Showing posts with label Texas. Show all posts
Showing posts with label Texas. Show all posts

Sunday, January 3, 2016

A Half Dozen 2016 Stock Market Poisons

By Tony Sagami

Most of the “adults” on Wall Street are on vacation this week, and trading volume shrivels up to a trickle. That low volume is exactly the environment that the momentum crowd uses to paint the tape green. I call it the financial version of Reindeer Games.

However, once the “adults” return, the stock market will need to pay attention to the actual economic fundamentals and deal with facts—like, 2015 being the first year since 2009 when S&P 500 profits declined for the year.


I expect that 2016 is going to be a very difficult year for the stock market. Why do I say that? For any number of reasons, such as:

Poison #1: The Strong US Dollar

The greenback has been red hot. The US dollar index is up 9% in 2015 after gaining 13% in 2014.
A strong dollar can have a dramatic (negative) impact on the earnings of companies that do a significant amount of business outside of the US—for example, Johnson & Johnson, Ford, Yum Brands, Tiffany’s, Procter & Gamble, and hundreds more.


Poison #2: Depressed Energy Prices

I don’t have to tell you that oil prices have fallen like a rock. That’s a blessing when you stop at a gas station, but the impact on the finances of petro dependent economies, including certain US states, has been devastating. Plunging energy prices are going to clobber everything from emerging markets to energy stocks, to states like North Dakota and Texas.


Poison #3: Junk Bond Implosion

You may not have noticed because the decline has been orderly, but the junk bond market is on the verge of a total meltdown.


Third Avenue Management unexpectedly halted redemption of its high-yield (junk) Focused Credit Fund. Investors who want their money… tough luck. The investors who placed $789 million in this junk bond fund are now “beneficiaries of the liquidating trust” without any idea of how much they will get back and or even when that money will be returned. Third Avenue admitted that it may take “up to a year” for investors to get their money back. Ouch!

The problem is that the bids of the junkiest part of the junk bond market have collapsed. For example, the bonds of iHeartCommunications and Claire’s Stores have dropped 54% and 55%, respectively, since June!
What the junk bond market is experiencing is a liquidity crunch, the financial equivalent of everybody trying to stampede through a fire exit at the same time. In fact, the International Monetary Fund (IMF) warned that blocking redemptions could lead to an increase in redemption requests at similar funds.


Poison #4: Rising Interest Rates

As expected, the Federal Reserve hiked interest rates at its last meeting. The reaction (so far) hasn’t been too negative; however, we may have several more interest rate hikes coming our way.


Every single one of the 17 Federal Reserve members expects the fed funds rate to increase by at least 50 bps before the end of 2016, and 10 of the 17 expect rates to rise at least 100 bps higher in the next 12 months. I doubt our already struggling economy could handle those increases.


Poison #5: Government Interference

Sure, 2016 is an election year, which brings uncertainty and possibly turmoil. But the Obama administration could shove several changes down America’s throat via executive action—such as higher minimum wage, limits on drug pricing, gun control, trade sanctions including tariffs, immigration, climate change, and increased business regulation.


I don’t give the Republican led Congress a free pass either, as I have no faith that it will put the best interests of the US ahead of its desire to fight Obama.


Poison #6: China Contagion

We do indeed live in a small, interconnected world, and it’s quite possible that something outside of the US could send our stock market tumbling. Middle East challenges notwithstanding, the one external shock I worry the most about is one coming from China. The sudden devaluation of the yuan and the significant easing of monetary policy by the People’s Bank of China are signs that trouble is brewing.


However, I think the biggest danger is an explosion of non-performing loans in China. Debt levels in China, both public and private, have exploded, and I continue to hear anecdotal evidence that default and non-performing loans are on the rise.


Conclusion

To be truthful, I have no idea which of the above or maybe even something completely out of left field will poison the stock market in 2016, but I am convinced that trouble is coming. Call me a pessimist, a bear, or an idiot… but my personal portfolio and that of my Rational Bear subscribers are prepared to profit from falling stock prices.
Tony Sagami
Tony Sagami
30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.



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Wednesday, December 17, 2014

Crude Oil, Employment, and Growth

By John Mauldin


Last week we started a series of letters on the topics I think we need to research in depth as we try to peer into the future and think about how 2015 will unfold. In forecasting U.S. growth, I wrote that we really need to understand the relationships between the boom in energy production on the one hand and employment and overall growth in the US on the other. The old saw that falling oil prices are like a tax cut and are thus a net benefit to the US economy and consumers is not altogether clear to me. I certainly hope the net effect will be positive, but hope is not a realistic basis for a forecast. Let’s go back to two paragraphs I wrote last week:

Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock on effects.

Lacy Hunt and I were talking yesterday about Texas and the oil industry. We have both lived through five periods of boom and bust, although I can only really remember three. This is a movie we’ve seen before, and we know how it ends. Texas Gov. Rick Perry has remarkable timing, slipping out the door to let new governor Greg Abbott to take over just in time to oversee rising unemployment in Texas. The good news for the rest of the country is that in prior Texas recessions the rest of the country has not been dragged down. But energy is not just a Texas and Louisiana story anymore. I will be looking for research as to how much energy development has contributed to growth and employment in the US.

Then the research began to trickle in, and over the last few days there has been a flood. As we will see, energy production has been the main driver of growth in the US economy for the last five years. But changing demographics suggest that we might not need the job creation machine of energy production as much in the future to ensure overall employment growth.

When I sat down to begin writing this letter on Friday morning, I really intended to write about how falling commodity prices (nearly across the board) and the rise of the dollar are going to affect emerging markets.

The risks of significant policy errors and an escalating currency war are very real and could be quite damaging to global growth. But we will get into that next week. Today we’re going to focus on some fascinating data on the interplay between energy and employment and the implications for growth of the US economy. (Note: this letter will print a little longer due to numerous charts, but the word count is actually shorter than usual.)

But first, a quick recommendation. I regularly interact with all the editors of our Mauldin Economics publications, but the subscription service I am most personally involved with is Over My Shoulder.
It is actually very popular (judging from the really high renewal rates), and I probably should mention it more often. Basically, I generally post somewhere between five and ten articles, reports, research pieces, essays, etc., each week to Over My Shoulder. They are sent directly to subscribers in PDF form, along with my comments on the pieces; and of course they’re posted to a subscribers-only section of our website. These articles are gleaned from the hundreds of items I read each week – they’re the ones I feel are most important for those of us who are trying to understand the economy. Often they are from private or subscription sources that I have permission to share occasionally with my readers.

This is not the typical linkfest where some blogger throws up 10 or 20 links every day from Bloomberg, the Wall Street Journal, newspapers, and a few research houses without really curating the material, hoping you will click to the webpage and make them a few pennies for their ads. I post only what I think is worth your time. Sometimes I go several days without any posts, and then there will be four or five in a few days. I don’t feel the need to post something every day if I’m not reading anything worth your time.

Over My Shoulder is like having me as your personal information assistant, finding you the articles that you should be reading – but I’m an assistant with access to hundreds of thousands of dollars of research and 30 years of training in sorting it all out. It’s like having an expert filter for the overwhelming flow of information that’s out there, helping you focus on what is most important.

Frankly, I think the quality of my research has improved over the last couple years precisely because I now have Worth Wray performing the same service for me as I do for Over My Shoulder subscribers. Having Worth on your team is many multiples more expensive than an Over My Shoulder subscription, but it is one of the best investments I’ve ever made. And our combined efforts and insights make Over My Shoulder a great bargain for you.

For the next three weeks, I’m going to change our Over My Shoulder process a bit. Both Worth and I are going to post the most relevant pieces we read as we put together our 2015 forecasts. This time of year there is an onslaught of forecasts and research, and we go through a ton of it. You will literally get to look “over my shoulder” at the research Worth and I will be thinking through as we develop our forecasts, and you will have a better basis for your own analysis of your portfolios and businesses for 2015.

And the best part of it is that Over My Shoulder is relatively cheap. My partners are wanting me to raise the price, and we may do that at some time, but for right now it will stay at $39 a quarter or $149 a year. If you are already a subscriber or if you subscribe in the next few days, I will hold that price for you for at least another three years. I just noticed on the order form (I should check these things more often) that my partners have included a 90 day, 100% money-back guarantee. I don’t remember making that offer when I launched the service, so this is my own version of Internet Monday.  

You can learn more and sign up for Over My Shoulder right here.

And now to our regularly scheduled program.

The Impact of Oil On U.S. Growth
I had the pleasure recently of having lunch with longtime Maine fishing buddy Harvey Rosenblum, the long-serving but recently retired chief economist of the Dallas Federal Reserve. Like me, he has lived through multiple oil cycles here in Texas. He really understands the impact of oil on the Texas and U.S. economies. He pointed me to two important sources of data.

The first is a research report published earlier this year by the Manhattan Institute, entitled “The Power and Growth Initiative Report.” Let me highlight a few of the key findings:

1. In recent years, America’s oil & gas boom has added $300–$400 billion annually to the economy – without this contribution, GDP growth would have been negative and the nation would have continued to be in recession.

2. America’s hydrocarbon revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses, not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people. [We typically don’t think of the oil business as the place where small businesses are created, but for those of us who have been around the oil patch, we all know that it is. That tendency is becoming even more pronounced as the drilling process becomes more complicated and the need for specialists keeps rising. – John]

3. The shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs – throughout the economy, from construction to services to information technology.

4. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry.

Oil & gas jobs are widely geographically dispersed and have already had a significant impact in more than a dozen states: 16 states have more than 150,000 jobs directly in the oil & gas sector and hundreds of thousands more jobs due to growth in that sector.

Author Mark Mills highlighted the importance of oil in employment growth:



The important takeaway is that, without new energy production, post recession U.S. growth would have looked more like Europe’s – tepid, to say the least. Job growth would have barely budged over the last five years.

Further, it is not just a Texas and North Dakota play. The benefits have been widespread throughout the country. “For every person working directly in the oil and gas ecosystem, three are employed in related businesses,” says the report. (I should note that the Manhattan Institute is a conservative think tank, so the report is pro-energy-production; but for our purposes, the important thing is the impact of energy production on recent US economic growth.)

The next chart Harvey directed me to was one that’s on the Dallas Federal Reserve website, and it’s fascinating. It shows total payroll employment in each of the 12 Federal Reserve districts. No surprise, Texas (the Dallas Fed district) shows the largest growth (there are around 1.8 million oil related jobs in Texas, according to the Manhattan Institute). Next largest is the Minneapolis Fed district, which includes North Dakota and the Bakken oil play. Note in the chart below that four districts have not gotten back to where they were in 2007, and another four have seen very little growth even after eight years. “It is no wonder,” said Harvey, “that so many people feel like we’re still in a recession; for where they live, it still is.”



To get the total picture, let’s go to the St. Louis Federal Reserve FRED database and look at the same employment numbers – but for the whole country. Notice that we’re up fewer than two million jobs since the beginning of the Great Recession. That’s a growth of fewer than two million jobs in eight years when the population was growing at multiples of that amount.



To put an exclamation point on that, Zero Hedge offers this thought:

Houston, we have a problem. With a third of S&P 500 capital expenditure due from the imploding energy sector (and with over 20% of the high yield market dominated by these names), paying attention to any inflection point in the U.S. oil producers is critical as they have been gung-ho “unequivocally good” expanders even as oil prices began to fall. So, when Reuters reports a drop of almost 40 percent in new well permits issued across the United States in November, even the Fed's Stan Fischer might start to question [whether] his [belief that] lower oil prices are "a phenomenon that’s making everybody better off" may warrant a rethink.

Consider: lower oil prices unequivocally “make everyone better off.” Right? Wrong. First: new oil well permits collapse 40% in November; why is this an issue? Because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non shale states have lost 424,000 jobs.



The writer of this Zero Hedge piece, whoever it is (please understand there is no such person as Tyler Durden; the name is simply a pseudonym for several anonymous writers), concludes with a poignant question:

So, is [Fed Vice-Chairman] Stan Fischer's “not very worried” remark about to become the new Ben “subprime contained” Bernanke of the last crisis?

Did the Fed Cause the Shale Bubble?

Next let’s turn to David Stockman (who I think writes even more than I do). He took aim at the Federal Reserve, which he accuses of creating the recent “shale bubble” just as it did the housing bubble, by keeping interest rates too low and forcing investors to reach for yield. There may be a little truth to that. The reality is that the recent energy boom was financed by $500 billion of credit extended to mostly “subprime” oil companies, who issued what are politely termed high yield bonds – to the point that 20% of the high yield market is now energy production related.

Sidebar: this is not quite the same problem as subprime loans were, for two reasons: first, the subprime loans were many times larger in total, and many of them were fraudulently misrepresented. Second, many of those loans were what one could characterize as “covenant light,” which means the borrowers can extend the loan, pay back in kind, or change the terms if they run into financial difficulty. So this energy related high yield problem is going to take a lot more time than the subprime crisis did to actually manifest, and there will not be immediate foreclosures. But it already clear that the problem is going to continue to negatively (and perhaps severely) impact the high-yield bond market. Once the problems in energy loans to many small companies become evident, prospective borrowers might start looking at the terms that the rest of the junk-bond market gets, which are just as egregious, so they might not like what they see. We clearly did not learn any lessons in 2005 to 2007 and have repeated the same mistakes in the junk bond market today. If you lose your money this time, you probably deserve to lose it.

The high yield shake out, by the way, is going to make it far more difficult to raise money for energy production in the future, when the price of oil will inevitably rise again. The Saudis know exactly what they’re doing. But the current contretemps in the energy world is going to have implications for the rest of the leveraged markets. “Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse,” says Bank of America (source: The Telegraph).

Contained within Stockman’s analysis is some very interesting work on the nature of employment in the post recession U.S. economy. First, in the nonfarm business sector, the total hours of all persons working is still below that of 2007, even though we nominally have almost two million more jobs. Then David gives us two charts that illustrate the nature of the jobs we are creating (a topic I’ve discussed more than once in this letter). It’s nice to have somebody do the actual work for you.

The first chart shows what he calls “breadwinner jobs,” which are those in manufacturing, information technology, and other white collar work that have an average pay rate of about $45,000 a year. Note that this chart encompasses two economic cycles covering both the Greenspan and Bernanke eras.



So where did the increase in jobs come from? From what Stockman calls the “part time economy.” If I read this chart right and compare it to our earlier chart from the Federal Reserve, it basically demonstrates (and this conclusion is also borne out by the research I’ve presented in the past) that the increase in the number of jobs is almost entirely due to the creation of part time and low wage positions – bartenders, waiters, bellhops, maids, cobblers, retail clerks, fast food workers, and temp help. Although there are some professional bartenders and waiters who do in fact make good money, they are the exception rather than the rule.



It’s no wonder we are working fewer hours even as we have more jobs.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.



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Tuesday, October 14, 2014

Is this the "Sea Change" some have warned us about?

By John Mauldin


Did you feel the economic weather change this week? The shift was subtle, like fall tippy toeing in after a pleasant summer to surprise us, but I think we’ll look back and say this was the moment when that last grain of sand fell onto the sand pile, triggering many profound fingers of instability in a pile that has long been close to collapse. This is the grain of sand that sets off those long chains of volatility that have been gathering for the last five years, waiting to surprise us with the suddenness and violence of the avalanche they unleash.

I suppose the analogy sprang to mind as I stepped out onto my balcony this morning. Texas has been experiencing one of the most pleasant summers and incredibly wonderful falls in my memory. One of the conversations that seem to occur regularly among locals who have a few decades under their belts here, is just how truly remarkable the weather has been. So it was a bit of a surprise to step out and realize the air had turned brisk. In retrospect it shouldn’t have fazed me. The air has been turning brisk in Texas at some point in October for the six decades that my memory covers, and for quite a few additional millennia, I suspect.

But this week, as I worked through my ever-growing mountain of reading, I felt a similar awareness of a change in the economic climate. Like fall, I knew it was coming. In fact, I’ve been writing about it for years! But just as fall tells us that it’s time to get ready for winter, at least in more northerly climes, the portents of the moment suggest to me that it’s time to make sure our portfolios are ready for the change in season.

Sea Change

Shakespeare coined the marvelous term sea change in his play The Tempest. Modern day pundits are liable to apply the word to the relatively minor ebb and flow of events, but Shakespeare meant sea change as a truly transformative event, a metamorphosis of the very nature and substance of a man, by the sea.
In this week’s letter we’ll talk about the imminent arrival of a true financial sea change, the harbinger of which was some minor commentary this week about the economic climate. This letter is arriving to you a little later this week, as I had quite some difficulty writing it, because, while the signal event is rather easy to discuss, the follow on consequences are myriad and require more in-depth analysis than I’ve been able to bring to them on short notice. As I wrestled with what to write, I finally came to realize that this sea change is going to take multiple letters to properly describe. In fact, it might eventually take a book.

So, in a departure from my normal writing style, I am going to offer you a chapter by chapter outline for a book. As with all book outlines, it will be simply full of bones but without much meat on them, let alone dressed up with skin and clothing. I will probably even connect the bones in the wrong order and have to go back later and replace a leg bone with a rib, but that is what outlines are for. There is clearly enough content suggested by this outline to carry us through the next several months; and given the importance of the subject, I expect to explore it fully with you. Whether it actually becomes a book, I cannot yet say.

I should note that much of what follows has grown out of in depth conversations with my associate Worth Wray and our mutual friends. We’ve become convinced that the imbalances in the global economic system are such that the risks are high that another period of economic volatility like the Great Recession is not only likely but is now in the process of developing. While this time will be different in terms of its causes and symptoms (as all such stressful periods differ from each other in many ways), there will be a rhyme and a rhythm that feels all too familiar. That should actually be good news to most readers, as the last 14 years have taught us a little bit about living through periods of economic volatility. You will get to use those skills you learned the hard way.

This will not be the end of the world if you prepare properly. In fact, there will be plenty of opportunities to take advantage of the coming volatility. If the weatherman tells you winter is coming, is he a prophet of doom? Or is it reasonable counsel that maybe we should get our winter clothes out?

Three caveats before we get started. One, I am often wrong but seldom in doubt. And while I will marshal facts and graphs aplenty to reinforce my arguments, I would encourage you to think through the counter factuals presented by those who will aggressively disagree.

Two, while it goes without saying, you are responsible for your own decisions. It is easy for me to say that I think the bond market is going to go in a particular direction. I can even bet my personal portfolio on my beliefs. I can’t know your circumstances, but if you are similar to most investors, this is the time to make sure you have a truly balanced portfolio with serious risk management in the event of a sudden crisis.

Three, give me (and Worth, whom I am going to draft to write some letters) some time to develop the full range of our ideas. To follow on with my weather analogy, the air is just starting to get crisp, and winter is still a couple months away. Absent something extraordinary, we are not going to get snow and a blizzard in Dallas, Texas, tomorrow. We may still have some time to prepare, but at a minimum it is time to start your preparations. So with those caveats, let’s look at an outline for a potential book called Sea Change.

Prologue

I turned publicly bearish on gold in 1986. At the time (a former life in a galaxy far, far away), I was actually writing a newsletter on gold stocks and came to the conclusion that gold was going nowhere – and sold the letter. I was still bearish some 16 years later. Then, on March 1, 2002, I wrote in Thoughts from the Frontline that it was time to turn bullish on gold. Gold at that time was languishing around $300 an ounce, near its all time bottom.

What drove that call? I thought that the future directions of gold and the dollar were joined at the hip. A bit over a year later I laid out the case for a much weaker dollar in a letter entitled “King Dollar Meets the Guillotine,” which later became the basis for a chapter in Bull’s Eye Investing. As the chart below shows, the dollar had risen relentlessly through the early Reagan years, doubling in value against the currencies of America’s global neighbors, causing exporters to grumble about US dollar policy. Then the bottom fell out, as the dollar made new lows in 1992. From 1992 through 2002 the dollar recovered about half of its value, getting back to roughly where it was in 1967. Elsewhere about that time, I predicted that the euro, which was then at $0.88, would rise to $1.50 before falling back to parity over a very long period of time. I believe we are still on that journey.



One of the biggest drivers of economic fortunes in the global economy is the currency markets. The value of your trading currency affects every aspect of your business and investments. It is fundamental in nature. While most Americans never even see a piece of foreign currency, every time we walk into Walmart, we are subject to the ebb and flow of global currency valuations, as are Europeans and indeed every person who participates in the movement of goods and services around the globe. In fact, globalization means that currency values are more important than ever. The world is more tightly interconnected now than it has ever been, which means that events which previously had no effect upon global affairs can trigger cascades of events that affect everyone.

I believe we are in the early stages of a profound currency valuation sea change. I have lived through five major changes in the value of the dollar in the 45 years since Nixon closed the gold window. And while we are used to 40% to 50% moves in the stock market and other commodity prices happening in just a few years (or less), large movements in major trading currencies typically take many years, if not decades, to develop. I believe we are in the opening act of a multi-year US dollar bull market.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Sea Change was originally published at mauldin economics


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Thursday, June 26, 2014

The Four Horsemen of the Geopolitical Apocalypse

By John Mauldin


Ian Bremmer, NYU professor and head of the geopolitical consulting powerhouse Eurasia Group, consults at the highest levels with both governments and companies because he brings to the table robust geopolitical analysis and a compelling thesis: that we are witnessing “the creative destruction of the old geopolitical order.” We live, as his last book told us, in a “G-0” world. In today’s Outside the Box, Ian spells out what that creative destruction means in terms of events on the ground today. As Ian notes, the most prominent feature of the international landscape this year has been the expansion of geopolitical conflict. That expansion is gaining momentum, he says, creating larger-scale crises and sharpening market volatility. Hold on to the reins now as Ian take us for a ride with the “Four Horsemen of the Geopolitical Apocalypse.”

We’ll follow up Ian’s piece with an excellent short analysis of the Iraq situation from a Middle East expert at a large hedge fund I correspond with. Pretty straightforward take on the situation with regard to ISIS. This quagmire has real implications for the world oil supply. (It appears that the Sunni rebel forces are now in complete control of the key Baiji Refinery, which produces a third of Iraq’s output.)

Back in Dallas, it’s a little hard to focus on geopolitical events when seemingly all the news is about ongoing domestic crises. But the outrageous IRS loss of emails doesn’t really affect our portfolios all that much. What happens in Iraq or with China does. There’s just not the emotional impact.

One domestic humanitarian crisis that is brewing just south of me is the massive influx of very young children across the U.S.-Mexican border. When this was first brought to my attention a few weeks ago, I must admit that I questioned the credibility of the source. We have had young children walking across the Texas border for decades but always in rather small numbers. The first source I read said that 40,000 had already come over this year. I just found that to be non credible, but then with a little reasonable research it not only became believable but could be a bit low – it looks as many as 90,000 children will cross the border this year.

What in the name of the Wide Wide World of Sports is going on? First of all, how do you cover up something of this magnitude until it is a true crisis? When the administration and other authorities clearly knew about it last year? (The evidence is irrefutable. They knew.)

I am the father of five adopted children. In an earlier phase of my life, I was somewhat involved with Child Protective Services here in Texas. It was an emotionally difficult and heartrending experience. (One of my children came out of that system and three from outside of the United States). I have no idea how you care for 90,000 children who don’t speak the language and have no connection to their new locale. Forget the dollar cost, which could run into the tens of billions over time. These are children, and they are on our doorstep and our watch. You simply can’t ignore them and say, “They are not supposed to be here, so it’s not our responsibility.” They are children. Someone, and that means here in the U.S., is going to have to figure out how to take care of them, even if it is only to learn why they try to come and figure out where to send them back to. And frankly, trying to to send them back is going to be a logistical and legal nightmare, not to mention psychologically traumatic to the children.

Maybe someone thought that waiting until there was a crisis to let this information slip out (and we found out about it because of photos posted anonymously of children packed together in holding cells) would create momentum for immigration reform. And they may be right. But I’m not certain it’s going to result in the type of immigration reform they were hoping to get.

I have to admit that I’ve been rather tolerant of illegal immigrants over the course of my life. There are a dozen or so key issues that I think this country should focus on, but I’ve just never gotten that worked up about illegal immigration. The simple fact is that everyone here in the US is either an immigrant or descended from immigrants. It may be, too, that I’ve hired a few undocumented workers here and there in my life. As an economist, I know that we should be trying to figure out how to get more capable immigrants here, not less. What you want are educated young people who are motivated to create and work, not children as young as four or five years old who are going to need housing, education, adult supervision, health care, and most of all a loving environment where they can grow up.

It is one thing for undocumented workers to come across the border looking for jobs or for families to come across together. It is a completely different matter when tens of thousands of preteen children come across the border without parents or supervision. They didn’t get across 1500 miles of desert without significant support and a great deal of planning. This couldn’t be happening without the awareness of authorities in Mexico and the Central American countries from which these children come, and if this is truly a surprise to Homeland Security, then there is a significant failure somewhere in the system.

And if it was not a surprise? That begs a whole different series of questions.

This is a major humanitarian crisis, and it is not in the Middle East or Africa. It is on our border, and we need to figure out what to do about it NOW!

I don’t care whether you think we need to build a 20 foot high wall across the southern border of the United States or give amnesty to anyone who wants to come in (or both), something has to be done with these children. It is a staggering problem of enormous logistical proportions, and we have a simple human responsibility to take care of those who cannot take care of themselves.

And on that note I will go ahead and hit the send button, and let’s focus on the critical geopolitical events happening around the globe. Iraq is a disaster. Ukraine is a crisis. What’s happening in the China Sea is troubling. It just seems to come at you from everywhere. Even on a beautiful summer day.

Your stunned by the magnitude of it all at analyst,
John Mauldin, Editor
Outside the Box


(From Ian Bremmer)

Dear John,
We're halfway through 2014, and the single most notable feature of the international landscape has been the expansion of geopolitical conflict. why should we care? what's the impact; what does it mean for the global economy? how should we think about geopolitics? My thoughts on the topic, looking at the four key geopolitical pieces "in play"–in Eurasia, the middle east, Asia, and the transatlantic.

Geopolitics

 

I've written for several years about the root causes of the geopolitical instability the world is presently experiencing. a new, g-zero world where the united states is less interested in providing global leadership and nobody else is willing or able to step into that role. that primary leadership vacuum is set against a context of competing foreign policy priorities from increasingly powerful emerging markets (with very different political and economic systems) and a Germany-led Europe; challenges to the international system from a revisionist Russia in decline; and difficulties in coordination from a proliferation of relevant state and non state actors even when interests are aligned. all of this has stirred tensions in the aftermath of the financial crisis: instability across the middle east after a stillborn Arab spring; a three-year Syrian civil war; a failed Russia "reset"; rising conflict between china and japan; fraying American alliances with countries like Brazil, Germany, and Saudi Arabia.

And yet geopolitical concerns haven't particularly changed our views on global markets. each conflict has been small and self contained (or the spillover wasn't perceived to matter much). Geopolitics has been troubling on the margins but not worth more than a fret.

That's about to change. though perceived as discrete events, the rise of these geopolitical tensions are all directly linked to the creative destruction of the old geopolitical order. it's a process that's gaining momentum, creating in turn larger-scale crises and broader market volatility. we've now reached the point where near to mid-term outcomes of several geopolitical conflicts could become major drivers of the global economy. that's true of Russia/Ukraine, Iraq, the east and south china seas and U.S./Europe. in each, the status quo is unsustainable (though for very different reasons). and so, as it were, the four horsemen of the geopolitical apocalypse.

Russia/Ukraine

 

The prospect of losing Ukraine was the last straw for a Russian government that has been steadily losing geopolitical influence since the collapse of the soviet union over two decades ago. Moscow sees NATO enlargement, expanded European economic integration, energy diversification and the energy revolution as direct security threats that need to be countered. Ukraine is also an opportunity for the Kremlin...for president Putin to invigorate a flagging support base at home.

Putin intends to raise the economic and military pressure on Kiev until, at a minimum, southeast Ukraine is effectively under Russian control. the Ukrainian government's latest effort in response, a unilateral week long cease fire in the southeast, was greeted with lukewarm rhetoric by Putin and rejected by Russian separatists in the region, who escalated their attacks against the Ukrainian military. meanwhile, thousands of Russian troops recently pulled back from the Ukrainian border have now been redeployed there, bolstered by Putin ordering 65,000 Russian troops on combat alert in the region.

The choices for Kiev are thankless. if they press further, violence intensifies and Russian support expands, either routing the Ukrainian military, or taking serious losses and requiring direct "formal" intervention of Russian troops. if they back off, they lose the southeast, which is critical for their internal legitimacy from the Ukrainian population at large. all the while the Ukrainian economy teeters with much of their industrial base off line, compounded by Russian disruptions on customs, trade, and gas supply.

The growing conflict will lead to further deterioration of Russia's relationship with the united states and Europe: gas flow disruptions, expansion of defense spending and NATO coordination with Poland and the Baltic states, turbulence around Moldova and Georgia given their European association agreements this week...and "level 3" sectoral sanctions against Russia. that in turn means a serious economic downturn in Russia itself...and knock-on economic implications for Europe, which has far greater exposure to Russia than the united states does.

For the last several years, the major market concern for Europe was economic: the potential for collapse of the euro zone. that's no longer a worry. the primary risk to Europe is now clearly geopolitical, that expanded Russia/Ukraine conflict hurts Europe, in worst case pushing the continent back into recession.

Iraq

 

Like so much of the world's colonial legacy, many of the middle east's borders only "worked" because of the combination of secular authoritarian rule and international military and economic support. that was certainly true of Iraq–most recently under decades of control by the Baath party, beginning in 1963. Saddam Hussein's ouster forty years later by the united states and Great Britain, combined with the dismantling of nearly all of the military and political architecture that supported him (in dramatic contrast to, say, the ouster of Egypt's hosni Mubarak) undermined Iraq's territorial integrity. since then, Iraqi governance could still nominally function given significant American military presence and military and economic aid. once that was removed, there was little left to keep iraq functioning as a country.

Sectarianism is the primary form of allegiance in iraq today, both limiting the reach of prime minister nouri al maliki's majority shia government and creating closer ties between iraq's sunni, shia and kurdish populations and their brethren outside Iraq's borders. extremism within iraq has also grown dramatically as a consequence, particularly among the now disenfranchised sunni population--made worse by their heavy losses in the war against bashar assad across the largely undefended border with syria. the tipping point came with the broad attacks by the islamic state of iraq and syria (isis) over the past fortnight, speeding up a decade-long expansion of sectarian violence and ethnic cleansing between iraq's Sunni and shia. the comparatively wealthy and politically stable Kurds have done their best to steer clear of the troubles, seizing a long sought opportunity for de facto independence.

The American response has been cautious. domestic support for military engagement in Iraq diminished greatly as the war in Iraq continued and the economic and human costs mounted. obama repeatedly promised an end to the occupation and considered full withdrawal a major achievement of his administration. there's little domestic upside for taking responsibility in the crisis. obama's position has accordingly been that any direct military involvement requires a change in governance from the Iraqis--initially sounding like a unity government and increasingly evolving into the replacement of prime minister maliki. the pressure on maliki has gained momentum with shia grand ayatollah ali al-sistani calling on the iraqi prime minister to broaden the government to include more kurds and sunnis.

But Maliki, having successfully fought constitutional crises and assassination attempts, to say nothing of decisively winning a democratic election, is unlikely to go. isis poses a threat to the unity of the iraqi state, but not to maliki's rule of iraq's majority shia population, which if anything now stands stronger than it did before the fighting. and maliki's key international sponsor, iran, has little interest in forcing maliki into compromise as long as there's no threat to baghdad: they see themselves in far better strategic standing with a maliki-led iraqi government where they exert overwhelming influence, than over a broader government where they're one of many competing international forces. further, even if maliki were prepared to truly share power with iraq's kurds and sunni (something made more likely by the informal "influence" of 300 us military advisors now arriving in baghdad), he's unlikely to see much enthusiasm responding to that offer. the kurds are better off sticking to nominal (and a clearer road to eventual formal) independence; and sunni leaders that publicly find common cause with maliki would better hope all their family members aren't anywhere isis can find them.
absent american (or anyone else's) significant military engagement, the iraqi government is unlikely to be able to remove isis from leadership and, accordingly, reassert control over the sunni and kurdish areas of the country. that will lead to a significant increase in extremist violence emanating from the islamic world, a trend that's already deteriorated significantly in recent years (and since obama administration officials announced that cyberattacks were the biggest national security threat to the united states--a claim president obama overturned during his west point speech last month). since 2010, the number of known jihadist fighters has more than doubled; attacks by Al Qaeda affiliates have tripled.

The combination of challenging economic conditions, sectarian leadership, and the communications revolution empowering individuals through narrowing political and ideological demographic lenses all make this much more likely to expand. that's a greater threat to stability in the poorer middle eastern markets, but also will morph back into a growing terrorist threat against western assets in the region and more broadly. that creates, in turn, demand for increased security spending and bigger concerns about fat tail terrorism in the developed world, particularly in southern and western europe (where large numbers of unintegrated and unemployed islamic populations will pose more of a direct threat).

The broader risk is that sunni/shia conflict metastasizes into a single broader war. isis declares an islamic state across sunni iraq and syria, becoming ground zero for terrorist funding and recruitment from across the region. the saudi government condemns the absence of international engagement in either conflict and directly opposes an increasingly heavy and public iranian hand in iraqi and syrian rule. the united states completes a comprehensive nuclear deal with iran and declares victory (but doesn't work meaningfully with teheran on iraq), steering clear of the growing divide between the middle east's two major powers. the gulf cooperation council starts to fragment as members see opportunity in economic engagements with Iran. Iranian "advisers" in Iraq morph into armed forces; Saudi Arabia publicly opposes isis, but Saudi money and weapons get into their hands and an abundance of informal links pop up. militarization grows between an emboldened Iran and a more isolated, defensive Saudi Arabia. that's when the geopolitical premium around energy prices becomes serious.

East/South China Sea

 

Ukraine and Iraq are the two major active geopolitical conflicts. but there are two more geopolitical points of tension involving major economies that are becoming significant.

In Asia, it's the consequences of (and reactions to) an increasingly powerful and assertive china. the growth of china's influence remains the world's most important geopolitical story by a long margin. but, at least to date, china's growth is mostly an opportunity for the rest of the world. for the middle east, it's the principal new source of energy demand as the united states becomes more energy independent. for Africa, it's the best opportunity to build out long-needed infrastructure across the continent. for Europe and even the united states, it's a critical source of credit propping up currency, and a core producer of inexpensive goods. that's not to argue that there aren't significant caveats in each of these stories (or that those caveats aren't growing--they are), but rather that overall, china has been primarily perceived as an opportunity rather than a threat for all of these actors, and so it remains today.

for asia, a rising china has been seen more clearly as a double-edged sword. the greater comparative importance of the chinese economy has translated into more political influence (formal and informal) for beijing, at the expense of other governments in the region. meanwhile, china's dramatic military buildup has fundamentally changed the balance of power in asia; it's had negligible interest elsewhere.
china's military assertiveness has also grown in its backyard. in other regions, china continues to promote itself as a poor country that needs to focus on its own development and stability. in east and southeast asia china has core interests that it defends, and it is increasingly willing to challenge the status quo as its influence becomes asymmetrically greater.

that's been most clear with vietnam, where china first sent one oil rig to drill in contested waters directly off vietnam's shore--accompanied by several hundred chinese fishing vessels. they announced last week that they are repositioning four more. unsurprisingly, the vietnamese response has been sharp--anti-chinese demonstrations, violence, increased naval presence in the region, and coordination with the philippines.
none of that creates significant political risk on its own: vietnam isn't an ally of the united states and so engenders less support and response from washington than the philippines or japan...which is precisely why beijing has decided that's the best place to start changing the regional security balance.

but tokyo feels differently. the japanese government understands that a rising china is longer term a much more existential threat to its own security position in asia, and it isn't prepared to wait to raise concern until its position weakens further. so prime minister shinzo abe has declared his security support for vietnam. for america's part, obama has jettisoned the official "pivot" to asia. but the administration continues to believe that america's core national security interests, now and in the future, are in asia; and if china significantly escalates tensions in the east and south china seas, the united states is not likely to sit as idly by as they have on syria or ukraine.

the good news here is that--unlike with the countries driving the tensions in eurasia and the middle east--china has solid political stability and isn't looking for international trouble. but the realities of chinese growth, coupled with strong leadership from japan and (over time) india, along with the persistence of a strong american footprint are contributing to a much more troublesome geopolitical environment in the region.
the principle danger to the markets is what happens if the chinese government no longer holds that perspective. president xi jinping's commitment to transformational economic reform has been strong over the first year of his rule, and he has gotten surprisingly little pushback from the country's entrenched elites. but the uncertainty around china's near- to medium-term trajectory is radically greater than that of any of the world's other major economies. should significant instability emerge in china, very plausible indeed, china's willingness to take on a far more assertive (and risk-acceptant) security strategy in the region, promoting nationalism in the way putin has built his support base of late, would become far more likely. and then, the east and south china seas move to the top of our list.

U.S.-Europe

 

finally, the transatlantic relationship. advanced industrial economies with consolidated institutions and political stability, there's none of the geopolitical conflict presently visible in the middle east, eurasia, or asia.

geopolitical tensions have long been absent from the transatlantic relationship, the great success of the nato alliance. for all the occasional disagreement in europe on us military and security policy both during the cold war and since (the war in iraq, israel/palestine, counterterrorism and the like), european states never considered the need for broader security ties as a counterbalance for nato membership.

but the changing nature of geopolitics is creating a rift between the united states and europe.
american global hegemony had security and economic components, and it was collective security that had been the core element holding together the transatlantic alliance. that's no longer the case--a consequence of changing priorities for the americans and europeans, and an evolving world order (russia/ukraine a major blip, but notwithstanding). the transatlantic relationship is much less closely aligned on economics.

it's not the conventional wisdom. most observers say that, after bush, american policy looks more european these days--less militarist, more multilateralist. but actually, us foreign policy isn't becoming more like europe, it's becoming more like china. it's less focused on the military, except on issues of core security concern (in which case the united states acts with little need to consult allies), while american economic policy tends to be unilateralist in supporting preferred american geopolitical outcomes--which is seen most directly in us sanctions behavior (over $15bn in fines now levied against more than 20 international banks--mostly european) and nsa surveillance policy (with no willingness of the us to cooperate in a germany requested "no spying" mutual agreement)

transatlantic economic dissonance is also in evidence in a number of more fundamental ways: america's "growth uber alles" approach to a downturn in the economy, compared to germany's fixation on fiscal accountability. europe's greater alignment between governments and corporations on industrial policy, as opposed to a more decentralized, private-sector led (and occasionally captured) american policy environment. a more economy-driven opportunistic european approach to china, russia and other developing markets; the us government looking focused more on us-led/"universalist" principles on industrial espionage, intellectual property, etc.

as the g-zero persists, we will see the united states looking to enforce more unilateral economic standards that the europeans resent and resist; while the europeans look to other countries more strategically as counterbalances to american economic hegemony (the german-china relationship is critical in this regard, but that's also true of europe's willingness to support american economic policies in russia and the middle east). all of this means a much less cooperative trans-atlantic relationship--less "universalism" (from the american perspective) and less "multilateralism" (from the european perspective). more zero-sumness in the transatlantic relationship is a big change in the geopolitical environment; a precursor to true multipolarity, but in the interim a more fragmented and much less efficient global marketplace.

* * *

so that's where i see geopolitics emerging as a key factor for the global markets--much more than at any time since the end of the cold war. there's some good news and bad news here.

the good news is none of these geopolitical risks are likely to have the sort of market implications that the macro economic risks did after the financial crisis. there are lots of reasons for that. a low interest rate environment and solid growth from the us and china--plus the eurozone out of recession--along with pent up demand for investment is leading to significant optimism that won't be easily cowed by geopolitics. the supply/demand energy story is largely bearish, so near-term geopolitical risks from the middle east won't create sustained high prices. and markets don't know how to price geopolitical risk well; they're not covered as clearly analytically, so investors don't pay as much attention (until/unless they have to).

the bad news...that very lack of pressure from the markets means political leaders won't feel as much need to address these crises even as they expand, particularly in the united states. this is another reason the world's geopolitical crises will persist beyond a level that a similar economic crisis would hit before serious measures start to be taken to mitigate them. these geopolitical factors are going to grow. now's the time to start paying attention to them.

* * *
every once in a while, it's good to take a step back and look at the big picture. hope you found that worthwhile. i'll surely get back in the weeds next monday.

meanwhile, it's looking like a decidedly lovely week in new york.
very best,
Ian

From intel sources:

Dislodging ISIS Will Be a Difficult Task

 

The ISIS advance toward Baghdad may be temporarily held off as the government rallies its remaining security forces and Shia militias organize for the upcoming Battle for Baghdad. There is a rather clear reason why the ISIS leader has renamed himself Abu Bakr al-Baghdadi, meaning the Caliph of Baghdad . ISIS will at a minimum be able to take control of some Sunni neighborhoods in Baghdad shortly and wreak havoc on the city with IEDs, ambushes, single suicide attacks, and suicide assaults that target civilians, the government, security forces, senior members of government, and foreign installations and embassies. Additionally, the brutal sectarian slaughter of Sunni and Shia alike that punctuated the violence in Baghdad from 2005 to 2007 is likely to return as Shia militias and ISIS fighters begin to assert control of neighborhoods and roam the streets.

Even if Iraqi forces are able to keep ISIS from fully taking Baghdad and areas south, it is unlikely the beleaguered military and police forces will be able to retake the areas under ISIS control in the north and west without significant external support, as well as the support of the Kurds.

ISIS and its allies are in a position today that closely resembles the position prior to the US surge back in early 2007. More than 130,000 US troops, partnered with the Sunni Awakening formations and Iraqi security forces numbering in the hundreds of thousands, were required to clear Anbar, Salahaddin, Diyala, Ninewa, Baghdad, and the "triangle of death." The concurrent operations took more than a year, and were supported by the US Air Force, US Army aviation brigades, and US special operations raids that targeted the jihadists’ command and control, training camps, and bases, as well as its IED and suicide bomb factories.

Today, the Iraqis have no US forces on the ground to support them, US air power is absent, the Awakening is scattered and disjointed, and the Iraqi military has been humiliated badly while surrendering or retreating in disarray during the lightning fast jihadists' campaign from Mosul to the outskirts of Baghdad. This campaign, by the way, has been remarkably and significantly faster than the U.S. armored campaign advance to Baghdad in 2003 . The US government has indicated that it will not deploy US soldiers in Iraq, either on the ground or at airbases to conduct air operations.  Meanwhile, significant amounts of US made advanced armaments, vehicles, ammunition, and diverse military equipment have fallen into ISIS jihadists’ hands .

ISIS is advancing boldly in the looming security vacuum left by the collapse of the Iraqi security forces and the West's refusal to recommit forces to stabilize Iraq. This has rendered the country vulnerable to further incursions by al Qaeda-linked jihadists as well as intervention by interested neighbors such as Iran. Overt Iranian intervention in Iraq would likely lead any Sunnis still loyal to the government to side with ISIS and its allies, and would ensure that Iraq would slide even closer to a full-blown civil war and de facto partition, and risk a wider war throughout the Middle East.

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Monday, September 23, 2013

Thoughts from the Frontline: Rich City, Poor City

By John Mauldin



"The future is already here," intoned William Gibson, one of my favorite cyberpunk science fiction authors, "it's just not very evenly distributed." Paraphrasing Gibson, the pension crisis is already here; it's just not very evenly distributed. For the past two weeks we've been exploring the problems of state pension funds. This week we will conclude our look at pension plans for the nonce with a 30,000-foot overview of the states and then take a deeper dive into one city: mine. This will give you at least one version of how to do your own homework about your own hometown. But fair warning, depending on your locale, you may need medical help or significant quantities of an adult beverage after you finish your research. Then again you may be pleasantly surprised and congratulate yourself on choosing a particularly adept hometown. And be on notice that, no matter what your personal conclusion and how well-grounded your analysis is, there will be people who live in your neighborhood who think you are utterly full of, well, let's just say "nonsensical matter" and leave it at that. This is a family letter.

Into the Transformational Future

First, a quick announcement. I am constantly asked where the future jobs will be, and I think hard about the answer to that very personal question (it's crucial to those of us who have young kids). Will we see Gibson’s dystopian world or Ian Banks' world of abundance? The answer is, of course, that secular growth in employment will come from the new, transformational technologies that are already being created all around us, truly new industries that will change everything and create opportunities for work that we can't even imagine yet, in the same way the automobile or telecommunications or the McCormick reaper both took some jobs away and created even greater opportunities. The transition is the thing, though. It will be filled with opportunities for some and forced change for others, while we wait for the future to become more evenly distributed. In the next few weeks, you are going to get a letter from me that will tell you about the newest addition to Mauldin Economics, the Transformational Technologies Alert, written by my longtime friend Pat Cox, who is no stranger to readers of this letter. Pat and I have long wanted to work together, exploring the future and especially biotech. He is the best, and you will want to join us from the very beginning. We invite you to charge ahead into the future with us, exploring opportunities that will begin to change your own life right now. And now back to pensions…

Through the courtesy of one of your fellow readers I've been given a treasure trove of data on 702 city pension plans. I won't say that I got lost in the data, but the search and rescue teams sent to find me had to go back for extra supplies. There were some very dark alleys that it took a while to find my way back out of. Not to mention some twists and turns that were totally surprising.

So first I need to say a big thank you to Gregg L. Bienstock and Justin Coombs of Lumesis for giving me access to their data. Gregg is a cofounder of Lumesis, and their signature software is called (appropriately enough, given the oceans of data they plumb) DIVER. They've compiled data on 54,000 issuers of municipal and state bonds from over 100 sources. They sent me an Excel file on the major pension plans of every state and the pension plans of cities with populations over 100,000. And Justin was kind enough to create multiple spreadsheets and graphs upon request and patiently explain their data. The bulk of the data in this letter is from http://www.lumesis.com. The opinions are my own and should not be attributed to Lumesis. From time to time we will also look at another fascinating study from the Pew Charitable Trusts on pensions and retiree healthcare in 61 cities.

As we have seen the last two weeks (here and here), the assumptions that states make about their future investment returns are fairly unrealistic and generally nothing like what they've achieved for the last 10 years. This makes their balance sheets look far better than they really are, and for some states the discrepancy is pretty stark. Witness Illinois, where unfunded pension liabilities run north of $280 billion, give or take. That is more than $20,000 for every man, woman, and child in the state. And the bill keeps rising every month as the state plows ever deeper in debt to its own future.

Keeping in mind the caveat that the percentages may actually be worse than reported, let's look at a few graphs on a state-by-state basis. This first graph shows the funded ratio of state pension plans through 2012. (Note: on all the graphs the large "island" below Louisiana is a representation of Puerto Rico. To its left is Alaska, and both are obviously not to scale.)




The next graph shows actuarial required contributions (ARC). The ARC is simply the amount of money required to fund the pension plan given the return assumptions of the plan. The important thing to note here is the amount of blue in the graph. If you ask your local politicians how their pension plan is doing, they can probably tell you with a straight face (and because they don't know any better) that their state's pension is fully funded. I note with some alarm that "conservative" Texas doesn't fare very well. While Texas claims funding above 80%, a more reasonable assumption on returns suggests it is no better than 43%. Can Rick Perry run for president as a conservative on that number? Then again, can New Jersey Republican governor uber-star Chris Christie run on his state's funding level of 33%? Just asking.




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Thursday, August 1, 2013

EIA: Natural Gas Reserves Rose by Almost 10 Percent

U.S. proved crude oil reserve additions in 2011 set a record volumetric increase for the second year in a row, according to U.S. Crude Oil and Natural Gas Proved Reserves, 2011, released today by the U.S. Energy Information Administration (EIA). Natural gas proved reserves rose also, but by less than 2010's record increase. Nevertheless, natural gas reserve additions in 2011 rank as the second largest annual increase since 1977.

"Horizontal drilling and hydraulic fracturing in shale and other tight rock formations continued to increase oil and natural gas reserves," said EIA Administrator Adam Sieminski. "Higher oil prices helped drive record increases in crude oil reserves, while natural gas reserves grew strongly despite slightly lower natural gas prices in 2011."

Proved oil reserves, including both crude oil and lease condensate, increased by 15 percent in 2011 to 29.0 billion barrels, marking the third consecutive annual increase and the highest volume of proved reserves since 1985. Proved reserves in tight oil plays accounted for 3.6 billion barrels (13 percent) of total proved reserves of crude oil and lease condensate in 2011.

Texas recorded the largest volumetric increase in proved oil reserves among individual states, largely because of continuing development in the Permian and Western Gulf basins, while North Dakota had the second largest increase, driven by development activity in the Bakken formation in the Williston Basin.

Natural gas proved reserves, estimated as wet gas that includes natural gas liquids, increased by almost 10 percent in 2010 to 348.8 trillion cubic feet (Tcf), the 13th consecutive annual increase.

Pennsylvania's proved natural gas reserves, which more than doubled in 2010, rose an additional 90 percent in 2011, contributing 41 percent of the overall U.S. increase. Combined, Texas and Pennsylvania added 73 percent of the net increase in U.S. proved wet natural gas reserves in 2011. Proved reserves in shale gas plays accounted for 131.6 trillion cubic feet (38 percent) of total proved reserves of wet natural gas in 2011.

Proved reserves are those volumes of oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. EIA's estimates of proved reserves are based on an annual survey of about 1,100 domestic oil and gas well operators.

U.S. Crude Oil and Natural Gas Proved Reserves, 2011 is available at: http://www.eia.gov/naturalgas/crudeoilreserves.

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Wednesday, July 31, 2013

Murphy Oil Corp. Reports 2nd Quarter 2013 Earnings

Murphy Oil Corporation (NYSE: MUR) announced today that net income was $402.6 million ($2.12 per diluted share) in the 2013 second quarter, up from $295.4 million ($1.52 per diluted share) in the second quarter 2012. Net income in the 2013 quarter included income from discontinued operations of $70.5 million ($0.37 per diluted share) compared to income from discontinued operations of $4.1 million ($0.02 per diluted share) in the 2012 quarter.

The 2013 income from discontinued operations was primarily generated by an after tax gain of $71.9 million from sale of the Mungo and Monan fields in the United Kingdom during the just completed quarter. Income from continuing operations was $332.1 million ($1.75 per diluted share) for the 2013 second quarter compared to $291.3 million ($1.50 per diluted share) in the same quarter of 2012.

The results of continuing operations improved in 2013 primarily due to higher earnings in the U.S. oil and gas business, which was attributable to growth in oil production in the Eagle Ford Shale area in South Texas.

Read the entire Murphy Oil Corp. earnings report.


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Thursday, July 19, 2012

Where are U.S Refineries Concentrated?

Of the more than 17.3 million barrels per day (bbl/d) of refinery capacity located in the United States as of January 1, 2012, about 44% (or nearly 7.7 million bbl/d) is located along the Gulf Coast. As the map below indicates, there are a number of refineries, some of them very large, situated along the coasts of Texas, Louisiana, Mississippi, and Alabama.

The U.S. Energy Information Administration's annual Refinery Capacity Report provides capacity information about individual refineries as of January 1 each year. The report identifies refineries that are operable at the beginning of each year. Operable refineries are further classified as either operating or idle. A refinery could be idle for a number of reasons including routine maintenance, unplanned maintenance, or market conditions.

map of Operable refinery locations and capacity volumes as of January 1, 2012, as described in the article text

The Refinery Capacity Report also identifies refineries that were new, reactivated, or shut down in the previous calendar year, as well as refineries that were sold in the previous calendar year. The report includes detailed information about the atmospheric crude oil distillation capacity at each refinery and the capacities for several important downstream refinery units that are used to process the products coming from the atmospheric crude oil distillation unit for further processing.

Many refineries are located close to crude oil production centers such as the Gulf Coast (which has significant volumes of crude oil produced both onshore and offshore); near destinations for importing crude oil; or near major population centers where much of the refineries' output will be needed (e.g., California and the areas near Philadelphia, New York City, and Chicago).

map of Operable refinery locations and capacity volumes as of January 1, 2012, as described in the article text



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Wednesday, July 11, 2012

Rising Production in the Permian Basin

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The Permian Basin, a long time oil and natural gas producing region in west Texas and eastern New Mexico, is showing signs of new life. The active rig count has grown from 100 rigs in mid 2009 to over 500 rigs in May 2012. According to data from the Texas Railroad Commission and the New Mexico Energy, Minerals and Natural Resources Department, oil production from the Permian has increased fairly steadily over the past few years, reaching the 1 million barrels per day (bbl/d) threshold in late 2011, the first time since 1998.

graph of Monthly Permian Basin rig count and oil production, as described in the article text
Sources: U.S Energy Information Administration, based on Baker Hughes, Railroad Commission of Texas, and New Mexic

Growing oil production in the Permian Basin and other Texas plays, most notably the Eagle Ford shale, may be starting to strain existing takeaway capacity and is creating a need for Texas oil to serve more distant refineries. While new pipeline projects are scheduled to come online, current transportation constraints have caused Permian crude oil, which is priced in Midland, Texas, to sell at a significant discount to WTI beginning in January 2012.

graph of Spot prices of WTI and Midland crude oil, as described in the article text

Friday, June 22, 2012

North American Spot Crude Oil Benchmarks Likely Diverging Due to Bottlenecks

Gold and Silver on the Verge of Something Spectacular

West Texas Intermediate at Cushing, Oklahoma (WTI Cushing), a light, sweet crude grade, is North America's most closely observed crude oil price benchmark and the underlying commodity of the NYMEX crude futures contract. Until 2008, all North American crude grades broadly tracked fluctuations in WTI Cushing prices and were clustered within about $8 per barrel of the WTI Cushing price. Pricing differences between crude grades were largely explained by the different quality characteristics of the crude oil in each location and transportation costs to Cushing, the delivery point of the NYMEX contract.

Since 2008, however, the price differences between WTI Cushing and other North American crude oil benchmarks have increased sharply (see chart below). In addition to WTI, other crude grades have emerged as alternative benchmarks. In particular, the Argus Sour Crude Price Index (ASCI), a weighted average of prices for several offshore Gulf of Mexico sour crude grades, has become the benchmark or reference used for assessing the price of several imported grades sold on a long-term contract basis, including Saudi Arabian and Kuwaiti crude grades.

graph of spot crude price minus spot WTI (Cushing, OK) crude oil prices, January 1, 2005 - June 19, 2012, as described in the article text

Transportation constraints in the wake of rising production from inland fields in Canada, North Dakota, and Texas are one of the main drivers of the growing price discrepancy between crude grades since 2008. Limited pipeline capacity has made it difficult to bring crude oil out of the center of the continent, lowering all the affected benchmarks compared to prices outside the area. But within the constrained area, prices have also diverged from each other, reflecting local transmission bottlenecks within the larger constrained area. For example, crude oil benchmarks for the Bakken, Western Canada, and West Texas Sour (Midland, Texas) have traded at a discount to WTI Cushing. Rising production in the Bakken and West Texas have exacerbated these price differences. Outside the constrained areas, benchmarks like Louisiana Light Sweet, Alaska North Slope, and Mars Blend in the Gulf of Mexico reflect premiums to WTI Cushing, sometimes significant.

The phrase "transportation constraints" refers to a broad range of logistic issues, with inadequate pipeline capacity being the most common issue. However, EIA is not aware of any crude oil production capacity being shut in because of a lack of capacity to move the oil. In the short term, production surges and/or pipeline shutdowns force oil producers to compete with each other for more expensive transport options: rail and then truck. In the longer term, additional transportation capacity (rail and pipeline) is likely to be built, which should lower the cost of transporting the oil to markets.

Some North American crude oil benchmark locations are identified in the map below.

map of select crude oil price points in North America, as described in the article text
Source: U.S. Energy Information Administration. 


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Tuesday, June 12, 2012

U.S. Dry Natural Gas Production Growth Levels off Following Decline in Natural Gas Prices

U.S. dry natural gas production has increased since late 2005 due mainly to rapid growth in production from shale gas resources. However, there have been two notable instances (see red ovals in the chart) in the last seven years when natural gas production leveled off during a period of falling spot natural gas prices. The first was during the recent economic recession and the latest began in the fourth quarter of 2011 and continued through the first quarter of 2012.

graph of Monthly U.S. dry natural gas production and Henry Hub natural gas spot price, January 2005 - March 2012, as described in the article text

Weather events (see green ovals) have also affected U.S. natural gas production.
The major events over the past seven years that have caused dry gas output to level off or even decline include:

Hurricanes Katrina and Rita (Sep-Oct 2005) - Disrupted up to 12.2 billion cubic feet per day (Bcf/d) in offshore natural gas production.

Hurricanes Gustav and Ike (Sep 2008) - Disrupted up to 9.5 Bcf/d in offshore natural gas production.

Economic recession and falling prices (Oct 2008- Sep 2009), Reduced industrial and manufacturing activity, and lower electricity use eased demand for natural gas as a feedstock and a power generation fuel. Natural gas prices fell sharply as a result.

Winter well freeze offs (Feb 2011) - Disrupted up to 7.5 Bcf/d in natural gas production from Texas to Arizona, when water froze inside wellheads during extremely cold weather and blocked gas flows.

Supply overhang and falling natural gas prices (Oct 2011-Mar 2012) A warm winter that reduced heating fuel demand and record high gas inventories resulted in a nearly 50% drop in gas prices, causing some energy companies to postpone new drilling and cut back on some existing operations.

Natural gas production was relatively flat between October 2011 and March 2012, when Henry Hub spot gas prices declined from just above $3.50 to around $2.00 per million British thermal units in March. Preliminary EIA data indicate a slight drop in production during March, according to the Natural Gas Monthly report released on May 31.

Of the five large gas producing states tracked monthly by EIA Texas, Louisiana, New Mexico, Oklahoma, and Wyoming, New Mexico had the highest percentage decline in its March gross natural gas production, down 2.2 percent from the previous month, while Texas had the largest volumetric drop, down 150 million cubic feet per day. States that EIA does not presently track on a monthly basis, such as Pennsylvania, may have seen their gas output increase during March.

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U.S. Crude Oil Production in First Quarter of 2012, Highest in 14 years

Strong growth in U.S. crude oil production since the fourth quarter of 2011 is due mainly to higher output from North Dakota, Texas,and federal leases in the Gulf of Mexico, with total U.S. production during the first quarter of 2012 topping 6 million barrels per day (bbl/d) for the first time in 14 years.

graph of United States crude oil Production, 1998-2012, as described in the article text

After remaining steady between 5.5 million and 5.6 million bbl/d during each of the first three quarters of 2011, EIA estimates that U.S. average quarterly oil production grew to over 5.9 million bbl/d during the fourth quarter and then surpassed 6 million bbl/d during the first quarter of 2012, according to the latest output estimates from EIA's May Petroleum Supply Monthly report (see chart below). The last time U.S. quarterly oil production was above 6 million bbl/d was during October-December 1998.

graph of United States quarterly crude oil Production, 2011-2012, as described in the article text

The roughly 6% growth in U.S. oil production from October 2011 through March 2012 is largely the result of increases in oil output in North Dakota, Texas, and the Gulf of Mexico. After passing California in December 2011 to become the third largest oil producing state, North Dakota then jumped ahead of Alaska in March 2012 as the state with the second largest oil output. Texas remains far ahead in the number one production spot.

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Sunday, April 29, 2012

Top 5 Producing States Combined Marketed Natural Gas Output Rose in 2011

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Combined marketed natural gas production from the top five natural gas producing states...Texas, Louisiana, Wyoming, Oklahoma, and Colorado increased by about 7.5% in 2011, although their share of total U.S. natural gas output fell slightly to about 65%.

Marketed natural gas production from these states in 2011 totaled 15.7 trillion cubic feet (Tcf), according to annual data from the U.S. Energy Information Administration. The drop in their combined share of total U.S. production reflects increased contributions from other states, particularly those in which operators significantly expanded development of shale gas formations. Shale gas production from states such as Pennsylvania helped boost overall U.S. natural gas output by almost 8% in 2011.

graph of Annual natural gas production from top five U.S. states, 2000-2011, as described in the article text
Source: U.S. Energy Information Administration, Marketed Natural Gas Production, and Colorado Oil and Gas Conservation 

Due primarily to drilling programs in the Marcellus shale formation, Pennsylvania's marketed natural gas production in 2011 more than doubled to nearly 1.3 Tcf, according to preliminary estimates from Pennsylvania's Department of Environmental Protection. Arkansas has also seen strong growth in its marketed natural gas production, with output more than tripling since 2007 due mainly to increased production in the Fayetteville shale play.

Alaska is the country's second leading natural gas producer in terms of gross withdrawals, but most of the state's production is not brought to market, as production volumes far exceed local demand and there is insufficient pipeline capacity to transport the gas to distant markets. Most of Alaska's natural gas not brought to market is re-injected into existing oil fields to provide sufficient pressure to maintain oil production rates.

Highlights from the top marketed natural gas producing states in 2011.....

Texas: Natural gas production increased 4.5% from the year before to the highest level since 1980, due in part to growing output from the Eagle Ford shale formation where drillers who are aggressively pursuing high-value liquid hydrocarbons are also producing growing amounts of natural gas.

Louisiana: Natural gas production increased 38% as the Haynesville shale gas formation in the northwest part of the state was one of the biggest shale gas producing plays in the United States.

Wyoming: Natural gas production fell 5.6% to the lowest level since 2007, as lower natural gas prices made coalbed methane gas that accounts for almost two-thirds of the state's natural gas production less profitable because high-priced gas liquids aren't normally found in coal seams.

Oklahoma: Natural gas production increased 3.9% to the second highest annual output since 1994 due to higher output in the Woodford shale play.

Colorado: Natural gas production grew about 1.4% as output increased for the 25th year in a row to break another record output high. The Niobrara shale play in the northeast corner of the state helped raise Colorado's natural gas production.

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