050
NAS + 51 = 4727
10 YR YLD + .10 = 1.78%
OIL + 2.52 = 52.09
GOLD – 13.70 = 1261.10
SILV + .09 = 17.37

One year ago, the Dow Industrials dropped down to 15,356, which proved to be the low for 2014. Since then, up 16%, mas o menos.

Corelogic reports home prices slipped 0.1% in December, to take the year-on-year rate to 5%. Twenty-seven states and the District of Columbia are at or within 10% of their peak; current prices in Arizona are still 29.5% below the peak. Colorado (8.4%), Texas (7.8%) and New York (7.6%) saw the fastest growth, while only three states — Maryland (-0.7%), Vermont (-0.9%) and Connecticut (-2.2%) — saw a decline on a year-on-year basis.

New orders for factory-made goods in the U.S. sank 3.4% in December to mark the fifth straight decline. The latest drop suggests that manufacturers may have scaled back production owing to a stronger dollar and weak economic growth overseas that’s made it harder to sell American-made goods. Inventories also declined for the first time in 19 months, down 0.3%. Excluding transportation, new factory orders fell a smaller 2.3%.

Earnings reporting season:
Chipotle Mexican Grill said its fourth-quarter earnings rose 52% as sales benefited from stronger customer traffic, higher menu prices and new stores. It’s tough to keep growing that fast. Chipotle also reiterated its October warning that sales growth may slow during 2015 from the robust gains reported in recent periods. Shares were down in after-hours trade.

United Parcel Service will start applying surcharges for residential packages this year after its costs soared during the recent disappointing holiday season. UPS also reported that fourth-quarter profit fell from a year ago but forecast earnings within the range of estimates.

Walt Disney reported stronger-than-expected earnings and revenue for its December quarter as growth at its media networks and parks and resorts divisions offset a slight drop in revenue from studio entertainment. The bright spot was the animated film “Frozen” which has been a huge hit in merchandise sales. Disney’s record results in recent periods have been spurred by price increases at its domestic theme parks; measles tossed in at no extra charge.

St. Louis Fed Bank President James Bullard, speaking at a conference in Delaware, called for the breakup of big banks. Bullard said the time for restoring the Glass-Steagall Act, which had separated investment banks and commercial banks, had probably passed and was not the best route going forward. But he did advocate for smaller financial institutions, saying the argument that large corporations need large banks was weak.

Minneapolis Fed Bank President Narayana Kocherlakota says the Fed should not hike rates this year because it would slow the return of inflation to the central bank’s target and also risk a loss of credibility for the US central bank. Kocherlakota said he thinks it will already take inflation a few years to return to the Fed’s 2% annual target rate from current low level.

The Reserve Bank of Australia has jumped on the easing bandwagon, becoming the latest global central bank to cut interest rates in response to slowing inflation and concerns over economic growth. The RBA lowered its benchmark rate by 25 bps – its first change since August 2013 – to a new record low of 2.25%.

European stocks moved higher today. Greece’s new finance minister Yanis Varoufakis has suggested that instead of requesting a write-off of its €315 billion ($357 billion) foreign debt, the government would ask to swap Greek debt for two new types of bonds linked to growth while also targeting oligarchs, cartels, and wealthy tax evaders; proving there’s more than one way to make a financial transfer. The Athens Stock Exchange Index jumped up 11% today. Yes, this is the same Greek finance minister that was quoted over the weekend saying “Greece won’t negotiate with the Troika.” Which is an excellent opening position for negotiation when you think about it.

Greece’s debts are held by other democratically-elected countries. The majority view in those countries is against debt forgiveness. On the other end of the spectrum is Greece actually not negotiating and defaulting on debt, and then dropping out of the European Union; actually they say they don’t want to exit the EU, so they would have to be kicked out; something the EU does not have to political authority or unanimous support to do; but even if everybody acted in a most stupid and malignant manner, the bond vigilantes would start circling like sharks smelling blood, and the losses would mount quickly. Against that backdrop, rescue loans for debt indexed to nominal economic growth sounds quite pleasant indeed.

Auto makers say their U.S. sales grew in January, typically a slower month for the industry. Chrysler, General Motors and Nissan all posted double-digit increases in January. GM reports auto sales were up 15% compared with January a year ago. Ford up 15%, Fiat Chrysler up 14%. Nissan up 15%. Toyota up 16%.

Automotive information provider Kelley Blue Book said transaction prices of new light vehicles are up 5% compared with a year ago to $33,993. TrueCar estimates average incentive spending, including rebates and discounts, was $2,642 during the month. That is a decline of 10% compared with December’s numbers, but up 3.6% over January 2014. Gas prices, sitting at about $2 gallon, are helping juice demand for trucks and SUVs that consume more fuel but also deliver higher margins. Some buyers are using savings from lower fuel costs to purchase pricier options or come into the market sooner than otherwise planned. The thinking is that low fuel prices provide a significant boost to consumer disposable income.

Oil is in a bull market. It took all of three days trading. It started Friday, when oil jumped 8%, and yesterday and another 5% today; from an intraday low of $43.58 last Thursday to an intraday high of $54.24 today; boom 20%-plus move; technically we are in a bull market. Of course oil prices are still down 50% from the highs of last June. If you think this has anything to do with fundamentals such as supply and demand, I would love to hear that justification. Over the past several weeks, more than 20K oil workers have lost their jobs as companies pare their workforces to deal with the drop in oil prices. More than 700 oil industry jobs are now being terminated in Texas, following recent layoff announcements. It should take months before that actually affects supply. The supply/demand equation did not change that much in 3 days. What did change? Traders decided they could pop the price and squeeze the shorts.

Meanwhile, you have probably noticed that prices for electricity never went down at all. According to the US Energy Information Administration, since 2004, average residential electricity prices have jumped 39%, to 12.5 cents a kilowatt-hour and prices for all users have jumped 36% to 10.42 cents. Meanwhile, Americans are using less electricity; we’re using efficient light bulbs and Energy Star appliances, and even a little solar on the roof. The result is that sales are down. All at a time when the electric grid is in need of upgrades. The Edison Electric Institute calls this a “death spiral” for utilities. As a result, many utilities are now considering charging fixed monthly fees for electricity services to cover the fixed cost, rather than the cost of the electricity itself.

Utilities like fixed fees, consumers not so much; fees punish energy-conservers and lengthen pay-back periods for solar power and energy-efficiency upgrades.

Meanwhile, a funny thing happened in India last week. President Obama visited and there was much pageantry and talk of expanded bilateral cooperation, and there was a $4 billion nuclear deal announced; the details of the deal are what make it interesting. It contrives a model to shift to Indian taxpayers the liability risks for nuclear accidents, thus undermining India’s domestic law, the Civil Liability for Nuclear Damage Act, which pins the liability on suppliers of nuclear-power plants and equipment. It will circumvent the central principle enshrined in that law — the right of recourse against nuclear suppliers, including manufacturers and designers.

The paradox is that America’s domestic law allows suppliers to be held liable, yet Washington has sought to shield its exporting firms by insisting that India accept operator’s strict liability and restrict potential claims. Great news for the nuclear suppliers; they face no downside risks and can concentrate on profits. For them, supplier liability ends with delivery of the plant or equipment.

In order to jumpstart its civilian nuclear power industry, India is agreeing to an insurance pool of $245 million to cover any liabilities. If a serious accident were to occur, India would be saddled with staggering, lasting costs. Japan’s Fukushima-disaster bill has been conservatively estimated at $105 billion, or 429 times higher than the Indian insurance pool’s capital.

So, what we have is an energy policy that is subject to 20% price swings in less than a week; clearly a market being manhandled by speculators; infrastructure that is crumbling and unable to pay for itself, and a source of electricity that can’t be used unless we are willing to dump liability on taxpayers. I’m just saying this might be cause for concern, at some point.

We’re giving more. The U.S. economic rebound last year pushed the stock market up and the jobless rate lower, helping to boost charitable giving in the country to a record $456 billion—a jump of more than 9 percent from the year before. The number of nonprofits has grown 50 percent since 2002, and many of them have turned to more sophisticated fundraising technologies like online giving and crowdfunding. The bulk of the contributions were small gifts from individuals; mega-gifts of $100 million or more accounted for just 1% of the total.

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